2024 (1) TMI 1471 - HC - FEMA

Proceedings under FEMA Act - show cause notice dated 11.09.2023 issued under Rule 4(3) questioned - HELD THAT - The Writ against the show cause notice is not entertainable in a routine manner. A writ would be entertainable if such notice has been issued by an incompetent Authority having no jurisdiction are tainted with the allegations of malafides. Even in case the allegations of malafides are raised the Authority against whom such allegations are raised must be impleaded as party respondent in their personal capacity in the writ proceedings. Appellant was not supplied with four crucial documents - Whether any error occurred in the matter of adhering the procedures as contemplated under Rule 4 of the Rules? - whether non-supply of those four relied upon documents to the petitioners caused any prejudice warranting interference from the hands of this Court? - Adjudicating Authority has considered the materials available on record and formed an opinion an inquiry is to be conducted it becomes unnecessary to set aside the said order since the non-supply of the additional four relied upon documents would not vitiate the entire proceedings. But an opportunity is to be provided to the petitioners for submitting their explanations in respect of those four relied upon documents. Thus on receipt of explanation from the petitioners in entirety including for the four additional relied upon documents the Adjudicating Authority shall take the decision and proceed with the inquiry or drop the same as the case may be based on the materials available on record and on merits. The scope of notice under Rule 4(3) cannot be expanded so as to arrive at a conclusion that the Adjudicating Authority has determined the issues. It is only an opinion formed for the purpose of conducting an inquiry and on receipt of further explanations from the petitioners further opinion may be formed by the Adjudicating Authority either to proceed or to drop further proceedings. The opinion formed by the Adjudicating Authority may be based on the available material records. Even in the absence of those four relied upon documents supplied to the petitioners there is a possibility of forming an opinion by the Adjudicating Authority that an inquiry is to be proceeded under Rule 4 of the Rules. The Adjudicating Authority is the empowered to take a decision based on the materials available. Since an opinion has already been formed by the Adjudicating Authority to proceed with the inquiry under Rule 4 of the Rules and the additional relied upon documents sought for by the petitioners were supplied subsequently after the issuance of 4(3) notice it would be suffice if an opportunity is provided to the petitioners to submit their explanation in entirety once again before the Adjudicating Authority who in turn is bound to consider the explanations and form further opinion whether to proceed to inquire or to drop the same as the case may be and accordingly communicate the same to the petitioners without causing undue delay. In order to comply with the above procedures the petitioners are granted 30 days time from today i.e. 23.01.2024 to submit their explanations in entirety to the Adjudicating Authority and on receipt of the same the Adjudicating Authority shall take a decision and communicate the same to the petitioner and thereafter proceed in accordance with law and in the manner contemplated under the Act and Rules in force.

Summary

The core legal questions considered by the Court in this matter are as follows:

1. Whether the writ petition challenging the show cause notice issued under Rule 4(3) of the Foreign Exchange Management (Adjudication Proceedings and Appeal) Rules, 2000 is maintainable in the absence of allegations of jurisdictional incompetence or malafides against the Adjudicating Authority.

2. Whether the procedural requirements under Rule 4 of the Rules, particularly relating to the supply and inspection of relied upon documents, have been adhered to, and if not, whether any such lapses are curable or incurable.

3. Whether the issuance of the hearing notice under Rule 4(3) prior to the supply of certain relied upon documents requested by the petitioner vitiates the proceedings.

4. The extent and scope of the Adjudicating Authority's opinion formed under Rule 4(3) and whether it amounts to a final determination or merely an initiation of inquiry.

Issue-wise Detailed Analysis

1. Maintainability of Writ Petition Against Show Cause Notice

The Court noted that a writ petition challenging a show cause notice issued under Rule 4(3) is not ordinarily entertainable. The legal framework mandates that such writs are maintainable only if the notice is issued by an authority lacking jurisdiction or if the notice is tainted with malafides. Further, if malafides are alleged, the authority must be impleaded personally in the writ proceedings. This principle aligns with the doctrine of exhaustion of statutory remedies and the need to prevent premature interference in quasi-judicial proceedings.

The Court found no allegations of jurisdictional incompetence or malafides against the Adjudicating Authority in this case, and thus the writ petition was not maintainable on these grounds.

2. Adherence to Procedural Requirements under Rule 4 of the Rules

The Rules prescribe a two-stage process: first, issuance of a show cause notice under Rule 4(1), requiring the noticee to show cause why inquiry should not be held; second, issuance of a hearing notice under Rule 4(3) upon formation of an opinion to proceed with inquiry. The petitioner received the Rule 4(1) notice on 09.06.2023 and responded with requests for inspection and copies of relied upon documents.

Although the petitioner was permitted to inspect documents, four specific relied upon documents requested were not initially furnished. These documents were later supplied on 22.11.2023, after the Rule 4(3) hearing notice dated 11.09.2023 had been issued. The petitioner contended that this non-supply before the hearing notice impaired their ability to submit complete explanations, thereby violating principles of natural justice.

The Court referred to the Supreme Court's decision in the case of Natwar Singh v. Director of Enforcement, which emphasized that furnishing relied upon documents to the noticee is integral to the right to a fair hearing under natural justice. Although the Rules do not explicitly mandate supply of copies, the Court held that such supply is necessary to enable effective defense.

However, the Court also recognized that the non-supply of these four documents prior to the hearing notice was a curable procedural lapse and not a fatal irregularity that would vitiate the entire proceedings. The Court observed that such errors should not be exploited by the petitioner to evade compliance with the statutory provisions.

3. Validity of Hearing Notice Issued Prior to Supply of Additional Documents

The petitioner argued that the hearing notice under Rule 4(3) dated 11.09.2023 was issued prematurely, before the four additional relied upon documents were supplied, thus rendering the notice invalid.

The Additional Solicitor General countered that the Adjudicating Authority formed an opinion based on available materials and that the hearing notice merely initiates inquiry rather than concluding it. The Court agreed with this interpretation, holding that the opinion formed under Rule 4(3) is provisional and subject to change upon receipt of further explanations from the petitioner.

The Court emphasized that the Adjudicating Authority is empowered to form an opinion based on the materials on record, even if some documents are not yet supplied to the noticee, and that the issuance of the hearing notice does not preclude the petitioner from submitting further explanations once all documents are furnished.

4. Scope and Effect of the Adjudicating Authority's Opinion under Rule 4(3)

The Court clarified that the opinion formed by the Adjudicating Authority under Rule 4(3) is not a final adjudication but an administrative decision to proceed with inquiry. It is a preliminary step that allows the Authority to conduct further inquiry and consider explanations before making a final determination.

The Court held that the scope of the Rule 4(3) notice cannot be expanded to imply that the Authority has already determined the issues on merits. Rather, it is a procedural step to ensure that the inquiry is warranted based on the materials available.

Application of Law to Facts and Treatment of Competing Arguments

The Court balanced the petitioner's right to fair hearing and the procedural requirements under the Rules with the public interest in ensuring effective enforcement of foreign exchange laws. While acknowledging the petitioner's right to receive all relied upon documents to prepare their defense, the Court found that the procedural lapse of delayed supply of four documents was not fatal.

The Court rejected the petitioner's contention that the hearing notice was invalid and set aside, holding that the Authority's opinion to proceed with inquiry was based on materials available and that the petitioner's right to submit explanations on the additional documents can be protected by granting further opportunity.

The Court directed that the petitioner be granted 30 days to submit explanations in respect of all relied upon documents, including the four furnished late, and that the Adjudicating Authority shall consider these explanations before deciding whether to proceed with or drop the inquiry. This approach preserves the principles of natural justice without unduly delaying the enforcement process.

Significant Holdings

"The writ against the show cause notice is not entertainable in a routine manner. A writ would be entertainable if such notice has been issued by an incompetent Authority having no jurisdiction or are tainted with the allegations of malafides."

"The procedures contemplated are structured by the statutes and Rules in force. Therefore, the respondents have no discretion to dispense with the procedures. Such mandatory procedures and its compliance are part of the Statutes and Rules and therefore, the non-adherence would vitiate hearing notice."

"The Supreme Court in the case of Natwar Singh... emphasized that documents shall be supplied to the noticees enabling them to defend their case in an effective manner. Furnishing of relied upon documents was considered as part of the compliance of the rules of natural justice."

"An error or mistake or a decision not to furnish those four relied upon documents by the Authorities occurred cannot be construed as incurable. It is a curable error and in public interest such errors cannot be taken as a ground to vitiate the entire proceedings."

"The scope of notice under Rule 4(3) cannot be expanded so as to arrive at a conclusion that the Adjudicating Authority has determined the issues. It is only an opinion formed for the purpose of conducting an inquiry."

"Since an opinion has already been formed by the Adjudicating Authority to proceed with the inquiry under Rule 4 of the Rules and the additional relied upon documents sought for by the petitioners were supplied subsequently after the issuance of 4(3) notice, it would be suffice, if an opportunity is provided to the petitioners to submit their explanation in entirety once again before the Adjudicating Authority."

The Court's final determinations are that the writ petition challenging the Rule 4(3) notice is not maintainable on grounds of jurisdiction or malafides; the procedural lapse in delayed supply of four relied upon documents is curable; the hearing notice under Rule 4(3) is valid as an opinion to proceed with inquiry and not a final determination; and the petitioner must be granted an opportunity to submit explanations on all relied upon documents before the Adjudicating Authority proceeds further.