2012 (8) TMI 253 - HC - FEMA

Foreign exchange was acquired by the Company - bank-to-bank transaction under a Letter of Credit - contravention of the provisions of FERA, 1973 - Held that - The Appellant Parag Dalmia stated that notice to the company is not notice to the Appellant especially when the company had been wound up - though the offence was allegedly committed on 28th April, 1987, Appellant Parag Dalmia was sent summons for the first time to appear on 16th July, 2001 & till that date no summons were ever issued to him. This belated issuance of summons after 14 years has caused serious prejudice to him as then nothing was available with him to show that he had no role to play in the alleged offence. He neither has the bills of entry nor the postal refer of 1987 - Since the Appellants Parag Dalmia was only an ex-employee, he had no access to the documents and thus he could not file any document in reply to the opportunity notice. Merely because a person is a Director, he cannot be held liable and the onus is cast on the prosecution to prove that the Appellant was responsible and in-charge for the day-to-day functioning of the Company. As per Section 68(1) the initial burden is on the prosecution which is not discharged here. That extensive efforts were made to trace out the address of the company and various letters were written to the bank, however, it may be noted that the least that was required from the Respondent was to find out from the record of the Registrar of Companies about the address of the company - As serious prejudice is caused to the Appellant after more than 14 years in leading his defence this is not a case of delay on account of the acts of the Appellants but because of a casual approach adopted by the Respondent - in favour of assessee.

Issues Involved:
1. Delay in service of notice causing prejudice to the appellants.
2. Whether the prosecution discharged the initial burden of proving that the appellants were responsible and in-charge of the day-to-day affairs of the company.
3. Evidence of contravention of FERA provisions with consent, connivance, or neglect by the appellants.
4. Applicability of Section 8(3) & (4) of FERA regarding foreign exchange acquisition.

Issue-wise Detailed Analysis:

1. Delay in Service of Notice:
The appellants argued that the delay in serving the notice caused prejudice to their defense as the documents and evidence necessary for their defense were no longer available. The court noted that the alleged offense occurred on 28th April 1987, but the first summons were issued to the appellants in 2001, causing significant prejudice. The court cited several precedents, including *Government of India v. Citadel Fine Pharmaceuticals* and *Bhagwandas S. Tolani v. B.C. Aggarwal*, emphasizing that authorities must exercise their power within a reasonable period. The delay was attributed to the casual approach of the respondent, not the appellants' actions.

2. Prosecution's Initial Burden:
The court highlighted that the prosecution must initially prove that the appellants were responsible and in charge of the company's day-to-day affairs. In the case of appellants Jaihari Dalmia and H.S. Rustagi, the court found no evidence or specific findings that they were responsible for the day-to-day functioning of the company. The prosecution failed to discharge its burden, and merely being directors was insufficient to hold them liable. The court referenced *S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla* and *National Small Industries Corpn. Ltd. v. Harmeet Singh Paintal*, which clarified that liability arises from being in charge of the company's conduct at the relevant time, not merely holding a directorial position.

3. Evidence of Contravention with Consent, Connivance, or Neglect:
The court found no evidence that the alleged contravention of FERA provisions took place with the consent, connivance, or neglect of the appellants. The prosecution did not provide specific allegations or proof that the appellants were directly involved in the contravention. The court reiterated that the burden of proof lies with the prosecution to show direct involvement or responsibility for the alleged offense.

4. Applicability of Section 8(3) & (4) of FERA:
The court decided not to delve into this issue as the appeals could be resolved based on the other issues. The appellants argued that no foreign exchange was acquired by the company, as the payment was made through a bank-to-bank transaction under a Letter of Credit (LOC). The court did not make a specific ruling on this matter, focusing instead on the procedural and evidentiary issues.

Conclusion:
The court set aside the impugned orders dated 7th October 2010 by the Appellate Tribunal for Foreign Exchange and 25th May 2010 by the Special Director of Enforcement. The appeals were allowed on the grounds of significant delay in serving the notice and the prosecution's failure to prove that the appellants were responsible for the company's day-to-day affairs. The court ordered the return of the deposited amount to the appellant Jai Hari Dalmia with interest, if any.

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