TMI Blog2021 (5) TMI 929X X X X Extracts X X X X X X X X Extracts X X X X ..... case. The Impugned Opinion/Order dated 05.06.2020, does not satisfy the test of giving reasons by the respondent no. 1 for the formation of opinion to proceed with the inquiry against the petitioner. The reasons are the bridge between the material on record and the final decision. Therefore, after considering the judgment of the Supreme Court, the Complaint and the reply of the petitioner to show cause, that is the material on record, the Adjudicating Authority is to give reasons, howsoever brief, at least showing that he is alive to the contentions raised in the reply to the Show Cause Notice and why he is of the opinion that inquiry must still be held. In the present case, this bridge is missing. It is also to be seen as to whether the inquiry deserves to be set aside only for the above violation. In the present case, as noted herein above, the Supreme Court has passed a detailed judgment finding various acts of violation of the FEMA and the Rules/Regulations framed there-under inter alia against the JP Morgan group of companies, may not be specifically by name against the petitioner. The present inquiry has been initiated on the direction of the Supreme Court in the sai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ff, Mr. Nishant Joshi, Ms. Sowjhanya Shankaran, Mr. Kunal Singh, Ms. Nimrah Alvi, Ms. Nitika Khaitan, Advs. Respondents Through : Mr. Sanjay Jain, ASG with Mr. Amit Mahajan, CGSC with Ms. Mallika Hiremath, Adv. 1. These petitions have been filed by the petitioner challenging the Show Cause Notice(s) dated 29.01.2020 and the consequent Order(s) dated 05.06.2020 and the Communication(s) dated 03.09.2020 of the respondent no. 1, proceeding with the inquiry against the petitioner under the Foreign Exchange Management (Adjudication Proceedings and Appeal) Rules, 2000 (hereinafter referred to as the Adjudication Rules ) on the alleged violation of Section 6(6) of the Foreign Exchange Management Act, 1999 (hereinafter referred to as the FEMA ) read with Regulation 3 of the Foreign Exchange Management (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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en found by the Forensic Auditors that J.P. Morgan was in the knowledge of the fact that Amrapali Zodiac Developers had paid the money received to other companies of Amrapali group. Advances exceeded the limits specified in the shareholders agreement, but J.P. Morgan did not ensure bringing back the money. It was accepted by Mr. Suraj Chhabria that it was in his knowledge and that of J.P. Morgan that the money has been diverted from shareholder s agreement and share subscription agreement. The valuation of the shares did not follow the correct methodology of discounted cash flow as detailed out by the forensic auditors. The valuation exercise was done backwardly in order to inflate the value of share to siphon out the money of home buyers through J.P. Morgan. 88. The FEMA rules prohibited the kind of transactions 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 dev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. This transfer of fund by ASCPL to ACPPL is termed as absolutely violative of FDI Rules and agreement. With respect to ₹ 55 crores routed from IPFFI Singapore in the Escrow Account of Bank of Baroda, Escrow Account was transferred from 8.8.2012 to 28.9.2012 in the account of Bank of Baroda and used for payment of term loan instalments of OBC and Bank of Maharashtra for repayment of their term loan instalment. This money was not meant for payment of term loan instalment as per FDI Rules. It was to be used in the construction. 91. The ASCPL did not use the money for the project which was received from IPFII Singapore but transferred ₹ 85 crores to ACPPL and ₹ 55 crores to repay bank loan instalments and repay the outstanding creditors provided for in the books and standing in the books. The said payments have rightly been held by Auditors to be in contravention of the FDI norms and rules and for which the money was brought in India. 92. From 2013 to 2015, ASCPL has paid interest of ₹ 58.81 crores @ 17 percent, which is a highly abnormal rate. A sum of ₹ 14.41 crores was paid on 31.3.2013. Likewise, on 31.3.2014, ₹ 22.20 crores were pai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cords, (01.04.2010 to 31.03.2011) of JP Morgan India Pvt. Ltd. (JPMIPL) reveals inter-alia that JP Morgan Chase Co., USA is the group holding company. JPMIPL is 96.26% subsidiary of JP Morgan India Securities Holding Limited, Mauritius and part of the JP Morgan group. JP Morgan Chase Co., USA is the ultimate holding company of all JP Morgan group entities. JPMIPL is engaged in merchant banking, underwriting, stock broking trading cum clearing of equity and currency derivatives and providing financial and investment advisory services. JPMIPL is in transactions with 18 subsidiaries located outside India of the JP Morgan group. JP Morgan, USA has deputed its employee Hrushikesh Kar in India on deputation, inter-alia to establish real estate business in India in the name and style of JPMIPL Hrushikesh Kar was receiving salary from JP Morgan, USA. Thus JPIML is place of business in India of JP Morgan India Securities Holding Limited, Mauritius without prior approval of RBI. xxx ₹ 85 Crore xxx Contravention of Section 6(6) of FEMA read with the provisions of Regulation 3 of the FEM (Est ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iled by the respondent no. 2, the respondent no. 1 admitted receiving the reply dated 26.05.2020 of the petitioner to the Show Cause Notice on 27.05.2020, however, insofar as Complaint no. 01/2020 is concerned, it was claimed by the notice that no reply to the Show Cause Notice was received by the respondent no. 1 from the petitioner. The respondents, however, now admit that this observation of the respondent no. 1 was a mistake as reply had been duly received and, in fact, considered by the respondent no. 1 before proceeding with the inquiry. 12. The petitioner duly appeared before the respondent no. 1 and claimed violation of Rule 4(3) of the Adjudication Rules by the respondent no. 1. 13. In answer to such objection, by the Impugned Communication(s) dated 03.09.2020, the petitioner was informed as under: Attention is invited towards your reply dated 26.05.2020 in response to the captioned show cause notice received in this office on 26.05.2020. In this regard I have been directed to inform you that pursuant to your reply, the Ld. Adjudicating Authority is of the opinion that further proceeding in the matter should be held in terms of sub-rule (3) of Rule 4 of For ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me Court in Natwar Singh v. Director of Enforcement Anr., (2010) 13 SCC 255; Mohindhr Singh Gill Anr. v. Chief Election Commissioner, New Delhi Ors., (1978) 1 SCC 405; of the High Court of Bombay in Shashank Vyankatesh Manohar v. Union of India Anr., 2014 (1) Mh.L.J. 838; as also on the Technical Circular No. 11/2014, dated 26.09.2014 issued by the Directorate of Enforcement, Government of India. 17. On the general principles of recording of reasons, he places reliance on the renowned judgments of the Supreme Court in S.N. Mukherjee v. Union of India, (1990) 4 SCC 594; and Union of India v. Mohan Lal Capoor Ors., (1973) 2 SCC 836 . He also places reliance on the following judgments: Bhikhubhai Vithlabhai Patel Ors. v. State of Gujarat Anr., (2008) 4 SCC 144; Siemens Engineering Manufacturing Co. of India Ltd. v. Union of India Anr., (1976) 2 SCC 981; Nareshbhai Bhagubhai Ors. v. Union of India Ors., (2019) 15 SCC 1; G. Vallikumari v. Andhra Education Society Ors., (2010) 2 SCC 497; 18. On the other hand, Mr. Sanjay Jain, the learned Additional Solicitor General, and Mr. Amit Mahajan, the learned Central Govern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adjudication under Section 13 of the FEMA. An appeal against any order passed by the Adjudicating Authority lies before the Special Director (Appeals) under Section 17 or before the Appellate Tribunal under Section 19 of the FEMA. 21. In exercise of its powers under Section 46 of the FEMA, the Central Government has framed the Adjudication Rules. The present petitions raise issues on interpretation and effect of Rule 4 of the Adjudication Rules, which is reproduced herein below: 4. Holding of inquiry. (1) For the purpose of adjudicating under Section 13 of the Act whether any person has committed any contravention as specified in that section of the Act, the Adjudicating Authority shall, issue a notice to such person requiring him to show cause within such period as may be specified in the notice (being not less than ten days from the date of service thereof) why an inquiry should not be held against him. (2) Every notice under sub-rule (1) to any such person shall indicate the nature of contravention alleged to have been committed by him. (3) After considering the cause, if any, shown by such person, the Adjudicating Authority is of the opinion that an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) shall be dated and signed by the Adjudicating Authority. (11) A copy of the order made under sub-rule (8) of the rule 4 shall be supplied free of charge to the person against whom the order is made and all other copies of proceedings shall be supplied to him on payment of copying fee @ ₹ 2 per page. (12) The copying fee referred to in sub-rule (11) shall be paid in cash or in the form of demand draft in favour of the Adjudicating Authority. 22. A reading of the above Rule would clearly show that the adjudication process contemplated under the rules is a two-stage process. In the first stage, the Adjudicating Authority, on receiving a complaint, issues a notice to the person against whom violation of the FEMA or the Rules/Regulations framed thereunder is alleged, to show cause as to why an inquiry be not held against him. Upon receiving such cause, the Adjudicating Authority is to then form an opinion as to whether an inquiry should be held against such noticee. In the second stage, if the Adjudicating Authority has formed an opinion of holding an inquiry against the noticee, the Adjudicating Authority has to fix a date for the appearance of the noticee, eithe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cation into alleged contravention but only for the purpose of deciding whether an inquiry should be held against him or not. Every such notice is required to indicate the nature of contravention alleged to have been committed by the person concerned. That after taking the cause, if any, shown by such person, the adjudicating authority is required to form an opinion as to whether an inquiry is required to be held into the allegations of contravention. It is only then the real and substantial inquiry into allegations of contravention begins. xxxxx 31. The concept of fairness may require the adjudicating authority to furnish copies of those documents upon which reliance has been placed by him to issue showcause notice requiring the noticee to explain as to why an inquiry under Section 16 of the Act should not be initiated. To this extent, the principles of natural justice and concept of fairness are required to be read into Rule 4(1) of the Rules. Fair procedure and the principles of natural justice are in-built into the Rules. A noticee is always entitled to satisfy the adjudicating authority that those very documents upon which reliance has been placed do not make out eve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... true that ordinarily this Court would not entertain a Writ Petition against a show cause notice as the noticee would get an opportunity to submit his reply and of hearing before the adjudicating authority. However, the scheme of the Adjudication Rules in question is different from the other inquiries where an authority issues a show cause notice, the noticee submits his reply, the authority then hears the complainant and the noticee for taking a decision in the matter. Ordinarily, inquiries are not divided into different stages, unlike the inquiry for which procedure is laid down in Rule 4 of the Adjudication Rules. In ordinary inquiries, the inquiry officer is not required to form any opinion before conclusion of the inquiry. On the other hand, the scheme of Rule 4 of the Adjudication Rules is quite different and the same is required to be examined both for the purpose of considering the last alternative submission of the petitioner about breach of Rule 4 of the Adjudicating Rules and also for considering the aforesaid preliminary objection raised by the learned Additional Solicitor General about maintainability of the Writ Petition. 11. It is the case of the petitioner that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the objective of receiving objections to the show cause notice and forming an opinion whether or not the inquiry should be conducted further, has been provided only for the purpose of ensuring that the authorities under the Act do not proceed against persons who are complete strangers to the alleged contravention under the Act. The above provision according to him can have no application where prima facie, the noticee is connected to the alleged contravention such as in the present case and, therefore, the authority has formed the opinion to proceed with the inquiry and, therefore, the impugned notice for personal hearing has been issued on 6 June, 2013. 14. This submission of the learned Additional Solicitor General would require one to read words into Rule 4 of the Adjudication Rules that the objections to the show cause notice would be considered, only if they are of particular type, such as, the noticee is a stranger to the proceedings and no other objection would be considered while deciding whether or not the adjudication must be proceeded with further. Even if one were to proceed on the basis of the submission of the learned Additional Solicitor General that only some t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the considerations which weighed with the Adjudicating Authority to reject the preliminary objections. It is also very clear from the provisions of the Act and the Rules that an Appeal which is provided would not lie from an order recording an opinion of the Adjudicating Authority to proceed further with the adjudication of the notice, but the appeal would only be against the final order. xxxxx 19. The above view taken by us on the interpretation of Rule 4 of the Adjudication Rules finds supports from decision of the Apex Court rendered in Income Tax matters. Sections 147 and 148 of the Income Tax Act, 1961 provides for reopening of completed assessment. In the above provision of the Income Tax Act, 1961, there is no provision as found in Rule 4 of the Adjudication Rules of inviting objections to the notice and thereafter, forming an opinion on these objections before proceeding further with the notice for re-opening an assessment. Even so, the Supreme Court in the matter of GKN Driveshafts in 259 ITR 19 has held that on receipt of notice under section 148 of the Income Tax Act, 1961, seeking to reopen a completed assessment, the party is entitled to seek from the Asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wever, in cases where the opinion is formed to proceed further with the show cause notice, then a notice for personal hearing is required to be given to the party in terms of Rule 4 of the Adjudication Rules. However, if on receipt of the notice for personal hearing, the recorded reasons are sought for by the noticee, the same should be given. However, this recording of reasons is not an appealable order but it would give the noticee a chance during adjudication proceedings to meet the reasons which led the Adjudicating Authority to form an opinion that he must proceed further with the inquiry against noticee. This would only result in fair procedure which would be in consonance not only with Rule 4 of the Adjudication Rules but with principles of natural justice. xxxxx 38. In view of the above discussion, though we do not disturb, at this stage, the impugned show cause notices dated 25 November, 2011 issued by the Special Director, Directorate of Enforcement, to the Petitioner, we set aside the communication dated 6 June, 2013 issued by respondent No. 2, calling the petitioner for a personal hearing. We direct the Special Director, Directorate of Enforcement first to for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icating Authorities appointed under section 16(1) of the Foreign Exchange Management Act, 1999 (42 of 1999). 4. The above is brought to the notice of all the Adjudicating Authorities. 5. This issues with the approval of the Director of Enforcement. 28. Therefore, the following principles regarding the inquiry procedure under Rule 4 of the Adjudication Rules emerge from the above judgments: (a) Rule 4 contemplates a two-stage inquiry process; (b) Principles of natural justice and fairness are embodied into both the stages, though the rigours of the same at the first stage are a bit lighter in form of no compulsion to grant personal hearing to the noticee, supply of documents not relied upon, etcetera; (c) The opinion formed by the Adjudicating Authority under Rule 4(3) must be informed and must reflect due application of mind; (d) The opinion formed must also reflect reasons for the same. Though detailed and elaborate reasons need not be given, the same must satisfy the test of reflecting due application of mind by the Adjudicating Authority. 29. The requirement of giving reasons, as observed by Lord Denning, M.R. in Breen v. Amalgamated Engg. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity must record reasons for its decision, are of no less significance. These considerations show that the recording of reasons by an administrative authority serves a salutary purpose, namely, it excludes chances of arbitrariness and ensures a degree of fairness in the process of decision-making. The said purpose would apply equally to all decisions and its application cannot be confined to decisions which are subject to appeal, revision or judicial review. In our opinion, therefore, the requirement that reasons be recorded should govern the decisions of an administrative authority exercising quasi-judicial functions irrespective of the fact whether the decision is subject to appeal, revision or judicial review. It may, however, be added that it is not required that the reasons should be as elaborate as in the decision of a court of law. The extent and nature of the reasons would depend on particular facts and circumstances. What is necessary is that the reasons are clear and explicit so as to indicate that the authority has given due consideration to the points in controversy. The need for recording of reasons is greater in a case where the order is passed at the original stage. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e one common purpose which is to demonstrate by reason that the relevant factors have been objectively considered. This is important for sustaining the litigants faith in the justice delivery system. (j) Insistence on reason is a requirement for both judicial accountability and transparency. (k) If a Judge or a quasi-judicial authority is not candid enough about his/her decision-making process then it is impossible to know whether the person deciding is faithful to the doctrine of precedent or to principles of incrementalism. (l) Reasons in support of decisions must be cogent, clear and succinct. A pretence of reasons or rubber-stamp reasons is not to be equated with a valid decision-making process. (m) It cannot be doubted that transparency is the sine qua non of restraint on abuse of judicial powers. Transparency in decisionmaking not only makes the Judges and decisionmakers less prone to errors but also makes them subject to broader scrutiny. (See David Shapiro in Defence of Judicial Candor, [(1987) 100 Harvard Law Review 731-37 ] (n) Since the requirement to record reasons emanates from the broad doctrine of fairness in decision-making, the said req ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aft development plan and regulations are necessary, ... . These words are indicative of the satisfaction being subjective one but there must exist circumstances stated in the proviso which are conditions precedent for the formation of the opinion. Opinion to be formed by the State Government cannot be on imaginary grounds, wishful thinking, however laudable that may be. Such a course is impermissible in law. The formation of the opinion, though subjective, must be based on the material disclosing that a necessity had arisen to make substantial modifications in the draft development plan. 25. The formation of the opinion by the State Government is with reference to the necessity that may have had arisen to make substantial modifications in the draft development plan. The expression: as considered necessary is again of crucial importance. The term consider means to think over; it connotes that there should be active application of the mind. In other words the term consider postulates consideration of all the relevant aspects of the matter. A plain reading of the relevant provision suggests that the State Government may publish the modifications only after consideration th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... least showing that he is alive to the contentions raised in the reply to the Show Cause Notice and why he is of the opinion that inquiry must still be held. In the present case, this bridge is missing. 37. However, having said the above, it is also to be seen as to whether the inquiry deserves to be set aside only for the above violation. In the present case, as noted herein above, the Supreme Court has passed a detailed judgment finding various acts of violation of the FEMA and the Rules/Regulations framed there-under inter alia against the JP Morgan group of companies, may not be specifically by name against the petitioner. The present inquiry has been initiated on the direction of the Supreme Court in the said judgment. The allegations against the petitioner also cannot be said to be such that do not warrant any inquiry given the above factual background. The role of the petitioner and its employees and the capacity in which they acted in the transactions in question need a detailed inquiry as such allegations form part of a larger whole which is being inquired into. 38. In Maharashtra State Board of Secondary and Higher Secondary Education v. K.S. Gandhi Ors., (1991) ..... X X X X Extracts X X X X X X X X Extracts X X X X
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