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2013 DIGILAW 967 (KAR)

S. P. Krishna v. Deputy Director

2013-08-22

B.MANOHAR, N.K.PATIL

body2013
Judgment : B. Manohar, J. 1. These two appeals are filed by the Former Managing Director of Kolar District Cooperative Milk Producers Societies Union Limited as well as the Kolar District Cooperative Milk Producers Societies Union Limited challenging the legality and correctness of the order dated 20th June 2008 made in Appeals No.675/2003 and 676/2003 passed by the Appellate Tribunal for Foreign Exchange, New Delhi, confirming the order No.DD/95/BZ/BAN/2003/FERA/VS dated 14-10-2003 passed by the Deputy Director, Directorate of Enforcement (Foreign Exchange Management Act), Bangalore, whereby imposing penalty of Rs.1,25,000/- on the Ex-Managing Director and a sum of Rs.4,00,000/- on the Kolar District Co-operative Milk Producers Societies Union Limited for violating Sections 8(3) and 8(4) of Foreign Exchange Regulation Act, 1973 (hereinafter referred to as 'the Act'). 2. The case of the appellants in both the appeals is that the appellant in MFA No.9214/2008 is a Co-operative Milk Producers Societies Union Limited registered under the Co- operative Societies Act, engaged in procurement of Milk from the members of the Society in Kolar District and distributing the same in the District of Kolar and the State of Karnataka. The appellant in MFA No.9213/2008 is the then Managing Director of the said Society. In the month of July 1998, the appellant-Society in its meeting passed a resolution to purchase a reconditioned Butter Making Machine from an Australian Company. Accordingly, placed a purchase order with M/s.Lynjef International, Australia for purchase of Pasilac Continuous Butter Making Machine inclusive of two numbers 15 MT Deep Freeze Cabin container at a cost of 1,05,000 Australian Dollars. The terms of purchase order was that the machine should be delivered within four weeks at Chennai Port by Sea and from there, the machine had to be delivered to Kolar by road. The mode of payment was by opening a letter of credit by the appellant-Society. The letter of credit was for a period of 180 days. Accordingly, the appellant approached the Canara Bank to open a letter of credit in favour of the Australian Company. The payment of letter of credit was to be effected only after the Society reported to M/s.Lynjef International, Australia regarding satisfactory performance of the supplied machine. As per the conditions, the custom duty has to be borne by the supplier. Until the machine was delivered, erected and commissioned to the satisfaction of the Society, the Banker should not effect payment to the supplier. As per the conditions, the custom duty has to be borne by the supplier. Until the machine was delivered, erected and commissioned to the satisfaction of the Society, the Banker should not effect payment to the supplier. As per the terms and conditions, the supplier M/s.Lynjef International, Australia, accepted the purchase order and confirmed to supply the Butter Making Machine to the Society. As per the terms and conditions, the machine ought to have reached Kolar during the 2nd or 3rd week of September 1998, however no information was received from the supplier. Since the payment had to be made to the supplier for machine by the Canara Bank only after the Society informs the Bank about the delivery and satisfactory performance of the machine, the Society was under the bonafide belief that the payment would not have been made by the Canara Bank to the supplier. 3. The Canara Bank wrote a letter to the Society on 12-2-1999 stating that the letter of credit has been de-linked from 12-2-1999 and liability of the Society was crystallized to an extent of Indian Rs.28,91,832/-including commission at 0.15% and requested the Society to remit the same along with interest at 17.34% p.a. from the date of de-linking till the date of remittance of the bill amount. The Society, in response to the said letter informed the Bank that, they had not received any machinery and unless the machinery is installed, the payment cannot be made. However, the Canara Bank vide its letter dated 12-5-1999 directed the Society to remit the devolved liability in respect of foreign letter of credit and also stated that the question of giving any extension of letter of credit do not arise. They further threatened the appellants that if the Society fails to pay the said amount, the amount of Rs.50,00,000/-of the appellant which is in the Bank, would be prematurely foreclosed. In view of the said threat given by the Bank, the appellant-Society issued a Cheque in favour of the Canara Bank and requested the Bank to release necessary documents to enable the Society to receive the Butter Making Machine. The authorized dealer of the appellant, i.e. the Canara Bank in violation of conditions of the purchase order released the amount in favour of the Australian Company, though they have not sent the Butter Making Machine in view of violation of the conditions of the purchase order. The authorized dealer of the appellant, i.e. the Canara Bank in violation of conditions of the purchase order released the amount in favour of the Australian Company, though they have not sent the Butter Making Machine in view of violation of the conditions of the purchase order. The appellant-Society by its letter dated 28-12-1999 addressed to the M/s.Lynjef international, Australia seeking for refund of 1,05,000 Australian Dollars with interest, since the Butter Making Machine was not supplied, even though the letter of credit amount has already been drawn. In response to the said letter, M/s.Lynjef International, Australia wrote a letter dated 27-08-2001 apologizing for the inordinate delay and promising to dispatch the new machine. In spite of the said assurance, the supplier Company failed to supply the Butter Making Machine even after four months. In spite of repeated reminders and requests, the supplier has failed to respond the same. In view of that the appellant-Society has approached the National Consumer Disputes Redressal Commission, New Delhi complaining against the Canara Bank as well as the supplier- Company. 4. When the matter stood thus, the appellant-Society received directions from Directorate of Enforcement, Bangalore to furnish the information, books and documents particularly the relevant exchange control copy of authorized bill of entry submitted to the Bank in respect of payment made to M/s.Lynjef International, Australia. In response to the same, the appellant-Society submitted the correspondence between M/s.Lynjef International and requested the Canara Bank and Reserve Bank of India for granting time to furnish the documents as required by Directorate of Enforcement under the Foreign Exchange Regulations Act. A letter was also addressed to the Reserve Bank of India explaining the facts about import of Butter Making Machine from M/s.Lynjef International and inordinate delay in supply of the machine. The issue was brought before the Indian Embassy, Australia and legal action was taken in this regard also. In spite of the same, the appellant received a show-cause notice on 13-05-2002 from the Enforcement Directorate, alleging that the Society has contravened Section 8(3) and 8 (4) of the Act and also contravened Section 68 of the Act and called upon the appellant to appear before the Directorate of Enforcement. 5. In spite of the same, the appellant received a show-cause notice on 13-05-2002 from the Enforcement Directorate, alleging that the Society has contravened Section 8(3) and 8 (4) of the Act and also contravened Section 68 of the Act and called upon the appellant to appear before the Directorate of Enforcement. 5. In pursuance to the said show cause notice, the appellant-Society filed detailed reply to the said show cause notice and appeared before the Directorate of Enforcement along with their Advocate contending that the appellant is not a company and it is a Society registered under the Co-operative Societies Act. The Enforcement Directorate cannot invoke Section 68(1) and (2) of the Act and Dr.S.P.Krishna is no more a Managing Director of the Society. Hence, the action against the appellant-Society as well as the Ex-Managing Director is contrary to law. The Foreign Exchange Regulation Act is not applicable to the Co-operative Societies and sought for dropping the proceedings. 6. The Deputy Director, Directorate of Enforcement without considering the contentions raised by the appellant- Society, by its order dated 14-10-2003 held that the appellant-Society as well as the Managing Director in-charge of the business are guilty of charges of Sections 8(3) and 8(4) of the Act and in terms of Section 68(1) and 68(2) of the Act and invoking Section 50 of the Act, imposed a penalty of Rs.4,00,000/- on the appellant-Society and penalty of Rs.1,25,000/- on the Ex-Managing Director who was in-charge of the business. 7. Being aggrieved by the order passed by the Deputy Director of Enforcement, the Society as well as the Ex- Managing Director preferred two appeals before the Appellate Tribunal for Foreign Exchange in Appeal Nos. 675 & 676/2003 inter alia contending that the order passed by the Deputy Director of Enforcement imposing penalty on the Society as well as the Ex-Managing Director is contrary to law. Section 68(1) and 68(2) is not applicable to the Appellant-Society, which was registered under the Co- operative Societies Act. It is also contended that the appellants have not misused the foreign exchange. The entire amount has been remitted to the supplier-Company, however there is delay on the part of the supplier in dispatching the machine, for which, the appellant-Society cannot be held responsible. It is also contended that the appellants have not misused the foreign exchange. The entire amount has been remitted to the supplier-Company, however there is delay on the part of the supplier in dispatching the machine, for which, the appellant-Society cannot be held responsible. The Appellate Tribunal without considering the contentions raised in the appeal, dismissed the same confirming the order passed by the Deputy Director of Enforcement imposing penalty of Rs.4,00,000/- on the appellant-Society and Rs.1,25,000/- on the Ex-Managing Director of the appellant-Society. Being aggrieved by the said order, the appellants have preferred these two appeals. 8. Learned counsel appearing for the appellants contended that the order passed by the Appellate Authority as well as the Enforcement Authority is contrary to law. The specific contention taken by the appellants before the Enforcement Authority as well as the Appellate Authority is that applicability of Section 68(1) and (2) of the Act is not considered, which goes to the root of the matter. The appellant is a Society registered under the Co-operative Societies Act. Section 68 can be invoked only against the companies. Invoking Section 68(1) and (2) against the appellant-Society is contrary to law. A body corporate means as per Section 2(7) under the Companies Act reads as thus: (7) "body corporate" or "corporation" includes a company incorporated outside India but does not include- (a) a corporation sole; (b) a co-operative society registered under any law relating to co-operative societies; and (c) any other body corporate (not being a company as defined in this Act) which the Central Government may, by notification in the Official Gazette, specify in this behalf;)" Hence, the order passed by the Tribunal confirming the order of the Enforcement Authority is not legally sustainable. The Enforcement Authority has not taken any action against the Canara Bank which has remitted the amount to M/s.Lynjef International, Australia without ascertaining whether the supplier Company has supplied the machine and the same was installed in the appellant-Society. The action of the Bank in remitting the amount is contrary to the terms of purchase order and letter of credit. The imposition of penalty is contrary to law, since the penalty will not ordinarily be imposed unless the party either acted deliberately in defiance of law or was guilty of misconduct or acted consciously disregard to the obligation to the Act. The imposition of penalty is contrary to law, since the penalty will not ordinarily be imposed unless the party either acted deliberately in defiance of law or was guilty of misconduct or acted consciously disregard to the obligation to the Act. Hence, sought for allowing the appeals by setting aside the order of imposition of penalty. 9. On the other hand, Sri.Kalyana Basavaraj, Additional Solicitor General argued in support of the order passed by the Enforcement Authority as well as the Appellate Authority and contended that the appellant-Society failed to furnish the evidentiary proof of utilization of foreign exchange acquired and remitted in contravention of Sections 8(3) and 8(4) read with Section 68(1) and (2) of the Act. In spite of issuance of the show cause notice, the appellant-Society has failed to produce the documents with regard to utilization of foreign exchange of 1,05,000 Australian Dollars. The Butter Making Machine imported at Mumbai Port was valued at 52,765 Australian Dollars. The value of the said machine is nowhere near the amount remitted in abroad by the appellant-Society in the year 1999. The said machine was sold in the public auction on 15-4-2004. No document has been produced regarding the use of foreign exchange. Action has been taken by the authorities in accordance with law and sought for dismissal of the appeal. 10. We have carefully considered the arguments addressed by the parties and perused the orders passed by the Enforcement Authority as well as the Appellate Authority. 11. After hearing the learned counsel appearing for the parties, the only point that arise for consideration in these appeals is Whether the respondents are justified in imposing penalty, in spite of the contention of the appellants that the second appellant is not a Company and they cannot invoke Section 68(1) and (2) of the Act? 12. The records clearly disclose that the appellant in MFA 9213/2008 is the Former Managing Director of Kolar District Co-operative Milk Producers Societies Union Limited and the appellant in MFA 9214/2008 is a Co-operative Milk Producers Societies Union Limited, registered under the Co-operative Societies Act, engaged in procurement of Milk from the Kolar District and distributing the same in the District of Kolar and in the State of Karnataka. As per the resolution passed by the Board of Directors, a purchase order was issued for importing a Butter Making Machine from M/s.Lynjef International, Australia for a total value of 1,05,000 Australian Dollars. As per the instructions of the Australian Company, a letter of credit was opened in the Canara Bank. As per the purchase order, the Butter Making Machine was to be delivered to the appellants within four weeks of the purchase order and the payment has to be made by the Canara Bank to the supplier-company only after delivery of the said machine at the premises of the Society and only after commissioning of the machine. Even though the machine was not shipped, the Canara Bank had made payment to the Australian Company. The Canara Bank threatened the appellants to make full payment otherwise, the Fixed Deposit of the appellant-Company in their Bank will be prematurely foreclosed. In view of that, full payment has been made. In spite of repeated requests and demands, the Australian Company failed to supply the machine. The records further disclose that even in the month of January 2001, the Australian Company assured that shipping of the machine will be made within a period of two months, however, the machine was not shipped. The appellant- Company sent a letter on 4-9-2001 seeking return of the foreign exchange released to them. Further, a case was filed before the National Consumer Forum against the Canara Bank as well as the Australian Company. Hence, there is no misuse of the foreign exchange by the appellants. 13. In the statement of objections filed to the show cause notice, the appellants have narrated the entire circumstances under which, they could not get the machine. They also contended that the respondents cannot invoke Section 68(1) and (2) of the Act since it is a co-operative Society registered under the Co-operative Societies Act. Section 68(1) and (2) of the Act can be invoked only against the Company or a body corporate. Section 2(7) of the Companies Act defines the body corporate or the Corporation which includes company corporate outside India, but it does not include cooperative Society registered under the Co-operative Societies Act. Section 68(1) and (2) of the Act can be invoked only against the Company or a body corporate. Section 2(7) of the Companies Act defines the body corporate or the Corporation which includes company corporate outside India, but it does not include cooperative Society registered under the Co-operative Societies Act. The specific contention taken by the appellants in their objection statement as well as the memorandum of appeal before the Appellate Authority was neither considered by the Enforcement Authority nor the Appellate Authority, which goes to the root of the matter. There is no allegation regarding misutilization of the foreign exchange nor it was issued in favour of the appellant-Society. In the instant case, the foreign exchange has not been utilized for any other purposes, but, in violation of the purchase order, the Canara Bank has remitted the entire amount to the Australian company. Further one of the machines received in the Bombay Port was auctioned by the Port authorities. The order passed by the Enforcement Authority as well as the Appellate Tribunal is contrary to law and the same was passed without considering the objections filed to the show cause notice. Admittedly, the appellant is a co-operative Society registered under the Cooperative Societies Act and it is not a company incorporated under the Companies Act. Hence the order passed by the Enforcement Authority as well as the Appellate Tribunal cannot be sustainable, accordingly the matter requires to be reconsidered by the Enforcement Authority. 14. Accordingly, we pass the following ORDER Both the appeals are allowed. The order dated 20-06-2008 passed in Appeal Nos.675 & 676/2003 on the file of the Appellate Tribunal for Foreign Exchange, New Delhi and the order dated 14-10-2003 passed by the Deputy Director of Enforcement, imposing penalty of 1,25,000/- as well as Rs.4,00,000/-against the former Managing Director as well as the Society is set aside and the matter is remanded back to the Enforcement Authority to reconsider the matter afresh and pass appropriate orders in accordance with law, taking into consideration the contentions raised in the statement of objections within a period of three months from the date of receipt of a copy of this judgment.