Case: Pheroze Kudianavala Consultants Private Limited Vs. Foreign Exchange Regulation Appellate Board

and the directors claiming that though the Company had right to receive foreign exchange, by non-action the recovery was delayed. The adjudicating authority merely observed that as the amount was due to the Company from various parties and the Company was unable to show what efforts were made to realise the same, the Company had contravened Section 16 (1) (a) of the Act and the Directors were liable to imposition of penalty under Section 68 (1)of the Act. The appellate authority, relying upon the decision of the Madras high Court reported in AIR 1989 Mad 141 and to which the reference is made hereinabove, held that the action for breach of sub-section (1) of Section 16 was not permissible in absence of any directions under sub-section (2 ). Shri Zaiwala submitted that the conclusion of the appellate authority on this aspect is erroneous and the submission is of considerable merit. We have already held that the decision of the Madra High Court holding that the contravention under sub-section (1) of Section 16 of the Act does not take place in absence of direction given under sub-section (2) of Section 16 of the act is not correct. Shri Zaiwala, therefore, submitted that the proceedings should be remitted back to the appellate authority to examine the claim on merits. We are not prepared to accede to the demand for several reasons. It would not be prudent to remit the proceedings back to the appellate authority and put the parties to considerable expenses when the proceedings are pending for over several years. Secondly, the remand to the appellate authority could only be for the purpose of examining whether even on merits, the conclusion that the Company and the Directors are not liable in respect of charge covered by Show Cause Notice No. V is correct or otherwise. Shri Zaiwala very fairly stated that all the facts relevant for establishing the charge against the Company and the Directors are on record. In these circumstances, in our judgment, the appropriate course is to examine the facts in this appeal and determine whether the conclusion of the appellate authority can be sustained on merits. Accordingly, we heard Shri Zaiwala and shri Nariman on merits of the charge covered by Show Cause Notice No. V. In our judgment, the charge covered by Show Cause Notice No. V cannot be sustained. The charge was tried to be sustained by the Department by merely relying upon the statement of the Chairman recorded on March 4, 1983. The perusal of the statement leaves on manner of doubt that the company was not guilty of delaying the recovery of amount which was due. The contravention under Section 16 (1) (a) takes place when a person has a right to receive foreign exchange and intentionally delays the receipt thereof. The contravention cannot be assumed even if there is no intention and the delay occurs for reasons which are beyond the control of the person. Shri Nariman submitted that the statement of the Chairman recorded by the enforcement Directorate clearly pointed out the steps taken for realisation of dues from parties based at Behrain and the inability to recover the same. The learned Counsel further pointed out that the Company was indebted to Bank of Baroda in respect of the projects undertaken in Behrain and other countries and that debt was discharged inspite of the fact that the company could not recover anything from the parties based at Behrain. There is considerable merit in the submission of the learned counsel that the company cannot be faulted because though the Company had right to receive, the payment could not be recovered. The delay on the facts and circumstances of the case cannot be because of any inaction and that too intentionally on the part of the Company. The company was to recover a substantial amount from the Defence Forces of behrain Government and the other debtors were also residents of Behrain. The statement of the Chairman indicates that the Defence Forces were not even willing to meet the representative of the Company. The statement further establishes that the Government of India as well as the Reserve Bank of India declined to give any assistance. It is not difficult to imagine that the Company could not have instituted any legal action at Behrain without the requisite foreign exchange and even if the foreign exchange is available, it would be extremely difficult to prosecute actions on a foreign soil. Shri Zaiwala could not dispute the accuracy of the statements made by the Chairman before the enforcement authorities and, therefore, it is impossible to hold that the company had contravened the provisions of Section 16 (1) (a) of the Act by intentionally delaying recovery of the amount which the Company had a right to receive. It is impossible on facts relied upon by the Department to bold that the Company was liable to penalty for contravention. As the Company was not liable, the question of holding the Directors liable does not arise. In our judgment, on merits, the charge levelled by Show Cause Notice No. V is not, at all, sustainable. Shri Zaisvala was unable to explain why the Enforcement department waited almost for more than three years to serve Show Cause notices in respect of alleged violation in the year 1982. In these circumstances, in our judgment, the order of the appellate authority in respect of Show Cause notice No. V is not required to be disturbed, though for different reasons. 9. Shri Nariman very fairly stated that the Original Side Appeal No 41 of 1990 will not survive in view of the disposal of the remaining appeals. This appeal was preferred to challenge the order of summary dismissal of Writ petition and which was filed due to the apprehension that the Enforcement directorate will launch prosecution against the Company and the Directors. The apprehension no longer survives as all the Show Cause Notices stand discharged and, therefore, Appeal No. 41 of 1990 does not survive.

Court's decision (1 = petition accepted / positive for appellant, 0 = rejected / negative): 0

Reasoning from the judgment:
0[ds]It is not in dispute that the contract between the Company and the Governing board of the Indian School for construction of School is not by a written document but is to be gathered from the correspondence. The first letter from Indian School, Behrain is dated April 13, 1977 and was addressed to the Chairman of the Company. The letter, inter alia, recites that the Indian school confirms the design prepared by the Company and also confirms the appointment of the Company as consulting Architects. The letter further recites that the professional services in contention with the project will be at the rate of 6% of the total cost of the project excluding the value of the land. The next letter is dated, September 22, 1977 from the Chairman of the board of Governors of the Indian School to the State Bank of India who were the Companys Bankers in Behrain. The letterrecites that under the terms of the agreement, the Company is entitled to 6% of the project cost. The next letter is dated January 6, 1978 from the Chairman of the Board to Shri Srivasan, Vice President of the Company and the letter notes the gesture made by the Vice President at the Board meeting of September 9, 1977 to contribute to the worthy cause of School by donating an amount almost equal to 50% of the Companys fees. The next letter is dated march 30, 1978 from the Chairman of the Board of Governors of Indian school, Behrain to the Vice President of the Company andrecites that the Vice President desired a letter from the Chairman of the Board to facilitate opening of Bank account and which would givefacility the letter notes that the Vice President desired that the consultancy fees should be mentioned at the rate of 6% of the total amount of the project in order not to lower the standing of the Company in the business world although the Company will ultimately make a donation to the school almost equal to 50% of the fees charged. Thereafter on December 16, 1980, a telex message was forwarded by Dubai Office to the Company in Bombay and where the fact of reducing the fees to 3% of the cost of the project was referred to. On October 2, 1979, the Chairman of the Company informed the Vice President Shri Srinivasan that reducing the rate of agreed fees in connection with the Indian School at Behrain would cause a pecuniary loss and would face acute embarrassment as the Reserve Bank of India will never believe that the fees were reduced and that too without anything in writing. Thereafter, the statement of the Chairman was recorded on January 30, 1980 and December 2, 1980 by the Chief Enforcement Officer, Bombay in respect of the reduction of fees and the Chairman clearly stated that the reduction was agreed because the Indian community in Behrain, the Bankers of the company and the Indian Embassy staff requested to reduced the fees. On this material, it was contended that it is impossible to conclude that the company has right to receive 6% of the total amount of the cost of the project. The appellate authority declined to accept the claim of the Company on three counts. The first reason is that there was no written agreement between the parties altering the original rate, the second ground is that the wording of the Minutes of the meeting of the Board of Governors does not equivocally state that the Company agreed to reduce the rate. The third reason is that the intention of the Company to honour the promise of giving concession to the School as reflected in the minutes do not go to the extent of pinning down to a 50% concession. In our judgment, each of the reason is unsustainable. The appellate authority overlooked that the original contract was not reduced to writing but was reflected only in the correspondence and consequently alteration in respect of quantum of fees need not be by separate written agreement. The Minutes of the meeting did not unequivocally state that the Company is agreeable to reduce the quantum of fees is also not accurate The Minutes establish that the School authorities appreciated the gesture of the Company to reduce the fees by assuring to give donation of the amount equivalent of 50% of the consultancy fees The third reason that the Minutes do not go to the extent of pinning down to a 50% concession cannot establish that the Company had a right to receive 6% of the fees. It cannot be overlooked that the Company was trying to secure contracts in a foreign country and while undertaking the project of an Indian School in a foreign country was justified in giving concession and that too at the behest of the Indian community, the staff of the Indian Embassy and the Bankers of the Company. In these circumstances, the claim of the Company that the provisions of Section 16 (1) (b) of the Act are not attracted deserves acceptance. The contravention under Section 16 (1) of the Act can arise only when the Company has a right to receive foreign exchange Once, it is found that the Company had a right to receive only 3% of the total cost of the project of constructing School, then the charge levelled under Show Cause Notice no IV must fall to thethe present case, the Company had assured to donate before completion of the project and before determination as to what quantum of consultancy fees could be recovered The Company bad agreed to give 50% of the fees to the Indian School or in other words, to charge only 3% of the total cost of the project as fees. This agreement prior to the date of completion of the project, in our judgment, clearly establishes that the right to receive was only at 3% and not 6% as assumed by the department. In these circumstances, the appellate authority also found that the claim of the Company is a debatable one. In our judgment, once the appellate authority came to that conclusion, then it was not proper to uphold the order of adjudicating authority which was passed in quasi criminal jurisdiction. In these circumstances, the appeal preferred by the Company is required to be allowed and the levy of penalty on the Company in respect of violation of Section 16 (1) (b) of the Act in respect of charge covered by show Cause Notice No. IV is required to be setour judgment, on the facts and circumstances of the case, it is clear that the Directors cannot be treated as a person committing contravention because the liability is only of person who at the time of the contravention was in charge of and responsible for the Company. The plain reading of(1) of Section 68 of the Act makes it clear that the expression "other person" does not necessarily mean only the Directors. The Legislature contemplated that a person whether he is Director or otherwise will be liable provided such person was in charge of and responsible for the Company at the time of contravention. The claim of the Department is that the contravention took place when on behalf of the Company. Shri Srinivasan agreed to reduce the fees from 6% to 3%. It is not the claim of the department that any of the Directors of the Company were in charge of the affairs of the Company at Behrain at the time of contravention, but on the other hand, the evidence on record clearly establishes that Shri Srinivasan, the Vice President posted at Behrain was in sole charge of the affairs of the Company at behrain and if any contravention has takes place, only Shri Srinavasan could be held liable. Shri Zaiwala had no explanation why the show cause notice was not served against Shri Srinivasan but Shri Nariman submitted that the reason was that Shri Srinivasan was removed from service and at his behest the Enforcement Directorate had commenced proceedings. In our judgment, the appellate authority was not accurate in holding that the Chairman and the Director was liable under(1) of Section 68 of the Act but was entitled to be relieved because of the proviso toIn our judgment, on the facts and circumstances of the case,(1) is not attracted and, therefore, it was unnecessary to turn to the proviso. Even otherwise, we are unable to find any infirmity in the conclusion recorded by the appellate authority that the Directors could not be held responsible in view of proviso to sub section (1) as the Directors were not aware of the contravention and had exercised all due diligence to prevent such occurrence. In our judgment, the appeal preferred by the Department to challenge the order of the appellate authority holding that the Directors are not responsible for the contravention referred to in Show Cause Notice No. IV is not required to bewe heard Shri Zaiwala and shri Nariman on merits of the charge covered by Show Cause Notice No. V. In our judgment, the charge covered by Show Cause Notice No. V cannot be sustained. The charge was tried to be sustained by the Department by merely relying upon the statement of the Chairman recorded on March 4, 1983. The perusal of the statement leaves on manner of doubt that the company was not guilty of delaying the recovery of amount which was due. The contravention under Section 16 (1) (a) takes place when a person has a right to receive foreign exchange and intentionally delays the receipt thereof. The contravention cannot be assumed even if there is no intention and the delay occurs for reasons which are beyond the control of the person. Shri Nariman submitted that the statement of the Chairman recorded by the enforcement Directorate clearly pointed out the steps taken for realisation of dues from parties based at Behrain and the inability to recover the same. The learned Counsel further pointed out that the Company was indebted to Bank of Baroda in respect of the projects undertaken in Behrain and other countries and that debt was discharged inspite of the fact that the company could not recover anything from the parties based at Behrain. There is considerable merit in the submission of the learned counsel that the company cannot be faulted because though the Company had right to receive, the payment could not be recovered. The delay on the facts and circumstances of the case cannot be because of any inaction and that too intentionally on the part of the Company. The company was to recover a substantial amount from the Defence Forces of behrain Government and the other debtors were also residents of Behrain. The statement of the Chairman indicates that the Defence Forces were not even willing to meet the representative of the Company. The statement further establishes that the Government of India as well as the Reserve Bank of India declined to give any assistance. It is not difficult to imagine that the Company could not have instituted any legal action at Behrain without the requisite foreign exchange and even if the foreign exchange is available, it would be extremely difficult to prosecute actions on a foreign soil. Shri Zaiwala could not dispute the accuracy of the statements made by the Chairman before the enforcement authorities and, therefore, it is impossible to hold that the company had contravened the provisions of Section 16 (1) (a) of the Act by intentionally delaying recovery of the amount which the Company had a right to receive. It is impossible on facts relied upon by the Department to bold that the Company was liable to penalty for contravention. As the Company was not liable, the question of holding the Directors liable does not arise. In our judgment, on merits, the charge levelled by Show Cause Notice No. V is not, at all, sustainable. Shri Zaisvala was unable to explain why the Enforcement department waited almost for more than three years to serve Show Cause notices in respect of alleged violation in the year 1982. In these circumstances, in our judgment, the order of the appellate authority in respect of Show Cause notice No. V is not required to be disturbed, though for different reasons. 9. Shri Nariman very fairly stated that the Original Side Appeal No 41 of 1990 will not survive in view of the disposal of the remaining appeals. This appeal was preferred to challenge the order of summary dismissal of Writ petition and which was filed due to the apprehension that the Enforcement directorate will launch prosecution against the Company and the Directors. The apprehension no longer survives as all the Show Cause Notices stand discharged and, therefore, Appeal No. 41 of 1990 does not survive.