2022 (5) TMI 256 - HC - FEMA

Offence under FEMA - prejudice on account of infraction of the procedure - main ground of challenge was that the impugned notice was issued without complying with the Rule 4(1) and Rule 4(2) of the Rules of 2000 - HELD THAT - The adjudicating authority is required to give the notice under sub-rule (1) to the concerned person requiring him to show cause as to why inquiry should not be held against him indicating the nature of contravention alleged to have been committed by him. After considering the cause, if any shown, and on forming an opinion that an inquiry should be held, the adjudicating authority is required to issue notice under sub-rule (3) fixing the date of appearance. In the present case, undisputedly no notice in terms of sub-rule (1) and (2) of Rule 4 has been given and straight away notice under sub-rule (3) of Rule 4 has been issued which was subject matter of the challenge in the writ petition. As decided in KANWAR NATWAR SINGH KANWAR JAGAT SINGH VERSUS DIRECTORATE OF ENFORCEMENT 2010 (10) TMI 156 - SUPREME COURT Notice in terms of sub-rule (1) and (2) is necessary and thereafter formation of opinion under sub-rule (3) is required before conducting inquiry in terms of other provisions of the Rule. The Hon ble Supreme Court in the matter of State of Uttar Pradesh vs. Singhara Singh and Others 1963 (8) TMI 43 - SUPREME COURT has noted that where a power is given to do a certain thing in a certain way, the thing must be done in that way or not at all and that other methods of performance are necessarily forbidden. Enforcement Directorate was required to form an opinion after giving notice to the petitioner before issuing the impugned show cause notice dated 06.07.2020 which he has failed to do in the present case. Hence, we dispose of the appeal without interfering in the show cause notice dated 06.07.2020 but by directing the Special Director, Eastern Region, Enforcement Directorate to form his opinion after recording reasons in terms of sub-rule (3) of Rule 4. If the opinion so formed is adverse to the appellant, such opinion along with the reasons so recorded shall be furnished so as to reach the appellant at least 15 days prior to the date of personal hearing as the same would meet the requirement of Rule 4(3).

Summary

Issues Involved:
1. Compliance with Rule 4(1) and Rule 4(2) of the Foreign Exchange Management (Adjudication Proceedings and Appeal) Rules, 2000.
2. Validity of the show cause notice issued under Rule 4(3) without prior compliance with Rule 4(1) and Rule 4(2).
3. Application of the principle of prejudice in the context of procedural compliance.

Issue-wise Detailed Analysis:

1. Compliance with Rule 4(1) and Rule 4(2) of the Foreign Exchange Management (Adjudication Proceedings and Appeal) Rules, 2000:
The appellant challenged the show cause notice dated 06.07.2020 issued by the Special Director, Eastern Region, Enforcement Directorate, arguing that it was issued without adhering to Rule 4(1) and Rule 4(2) of the Rules of 2000. The appellant contended that these rules mandate a specific procedure for issuing notices and conducting inquiries, which was not followed in this case. The court examined Rule 4, which stipulates that the adjudicating authority must issue a notice requiring the person to show cause why an inquiry should not be held, indicating the nature of the alleged contravention.

2. Validity of the show cause notice issued under Rule 4(3) without prior compliance with Rule 4(1) and Rule 4(2):
The court noted that the adjudicating authority had issued a notice directly under Rule 4(3) without first issuing a notice under Rule 4(1) and Rule 4(2). This procedural lapse was central to the appellant's challenge. The court referenced the Supreme Court's judgment in Natwar Singh vs. Director of Enforcement, which emphasized that the adjudicating authority must follow the structured procedure outlined in the statute and the rules. The court also cited the Bombay High Court's decision in Shashank Vyankatesh Manohar vs. Union of India, which highlighted the importance of the two-tier adjudication process provided under Rule 4.

3. Application of the principle of prejudice in the context of procedural compliance:
The learned Single Judge had previously held that the appellant needed to demonstrate prejudice due to the procedural infraction. However, the appellate court found this application of the principle of prejudice to be misplaced. The court emphasized that the procedural requirements under Rule 4(1) and Rule 4(2) are mandatory and must be rigorously applied, especially given the severe consequences of proceedings under Section 13 of FEMA. The court concluded that the procedural safeguards provided by these rules must be followed to avoid arbitrary decisions and ensure fairness.

Conclusion:
The court disposed of the appeal by directing the Special Director, Eastern Region, Enforcement Directorate, to form an opinion after recording reasons in compliance with Rule 4(3). If the opinion formed is adverse to the appellant, it must be furnished to the appellant at least 15 days before the date of the personal hearing to meet the requirements of Rule 4(3). The court did not interfere with the show cause notice dated 06.07.2020 but ensured that the procedural requirements were met to protect the appellant's rights.