2009 (3) TMI 1011 - HC - FEMA

Summary

Issues Involved:
1. Legality of the Tribunal's order dispensing with the statutory requirement of pre-deposit of penalty.
2. Determination of whether undue hardship was established by the respondents.
3. Examination of the merits of the adjudicatory findings by the Special Director.
4. Applicability of the Foreign Exchange Regulation Act (FERA) versus the Foreign Exchange Management Act (FEMA).

Issue-wise Detailed Analysis:

1. Legality of the Tribunal's Order Dispensing with the Statutory Requirement of Pre-Deposit of Penalty:
The Special Director of Enforcement challenged the Tribunal's order which unconditionally dispensed with the statutory requirement of pre-deposit of the penalty amount before the respondents' appeal could be heard. The Tribunal reasoned that the proceedings were conducted under FERA and not FEMA, thus Section 19(1) of FEMA was not applicable. The Tribunal also concluded that the appellants had a prima facie strong case and that undue hardship would be caused by the pre-deposit requirement. The High Court found that the Tribunal erred in its understanding that the burden of proof in FERA proceedings was "beyond reasonable doubt," which is incorrect as per the Supreme Court's ruling in Director of Enforcement v. M.C.T. M. Corpn. (P) Ltd. The High Court emphasized that the Tribunal must follow the legislative mandate of pre-deposit unless undue hardship is clearly established.

2. Determination of Whether Undue Hardship Was Established by the Respondents:
The Tribunal granted complete exemption from pre-deposit by concluding that the respondents had a prima facie strong case and that undue hardship would be caused by the pre-deposit. However, the High Court noted that the Tribunal did not properly scrutinize the individual facts to establish undue hardship as required by the Supreme Court's rulings in Benara Valves Ltd. v. CCE and Monotosh Saha -Vs- Special Director, Enforcement Directorate. The High Court emphasized that undue hardship must be shown to be excessive and disproportionate to the nature of the requirement.

3. Examination of the Merits of the Adjudicatory Findings by the Special Director:
The Special Director argued that the respondents failed to establish a prima facie case and did not disclose the source of funds amounting to over Rs. 208 crores. The adjudicatory order relied on statements and documents obtained during search and seizure, which indicated manipulation of foreign exchange by Sterilite and its directors. The Tribunal, however, found that the Special Director's findings were not beyond reasonable doubt and that RBI permissions were available. The High Court noted that the Tribunal's approach was improper as it did not consider the standard of proof required in FERA proceedings, which is not "beyond reasonable doubt" but rather a balance of probabilities.

4. Applicability of the Foreign Exchange Regulation Act (FERA) Versus the Foreign Exchange Management Act (FEMA):
The Tribunal reasoned that the appeal was governed by FERA as the proceedings were initiated under FERA and the appeal was filed before the newly created Tribunal after the abolition of the FERA Board by Section 49(1) of FEMA. The High Court agreed that the appeal should be disposed of under FERA and not FEMA. However, the High Court found that the Tribunal did not properly apply the principles of undue hardship and pre-deposit requirements as mandated by the relevant legal provisions and judicial precedents.

Conclusion:
The High Court concluded that the Tribunal's order was unsustainable as it did not properly address the issue of undue hardship and misapplied the standard of proof required in FERA proceedings. The Tribunal's order was set aside, and the respondents' applications for waiver of pre-deposit requirements were to be heard afresh in accordance with the law. The writ petitions were allowed, and all pending applications were disposed of without any order on costs.