Shailendra Swarup vs Special Director, Enforcement ...
2014 Latest Caselaw 6122 Del

$~*     IN THE HIGH COURT OF DELHI AT NEW DELHI

#321

+                                 CRL.A. No. 940 of 2008

        SHAILENDRA SWARUP                   ..... Appellant
                     Through: Mr. Kailash Vasdev, Senior
                     Advocate with Ms. Bindu Saxena,
                     Ms. Aparajia Swarup and Mr. K.K. Patra,
                     Advocates.
                                  versus

        SPECIAL DIRECTOR, ENFORCEMENT
        DIRECTORATE                             ..... Respondent
                      Through: Ms. Rajdipa Behura with
                        Ms. Monica Gupta, Advocates.
        CORAM: JUSTICE S. MURALIDHAR

                                  ORDER

% 25.11.2014

1. This appeal is directed against an order dated 2nd July 2008 by the

Appellate Tribunal for Foreign Exchange („AT‟) dismissing the

Appeal No. 1268 of 2004 filed against Adjudication Order („AO‟) No.

SDE (SKD) III/264/2004 dated 3rd November 2004 passed by the

Special Director, Enforcement Directorate („ED‟), Government of

India, inter alia holding the Appellant to be in contravention of

Sections 18(2) and 18(3) read with Section 68 of the Foreign

Exchange Regulation Act, 1973 („FERA‟) and levying a penalty of

Rs. 5 lakhs on the Appellant.

2. The facts leading to the filing of the present appeal are that the

Appellant was a part-time non-executive director of Flex Industries

Ltd. („FIL‟) from 10th November 1990 till 31st October 2001. By a

letter dated 31st October 2001 addressed to the Board of Directors of

the FIL, the Appellant resigned. An intimation under Form No. 32 to

that effect was filed by the FIL with the Registrar of Companies

(„ROC‟) on 13th November 2011. This Form No. 32 with the

acknowledgment of the ROC has been enclosed as Annexure A to the

appeal.

3. On 28th May 2002, the ED issued a Memorandum/Show Cause

Notice (SCN) to FIL and its Directors in relation to the non-realisation

of the export proceeds to the value of Rs. 1,10,96,544.22. These

exports are stated to have taken place during the period 1996-99. The

SCN was addressed to FIL and its Directors, including the Appellant,

at the address of the company, "A-107-109, Sector-IV, NOIDA (UP)".

4. The case of the Appellant is that he never received the said SCN

and was never informed by the FIL of its receipt. The Appellant has

placed on record, copies of two letters sent on behalf of the FIL to the

ED in response to the said SCN. The first is dated 19 th May 2004 with

the subject matter stating "In the case of M/s Flex Industries Ltd." The

said letter has been addressed to the ED by M/s A. Arora &

Associates, Chartered Accountants. It begins with the line "Under

instructions and on behalf of our captioned client........". A second

reply was sent on behalf of FIL by the said firm of Chartered

Accountants on 12th July 2004. The AO dated 3rd November 2004

refers to the aforementioned replies but states that it is filed on behalf

of the "noticees" although at the time when the notice was issued, the

Appellant was no longer a Director of FIL.

5. The question before the Adjudicating Authority in relation to the

Directors of FIL was whether each of them to whom notices were

issued, were during the relevant period "in charge of and responsible

to the said company for the conduct of the day-to-day business of the

company".

6. In para 5 of the AO, the SD stated as under:

"I have carefully considered reply dated 19.2.04 filed by Shri Anil Arora, CA on behalf of Shri Ashok Chaturvedi, Smt. Rashmi Chaturvedi and Shri R.P. Agarwal noticees. The submission is not supported by any documentary evidence".

7. Clearly, therefore, there was no separate reply filed on behalf of the

Appellant. The fact that the Appellant was no longer a part-time non-

executive Director with FIL was not brought to the notice of the SD

throughout the period when the adjudication proceedings were

pending before him.

8. Consequently, the SD proceeded on the basis that the Appellant

had been duly served. The SD, in the impugned AO, held that FIL as

well as each of its Directors were liable for contravention of Sections

18(2) and 18(3) FERA read with Section 68 FERA. A uniform penalty

of Rs. 5 lakhs was levied on each of the Directors, including the

Appellant.

9. The Appellant has placed on record a copy of the Memorandum of

Appeal in Appeal No. 1268 of 2004 filed by the FIL. It was

specifically averred by the Appellant before the AT that he was an

advocate of thirty-five years‟ standing and was a non-executive part-

time Director of FIL "from 10th November 1990 till his resignation on

October 31, 2001". He enclosed a copy of the resignation letter dated

31st October 2001 and copy of the Form 32 filed by the FIL, pursuant

to such resignation, with the ROC.

10. The Appellant specifically averred that he was not aware of the

proceedings of the Adjudicating Authority and even the issuance of

the SCN in which the AO was passed and "became aware of the

proceedings and impugned order after passing of the same only on or

about December 2, 2004" when he received from the FIL a copy of

the said AO. In para 3 of the Memorandum of Appeal, it was

specifically averred as under:

"3. The Appellant was not served SCN or any other notice by the Special Director, Enforcement Directorate, the Respondent herein, before or after the passing of the impugned order. On or about 2nd December 2004 the Company informed the Appellant about the impugned order. The Appellant came to know about the proceedings, the SCN and the impugned order only when the Company informed the Appellant about the impugned order and therefore, could not appear or authorize any person to represent him. Further the Appellant had resigned as Director of the Company on about 31st October 2001, much before the commencement of the proceedings or issue of SCN to the Company and therefore, even otherwise the Appellant could not have known about the proceedings or the SCN."

11. On the merits of the case, it was averred by the Appellant that he

was not "at the time of the alleged contravention nor at any other

time" the person in charge of or responsible to the company for

conduct of its affairs much less day-to-day business. It was further

averred that no SCN under Rule 4 of the Foreign Exchange

Management (Adjudication, Proceedings and Appeal) Rules, 2000

was served on the Appellant.

12. In the Appellant‟s Appeal No.1268 of 2004 and the appeals filed

by the other Directors, the impugned common order was passed by the

AT on 2nd July 2008.The said impugned order of the AT fails to note

the separate averments put forth in Appeal No. 1268 of 2004. In the

entire impugned order, there is no discussion of the facts averred by

the Appellant, in particular of his having resigned from the FIL on 31 st

October 2001 and therefore not receiving the SCN. It is evident from

para 14, that the order proceeds on the basis that "it is not

controverted that SCNs issued to the appellants contain clauses which

spell out that the appellants were charged for vicarious liability". In

effect, therefore, there is no discussion in the impugned order of the

central point that arose for consideration in the appeal filed by the

Appellant, i.e., whether the Appellant was ever issued a SCN in the

adjudication proceedings and whether the AO as far as Appellant is

concerned stood vitiated on that ground.

13. At the time of issuance of notice in the appeal on 15 th December

2008, the Court stayed the impugned order of the AT qua the

Appellant.

14. In the reply filed in the present appeal it has been repeatedly

asserted by the ED that the Appellant was one of the Directors of FIL

during the relevant period of export; that the Appellant failed to take

steps for realising the export goods; that the SCN had been duly

served upon the Appellant; that he was represented by an advocate

before the Adjudication Officer "and that the Adjudicating Officer has

passed order after granting ample opportunities to the Appellant to

defend the matter".

15. Even while the appeal was at the stage of admission one issue

raised by the Appellant which is noted in the Court‟s order dated 15th

December 2008, is that Form 32 had been filed by the FIL in respect

of both the resignation of the Appellant as well as of one Mr. Amar

Singh from the Board of Directors of FIL Mr. Amar Singh resigned

on 7th November 2001. However, Amar Singh had not been proceeded

against by the ED.

16. The explanation as to why the ED did not proceed against Mr.

Amar Singh, is given in the counter-affidavit where it is stated that the

ED had recorded the statement of one Mr. Pradeep Verma, Assistant

General Manager (Commercial) who had informed the ED that Mr.

Amar Singh was "actually not connected with the day-to-day

functioning of the company and that Shri Amar Singh had resigned on

7.11.01". The ED in its reply stated that Mr. Verma had named the

Directors of FIL who according to him were conducting the day-to-

day business of the FIL. This included the Appellant.

17. It may be noticed at this stage that the statement of Mr. Verma

was recorded by the ED on 8th March 2002, 18th March 2002, 20th

May 2002 and 28th March 2002. By that time, the Appellant had

already ceased to be a Director of FIL. It is strange that the said fact

was not disclosed by Mr. Verma to the ED when his statement was

recorded.

18. In the Memorandum of Appeal filed in this Court in para 3(a), the

Appellant has specifically averred that he ceased to be a Director of

FIL since 31st October 2001 and has enclosed the copy of the Form 32

filed with the ROC in that behalf. In reply to para 3 (a), it is stated by

the ED that the Appellant had admitted that he was a Director in the

FIL till 31st October 2001, and that he continued as a Director during

the period the exports took place, i.e., from 1996 to 1999. In other

words, there is no denial that the Appellant ceased to be a director

with effect from 31st October 2001.

19. The ED has not been able to deny that the SCN was served on

FIL and its directors, including the Appellant only at the address of

the company and at the time when the Appellant had ceased to be a

director. It is not the case of the ED that even after coming to know,

when the appeal was filed by the Appellant, that he had ceased to be a

director of FIL with effect from 31st October 2001, it offered to serve

him a separate SCN at his address. Consequently, it is evident that no

SCN was in fact served upon the Appellant at his address as on the

date of the SCN, i.e., 28th May 2002.

20. The ED ought to have fairly stated before the AT that since no

SCN had been served on the Appellant at his ordinary place of his

residence, the AO qua him should in fact be set aside and the ED

should be permitted to serve a separate SCN on him. However, even

before this Court it was repeatedly asserted that as far as the ED was

concerned, it had served the SCN on the Appellant through FIL.

Therefore the Court is constrained to observe that the fundamental

requirement of the Adjudication Proceedings and Appeal Rules, 1974

(„APAR‟) (1974 Rules) and in particular Rule 10 (reproduced herein

below) has not been satisfied in the present case.

21. Rule 10 of the APAR reads as under:

"10. Service of Notices and Orders:

A notice or an order issued under these rules shall be served on any person in the following manner, that is to say,

(a) by delivering or tendering the notice or order to that person or his duly authorized agent;

(b) by sending the notice or order to him by registered post with acknowledgment due to the address of his place of residence or his last known place of residence or the place where he carries on, or last carried on, business or personally works or last worked for gain;

(c) if the notice or order cannot be served under clause (a) or clause (b), by affixing it on the outer door or some other conspicuous part of the premises in which the person resides or is known to have last resided, or carried on business or personally works or last worked for gain and that written report thereof should be witnessed by two persons."

22. In terms of Rule 10(b), service of notice had to be on either the

address of his place of residence or his last known place of residence

or the place where he carries on, or last carried on, business or

personally works or last worked for gain. There can be no doubt that

as on 28th May 2002, i.e., the date of the SCN, it had to be served

either at the place of residence of the Appellant or the last known

place of his work. As on that date, his address was not the address of

FIL.

23. Even after coming to know that as on the date of the issuance of

the SCN, the Appellant was no longer a director of FIL and therefore

the notice issued to him at the address of FIL could not obviously be

treated to have been served upon him, the ED was not prepared to say

that the AO qua him must be set aside on that ground.

24. The AT failed to deal with the central point in the appeal filed by

the Appellant. It has also failed to note his submissions in that regard.

25. It is contended by Ms. Behura that the ED went by the statement

of Mr. Pradeep Verma to conclude that the Appellant was in charge of

the day-to-day affairs of the FIL during the relevant period, i.e., 1996-

99. It is submitted that even in his Memorandum of Appeal before the

AT, the Appellant did not place any material to show anything to the

contrary, except his bald assertion that he was not in charge of the

day-to-day affairs of the FIL.

26. The occasion for the Appellant to avail of the defence available to

him under Section 68(1) FERA, i.e., to show that he was not in charge

of the day-to-day affairs of the company or that the infraction

complained of had not occurred with his knowledge or that he had

exercised due diligence to avoid such contravention would arise only

after he was served with the SCN along with the documents relied

upon against him by the ED. In this case, the documents include the

statement of Mr. Pradeep Verma. It is not the case of the ED that

even on the date of the AO, it had actually served on the Appellant,

the documents relied upon in the SCN. Consequently, it is not open to

the ED to now contend that even without the relied upon documents

being served on the Appellant, he should somehow have made out his

case before the AT in support of his defence under the proviso to

Section 68 (1) FERA. The impugned AO was in violation of the

principles of natural justice, as well as the requirement of Section 51

FEMA read with Rule 10 of the APPR.

27. Ms. Behura, learned counsel appearing for the ED, placed reliance

on a decision dated 18th November 2009 in Crl. A. No. 575 of 2008

(Shailendra Swarup v. The Director, Enforcement Directorate) to

urge that in an appeal filed by the present Appellant in relation to the

proceedings initiated against another company (i.e., M/s Modi Xerox

Limited) of which he was the Director, this Court had not accepted the

plea of the Appellant that he was not liable for the conduct of day-to-

day affairs of the company and had dismissed the appeal.

28. The Court finds that the said case did not concern the issue of non-

service of the SCN on the Appellant, which is the central point in the

present case. The Court is informed that in any event a Special Leave

Petition No.1370 of 2010 has already been filed against the said

judgment and leave has been granted by the Supreme Court on 18 th

November 2014.

29. For the aforementioned reasons, the court is of the view that the

impugned AO dated 3rd November 2004 and the impugned order

dated 2nd July 2008 of the AT are unsustainable in law and are hereby

set aside.

30. The appeal is allowed in the above terms but in the circumstances

with no order as to costs.

S. MURALIDHAR, J.

NOVEMBER 25, 2014/akg