Case: M.M. Shah Vs. The Deputy Director of Enforcement &amp; Others

2. The facts necessary to be cited for adjudication of the above Appeal can be stated thus:The Appellant during the relevant period i.e. 161994 to 2821997 was the paid Managing Director of the Company known as Indian Card Clothing Ltd. (for short ICC), a public limited company. The Appellant was devoting his full time attention to the affairs of the ICC and retired from the said Company in the year ending 2001. The said ICC and one Spifa Germany promoted a Joint Venture Company known as Suessen Asia Ltd. (for short SA Ltd.) wherein Spifa Germany was to hold 60% equity and ICC was to hold 40% equity. By a resolution datedpassed by the S A Ltd., the Appellant was to be concurrently appointed as the Managing Director of S.A. Ltd effective from 181994 at nil salary for a period of 5 years on the terms and conditions as mentioned in the contract which was tabled at the meeting. However, the said contract did not fructify as the ICC Board was not in favour of having concurrent Managing Directors for two companies and, therefore, by further resolution dated 2991994, the Appellants appointment as the Managing Director of S.A. Ltd, was deferred till further notice. By further resolution passed by the Board of S.A. Ltd. dated 971997, it was reiterated that the Appellant was not appointed as Managing Director of S. A. Ltd and that his appointment was deferred, since the Appellant could only periodically visit the factory of S.A. Ltd as a nominee Director of ICC Ltd. The S. A. Ltd appointed one Mr. Oberoi as the Managing Director of S.A. Ltd. In 1997. Since the Appellant has been held to be responsible for the evasion of customs duty, by the said S.A. Ltd, it would be necessary to go into the factual background in respect of which, the penalty has now been imposed upon the Appellant in his capacity as a Managing Director of the said S.A. Ltd.3. It appears that in furtherance of its intentions the Spifa which held 60% shares in S.A. Ltd, entered into Licence Agreement with it for the manufacture of textile machinery and its components on account of which, several capital goods, spare part and raw materials were required to be imported by the S.A. Ltd from Spifa. It appears that to expedite the said process of acquisition of certain spare parts on certain occasions, S.A. Ltd imported such items through the baggage of several personnel of Spifa visiting India and/or the personnel of S.A. Ltd. who were returning from Germany to India. It is the case of the Appellant that the said imports were covered under the Open General Licence and, therefore, did not require any import licence and that through over sight and inadvertence the baggage imported was not declared by the personnel of Spifa and/or S.A. Ltd to the Customs authorities. On investigation, the Commissioner of Customs issued a show cause notice dated 1571998 and called upon the S.A. Ltd to explain the non payment of customs duty on items imported through baggage. It is the case of the Appellant that there was no allegation against the Appellant for alleged infraction of Customs Law or baggage Law nor was he made a party to the said show cause notice. The said show cause notice culminated in the order dated 3131999 passed by the Commissioner of Customs who inter alia held that the employees of S. A. Ltd had failed to declare the contents of their baggage under Section 77 of the Customs Act, 1961 which has led to the evasion of Customs Duty to the tune ofthat the dutiable goods imported in personal baggage were classifiable under the head 98.03 of the Schedule to the Customs Tariff Act, 1975. The Commissioner by the said order refrained from confiscation of the goods, as he was of the view of the penal action under Section 112 of the Customs Act would be sufficient to meet the ends of justice and although the show cause notice demanded the duty ofthe duty adjudicated was lesser i.e. Rs.It is the case of the Appellant that the customs duty ofbeen deposited by the S.A.Ltd before issue of the said show cause notice. It is also stated by the Appellant that the total value of import through baggage was Rs.that the sum ofcredited to the account of Spifa maintained by the S.A. Ltd in its books of accounts. However, according to the Appellant the said amounts were not paid to Spifa as S.A. Ltd was facing financial difficulties and Spifa agreed to not to insist on payment being made by S.A. Ltd.4. Thereafter some time in August 1999, the Appellant received a show cause notice dated 2561999, a similar show cause notice has also issued to S.A. Ltd, to one Shri Venkatramani and Shri Traubel who were the nominee Directors, Deputy General Manager (Materials) and Resident Representative of Spifa, the collaborator of S.A. Ltd. respectively. It was alleged in the said show cause notice that by placing sums to the credit of Spifa in the manner which was set out in the show cause notice, the S.A.Ltd. appeared to have contravened the provisions of Section 9(1)(e) of the Foreign Exchange Regulation Act (FERA for short) and, thereby rendered themselves liable to be proceeded against under Section 50 of the FERA Act. The said show cause notice also called upon the Appellant as to why the adjudication proceedings as contemplated under Section 51 of the said Act should not be initiated against him. It was further alleged against the Appellant that the Appellant was incharge of S.A. Ltd and responsible for the conduct of the Company and, therefore, appeared to have contravened the provisions of Section 68(1) of the said Act. The said Show cause notice was adjudicated and by an order dated 30102001, the Respondent No.1 imposed a penalty of Rs.the Appellant and the other two noticees and a penalty of Rs.S.A. Ltd. While imposing the said penalties, the Respondent No. 1 held that S.A. Ltd had contravened the provision of Section 9(1)(c) of the FERA Act, despite the fact that in the show cause notice, the allegations against the S.A.Ltd was as regards the contravention of Section 9(1)(e) of the said Act. Being aggrieved by the said order dated 31102001, the Appellant filed an Appeal under the provisions of Foreign Exchange Management Act, 1999 (FEMA) and also a stay application. The Appellant had before the hearing of the said Stay Application, had filed an affidavit inter alia setting out the correct facts enclosing the explanatory note showing that for the relevant period he was the Managing Director of ICC and that as far as his appointment of being the concurrent Managing Director, S.A. Ltd at nil salary was concerned, the same was deferred which was duly recorded in various Board Resolutions of S.A. Ltd. The Respondent No.2 granted a conditional stay to the Appellant vide order dated 2282008, on the Appellant furnishing a bank guarantee of the entire penalty amount of Rs.a nationalised Bank. The said Appeal ultimately came to be dismissed. However, in so far as the Appellant was concerned, the penalty against him was reduced from Rs.r the reasons mentioned in the said order. As indicated above, it is the said Order dated 1082009 which is impugned in the present Appeal.

Court's reasoning:
20. In view of the above discussion, our answers to the questions posed in the Reference are as under:(a) It is necessary to specifically aver in a complaint under Section 141 that at the time the offence was committed the person accused was in charge of and responsible for the conduct of business of the company. This averment is an essential requirement of Section 141 and has to be made in a complaint. Without this averment being made in a complaint, the requirements of Section 141 cannot be said to be satisfied.(b) The answer to question posed in(b) has to be in negative. Merely, being a director of a company is not sufficient to make the person liable under Section 141 of the Act. A director in a company cannot be deemed to be in charge of and responsible to the company for conduct of its business. The requirement of Section 141 is that the person sought to be made liable should be in charge of and responsible for the conduct of the business of the company at the relevant time. This has to be averred as a fact as there is no deemed liability of a director in such cases.(c) The answer to question (c) has to be in affirmative. The question notes that the Managing Director or Joint Managing Director would be admittedly in charge of the company and responsible to the company for conduct of its business. When that is so, holders of such positions in a company become liable under Section 141 of the Act. By virtue of the office they hold as Managing Director or Joint Managing Director, these persons are in charge of and responsible for the conduct of business of the company. Therefore, they get covered under Section 141. So far as signatory of a cheque which is dishonoured is concerned, he is clearly responsible for the incriminating act and will be covered under subsection (2) of Section 141.In the light of the aforesaid, the above Appeal would have to be allowed and the question of law would have to be answered in favour of the Appellant and against the Department.