2006 (2) TMI 272 - SC - FEMA

Section 68 applies broadly to contraventions; companies liable under Sections 50 and 56; imprisonment only for responsible officers

The SC modified the HC's decision, holding that Section 68 applies broadly to contraventions of the Act and is not confined to criminal prosecutions under ... Inclusion in the Ninth Schedule and bar under Article 31B - Constitutional challenge under Articles 14 and 21 - Notices of enquiry under Section 61 of FERA - Independence of adjudication and prosecution proceedings - Scope and operation of Section 68 of FERA (liability of officers where contravention by company) - Meaning of 'offence' and applicability to penalty proceedings - Writ of prohibition-interference with statutory show-cause noticesInclusion in the Ninth Schedule and bar under Article 31B - Constitutional challenge under Articles 14 and 21 - Whether the appellants can successfully challenge Sections 50, 51, 56 and 68 of FERA as violative of Articles 14 and 21 in view of inclusion of FERA in the Ninth Schedule - HELD THAT: - The Court held that because the FERA is included in the Ninth Schedule as Item No.100, Article 31B operates to preclude invalidation of the Act or its provisions on the ground that they abridge rights under Part III. Consequently, challenges grounded on Articles 14 and 21 cannot result in striking down the provisions. The Court therefore declined to entertain the contention that the impugned provisions be read down or struck down on those constitutional grounds, and noted that the appellants abandoned an alternative basic-structure challenge. The constitutional objections to the provisions therefore do not sustain the writ relief sought. [Paras 4, 5, 6, 8]Challenge under Articles 14 and 21 dismissed as barred by inclusion of FERA in Ninth Schedule; no read-down or invalidation on those grounds.Notices of enquiry under Section 61 of FERA - Writ of prohibition-interference with statutory show-cause notices - Whether notices issued under Section 61 of FERA were vitiated and whether writ of prohibition should issue to restrain adjudication or prosecution based on those notices - HELD THAT: - The Court characterised Section 61 notices as enquiries calling upon the person to show that requisite permission existed for the transaction; they do not decide guilt. The notices were held to be in terms of Section 61 and to satisfy the jurisdictional requirement of setting out the alleged contraventions so as to enable the recipient to show permission, if any. Given that adequate remedies and defences remain available before the magistrate or adjudicating authority, and that courts should not normally interfere with such statutory show-cause notices unless palpably without authority, the writs of prohibition were refused. The Court left appellants to raise their defences in the criminal and adjudicatory forums. [Paras 9, 10, 11, 12, 23]Section 61 notices are valid enquiries in terms of the Act; writs of prohibition to restrain proceedings based on those notices were refused.Scope and operation of Section 68 of FERA (liability of officers where contravention by company) - Constitutional challenge under Articles 14 and 21 - Whether Section 68(1) is arbitrary, offends Articles 14 and 21 (by reversing burden and enabling 'pick and choose'), and whether persons can be roped in merely by status in the company - HELD THAT: - The Court rejected the submission that Section 68(1) is arbitrary or violative of Articles 14 and 21. It observed that when contravention by a company is proved, the person in charge and responsible for the conduct of the company's business is deemingly guilty subject to his opportunity to prove absence of knowledge or that due diligence was exercised. Section 68(2) applies where contravention is shown to have occurred with consent, connivance or attributable neglect of a particular officer, in which case the prosecution bears the burden. The scheme provides safeguards and rational connection to the legislative objective of protecting economic interests; therefore the reversal of burden, in the statutory context and given Ninth Schedule protection, does not invalidate the provision. Questions of individual culpability and factual identification of the person liable are matters for trial. [Paras 14, 15, 16, 17]Challenge to Section 68(1) as arbitrary or violative of Articles 14 and 21 rejected; factual issues of individual culpability to be decided at trial.Independence of adjudication and prosecution proceedings - Adjudication under Section 51 and prosecution under Section 56 - Whether adjudication under Section 51 must precede prosecution under Section 56, or whether both proceedings can be launched and pursued simultaneously - HELD THAT: - The Court held that adjudication and prosecution are distinct and independent remedies addressing different objectives - adjudication for imposition of penalty and prosecution for penal deterrence. Section 56 begins with a 'without prejudice to any award of penalty' clause but that does not require prosecution to be deferred until adjudication concludes. The legislative scheme contains no proviso mandating sequential action; historical contrasts with the 1947 Act indicate express language would have been used if sequentiality was intended. Precedents and Full Bench decisions were approved which permit simultaneous initiation and pursuit of both proceedings. The finding in one forum is not conclusive in the other. [Paras 18, 20, 21, 22]Adjudication need not precede prosecution; both proceedings may be launched and pursued independently and simultaneously.Meaning of 'offence' and applicability to penalty proceedings - Scope and operation of Section 68 of FERA (liability of officers where contravention by company) - Whether Section 68 of FERA is confined to criminal prosecutions under Section 56 or also applies to adjudication/penalty proceedings under Sections 50 and 51 - HELD THAT: - The Court examined statutory language and common law meaning of 'offence', concluding that 'offence' is not confined to crimes punishable by imprisonment but includes contraventions punishable by civil/pecuniary sanctions. Section 68 deems certain officers guilty of the contravention and provides they 'shall be liable to be proceeded against and punished accordingly'; that formulation is apt equally where the contravention gives rise to adjudicatory penalty under Section 50 as well as prosecution under Section 56. There is nothing in the Act or its scheme restricting Section 68 to criminal prosecutions; confining it so would be inconsonant with the Act's object and wording. Consequently the High Court's holding that Section 68 is inapplicable to adjudication was modified. [Paras 27, 28, 29, 30, 31]Section 68 applies to contraventions by a company irrespective of whether liability is pursued by adjudication (penalty) or prosecution; High Court's restriction of Section 68 to prosecution only set aside.Writ of prohibition-interference with statutory show-cause notices - Whether writs of prohibition should have been issued to restrain the authorities from proceeding with adjudication and prosecution in light of the Court's other conclusions - HELD THAT: - The Court reiterated the settled principle that prohibition issues where an authority acts without jurisdiction, in excess of jurisdiction, or under an unconstitutional law. Since the impugned provisions were held constitutional (and Section 61 notices valid), the statutory authorities were not acting without jurisdiction and the High Court correctly refused prohibition. The appellants were directed to pursue available remedies before the adjudicating authorities and criminal courts. [Paras 23]Prayer for writ of prohibition refused; High Court decision affirmed in that respect.Final Conclusion: All appeals and writ petitions are dismissed except Civil Appeal Nos. 1751 and 1944 of 1999, which are allowed insofar as the High Court of Bombay's finding that Section 68 of FERA applies only to prosecutions and not to adjudication/penalty proceedings is set aside; parties to bear their costs. Issues Involved:1. Constitutionality of Sections 50, 51, 56, and 68 of the Foreign Exchange Regulation Act (FERA).2. Applicability of Section 68 of FERA to adjudication proceedings.3. Simultaneity of adjudication and prosecution under FERA.4. Validity of notices issued under Section 61 of FERA.5. Scope and interpretation of Section 68 of FERA regarding liability of company officers.6. Inclusion of FERA in the Ninth Schedule of the Constitution and its implications.Issue-wise Detailed Analysis:1. Constitutionality of Sections 50, 51, 56, and 68 of FERA:The appellant bank and its officers challenged the constitutional validity of Sections 50, 51, 56, and 68 of FERA, claiming they violated Articles 14 and 21 of the Constitution of India. The High Court of Bombay rejected this challenge, and the Supreme Court upheld this decision, noting that FERA is included in the Ninth Schedule of the Constitution. This inclusion under Article 31B protects FERA from being declared void on grounds of inconsistency with Part III of the Constitution, which includes Articles 14 and 21. Therefore, the challenge to these sections based on alleged violations of Articles 14 and 21 was dismissed.2. Applicability of Section 68 of FERA to Adjudication Proceedings:The High Court of Bombay held that Section 68(1) of FERA, which pertains to the liability of company officers for offences committed by the company, is applicable only to prosecutions and not to adjudication proceedings. The Supreme Court modified this decision, stating that Section 68 is not confined to prosecutions under Section 56 but also applies to adjudication proceedings under Section 50. The Court reasoned that the term 'offence' in Section 68 includes any contravention of the Act, whether it leads to a penalty or prosecution.3. Simultaneity of Adjudication and Prosecution under FERA:The appellants argued that penal proceedings should not be initiated simultaneously with adjudication proceedings under FERA. The Supreme Court rejected this argument, affirming that adjudication and prosecution are independent processes. The Court noted that Section 56 of FERA allows for prosecution 'without prejudice to any award of penalty,' indicating that both proceedings can occur simultaneously. The Court upheld the Full Bench decision of the Calcutta High Court, which stated that a complaint under Section 56 is not premature if initiated before the conclusion of adjudication under Section 51.4. Validity of Notices Issued under Section 61 of FERA:The appellants challenged the notices issued under Section 61 of FERA, arguing that they were not merely formalities and should contain relevant materials. The Supreme Court held that the notices under Section 61 are valid as they provide an opportunity for the appellants to show that they had the necessary permission for the transactions in question. The Court emphasized that these notices are preliminary and do not decide anything against the appellants. The appellants can present their defenses during the subsequent criminal proceedings.5. Scope and Interpretation of Section 68 of FERA Regarding Liability of Company Officers:The appellants contended that Section 68(1) of FERA, which presumes the liability of company officers for offences committed by the company, violated Articles 14 and 21 of the Constitution. The Supreme Court dismissed this contention, stating that the section is not arbitrary or discriminatory. The Court explained that Section 68(1) applies to individuals responsible for the conduct of the company's business, and these individuals have the opportunity to prove their lack of knowledge or due diligence. The Court also clarified that Section 68(2) applies to other officers who consented to or connived in the contravention.6. Inclusion of FERA in the Ninth Schedule of the Constitution and Its Implications:The inclusion of FERA in the Ninth Schedule of the Constitution under Article 31B protects it from being challenged on the grounds of violating fundamental rights in Part III of the Constitution. The Supreme Court noted that this inclusion means that even if the provisions of FERA are found to violate Articles 14 or 21, they cannot be struck down. The Court also highlighted that the legislative intent behind FERA is to protect the economic interests of the country, justifying the stringent provisions of the Act.Conclusion:The Supreme Court dismissed the appeals challenging the constitutional validity of FERA's provisions and upheld the simultaneous initiation of adjudication and prosecution proceedings. The Court also broadened the applicability of Section 68 to include both adjudication and prosecution, emphasizing the legislative intent to address contraventions comprehensively. The inclusion of FERA in the Ninth Schedule was a significant factor in protecting the Act from constitutional challenges.