2024 (9) TMI 1034 - AT - FEMA

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

Shri Vikrant K. Gurnani Versus The Special Director, Directorate of Enforcement, Hyderabad

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 ... Order passed u/s 19(1) of FEMA imposing penalty for contravention of Section 42(1) of FEMA - transactions were carried out in violation of various provisions of FEMA - liability of person who, at the time of contravention, was in-charge of, and responsible to the company for conduct of business of the Company - HELD THAT:- There is a deeming Clause to hold in-charge to conduct the business of the Company liable for the punishment. The Proviso, however, exclude those who submit that the contravention was without their knowledge and due diligence to prevent such contravention was taken. The case of the Appellant is that he was not Incharge for compliances rather it was Mohendar Ahuja. It was submitted that due safeguard was put in place for compliances and even comprehensive policy was prepared. It was to show that due diligence was exercised and otherwise contravention was not in his knowledge. We find the order of the Adjudicating Authority is silent on the issue rather the cryptic order has been passed in reference to the role of the Appellant and none of the argument has been dealt with while recording finding and imposing penalty. Adjudicating Authority should have dealt with the plea raised by the Appellant to the fact that contravention was not in his knowledge and otherwise he exercised due diligence to prevent the contravention. We find aforesaid to have been proved. Accordingly, we find the case in favour of the Appellant and thereby set aside the impugned order and with the aforesaid Appeal is allowed. 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.