2024 (7) TMI 1360 - HC - FEMA

Writ petition challenging Rule 4(3) hearing notices under Foreign Exchange Management dismissed for violating natural justice

Robert and Ardis James company Ltd., C/o. IQ EQ Corporate Services (Mauritius) Limited Versus Directorate of Enforcement, Through Learned Special Director of Enforcement, Chennai

The Madras HC dismissed a writ petition challenging the validity of hearing notices under Rule 4(3) of the Foreign Exchange Management (Adjudication ... Validity of the notice of hearing - Adherence to Rule 4(3) of the Foreign Exchange Management (Adjudication Proceedings and Appeal) Rules, 2000 - HELD THAT:- The adjudicating authority is duty bound to explain to the person proceeded against or his legal practitioners about the contraventions alleged to have been committed. Communicating the formation of opinion and the reasons will be informed to the person or his legal representative by the adjudicating authority under Rule 4(4) of the Rule. On receipt of such materials from the adjudicating authority on the hearing date the person concerned is at liberty to defend their case by following the procedures as contemplated under Rule 4(5) to 4(12) of the Rules. When Rule 4(4) unambiguously contemplates that the reason for proceeding with the adjudication must be informed to the persons or to the legal practitioners or to the Chartered Accountants, and the such information should be provided along with the allegations and the provisions of the Act and Rules. The said rules contemplates providing of information to the persons and therefore, Rule 4(3) cannot be construed as violating the Rules of Natural Justice or contravening any of the provisions of law. Rule 4(3) and Rule 4(4) should be read constructively so as to understand that a fair opportunity has been provided. Communicating the opinion of the adjudicating authority under Rule 4(3) may not be required since the adjudicating authority is bound to provide all such information along with the provisions under Rule 4(4) of the Rules. Therefore, Rule 4(3) cannot be read in isolation and it is to be read along with Rule 4(4) for constructively interpreting the procedures so as ensure that fair opportunity has been provided under the Rules and the Rules of Natural Justice has been complied with. Though this Court had an opportunity to consider the Bombay High Court Judgement, relied on by the Delhi High Court and the Kolkata High Court, the later judgement of the Division Bench of the Madras High Court is more relevant with reference to the spirit of Rule 4 in entirety including Rule 4(3). The scope of rules/procedures cannot be expanded by the High Court in exercise of the powers of the judicial review under Article 226 of the Constitution of India. The procedures, as contemplated under the Rules, are to be read as it is and any expansion providing additional opportunity, would undoubtedly cause prejudice to any one of the parties and would provide further cause for the purpose of prolonging and protracting the proceedings. The practice of prolonging and protracting the enquiry proceedings by approaching the High Court at each stage cannot be appreciated. Once the proceedings are commenced, the adjudicating authorities are expected to follow the procedures scrupulously and the persons concerned are bound to cooperate and defend their case by availing the opportunities to be provided in accordance with the Rules in force. In view of the fact that the judgement of the Division Bench of the Madras High Court, in the case of India Cements Limited [2018 (6) TMI 389 - MADRAS HIGH COURT] is the latest judgement wherein the interpretation of Rule 4(3) offered by the Bombay High Court was considered, this Court is bound by the decision of the Division Bench of High Court of Madras. WP dismissed. Issues Involved:1. Validity of the notice of hearing.2. Adherence to Rule 4(3) of the Foreign Exchange Management (Adjudication Proceedings and Appeal) Rules 2000.3. Compliance with the rules of natural justice.4. Interpretation of Rule 4(3) by different High Courts.5. Enforceability of departmental circulars issued based on judicial decisions.Issue-wise Detailed Analysis:1. Validity of the Notice of Hearing:The writ petitions challenge the validity of the notice of hearing on the grounds that the spirit of Rule 4(3) of the Foreign Exchange Management (Adjudication Proceedings and Appeal) Rules 2000 was not adhered to, rendering subsequent proceedings null and void. The petitioners argue that communicating the reasons recorded for proceeding with the action would enable them to defend their cases effectively.2. Adherence to Rule 4(3) of the Foreign Exchange Management (Adjudication Proceedings and Appeal) Rules 2000:The petitioners contend that Rule 4(3) was not followed, citing the Bombay High Court judgment in Shashank Vyankatesh Monohar Vs. Union of India, which was confirmed by the Supreme Court. They argue that the Enforcement Directorate's circular of 2014, based on this judgment, mandates strict adherence to Rule 4(3). The Bombay High Court's interpretation requires the adjudicating authority to record and communicate reasons for proceeding with an enquiry, a view supported by the Delhi and Kolkata High Courts.3. Compliance with the Rules of Natural Justice:The petitioners emphasize that the rules of natural justice are paramount and that violation of Rule 4(3) and related circulars would affect the proceedings. They argue that the Madras High Court's interpretation is factually distinguishable and should not be equated with the Bombay High Court's interpretation, which they believe should be followed.4. Interpretation of Rule 4(3) by Different High Courts:The Madras High Court's Division Bench in India Cements Limited Vs. Union of India disagreed with the Bombay High Court's interpretation, stating that Rule 4(3) does not require recording and communicating reasons for forming an opinion to conduct an enquiry. The Madras High Court held that Rule 4(3) should be read in conjunction with Rule 4(4), which mandates explaining the contraventions to the noticee during the enquiry. The court concluded that the adjudicating authority's opinion under Rule 4(3) is a procedural step, not a decision that needs to be communicated.5. Enforceability of Departmental Circulars Issued Based on Judicial Decisions:The respondents, represented by the Additional Solicitor General, argue that departmental circulars are not binding on courts or quasi-judicial authorities. They cite the Supreme Court's decisions in Commissioner of Central Exercise, Bhopal Vs. Minwool Rock Fibres Limited and Commissioner of Central Excise Vs. Ratan Melting and Wire Industries, which state that circulars represent the executive's understanding of statutory provisions and are not binding on courts. The court should declare the law, not the executive.Conclusion:The Madras High Court, bound by its Division Bench's later judgment in India Cements Limited, dismissed the writ petitions. The court held that Rule 4(3) does not require the adjudicating authority to record and communicate reasons for forming an opinion to conduct an enquiry. The opinion under Rule 4(3) is a procedural step, and the adjudicating authority is required to provide all necessary information during the enquiry as per Rule 4(4). The court emphasized that procedures should be followed as they are, without expanding their scope, to avoid prolonging proceedings and ensure fair opportunity. The writ petitions were dismissed, and there was no order as to costs.