2024 (4) TMI 1284 - HC - FEMA

Violation of Rules 4(3) of the Rules of FEMA - requirement of recording of reasons and communication of such reasons to the noticee - HELD THAT - Procedures are to be read as it is and the Court cannot expand the scope of the procedures so as to provide any additional opportunity or otherwise. In the absence of any challenge scope of the procedures contemplated under the Rules are to be followed as it is and any expansion would result in derailing of the procedures which is otherwise contemplated under the Rules. Inconsistency may also arise in such circumstances which exactly arose in the present case. The inconsistency in interpretation arose on account of the expansion of Rule 4(3) offered by the Bombay High Court. Bombay High Court while interpreting Rule 4(3) expanded the scope by stating that the term The adjudicating authority is of the opinion that an enquiry should be held would mean that the opinion formed must be communicated to the person concerned enabling them to defend the case . Therefore in the opinion of this Court it amounts to an expansion providing an additional opportunity to the person to get the copy of the opinion recorded in writing by the adjudicating authority in the file which is not contemplated under Rule 4(3). The scope of rules/procedures cannot be expanded by the High Court in exercise of the powers of the judicial review under Article 226 of the Constitution of India. The procedures as contemplated under the Rules are to be read as it is and any expansion providing additional opportunity would undoubtedly cause prejudice to any one of the parties and would provide further cause for the purpose of prolonging and protracting the proceedings. The practice of prolonging and protracting the enquiry proceedings by approaching the High Court at each stage cannot be appreciated. Once the proceedings are commenced the adjudicating authorities are expected to follow the procedures scrupulously and the persons concerned are bound to cooperate and defend their case by availing the opportunities to be provided in accordance with the Rules in force. In view of the fact that the judgement of the Division Bench of the Madras High Court in the case of India Cements Limited. 2018 (6) TMI 389 - MADRAS HIGH COURT is the latest judgement wherein the interpretation of Rules 4(3) offered by the Bombay High Court was considered this Court is bound by the decision of the Division Bench of High Court of Madras. When the interpretation offered by the Bombay High Court in Shashank Vyankatesh Monohar case 2013 (8) TMI 435 - BOMBAY HIGH COURT has not been followed by the division bench of Madras High Court the validity of the circular lapses automatically. Therefore the Enforcement Directorate has to issue suitable orders cancelling the circular. Accordingly the writ petition stands dismissed.

Summary

The core legal questions considered by the Court revolve around the interpretation and application of Rule 4(3) of the Foreign Exchange Management (Adjudication Proceedings and Appeal) Rules, 2000 ("the Rules"). Specifically, the issues include whether the adjudicating authority is required to record and communicate the reasons for forming an opinion to proceed with an enquiry under Rule 4(3), the scope and spirit of Rule 4(3) in conjunction with other sub-rules of Rule 4, the applicability and binding nature of departmental circulars issued pursuant to judicial pronouncements, and the adherence to principles of natural justice in the adjudication process under the Rules.

The first issue concerns the interpretation of Rule 4(3) of the Rules, which states that after considering the cause shown by the person against whom a show cause notice is issued, if the adjudicating authority is of the opinion that an enquiry should be held, it shall issue a notice fixing the date for appearance. The petitioner contended that the adjudicating authority must record and communicate the reasons forming the basis of such opinion to the person concerned, enabling them to defend their case effectively. This contention was supported by reliance on the judgment of the Bombay High Court in Shashank Vyankatesh Monohar, which was affirmed by the Supreme Court and led to the issuance of a 2014 circular by the Enforcement Directorate. The petitioner also cited supportive rulings from the Delhi and Kolkata High Courts that followed the Bombay High Court's interpretation.

In opposition, the respondent argued that the departmental circulars are not binding on courts or quasi-judicial authorities and cannot override statutory provisions or judicial pronouncements. The respondent relied on Supreme Court precedents emphasizing that circulars merely represent executive understanding and cannot substitute judicial interpretation of statutory provisions. Further, the respondent relied on the Division Bench judgment of the Madras High Court in India Cements Limited, which held that Rule 4(3) does not require the adjudicating authority to record or communicate reasons for forming an opinion to hold an enquiry. The Madras High Court emphasized that the Rules must be read as a whole and not in isolation, and that expanding the scope of Rule 4(3) to include such requirement would amount to judicial overreach and cause procedural delays.

The Court examined the relevant legal framework, including the text of Rule 4 of the Rules, which governs the holding of enquiries under Section 13 of the Foreign Exchange Management Act. Rule 4(1) mandates issuance of a show cause notice specifying the alleged contraventions. Rule 4(2) requires that the notice indicate the nature of contraventions. Rule 4(3) provides that if, after considering the cause shown, the adjudicating authority is of the opinion that an enquiry should be held, a notice fixing the date for appearance shall be issued. Rule 4(4) obligates the authority on the date of hearing to explain to the person or their representative the contraventions alleged, with reference to the Act, Rules, or RBI authorizations. Subsequent sub-rules (4(5) to 4(12)) detail procedural safeguards and opportunities for defence.

The Court analyzed the competing interpretations of Rule 4(3). The Bombay High Court had read into Rule 4(3) an implicit requirement that the adjudicating authority must record and communicate the reasons for forming the opinion to proceed with enquiry, to uphold principles of natural justice. This interpretation was grounded on the serious consequences of adjudication and the need for transparency at the enquiry initiation stage. The Enforcement Directorate's 2014 circular was issued to implement this interpretation.

Conversely, the Madras High Court Division Bench rejected this expansive reading, holding that the plain language of Rule 4(3) does not mandate recording or communication of reasons at this stage. The Court noted that the opinion formed under Rule 4(3) is a prima facie satisfaction enabling the commencement of enquiry and is not itself an adjudicatory finding subject to challenge. The adjudicating authority's obligation to explain the contraventions arises only at the hearing stage under Rule 4(4). The Court reasoned that requiring recording and communication of reasons at the opinion stage would cause procedural delays and enable protracted litigation, contrary to the intent of the Rules. The Court further observed that procedural provisions must be followed as enacted and cannot be judicially expanded to provide additional opportunities not contemplated by the Rules.

The Court also considered the binding nature of departmental circulars issued pursuant to judicial decisions. It reaffirmed the principle that such circulars do not bind courts or quasi-judicial authorities and cannot override statutory provisions or judicial interpretations. Therefore, the 2014 circular implementing the Bombay High Court's interpretation loses validity in light of the Madras High Court Division Bench's later authoritative ruling.

Regarding the principles of natural justice, the Court held that compliance is ensured by the procedural scheme of Rule 4 as a whole. The issuance of a show cause notice specifying contraventions (Rule 4(1) and (2)), the opportunity to submit explanations, the adjudicating authority's consideration of such explanations before forming an opinion (Rule 4(3)), and the detailed explanation of contraventions at the hearing (Rule 4(4)) collectively satisfy natural justice requirements. The opinion under Rule 4(3) is an internal satisfaction to proceed with enquiry, not a final or appealable decision, and hence does not require separate communication or recording for the benefit of the person concerned.

The Court applied these legal principles to the facts of the present case, where the petitioner challenged the impugned order and proceedings on the ground of non-compliance with Rule 4(3) as interpreted by the Bombay High Court and the Enforcement Directorate circular. The Court found that the adjudicating authority had issued a show cause notice detailing the contraventions, considered the petitioner's explanations, and proceeded in accordance with Rule 4(3) by fixing a hearing date. The authority also complied with Rule 4(4) by explaining the contraventions at the hearing stage. Thus, the procedural requirements were met, and no violation of natural justice occurred.

The Court considered and rejected the petitioner's reliance on the Bombay High Court judgment and the Enforcement Directorate circular, holding that the later Division Bench ruling of the Madras High Court in India Cements Limited, which is binding on the Court, correctly interprets Rule 4(3). The Court noted that the Madras High Court's interpretation is more consistent with the statutory language, the procedural scheme, and the avoidance of unnecessary procedural delays. The Court further held that the Enforcement Directorate must withdraw the circular issued pursuant to the now-overruled interpretation.

In addressing the competing arguments, the Court distinguished the facts and reasoning of the Madras High Court judgment from the Bombay High Court's decision, emphasizing that the former considered the Rules in their entirety and rejected an expansive reading of Rule 4(3). The Court also underscored that the adjudicating authority's opinion under Rule 4(3) is not appealable or challengeable, and communicating it would serve no practical purpose but only prolong proceedings. The Court rejected the petitioner's argument that failure to communicate reasons violates natural justice, holding that the procedural safeguards under Rule 4 suffice.

Significant holdings of the Court include the following:

"The adjudicating Authority is not under any statutory obligation to communicate his reasons for forming an opinion to conduct an enquiry under sub-Rule 3 of Rule 4 of Foreign Exchange Management (Adjudication Proceedings and Appeal) Rules, 2000."

"The opinion under Rule 4(3) is to be construed as personal satisfaction of the authority to proceed further and such personal opinion formed by the adjudicating authority must be recorded in the file so as to ensure that further proceedings are not continued without considering the explanations and the materials available on record."

"The adjudicating authority is duty bound to explain to the person proceeded against or his legal practitioners about the contraventions alleged to have been committed under Rule 4(4) of the Rules."

"Rule 4(3) cannot be read in isolation and it is to be read along with Rule 4(4) for constructively interpreting the procedures so as ensure that fair opportunity has been provided under the Rules and the Rules of Natural Justice has been complied with."

"The practice of prolonging and protracting the enquiry proceedings by approaching the High Court at each stage cannot be appreciated."

"The Enforcement Directorate has to issue suitable orders cancelling the circular issued pursuant to the Bombay High Court judgment."

In conclusion, the Court held that the procedural scheme under Rule 4 of the Rules must be followed as enacted without judicial expansion. The adjudicating authority's opinion under Rule 4(3) is an internal satisfaction to proceed with enquiry and does not require communication or recording for the benefit of the person concerned. The adjudicating authority must explain the contraventions at the hearing stage under Rule 4(4), which suffices to meet natural justice requirements. Departmental circulars cannot override statutory provisions or judicial interpretations and lose effect if based on overruled judgments. The writ petition challenging the impugned order was dismissed accordingly, with no order as to costs.