2025 (11) TMI 1802 - HC - FEMA

Penalty pre-deposit partly waived, 50% bank guarantee ordered, recovery stayed citing Ketan V Parekh hardship guidelines

B. Sanjay, T.V. Madhusudan Rao Versus Special Director

HC considered applications seeking waiver of pre-deposit and stay of recovery of penalty relating to valuation of imported goods and transfer of funds ... Application for waiver of pre-deposit - valuation of imported goods and transfer of funds overseas in the conduct of business of import of stone cutting tools - expressions in Section 35-F - concept of 'undue hardship' - contravention of provisions of the Act and Rules thereunder, more particularly, Section 3(d) read with Section 42 - seeking stay on recovery of penalty - It is contended that the Appellate Tribunal on one hand arrived at conclusion that directing to pay penalty would cause financial hardship on the other hand directed for payment of 30% in cash and 70% through Bank Guarantee. HELD THAT:- The facts considered by the Appellate Tribunal while adjudicating stay petition are that there is prima facie case on behalf of the appellants and that M/s. Vasavi Impex was closed in the year 2008. When the proprietary concern is closed in the year 2008 and the business is no longer functional directing the appellants to make pre-deposit of penalty in their individual capacity would definitely cause undue hardship. However, as per guidelines laid down by the Hon’ble Supreme Court of India in Ketan V. Parekh [2011 (11) TMI 62 - SUPREME COURT] undue hardship of the individuals has to be considered, but vis-à-vis recovery of penalty as and when the appeal is disposed of and the appellants are found liable to pay the penalty. Since the proprietary concern i.e., M/s.Vasavi Impex has been closed down considering the individual risk of the appellants modifying the orders passed by the Appellate Tribunal would meet the ends of the justice. Thus, this Court is of the considered opinion that directing the appellants to furnish Bank Guarantee towards 50% of the penalty amount and waiving deposit of rest of the 50% would meet the ends of justice. In the result, the Civil Miscellaneous Second Appeals are partly allowed by setting aside the order dated 20.08.2014 passed by the Appellate Tribunal by waving of pre-deposit of 50% of the penalty amount and directing the appellants to furnish Bank Guarantee for remaining 50% of the penalty amount each within one month from the date of receipt of copy of this order. Consequently, the recovery of penalty amount against the appellants shall remain stayed till disposal of the appeals before the Appellate Tribunal. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether, in an appeal concerning waiver of pre-deposit under the Foreign Exchange Management Act, the condition imposed by the Appellate Tribunal directing deposit of 30% of the penalty in cash and furnishing bank guarantee for 70% was justified in light of the parameters of prima facie case and 'undue hardship'. 1.2 Whether interference by the High Court with the Appellate Tribunal's discretionary order on pre-deposit was warranted on the facts and in view of the legal principles governing pre-deposit and waiver under Section 19 of the Act. 1.3 Whether, having regard to the closure of the proprietary concern and the individual financial position of the appellants, modification of the pre-deposit condition was necessary to balance 'undue hardship' to the appellants with safeguarding the interests of the Revenue. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 & 2 - Justification for Tribunal's pre-deposit order and scope for interference Legal framework (as discussed) 2.1 The Court considered Section 19 of the Foreign Exchange Management Act, 1999, in the context of waiver/dispensation of pre-deposit, and the jurisprudence on analogous provisions (e.g., Section 35-F of the Central Excise Act) dealing with mandatory pre-deposit and the concept of 'undue hardship'. 2.2 The Court referred to precedents emphasizing: (i) the legislative mandate of pre-deposit as a condition for availing appellate remedies; (ii) the twin considerations of 'undue hardship' to the appellant and 'safeguarding the interests of the Revenue'; and (iii) that 'undue hardship' generally relates to economic hardship and must be established by material, not bare assertion. Interpretation and reasoning 2.3 The Court noted that the Adjudicating Authority, after issuing show cause notice, granting opportunity of hearing, and relying on the statements of the authorized signatory and seized documents, had found contravention of Section 3(d) of the Act and imposed penalty of Rs.55,00,000/- each and confiscation of Rs.5,00,000/-. These findings formed the basis of the penalties which were the subject of the pre-deposit condition. 2.4 The Appellate Tribunal, while dealing with the stay/pre-deposit applications, expressly examined: (i) existence of a prima facie case - including doubts about reliance on photocopies of seized documents and about liability without arraying the concern itself - and (ii) the financial position of the appellants, noting from income tax returns that the business of the concern was closed in 2008, which would cause 'great hardship' if full pre-deposit were insisted upon. 2.5 On that basis, the Tribunal held that there was a prima facie case and some financial hardship, but nonetheless directed each appellant to pay 30% of the penalty in cash and to furnish bank guarantee for the remaining 70% to obtain stay of recovery. 2.6 The Court accepted that the Tribunal had approached the matter on the correct broad parameters of prima facie case and undue hardship, but examined whether, in the peculiar factual matrix, the specific conditions imposed were proportionate and consistent with the concept of 'undue hardship' and the object of safeguarding Revenue. 2.7 The Court observed that the proprietary concern, through which the impugned transactions had been carried on, had been closed in 2008, and that the Tribunal itself had recognized that this closure and the income tax material indicated hardship to the appellants if pre-deposit were insisted upon in a stringent form. 2.8 It reasoned that, when the proprietary concern is no longer functional and the penalties are sought to be recovered from the individuals in their personal capacities, insisting on substantial cash pre-deposit would 'definitely cause undue hardship' to the appellants, though the interests of the Revenue still required protection against eventual non-recovery. 2.9 In applying the 'undue hardship' test as elaborated in the cited judgments, the Court treated the severity of the economic burden in light of the closure of business and individual financial risk as outweighing the necessity of a substantial cash component, provided that an adequate security mechanism remained in place to protect the Revenue. Conclusions 2.10 The Court held that, in the circumstances of the closure of the proprietary concern and the individual financial position of the appellants, the Tribunal's direction to pay 30% of the penalty in cash and furnish bank guarantee for 70% was unduly onerous and required modification. 2.11 Interference with the Tribunal's discretionary order on pre-deposit was therefore justified to the limited extent of recalibrating the balance between undue hardship and protection of Revenue, without disturbing the finding that a prima facie case existed or prejudging the merits of the appeals. Issue 3 - Appropriate modification of pre-deposit conditions to balance undue hardship and protection of Revenue Interpretation and reasoning 3.1 The Court considered that the appellants had been found, at the adjudicatory stage, to have contravened the Act, and that penalties of a significant quantum were imposed; thus, complete dispensation of security could compromise the interests of the Revenue should the appeals fail on merits. 3.2 Simultaneously, the Court gave decisive weight to: (i) the closure of M/s. Vasavi Impex in 2008; (ii) the Tribunal's own finding that insistence on pre-deposit, in the facts, would cause 'great hardship'; and (iii) the principle that 'undue hardship' imports a burden disproportionate to the nature of the requirement and not warranted by the circumstances. 3.3 Weighing these factors, the Court concluded that a solution which substantially reduced the immediate pecuniary outflow while maintaining an enforceable security for a part of the penalty would best serve both the appellants' interest in access to appellate remedy and the statutory requirement to safeguard Revenue. Conclusions 3.4 The Court set aside the Tribunal's order to the extent it required 30% cash deposit and 70% bank guarantee, and substituted it with a direction that each appellant shall furnish a bank guarantee for 50% of the penalty amount, with complete waiver of deposit for the remaining 50%. 3.5 The Court directed that the bank guarantee for 50% of the penalty be furnished within one month from the date of receipt of the order, and ordered that recovery of the penalty against the appellants shall remain stayed till disposal of the appeals before the Appellate Tribunal. 3.6 The Court thus partially allowed the second appeals, confined to modification of pre-deposit conditions, without adjudicating upon the substantive findings of contravention or the merits of the appeals pending before the Appellate Tribunal.