Company Director Escapes FEMA Section 19(1) Penalty After Proving Due Diligence Defense

The Appellate Tribunal under SAFEMA set aside a penalty order imposed under Section 19(1) of FEMA for contraventions of Section 42(1). The appellant, who was deemed in-charge of company business, successfully argued that the contraventions occurred without his knowledge and that he had exercised due diligence to prevent violations by implementing comprehensive compliance policies and safeguards. The Tribunal found that the Adjudicating Authority failed to address these arguments in its order and ruled in favor of the appellant, allowing the appeal and setting aside the penalty.

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Issues:
Challenge to order under Section 19(1) of FEMA imposing penalty for contravention of Section 42(1) of FEMA.

Analysis:
The appeal was filed challenging the order imposing a penalty of rupees five lacs on the Appellant for contravention of Section 42(1) of FEMA. The Appellant, a Managing Director of a company, was alleged to have contravened FEMA provisions. The Adjudicating Authority found against the Appellant without considering the facts and provisions of law. The Appellant argued that he was not directly responsible for compliances as it was the Principal Compliance Officer's role. Reference was made to the Apex Court judgment in Salendra Swaroop Vs. Deputy Director to support the argument.

The Adjudicating Authority's order was challenged on the grounds that the Appellant was not directly responsible for the contravention under Section 42(1) of FEMA. The Appellant argued that the Adjudicating Authority did not consider his defenses and failed to establish his knowledge or lack of due diligence in preventing the contravention. The Appellant also pointed out that the Principal Compliance Officer took responsibility, and the penalty was imposed on him as well.

The Tribunal considered the arguments of both parties and examined the materials on record. It noted that the Company had contravened FEMA provisions, but the main issue was the Appellant's responsibility under Section 42(1) of FEMA. The Tribunal analyzed Section 42 of FEMA, emphasizing that liability under the section applies to those in charge of the company's business conduct, subject to the Proviso excluding liability if the contravention occurred without their knowledge and due diligence was exercised to prevent it. The Appellant argued that he was not directly in charge of compliances and had taken due diligence measures.

The Tribunal found that the Adjudicating Authority's order lacked consideration of the Appellant's defenses regarding knowledge and due diligence. It concluded that the Appellant had proven that the contravention was not within his knowledge, and he had exercised due diligence to prevent it. Therefore, the Tribunal set aside the impugned order and allowed the appeal in favor of the Appellant.

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