Case: V.S. Ubhayakar &amp; Others Vs. Special Director, Directorate of Enforcement &amp; Others

diligence to prevent such contravention. Under the proviso, the burden lies on the person against whom a contravention is established by the deeming provisions of subsection (1).11. Both the adjudicating authority and the Tribunal have held concurrently that the burden that was cast upon the Appellants has not been discharged. During the course of the hearing of the Appeals, counsel appearing for the Appellants adverted to the statement of Shri Kirti Shah, (a Director of the company) that the officer in charge of the Bangalore office had been appointed based on his previous experience in foreign exchange operations with Thomas Cook; that he was instructed to adhere to the guidelines of the Reserve Bank and that after the appointment of an internal auditor in 1996, the Bangalore branch had been inspected twice and nothing adverse had been reported. The Managing Director also made the same statement. Moreover, reliance was further placed on the defence stated in the reply dated 12 March 1999 to the effect that the Reserve Bank had inspected the books of account of the company on more than three occasions and that the company expected its officer at Bangalore to comply with the terms and conditions of the Reserve Bank while selling foreign exchange to bonafide travellers. In our view, a mere averment that the company had exercised due diligence or that the contravention took place without the knowledge of the company or the officers responsible for the conduct of the business would not be suffice to establish a defence under the proviso to subsection (1) of Section 68. The burden of establishing a defence in terms of the proviso to subsection (1) of Section 68 lies upon the person against whom the contravention is established under the substantive part of the provision. The Tribunal was, in our view, justified in holding that a proper disclosure ought to have been made in regard to the internal arrangements made by the company for the proper conduct of the business in accordance with the guidelines of the Reserve Bank. That has not been explained. Perusing the statements and the reply upon which reliance has been placed on behalf of the Appellants at the hearing, it is evident that apart from a few vague averments, nothing has been established that would have enabled the adjudicating authority to hold that the defence was proved. As a Full Fledged Money Changer, the company is vested with custody of foreign exchange which has to be disbursed to bonafide travellers. The contravention in the present case is of a serious nature since it is evident that foreign exchange was disbursed to persons who were not bonafide travellers as in the case of the first notice to show cause under the BTQ scheme and to bogus entities as in the case of the second notice to show cause under the Business Visit Scheme. The contravention is therefore of a serious nature and it was for the Appellants to establish by leading cogent evidence a defence within the meaning of the proviso to subsection (1) of Section 68. That has not been done. The quantum of the penalty which has been imposed is not disproportionate. The company has been subjected to a penalty of Rs.2.50 lacs and Rs.1 lac respectively under the two notices to show cause; a personal penalty of Rs.50,000/- and Rs.25,000/- has been imposed on the Managing Director, while a penalty of Rs.50,000/- and Rs.25,000/- has been imposed on the Director. The quantum of the penalty imposed cannot be regarded as disproportionate to the nature of the contravention which is shown.12. The issue as to whether there was any connivance between the officials is relevant to subsection (2) of Section 68. Subsection (2) of Section 68 provides that notwithstanding anything contained in subsection (1), where the contravention of the Act or of a rule, direction or order has been committed by a company and it is proved that the contravention has taken place with the consent or connivance of or is attributable to any neglect on the part of any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed guilty of the contravention. The ambit of subsection (1) of Section 68 is hence distinct from the ambit of subsection (2). Under subsection (1) every person who was in charge of and was responsible to the company for the conduct of the business of the company at the time when the contravention was committed, as well as the company, are deemed to be guilty of the contravention. Under subsection (2) the persons who are brought within the framework of the provision are those with whose consent or connivance the contravention has taken place or upon whose neglect the contravention has arisen. Consequently, the point which has been stressed by counsel for the Appellants to the effect that the Special Director had observed that there was no connivance on the part of the Managing Director would not be material in determining their liability under subsection (1) of Section 68. Under subsection (1) of Section 68 as persons who were in charge of and were responsible to the company for the conduct of its business, both the Appellants are deemed guilty of the contravention and the burden would then lie upon them to establish the defence within the purview of the proviso to subsection (1). In the circumstances, having failed to establish their burden, the absence of connivance cannot come to the aid of the Appellants. The fact that the Appellants are found not to have obtained an unlawful monetary benefit may at the highest be relevant to the quantum of the penalty which we have found in any event not to be disproportionate. The appeal has been argued on the basis that the contravention is of Section 68(1) and that is why the proviso was pressed in aid.13. In view of the aforesaid position, no substantial question of law would arise in these appeals.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]11. Both the adjudicating authority and the Tribunal have held concurrently that the burden that was cast upon the Appellants has not been discharged. During the course of the hearing of the Appeals, counsel appearing for the Appellants adverted to the statement of Shri Kirti Shah, (a Director of the company) that the officer in charge of the Bangalore office had been appointed based on his previous experience in foreign exchange operations with Thomas Cook; that he was instructed to adhere to the guidelines of the Reserve Bank and that after the appointment of an internal auditor in 1996, the Bangalore branch had been inspected twice and nothing adverse had been reported. The Managing Director also made the same statement. Moreover, reliance was further placed on the defence stated in the reply dated 12 March 1999 to the effect that the Reserve Bank had inspected the books of account of the company on more than three occasions and that the company expected its officer at Bangalore to comply with the terms and conditions of the Reserve Bank while selling foreign exchange to bonafide travellers. In our view, a mere averment that the company had exercised due diligence or that the contravention took place without the knowledge of the company or the officers responsible for the conduct of the business would not be suffice to establish a defence under the proviso to subsection (1) of Section 68. The burden of establishing a defence in terms of the proviso to subsection (1) of Section 68 lies upon the person against whom the contravention is established under the substantive part of the provision. The Tribunal was, in our view, justified in holding that a proper disclosure ought to have been made in regard to the internal arrangements made by the company for the proper conduct of the business in accordance with the guidelines of the Reserve Bank. That has not been explained. Perusing the statements and the reply upon which reliance has been placed on behalf of the Appellants at the hearing, it is evident that apart from a few vague averments, nothing has been established that would have enabled the adjudicating authority to hold that the defence was proved. As a Full Fledged Money Changer, the company is vested with custody of foreign exchange which has to be disbursed to bonafide travellers. The contravention in the present case is of a serious nature since it is evident that foreign exchange was disbursed to persons who were not bonafide travellers as in the case of the first notice to show cause under the BTQ scheme and to bogus entities as in the case of the second notice to show cause under the Business Visit Scheme. The contravention is therefore of a serious nature and it was for the Appellants to establish by leading cogent evidence a defence within the meaning of the proviso to subsection (1) of Section 68. That has not been done. The quantum of the penalty which has been imposed is not disproportionate. The company has been subjected to a penalty of Rs.2.50 lacs and Rs.1 lac respectively under the two notices to show cause; a personal penalty of Rs.50,000/as been imposed on the Managing Director, while a penalty of Rs.50,000/as been imposed on the Director. The quantum of the penalty imposed cannot be regarded as disproportionate to the nature of the contravention which is shown.12. The issue as to whether there was any connivance between the officials is relevant to subsection (2) of Section 68. Subsection (2) of Section 68 provides that notwithstanding anything contained in subsection (1), where the contravention of the Act or of a rule, direction or order has been committed by a company and it is proved that the contravention has taken place with the consent or connivance of or is attributable to any neglect on the part of any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed guilty of the contravention. The ambit of subsection (1) of Section 68 is hence distinct from the ambit of subsection (2). Under subsection (1) every person who was in charge of and was responsible to the company for the conduct of the business of the company at the time when the contravention was committed, as well as the company, are deemed to be guilty of the contravention. Under subsection (2) the persons who are brought within the framework of the provision are those with whose consent or connivance the contravention has taken place or upon whose neglect the contravention has arisen. Consequently, the point which has been stressed by counsel for the Appellants to the effect that the Special Director had observed that there was no connivance on the part of the Managing Director would not be material in determining their liability under subsection (1) of Section 68. Under subsection (1) of Section 68 as persons who were in charge of and were responsible to the company for the conduct of its business, both the Appellants are deemed guilty of the contravention and the burden would then lie upon them to establish the defence within the purview of the proviso to subsection (1). In the circumstances, having failed to establish their burden, the absence of connivance cannot come to the aid of the Appellants. The fact that the Appellants are found not to have obtained an unlawful monetary benefit may at the highest be relevant to the quantum of the penalty which we have found in any event not to be disproportionate. The appeal has been argued on the basis that the contravention is of Section 68(1) and that is why the proviso was pressed in aid.13. In view of the aforesaid position, no substantial question of law would arise in these appeals.