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TMI Blog2021 (5) TMI 929X X X X Extracts X X X X X X X X Extracts X X X X ..... ent (Establishment in India of a branch office or a liaison office or a project office or any other place of business) Regulations, 2000 (hereinafter referred to as the 'Place of Business Regulations'). 2. As the Show Cause Notice(s) and the Impugned Order(s)/Communication(s) are based on the same grounds for proceeding against the petitioner and the challenge thereto is common in both the petitions, the petitions are being adjudicated by way of this common judgment and order. 3. The petitioner herein is a private limited company incorporated under the Indian Companies Act, 1956. It is a subsidiary of JP Morgan India Securities Holding Limited, Mauritius ('JPMISHL'). 4. The genesis of the inquiry launched by the respondents originates from the judgment and order dated 23.07.2019 passed by the Supreme Court in W.P.(C) No. 940 of 2017, titled Bikram Chatterji & Ors. v. Union of India & Ors., finding various fraudulent transactions of Amrapali Group of Companies. 5. In the said judgment and order, various acts of fraud and statutory violations were alleged to have been committed by the JP Morgan Group of Companies. The Supreme Court inter alia observed as under: "87. The transac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s which were entered into with J.P. Morgan. Rule 4 of FEMA has been clearly violated. Master Circular No.8/2010-2011 of July 1, 2010, dealing with external commercial borrowings and trade credits clearly provides that external commercial borrowings are not permitted to be utilized for real estate business under the automatic route. The term real estate excludes the development of the integrated township. It was not a case of development of the integrated township. Even if it is taken to be a case of integrated township as submitted on behalf of J.P. Morgan, then also for approval route, hedging is required as pointed out by the Forensic Auditors in their report and borrowers had to submit their report about the signing of loan agreement with the lender for obtaining Loan Registration Number. In case J.P. Morgan had invested in the form of ECB, following would have been the requirements: (i) obtaining Loan Registration Number from the RBI; (ii) file ECB-2 returns every month to the RBI, (iii) to pay tax on interest payment to J.P. Morgan; and (iv) to file income tax return. We are in agreement with the findings of the forensic auditors in this regard. It is clear that it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the FDI norms and rules and for which the money was brought in India. 92. From 2013 to 2015, ASCPL has paid interest of Rs. 58.81 crores @ 17 percent, which is a highly abnormal rate. A sum of Rs. 14.41 crores was paid on 31.3.2013. Likewise, on 31.3.2014, Rs. 22.20 crores were paid and on 31.3.2015, another amount of Rs. 22.20 crores was paid. The violations were made with the knowledge of the IPFII Singapore and they were in connivance with the ASCPL." 6. The Supreme Court issued inter alia the following direction: "xxxxx (vi) In view of the finding recorded by the Forensic Auditors and fraud unearthed, indicating prima facie violation of the FEMA and other fraudulent activities, money laundering, we direct Enforcement Directorate and concerned authorities to investigate and fix liability on persons responsible for such violation and submit the progress report in the Court and let the police also submit the report of the investigation made by them so far." 7. Relying upon the above judgment and order of the Supreme Court and certain investigations carried out, the respondent no. 2 filed two complaints, being Complaint No(s). 01/2020 and 02/2020, both dated 08.01.2020, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e provisions of Regulation 3 of the FEM (Establishment in India of a Branch office or a Liaison office or a project office or any other place of Business) Regulations, 2000 JP Morgan India Securities Holding Limited, Mauritius & JPMIPL by establishing a place of business in India without prior approval of RBI. 16. Charges under FEMA: xxxxx e) JPMIPL has contravened the provisions of FEMA and Regulation issued by RBI as mentioned in Para 15 at Sl No.7 of the complaint to the tune of Rs. 85 Crore and thus has made itself liable to be proceeded against u/s 13 of FEMA." 8. It is important here to clarify that Complaint No. 01/2020 is interalia in relation to Rs. 85 crores invested by JP Morgan India Property Mauritius Company-II in M/s Amrapali Zodiac Developers Pvt. Ltd., whereas Complaint No. 02/2020 is inter alia in relation to investment of Rs. 140 crores approximately by IPFII-S Singapore PTE Ltd. in M/s Amrapali Silicon City Pvt. Ltd. The allegations against the petitioner are, however, common in both the complaints. 9. The respondent no. 1 took cognizance of the above complaints and issued the impugned notice(s) dated 29.01.2020 in terms of Rule 4(1) of the Adjudication R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Management (Adjudication Proceedings and Appeal) Rules, 2000. This is for your information please." 14. Along-with the counter affidavit filed to the present petitions, the respondents have also placed the File Noting(s) of 05.06.2020 which, according to the respondents, is the order/opinion of the respondent no. 1 in accordance with Rule 4(3) of the Adjudication Rules. The File Noting in Complaint No. 02/2020 reads as under: "I have carefully perused the complaint before me. I've also gone through the judgment of Hon'ble SC dated 23/07/2019 in WP(C) No. 940/2017 (especially para 91, 92 etc.) which is also referred by the complainant in the complaint before me. I have taken the cognizance of the complaint no. 02/2020 dtd. 08/01/2020 and SCN was issued on 29/01/2020. After due consideration of allegation levelled in the said complaint, judgment of Hon'ble SC dtd. 23/7/19 and replies received from the noticees, I am of the view that further enquiry is necessary & should be held in terms of Rule 4(3) of FEMA (Adjudication) Rule, 2000. Pl. issue notice to noticees and call for written submissions first considering the current pandemic situation." 15. Except a minor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rule 4(3) of the Adjudication Rules in the present case. They submit that in the present case, the respondent no. 1 formed his opinion to proceed with the inquiry as required in Rule 4(3) of the Adjudication Rules. The same is duly recorded in form of an Office File Noting(s) dated 05.06.2020. They submit that the expression of the opinion as required in Rule 4(3) of the Adjudication Rules need not be in form of elaborate reasons and as an order; it is a mere formation of an opinion, and in fact, is not even appealable under Section 19 of the FEMA. They further submit that in the present case, the Supreme Court in its judgment and order dated 23.07.2019 has found various violations of the FEMA against the JP Morgan Group of Companies and its officers. The complaint filed by the respondent no. 2 before the respondent no. 1 also makes reference to number of statements recorded during the course of investigation which make out the violation of inter alia the Place of Business Regulations by the petitioner. The respondent no. 1 in his opinion/order dated 05.06.2020 has clearly recorded that he has perused the complaint, the judgment of the Supreme Court as also the reply filed by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rson either personally or through his legal practitioner or a chartered accountant duly authorised by him. (4) On the date fixed, the Adjudicating Authority shall explain to the person proceeded against or his legal practitioner or the chartered accountant, as the case may be, the contravention, alleged to have been committed by such person indicating the provisions of the Act or of rules, regulations, notifications, direction or orders or any condition subject to which an authorisation is issued by the Reserve Bank of India in respect of which contravention is alleged to have taken place. (5) The Adjudicating Authority shall, then, given an opportunity to such person to produce such documents or evidence as he may consider relevant to the inquiry and if necessary, the hearing may be adjourned to future date and in taking such evidence the Adjudicating Authority shall not be bound to observe the provisions of the Indian Evidence Act, 1872 (1 of 1872). (6) While holding an inquiry under this rule the Adjudicating Authority shall have the power to summon and enforce attendance of any person acquainted with the facts and circumstances of the case to give evidence or to produce a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng Authority has to explain to the noticee or his representative, as the case may be, the contravention alleged to have been committed by such noticee. Thereafter, the noticee has to be given an opportunity to produce documents or evidence in support of his defence. The Adjudicating Authority upon consideration of the evidence so produced, shall then pass an order either exonerating the noticee or finding him guilty of having committed any contravention of the Act or of the Rules/Regulations/Instructions/Direction/Orders, etc. and impose such penalty as he thinks fit. It is only this order which can be challenged by the noticee under Section(s) 17 or 19 of the FEMA. 23. The effect of this two-stage process in Rule 4 of the Adjudication Rules came up for consideration before the Supreme Court in Natwar Singh (supra), wherein the Supreme Court held as under: "22. That a bare reading of the relevant provisions of the Act and the Rules makes it abundantly clear that the manner, method and procedure of adjudication are completely structured by the statute and the Rules. The authority is bound to follow the prescribed procedure under the statute and the Rules and is not free and entit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are required to be furnished to the noticee enabling him to show a proper cause as to why an inquiry should not be held against him though the Rules do not provide for the same. Such a fair reading of the provision would not amount to supplanting the procedure laid down and would in no manner frustrate the apparent purpose of the statute. xxxxx 34. As noticed, a reasonable opportunity of being heard is to be provided by the adjudicating authority in the manner prescribed for the purpose of imposing any penalty as provided for in the Act and not at the stage where the adjudicating authority is required merely to decide as to whether and inquiry at all be held into the matter. Imposing of penalty after the adjudication is fraught with grave and serious consequences and therefore, the requirement of providing a reasonable opportunity of being heard before imposition of any such penalty is to be met. In contradistinction, the opinion formed by the adjudicating authority whether an inquiry should be held into the allegations made in the complaint are not fraught with such grave consequences and therefore the minimum requirement of a show-cause notice and consideration of cause sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ner is correct, it becomes the duty of this Court to ensure that the authorities comply with the statutory provision while adjudicating the show cause notices. It would be convenient to reproduce Rule 4 of the Adjudication Rules, which reads as under: -- xxxxx 12. On reading the above Rule, particularly sub-rules (1) and (3) thereof, it is clear that on the issue of show cause notice, a noticee is permitted to submit his reply to the same. In terms of the above Rule, the Adjudicating Authority has to consider the objections raised by the noticee and only if he forms an opinion that an inquiry should be continued further that the Adjudicating proceedings can be proceeded with, by issuing a notice for personal hearing. However, if the Adjudicating Authority is satisfied that the objections raised to the notice are valid, he may drop the show cause notice. The provision as found in Rule 4 of the Adjudication Rules is a unique provision. The Counsel for the parties were not able to point out any similar rules under which a two tier adjudication of a show cause notice is provided for in any other statute. Normally, once a show cause notice has been issued, the Adjudicating Authority ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion raised by the noticee would only be evident if the formation of his opinion is recorded at least on the file. This forming of opinion need not be a detailed consideration of all the submissions but must show application of mind to the objections raised by the noticee. In case the objections are such as would require detailed consideration, the authority concerned can dispose of the objections by stating that the same would require detailed consideration, which would be done at the disposal of the notice by the final order. 15. However, this formation of opinion by the Adjudicating Authority is not required to be preceded by a personal hearing but only consideration of the written objections of the noticee would meet the ends of natural justice. The personal hearing would be afforded to the noticee before the disposal of the show cause notice by a final order an appealable order. This formation of opinion must be on record of the Adjudicating Authority, in this case the Special Director, Directorate of Enforcement. Keeping this recording of reasons on the file would ensure that there has been a due application of mind to the objections raised by the noticee. This would be a ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he reasons recorded for re-opening before the Assessing Officer. The Assessing Officer is then required to consider those objections and pass an order thereon before proceeding to reassess the assessee's income in respect of a completed assessment. Thus, the Supreme Court has provided for giving of reasons recorded while re-opening the assessment to the party and then dealing with the objections of the party. In this case, it has been specifically provided in Rule 4 of the Adjudication Rules that the noticee under the Act is entitled to raise objections to the issuance of the notice and the Adjudicating Authority is obliged to consider those objections and form an opinion whether or not to proceed further with the show cause notice. Formation of opinion itself would presuppose an application of mind to the facts and the objections of the party before it is decided to proceed further with the show cause notice. This opinion cannot be arbitrary, but must be supported by reasons, howsoever, minimal those reasons may be, to evidence application of mind to the objections raised by the noticee. 20. The nature of the adjudication proceedings, the nature of the alleged contraventions, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n so formed is adverse to the petitioner, such opinion along with the reasons so recorded shall be furnished so as to reach the petitioner at least 15 days prior to the date of personal hearing. This would meet the requirements of Rule 4(3) of the Adjudication Rules." 26. The High Court of Bombay has, while appreciating the uniqueness of the two-staged inquiry process in Rule 4 of the Adjudication Rules, observed that the formation of opinion under Rule 4(3) need not be a detailed consideration of all the submissions but must show application of mind to the objections raised by the noticee. It must give reasons for arriving at the opinion. In case the objections are such as would require detailed consideration, the authority concerned can dispose of the objections by stating that the same would require detailed consideration, which would be done at the disposal of the notice by the final order. However, the File Noting itself must show the due application of mind of the Adjudicating Authority to the cause shown by the noticee. 27. The Director of Enforcement, to ensure compliance with the judgment of the High Court of Bombay, issued Technical Circular No. 11/2014, which reads as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sons are live links between the mind of the decision-taker to the controversy in question and the decision or conclusion arrived at." Right to reasons is an indispensable part of a sound judicial system. Reasons substitute subjectivity by objectivity. 30. In S.N. Mukherjee (supra), the Supreme Court emphasized the requirement of giving reasons, in the following words: "35. The decisions of this Court referred to above indicate that with regard to the requirement to record reasons the approach of this Court is more in line with that of the American courts. An important consideration which has weighed with the court for holding that an administrative authority exercising quasi-judicial functions must record the reasons for its decision, is that such a decision is subject to the appellate jurisdiction of this Court under Article 136 of the Constitution as well as the supervisory jurisdiction of the High Courts under Article 227 of the Constitution and that the reasons, if recorded, would enable this Court or the High Courts to effectively exercise the appellate or supervisory power. But this is not the sole consideration. The other considerations which have also weighed with the Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... zed by the Supreme Court in Kranti Associates (P) Ltd. & Anr. v. Masood Ahmed Khan & Ors., (2010) 9 SCC 496, observing as under: "12. The necessity of giving reason by a body or authority in support of its decision came up for consideration before this Court in several cases. Initially this Court recognised a sort of demarcation between administrative orders and quasi-judicial orders but with the passage of time the distinction between the two got blurred and thinned out and virtually reached a vanishing point in the judgment of this Court in A.K. Kraipak v. Union of India, [(1969) 2 SCC 262 : AIR 1970 SC 150]. xxxxx 47. Summarising the above discussion, this Court holds: (a) In India the judicial trend has always been to record reasons, even in administrative decisions, if such decisions affect anyone prejudicially. (b) A quasi-judicial authority must record reasons in support of its conclusions. (c) Insistence on recording of reasons is meant to serve the wider principle of justice that justice must not only be done it must also appear to be done as well. (d) Recording of reasons also operates as a valid restraint on any possible arbitrary exercise of judicial and quas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which requires, "adequate and intelligent reasons must be given for judicial decisions". (o) In all common law jurisdictions judgments play a vital role in setting up precedents for the future. Therefore, for development of law, requirement of giving reasons for the decision is of the essence and is virtually a part of "due process"." 32. In Bhikhubhai Vithlabhai Patel (supra), the Supreme Court held that though the opinion of the authority may be to its subjective satisfaction, it should reflect application of mind with reference to the material available on record. It was observed as under: "22. Any opinion of the Government to be formed is not subject to objective test. The language leaves no room for the relevance of a judicial examination as to the sufficiency of the grounds on which the Government acted in forming its opinion. But there must be material based on which alone the State Government could form its opinion that it has become necessary to make substantial modification in the draft development plan. 23. The power conferred by Section 17(1)(a)(ii) read with proviso is a conditional power. It is not an absolute power to be exercised in the discretion of the Sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exicon, P. Ramanatha Aiyar, 3rd Edn., 2005.) 26. The formation of the opinion by the State Government should reflect intense application of mind with reference to the material available on record that it had become necessary to propose substantial modifications to the draft development plan." 33. The Adjudicating Authority, under the Scheme of the FEMA, performs a quasi-judicial function as opposed to a purely administrative function. The requirement of giving reasons therefore cannot be undermined and must be insisted upon from the Adjudicating Authority. The reasons to be given for its opinion under Rule 4(3) of the Adjudication Rules to proceed with the inquiry though need not be as elaborate as in a Court decision or let's say an order passed by the Adjudicating Authority under Rule 4(8) of the Adjudication Rules, but have to be adequate, proper and intelligible, sufficiently clear and explicit. They must reasonably deal with the substantial points raised in the matter and show that they were taken into consideration. However, the extent and nature of reasons depend upon specific facts and circumstances of each case. 34. The Impugned Opinion/Order dated 05.06.2020, in my op ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... person and attendant circumstances." 39. Following the above judgment, in Hanuman Prasad & Ors. v. Union of India & Anr., (1996) 10 SCC 742, the Supreme Court held that even though the order may not contain the reasons, the record may indicate the same. In the facts of that case, it was observed that as the action of cancellation of the Select List was based on the preliminary report submitted by the CBI which indicated that malpractices have been committed in writing the examination, it cannot be said that the order of cancellation does not contain any reasons. 40. Applying the above principle and especially considering that at the stage of Rule 4(3) of the Adjudication Rules, the Adjudicating Authority was merely to form an opinion whether to proceed with the inquiry; and as held by the Supreme Court in Natwar Singh (supra), it is only thereafter that the "real and substantial inquiry into allegations of contravention begins"; and that unlike the final order imposing penalty, "the opinion formed by the Adjudicating Authority whether an inquiry should be held into the allegations made in the complaint are not fraught with such grave consequences", and as held by the High Court o ..... 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