2010 (4) TMI 1121 - HC - FEMA

Summary

Issues Involved:
1. Validity of proceedings initiated under FERA post the sunset period defined by FEMA.
2. Financial hardship and the requirement to furnish a bank guarantee as a pre-condition for the appeal.

Detailed Analysis:

Issue 1: Validity of Proceedings Initiated Under FERA Post-Sunset Period Defined by FEMA

The primary challenge in this petition is to the order dated 22nd August 2002, passed by the Special Director, Enforcement Directorate (ED), which fixed a personal hearing for the petitioner on 12th September 2002. The petitioner also challenges the subsequent adjudication order dated 17th February 2005, which found the petitioner guilty and levied a penalty of Rs. 10 lakhs for contravention of Section 18(2) and 18(3) of the Foreign Exchange Regulation Act, 1973 (FERA). Additionally, the petitioner disputes the orders dated 7th February 2006 and 19th January 2007, passed by the Appellate Tribunal of Foreign Exchange.

The petitioner contends that the proceedings under FERA were initiated only on 22nd August 2002, after the expiry of the "sunset" period on 31st May 2002 as per Section 49(3) of FEMA. Therefore, the proceedings were without the authority of law. The petitioner argues that the issuance of a show cause notice under Section 51 FERA is merely an initiation and not the commencement of adjudication proceedings. The petitioner's counsel refers to Rule 3 of the Adjudication Proceedings and Appeal Rules (APAR), 1974, and argues that the show cause notice dated 28th February 2000 did not signify the commencement of proceedings under FERA. Instead, it was the communication dated 22nd August 2002 that signified the commencement of proceedings.

The court considered the arguments and referred to the Supreme Court judgment in S.K. Sinha v. Videocon International Ltd. (2008) 2 SCC 492, which explained that "commencement" connotes "take notice of judicially." The court also referred to the decision of the Single Judge of the Madras High Court in Deputy Director, Enforcement Directorate, Madras v. Naina Maricair AIR 1990 Madras 22, which held that adjudication proceedings under Section 51 of FERA commenced when a show cause notice is issued under Rule 3(1) of APAR.

The court concluded that the Adjudicating Officer took notice of the contravention when he issued the notices on 28th February 2000 and 27th March 2001 to the petitioner. This was within the sunset period, and therefore, the proceedings were not bad in law. Consequently, there was no error committed by the Adjudicating Officer in communicating on 22nd August 2002 that the proceedings would continue under FERA, 1973. The contention of the petitioner on this aspect was rejected.

Issue 2: Financial Hardship and Requirement to Furnish Bank Guarantee

The petitioner also challenged the validity of the orders dated 7th February 2006 and 19th January 2007, passed by the Appellate Tribunal, which required the petitioner to furnish an unconditional bank guarantee of Rs. 25 lakhs as a condition for the appeal being taken up for hearing. The petitioner argued that he demonstrated his lack of financial capacity to comply with the order.

The court noted that the adjudication order levied a total penalty of Rs. 50 lakhs on the petitioner for various contraventions under FERA. The petitioner was directed by the Appellate Tribunal to furnish a bank guarantee to the extent of 50% of the penalty amount, i.e., Rs. 25 lakhs. The petitioner pointed out that M/s Sita Electronics Pvt. Ltd., of which he was Chairman, suffered huge losses and was in liquidation. He also stated that he had resigned as Managing Director of Suri Computers Pvt. Limited on 29th October 1989.

The court found that the observations of the Appellate Tribunal, which stated that the petitioner had not shown any bona fide efforts in complying with the order for furnishing the bank guarantee, were not justified. The court held that the Appellate Tribunal erred in approaching the matter casually without adverting to the specific pleadings. The petitioner was able to demonstrate a lack of financial capacity to furnish a bank guarantee of Rs. 25 lakhs.

Considering the facts and circumstances, the court set aside both the orders dated 7th February 2006 and 19th January 2007, passed by the Appellate Tribunal. The court directed that subject to the petitioner depositing a sum of Rs. 1 lakh within four weeks, the petitioner's appeal would be heard by the Appellate Tribunal. The appeal would be placed for hearing before the Appellate Tribunal on 1st June 2010 or any day thereafter. If the petitioner failed to produce proof of having deposited the sum within the specified period, his appeal would automatically stand dismissed.

The writ petition was disposed of with no orders as to costs, and a copy of the order was directed to be sent to the Appellate Tribunal for Foreign Exchange.