Foreign exchange contraventions fail where transactions were disclosed to the Reserve Bank and accepted as closed.

Transactions disclosed to the Reserve Bank and accepted as closed could not be treated as unauthorised foreign exchange contraventions. The alleged transfer of Syrian Pounds 6,249.41 between projects was not established as a breach under the Foreign Exchange Regulation Act, because it had been disclosed and supported by accounts. The payment of US $2,107 as agency commission was also not treated as an excess or unauthorised payment, since commission up to 5% had been permitted and the payment pattern was explained to, and accepted by, the Reserve Bank. The alleged short payment of Syrian Pounds 18,438.58 and the directors' derivative penalty failed because the notice did not specifically charge that head and the principal contravention was not proved; the penalty order was set aside.

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Issues: (i) whether the transfer of Syrian Pounds 6249.41 between projects in Syria amounted to a contravention of sections 8(1) and 16(1) of the Foreign Exchange Regulation Act, 1973; (ii) whether payment of US $2107 towards agency commission in the manner made by the appellants attracted contravention of sections 8(1) and 16(1) of the Foreign Exchange Regulation Act, 1973; (iii) whether the alleged less payment of Syrian Pounds 18438.58 and the consequential penalty on the directors under section 68(1) of the Foreign Exchange Regulation Act, 1973 could be sustained.

Issue (i): whether the transfer of Syrian Pounds 6249.41 between projects in Syria amounted to a contravention of sections 8(1) and 16(1) of the Foreign Exchange Regulation Act, 1973.

Analysis: The transfer had been disclosed to the Reserve Bank of India and supported by the final accounts. The Reserve Bank had accepted the explanation and treated the matter as closed. In that background, the allegation that the amount was transferred without permission was not sustainable.

Conclusion: The alleged contravention in respect of Syrian Pounds 6249.41 was not established.

Issue (ii): whether payment of US $2107 towards agency commission in the manner made by the appellants attracted contravention of sections 8(1) and 16(1) of the Foreign Exchange Regulation Act, 1973.

Analysis: Permission had been granted for payment of commission up to 5% of the contract value, but the mode of payment was required to be out of advance or progressive receipts on a pro rata basis. The Reserve Bank had been informed of the final position and had accepted the statement of accounts and closed the case. In those circumstances, the payment could not be treated as an unauthorised excess payment attracting contravention.

Conclusion: The alleged contravention in respect of US $2107 was not established.

Issue (iii): whether the alleged less payment of Syrian Pounds 18438.58 and the consequential penalty on the directors under section 68(1) of the Foreign Exchange Regulation Act, 1973 could be sustained.

Analysis: The show-cause notice had not charged the appellants specifically on this head, and the matter in any event had been explained as arising from attachment and litigation in Syria, with the Reserve Bank kept informed. Since the substantive findings of contravention under sections 8(1) and 16(1) could not stand, the derivative penalty on the directors under section 68(1) also could not survive.

Conclusion: The finding of contravention in respect of Syrian Pounds 18438.58 and the penalty on the directors under section 68(1) were unsustainable.

Final Conclusion: The penalty order was set aside in entirety and the appellants were entitled to return of the pre-deposited amount.

Ratio Decidendi: Where the relevant transactions are disclosed to and accepted by the Reserve Bank of India, and the charge in the show-cause notice does not specifically encompass the alleged infraction, a finding of contravention under foreign exchange law cannot be sustained; consequential vicarious penalty must also fail if the principal contravention fails.

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