FEMA liability and discretionary penalty reduction: managing director remained liable, sleeping directors were exonerated, and penalty was scaled back.

Liability under FEMA Section 3(b) was sustained against a company and its managing director because the managing director was treated as responsible for the company's affairs, and deposit of the customs differential in another proceeding did not exonerate him. Two other directors were exonerated because they did not manage the day-to-day affairs of the company and had not signed import documents, so their role in the contravention was not proved. Penalty under FEMA Section 13(1) was treated as discretionary within the statutory ceiling, and it was reduced in light of mitigating circumstances and amounts already deposited under the pre-deposit direction.

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Issues: (i) whether the company and its managing director were liable for contravention under Section 3(b) of the Foreign Exchange Management Act, 1999; (ii) whether the other two directors were liable or were entitled to exoneration as sleeping directors; and (iii) whether the penalty imposed on the company and the managing director required reduction.

Issue (i): whether the company and its managing director were liable for contravention under Section 3(b) of the Foreign Exchange Management Act, 1999.

Analysis: The finding of contravention against the company was maintained. The managing director was treated as responsible for the company's affairs and was not entitled to exoneration merely on the plea that the customs differential had been deposited in another proceeding. The liability under the FEMA contravention was therefore sustained against both.

Conclusion: The company and the managing director remained liable for the contravention under Section 3(b) of the Foreign Exchange Management Act, 1999.

Issue (ii): whether the other two directors were liable or were entitled to exoneration as sleeping directors.

Analysis: The other two directors were found not to have managed the day-to-day affairs of the company and had not signed documents relating to import of consignments. On that factual basis, their role in the alleged contravention was not established and they were treated as sleeping directors.

Conclusion: The other two directors were exonerated from the alleged contravention under Section 3(b) read with Section 42 of the Foreign Exchange Management Act, 1999.

Issue (iii): whether the penalty imposed on the company and the managing director required reduction.

Analysis: Penalty under Section 13(1) of the Foreign Exchange Management Act, 1999 was treated as discretionary within the statutory ceiling and not as a fixed or irreducible amount. In view of the mitigating circumstances and the amounts already deposited in compliance with the pre-deposit direction, reduction of penalty was considered justified.

Conclusion: The penalty on the company and the managing director was reduced to the extent of the pre-deposit already made.

Final Conclusion: The appeals of the company and the managing director succeeded only to the extent of reduction in penalty, while the appeals of the other two directors succeeded in full by resulting in their exoneration.

Ratio Decidendi: Penalty under FEMA is discretionary within the statutory maximum and may be reduced on mitigating circumstances, while liability of directors depends on proof of their role in the day-to-day management of the company.

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