Foreign exchange contravention and proportionality of penalty: later return of funds does not erase the original default.

Conversion of non-convertible funds into convertible funds without prior Reserve Bank of India permission was treated as a proven foreign exchange contravention, and the later return of the funds did not cure the original default. The conduct was not regarded as a mere inadvertent error, though the matter was confined to negligence on the facts and prior High Court direction. The objection that the adjudicating authority acted as judge in its own cause was rejected because it proceeded on the material before it and followed the prescribed procedure. The penalty was nevertheless reduced because it was found disproportionate to the nature of the default and the limited culpability established.

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Issues: (i) whether the appellants had contravened the foreign exchange law by converting non-convertible funds without prior permission, and whether the conduct amounted only to negligence; (ii) whether the penalty imposed was disproportionate and liable to be reduced, and whether the adjudicating authority acted as judge in its own cause.

Issue (i): Whether the appellants had contravened the foreign exchange law by converting non-convertible funds without prior permission, and whether the conduct amounted only to negligence.

Analysis: The admitted factual position was that non-convertible funds were credited and thereafter transferred so as to become convertible without prior permission of the Reserve Bank of India. The subsequent return of the amount did not erase the original contravention. On the facts, the conduct was not treated as a mere inadvertent error, as the transfers occurred on more than one occasion, though the matter was confined to negligence in view of the earlier direction of the High Court.

Conclusion: Contravention of the foreign exchange law was established, and the appellants were held negligent.

Issue (ii): Whether the penalty imposed was disproportionate and liable to be reduced, and whether the adjudicating authority acted as judge in its own cause.

Analysis: The contention that the adjudicating authority acted as judge in its own cause was rejected because the authority proceeded on the material placed before it and followed the prescribed adjudicatory procedure. However, while contravention was sustained, the quantum of penalty was found to be excessive in light of the restricted scope indicated by the High Court and the surrounding facts, including the return of funds. The penalty was therefore viewed as disproportionate to the default.

Conclusion: The objection on bias was rejected, but the penalty was reduced from Rs.65 lakhs to Rs.30 lakhs on the bank and from Rs.10 lakhs to Rs.3 lakhs each on the individual appellants.

Final Conclusion: The appeals succeeded only to the extent of reduction in penalty, while the finding of contravention was maintained.

Ratio Decidendi: A proven contravention of foreign exchange law is not neutralised by subsequent return of the funds, but the penalty must still remain proportionate to the nature of the default and the proved level of culpability.

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