80 2

SUPERINTENDENT AND REMEMBRANCER OF LEGAL

. AFFAIRS, WEST BENGAL v.

GIRISH KUMAR NA V ALAKHA & ORS.

March 3, 1975

[A. N. RAY, CJ .. K. K. MATHEW, v. R. KRISHNA IYER AND

A. C. GUPTA, JJ.]

Constitution oi India, 1950, Art. 14-Purpose of dzaUenged classification in doubt-Concept of 'purpose' and 'similar situations', when can be resorted to-Legislature if can be given benefit of doubt abo'ut its purpose.

Constitution of India, 1950, Art. 14-Under-inclusive classification. meaning C of-Under-inclusive classification, when permissible.

' Foreign Exchang.~ Regulation Act, 1947, Section 23-Two difjer!'llf prvcedures for dealing with persons cdntra1•eni11g the Act-Benefit of inquiry by Director of Enforcement not available to persons dealt with under s. 23 (I A)-- Classification, if unreasonable. .

The respondents were tried for having committed offences under s. 4 ( 3), 20(3) and 22 of the Foreign Exchange Regulation Act, 1947 read with s. 120-11

of 1he Indian Penal Code and s. 23 of the Act. The Court discharged th1~ respondents in view of the decision of the H:gh Court of Calcutta in M, I s Serlljuddin & Co. and Ors. v. Union of India and Ors. Civil Rules Nos. 2183 (W) of 1966 and cases Nos. 1998 and 1999 of 1963 decided on 16-9-1971, holding that s. 23(Al) was violative of Art. 14 of the Constitution. The appellaii.t filed :a revision pet.ition against the order, before the High Court. The High Court conc; urred with the decision of the trial Court and dismissed the revision. This appc:al, by special Jeave, is against that order dismissing the revision,

It was contended for the respondents that s. 23 pro¥ides for two different procedures for deali11g with contravention of the provisions of the Act. That is tc> say, irersons who have contravened the provisions specified in s. 23 (I) (a) and are found guilty by the Director of Enforcement need not face prosecution in a criminal court if the Director is of opinion that the penalty he is empowered to impose would be adquate punishment, whereas, the peraons aJleged to contravene the other provisions of the Act have necessarily to face prose cution in criminal court without being given the benefit of an inquiry by the Din:ctor of Enforcement and the opportunity to the delinquents to convince him that imposition of penalty by him would be adequate punishment even if they are found guilty. The classification made in s. 23 (1) is under-inclusive and is, therefore, unreasonable.

Allowing 1he appeal,

HELD : (i) When th1~ purpose of a challenged classification is in doubt,

the courts attribute to the classification the purpose thought to be most pro- G hable. Instead of asking what purpose or purposes the statute and other materials reflect, the court may ask what constitutionally permissible objective this statute and other rele1<ant materials could plauibly be construed to reflect.

The latter approach is the proper on~ in economic regulation cases. The decisions dealing with economic regulation indicate that courts have used the concept of 'purpose' and 'similar situations' in a manner which give consider abte kway to the legislature. This approach of judicial restraint and presumption of constitutionality requires that the legislature is given the benefit H of doubt about its pupose. [805H-806C]

(ii) Often times the courts hold that unc1er0inclusion does not deny the equal protection of Jaws under Article 14. In str1.ct theory, this involves an

abandonment of the principle that classification must include all who are similarly situated with respect to the purpose'. This under-inC!usion is often explained by sa}'ing thav the legislature, is free to remedy parts of a mischief or to recognize degrees of evil ana strike at the harm where it thinks it most acute. There are two main considerations to justify an under-inclusive classification. First, administrative necessity.

Second, the legislature might not be fully convinced that the particular policy which it adopts will be fully succesf'ul or wise. Thus to demand application of the policy to all whom it

might logically encompass would restrict the opportunity of a state to make experiment. These techniques would shew that some sacrifice of absolute equality may be required in order that the legal system may preserve the flcxib'..lity to evolve new solutions to social and economic problems. [806E; H-

807B]

Missouri K. and T. Rly. v. May, (1903) 194 U.S. 267 at p. 269and Gujarat v. Ambicao Mills A.I.R. 1974 S.C. 1~00 referred to.

(iii) The experience of the Government was that persons contravening .the provisions of the Act specified in s. 23 (1) (a) invariably escaped without punishment : firstly because, successful prosecution of these offences in many Cases was not possible for want of legal evidence; secondly because, the criminal courts were not equipped with the training, expertize and experience necessary to deal with the intricate .and ingenious methods adop•ted by the persons contravening them. The Government, therefore, thought that imposi_tion of penalty by deparlml!ntal adjudication would prove a more effective means of checking \hese types of foreign-exchange offences as against the previous system of prosecution of all offences on the basis of the strict standard of proof required for criminal prosecution-which proof was, by and large, so much within the special knowledge of the offender and so much out of the reach of th~ department. [808D-FJ

The basis of classification was that in cases where there was likelihood of

gtting sufficientfy unimpeachable evidence as, for instance. in cases involving contravention of sections 14, 13(2), 15, 18 etc., where the Reserve Bank of Jndia as a specialized agency comes into the picture and be in possession of relevant materials, those cases were left to be dealt with under s. 23(1:\) by criminal courts. The classification made in s. 23(1A) is, therefore, not discriminatory. [808H;-809£.]

CRIMIN.AL APPELLATE JURISDICTION : Criminal Appeal No. 203 of 1973.

A'Ppeal by special leave from the Judgment and Order 'dated the 14th March, 1973 of the Calcutta High Court in Criminal Revision No .. 613 of 1972.

L. N. Sinha, Solicitor-General, G. L. Sanghi and Girish Chandra for the Appellant.

A. K. Sen, Mrs. Liela Seth and U. K. Khaitan for the Respondents. 1he Judgment of the Court was delivered by ·

MATHEW, J.

The respondents were tried before the Presidency Magistrate, 11th Court for' having committed offences un(ier sections 4(3), 20(3) and 22 of the Foreign Exchange Regulation Act, 1947

(he<einafter called 'the A.ct') read with s. 120-B of the Indian Penal Code and s. 23 of the Act. The Court discharged the respondents in view of the decision of the High Court of Calcutta in M/s. Serajuddin

& Co. and Others v. Union of India and Others(1) holding that s.

.{I) Civil Rules Nos. 2183 (W), 2184 (W) of 1966 and cases Nos. 1998 and 1999 of 1963 decided on 16-9-1971.

23 (1 A) was violative of Article 14 of the Constitution. The appeHant filed a revision petition against the order, before the High. Co.urt. The Court concurred with the decision of the trial Court and d1sm1ssed the

reviion. This appeal, by special leave, is against that order.

The question fo1 consideration is whether s. 23 (lA) of the Act violates Article 14 of the Constitution.

Section 23 ( l) as it originally stood in the Act provided that whocwr conLravenes any of the provisions of the Act or of any rule, direction or order ma<l2 thereunder shaU be punishable with imp1iwnm.;11t for a term which may extend to two years or with fine or with both, and any Court trying any such contravention may, if it thinks fit and in addition to any senteece which it may impose for such contravention, direct that any currency, security, gold or silver or goods or other property in respect of which the contravention has taken place shall b~ confiscated. Section 23 was amended in 1950 and 1952. We an! not concerned with those amendments.

In 1957, the section was further amentied by the Foreign Exchange Regulation (Amendment) Act, 1957 (Act No. 39 of 1957).

This amendment provided for depart-· mental adjudication in respect of contravention of certain provisions of the Act.

The section as amended read as under :

"23 (1) If any person contravenes the provisions of s. 4, s. 5, s. 9 or sub-section (2) of s. 12 or of any rule, direction or order made thereunder, he shall-

( a) be liable to such penalty not excec'ding three times the value of the foreign exchange in respect of which the contravention has taken place, or five thousand rupees, whichever is more, as may be adjudged by the Director of Enforcement in the manner hereinafter provided or,

(b) upon conviction by a Court, be punishable with imprisonment for a term which may extend to two years, or with fine or with 'both, (lA) Whoever contravenes-

(a)

(b)

any of the provisions of this Act or of any ruk direction. or order made thereunder, other than thos~ referred to in sub-section (1) of this section ands. 19 shall, upon conviction by a ceurt, be punishable with imprisonment for a term which may extend to two years, or with fine or with both.

any ir.ection or order made under s. 19 shall, upon conv1ct1on by a Court, be punishable with fine which may extend to two thou.sand rupees."

By s. 23D it was provided that the Director of Enforcement shall for the purpose of adjudicating under clause (a) of sub-section (1) of s. 23

hold an inquiry after notice to the person proceeded against and impo; c a penalty, but if at any stage of the. inquiry he is of opinion that having regard to the circumstances of the case, the penalty he is empowered Ill impose would not be adequate, he shall, instead of imposing a iJenalty. file a complaint in writing to the Court. ·

The argument of the respondents was that s. 23 provides for twu different procedures for dealing with contravention of the proviiuns of the Act; that while persons contravening the provisions of th<) Act specllied in s. 23 (l) (a) have to be dealt with by the Director of Enforcement in the first inst':lnce and need face trial in criminal court only if he is of opin.ion that having regard to circumstanes of the case the penalty he is empowered to impose would not be adequate, the persons contravening the other provisions of the Act are liable to be prosecuted in the first instance in criminal court without an injury by the D:rcLt.1r of Fnforcemcnt which would give them the possibility to cscap~ prosecution in a criminal court.

In other words the argument was that p.?rsons who have contravened the provisions specified in s. 23 (1 )(a) and arc tound guilty by the Director of Enforcement need not face prosccutkm in a criminal court if the Director is of opinion that the penalty he i; empowered to impose would be adequate punishment, whereas, the persuns alleged to contravene the other provisions of the Act have necessarily to face prosecutioQ in criminal court without being given the benefit of an inquiry by the Director of Enforcement and the opportumty to the delinque.nts to convince him that imposition of penalty by him would be adequate punishment even if they are found guilty.

The question, therefore, is whether persons contravening the provisions specified in s. 23 (I) (a) are similarly situated with persons con-

Lravenin~ the other provisions of the Act with respei; t to the purpose or object of the Act or whether by reason of the nature of the offences resulting from the contravention of the provisions pecified in s. 23 (1 )-

(a) the persons contravening them form a class by themselves distinct from the persons contravening the other provisions of the Acf and therefore the legislative judgment to deal with them under a different procedurr was justified with reference to the ultimate purp9se of the Ad .

l'he preamble provides the key to the general purpose of the Act.

That purpose is the regulation of certain payments, dealings in foreign exchange and securities and the import and export of currency and bullion in the economic and financial interest of India.

The general purpose or ob, iect of the Act given in the preamble may not show the specific purpose of the classification made ins. 23(1) (a) ands. 23(1A).

The Court has therefore to ascribe a purpose to the statutory classifica" tion and coordinate the purpose with the more general purpose of the A.t and with other relevant Acts and public policies.

For achieving this the Court may not only consider the language of s. 23 but also other public knowlede abQut the evil sought to be remedied, the prior law, the statement of the purpose of the change in the prior law and the interna 1 legislative history. When the purpose of a challenged classifi- \.1ltion is in doubt, the courts attribute to the classification the purpose

thought to be most probable. Instead of asking what purpose, or purposes the statute and other materials reflect, the court may a~:k what 1:onstitutionally permissible objective this statute and other . relevant materials i.:ould plausibly be construed to reflect.

The latter aipp-roach is the proper one in economic regulation cases.

The decisions dealing with economic regulation indicate that courts have used the concept of purpose' and 'similar situations' in a manner which give considerable leeway to the legislature.

This approach of juicial restraint and presumption of constitutionality requires that the legislature is given the benefit of doubt about its purpose. How far a court will go in attribut-· ing a purpose which though perhaps not the most probable is at least concdvable and which would allow the classification to stand depends to a certain extent upon its imag!nanve power and its devotion to the theory of judicial restramt.

At this stage, it is necessary to sharpen the focus to understand the real grievance of the respondents.

As already indicated, their submission is that since they are similarly situated with persons contravening the provisions of the Act specified in s. 23, (1) (a), they should have been included in that class and dealt with by the Director Enforcement in the first instance so that they might also have the benefit of inquiry by him with the possible advantage of escaping with penalty even if they are found guilty of the offences. Their grievance therefore is that the classification made in s. 23 (1) is under-inclusive and is, therefore, unreasonable.

Often times the courts hold that under-inclusion does not de111iy the equal protection of laws under Article 14. In strict theory, this jnvolves an abandonment of the principle that classification must include: all who are similarly situated with respect to the purpose. . This; under inclusion is .often explained by saying that the legislature is free to remedy parts of a mischief or to recognize degrees of evil and strike at the harm where it thinks it m0st acute.

The Courts have recognised the very real difficulties under which legislatures operate-difficulties arising out of both the nature of the legislative process and of the society 'which legislation attempts. perennially to re-shapeand they have refused to strike down indis- . criminately all legislation embodying classificatory inequality here

under consideratio•a .. _ Mr. Justice Holmes, in urging tolerance of under-inclusive classifications, stated that such legislation should not be disturbed by the Court unless it can clearly see that there is no fair reason for the law which would not require with equal forc:e its extension to those whom it leaves untouched.

See Missouri K. and T. Rly. v. May(1i).

What, then, are the fair reasons for non-extensi0n ? What should a court do when it is faced with a law making an under-inclusive classification in areas relating to economic and tax matters?

'TI1ere are two main considerations to justify an under-inclusive

clssification. First, administrative necessity.

Serond, the legislature H might not be fully convinced tnat the particular policy which it adopts /

(I) (1903) 193 U.S. 267 at p. 269.

!.UPDT. LEGAL AFFAIRS v. GIRISH (Mathew,!.) 807

will be fully successful or wise.

Thus to demand application of the policy to all whom it might logically encompass would restrict the opportunity of a state to make experiment. These techniques would show that some sacrifice of absolute equality may be required in order that the legal system may preserve the flexibility to evolve new solutions to social and economic poblems. The gradual and piece-meal change is often regarded as desirable and legitimate th0ugh in principle it is achieved at the cost of some equality. It would seem that in fiscal and regulatory matters the court not only entertains a greater presumption of constitutionality but also places the burden on the party challenging its validity to show that it has nn reasonable basis for making the classification. This was the approach of this Court in State of Gujarat v. Ar.ibica- Mills('). The Court said:

"The piecemeal approach to a general problem permitted by under-inclusive classifications, appears justified when it is considered that legislative dealing with such prohlems is usually an experimental matter. It is impossible to tell how successful a particular appr0ach may be, what dislocations might occur, what evasions might develop, what new evils might be generated in the attempt. Administrative expedients must be forged and tested.

Legislators, recognizing these factors, may wish to proceed cautiously, and courts must allpw them to do so (37 California Rev. 341)."

The background of the amendment of s. 23 of the Act will be relevant for appreciating the reason for making the distinction between the two classes of contraventions.

From April, 1949 to DecenJber, 1952, the Rese.rve Bank was handling all cases including those relating to unauthorized import, e'xport of gold and silver.

The Bank had an enforcement section.

In 1952, the Central Government authorised the Customs and Central Excise officers to investigate and prosecute cases if import or export of gold and silver in contravention of the provisions relating to them. In May, 1956, the Central Government took over the work relating to enforcement, i.e., the residuary work done by tO.e Reserve Bank other than those entrusted to Customs Department. . A Directorate of Enforcement was set up in May, 1956 with the , idea that there should be a specialized agency to deal with specified categories of offences.

Between April, 1949 and April 1956, when the duty of enforcement was with the Reserve Bank, the Bank had completed investigation in about 200 cases but prosecutions could be launched in respect of 66 cases only and out of these 60 cases ended in convictions.

No prosecution could be launched in respect of other cases in view of the fact that evidence legally necessary to secure conviction in a court was not forthcoming.

When the work was transferred to the Enforcement Directorate of the Ministry

of Finance, its experience was also similar.

From May, 1956 till about 1957, the Directorate had handled 832 cases. But prosecutions could be launched only in respect of 32 cases. This w'as due to . the fact that legal evidence necessary for establishing the cases beyond

(I) A.LR. 1974 S.C. 1300.

SUPREME COURT R.EPOR7S [19751 3 s.c.tt

doubt in a court of law was not forthcoming partly because it was

iifficult to secure cooperation of the foreign collaborators in getting the incriminating documents against the suspects and partly bemuse the banks in fJreign countries were under no obligation to furnish statements of accounts niaintained by the suspects in them. .Faced with this diflicuhy, the Government had to consider other ways of enforcing the provisions of the Act more effectively. The Government, after considering the pros and cons decided t'J provide for departmental enquiry and adjudication of contravention or certain provisions of the Act by an authority specially constituted for that purpose.

In the statement of Objects and ReasJns to the Foreign ExchangG Regulation Bill, 1957, it was stated ;

" .... The most important of _these amendments is th-: one providing for departmental inquiry and adjudication of torc1gn ex.change offences by an authority constituted by Government on the Sea Customs Act."

In short, the reason for the amendments made in 1957 was the experience gained in the working of the Act till then. That experience was that persons contravening the provision of the Act specified in s. 23 (1) (a) invariably escaped without punishment : firstly because, successful pros•ecution of these 0ffences in many cases was not possibk for want of legal evidence; secondly because, the criminal cm1rts were not equipped with the training, expertize and experknce necessary to deal . with the intricate and ingenious methods adopt<:d by the persons contravenfog them. ..

The Government therefore thought that imposition of penalr'y by departmental adjudicati0n would prove a more effective means of checking these types of foreign-exchange offences as against the previous system of prosecution of all offences on the basis of the strict standard of pro'Jf required for criminal prosection-which proof was by and large, si::i much within the special knowledge of the offender and so much out of the reach of the department. It may be noted that after the amendment in 1957, further ljmendments of s. 23 were made in 1964 whereby sections 10, 17, I 8(A) and 18(B) were also brought within the purview of s. 23(l)(a). The introduction of these sc:ctions within s. 23(1)(a) was _the result of further experie'lce gained during the succeeding years. It was only on the basis of the experience gained by the working of the Act that a decision could be taken abot the classification of offences in respect c; which a ti •. J by a cJiurt

would be expedient and those in respect of which summary pro1; edure visualized bys. 23(1) (a) might be necessary.

Generally speaking, therefure, the basis of the classification was that in cases where there was likelihood of getting sufficiently unim peachable evidence as, for instance, in cases involving contravention of sections 14, 13(2), 15 18, etc., where the Reserve Bank of India as a specialized agency comes into the picture and be in possession of relevant materials, those cases were left to be dealt with und1:r s. 23(1A) by criminal courts.

SUPDT. LEGAL AFFAIRS v. '..JIRISH (Mathew, J.) 8 0 9

In paragraph 117 of the affidavit of Shri M. L. Sharma, Under Secretary, inistry of Finance, Department of Economic Affairs, filed with te permission of this Court, the reasons why the legislature :; cb:ted th~ contravention of certain provisions of the Act for being dc:.ilt with 'by thr criminal courts in the first instance have been fully stated.

According to that al1ldavit, broadly speaking, the classes of offences whicl1 iLvc been brought under sections 23(1) and 23A arc whfit may be tbrmccl as 'primary' offences and those brought under o. 'iJ (l A) may be termed as 'secondary' o!Iences.

Primary offences ale those which need detection and action at executive or field level by the concerned specialized agency. There is greater need f'iir taing deterrent. measures in rcspet of these offences. It is nota question of the scricmsness or gravity of the offences.

Both pr}-; nary and secondary oences may be grave or serious and involve large an'iounts.

Hut the difference is th'at primary offences are distin, guished bv the volume and areas of incidence and may need greater deterrence which sometimes may lie in large pecuniary penalty and sometimes in criminal punishment by w, ay of imprisonment. A delinquent who has become an insolvent may not feel any deterrent effect however large the p::cuniary penalty may be and such a cae may call for a sentence of inm; isonment.

In respect of secondary offences there are already built-in institutional checks laid down by the Reserve Bank Jr other Government agencies.

As indicated above, where contraventions <lo take place in regard toother sections, there would normally e adequate or reasonable documentary evidence, etc., and these will facilitate prosecution in courts of Jaw. -

We do not think that there is any mrit in the contention that.the classification made in s.23(1 A) is discriminatory.

Even according to the respondents, it is the classification made in s.23(1 )(a) which is under inclusive and is, therefore, unreasonable. If this Court were to declare tht the classification made in s. 23 (1) (a) is under inclusive and therefore unreasonable, the result would be that contraventions of the provisions specified ins. 23(l)(a) would also fall withins. 23(1A) and would have to be dealt with by the Criminal Court-a consummation which the respondents devotedly want to avoid.

We do not think that• the High Court was right in holdin; i that s. 23(1A) was bad. We set aide the order of the igh Comt and allow the appeal. ·

A;1iJt'ii! allowed.

V.M.K

.;.