The High Court · 2025

Heard Sri Y. Sreenivasa Reddy, learned counsel for the appellants and Sri Anil Prasad riwari, leamed Standing counser for Directorate of Enforcement for respondent. perused the entire record.

2. These civil Miscelaneous second Appears are preferred by the appellants aggrieved by the common order dated 20.0g.2014 passed by the Appellate Tribunal for Foreign Exchange, l5'h Floor, Hindustan Times House, K.G. Marg, New Delhi, (.Appellate Tribunal,), in Appeal Nos.132 and 133 of 201 l, wherein applications filed by the appellants seeking sray of the common adjudicating order dated 13.10.201I in Order No'SDE/SKS/Vrl9/201r passed by the Special Director o[ Enforcement, Enforcement Directorate, Government of India, New Derhi, (.Adjudicating Authority'), were disposed of.

3. The brief facts of the case are that the Assistant Director, Directorate of Enforcement, Hyderabad Zonal Office, lodged a complaint under Section 16 (3) of the Foreign Exchange Management Act, I 999 (hereinafter referred to as 'the Act') against both the appellants herein for contravention of provisions of the Act and Rules thereunder, more particularly, Section RY.J ( r rsA 32 & 33 20t4 :. \ 3(d) read with Section 42 of the Act. M/s. Vasavi Imp x is a proprietary concem and the appellant-B. Sanjay is the proprietor ir d appellant-T. V. Madhusudhan Rao is its authorized signatory. Appellant-T.V. Madhusudhan Rao, assured appellant-B. Sanjay that lLr would get 25 to 307o interest per annum on the amount of Rs. 3,00,000/ invested in stone cutting tools business. Appellant-T.V. Madhusudhan )l Lo, was proprietor of lWs. Mark Stonex, which was trading in granite cutti r I tools, which was established prior to M/s.Vasavi Impex. Granite cutting t< cls were imported from China and were locally sold. While so, on 17.12.').r 07 officials o[ the Directorate of Enlorcement searched the residence :f appellant-T.V Madhusudhan Rao and on 18.12.2007 they seized a lal top, Rs.5,00,000/- and certain documents. The statement of appellant-T.V v'ladhusuclhan Rao was recorded on 18.12.2007 and again on 07.01.2008 r hich show that he was importing granite cutting tools from China and s': ling them locally The said tools rvere purchased in the name of M/s. V r avi Impex, which stood in the name of appellant-B.Sanjay. Appellant-l.V. Madhusudhan Rao being the authorized signatory looked after the entir : business and the supplier in China appointed them as sole representative n Andhra Pradesh for importing cutting tools. The business started in t rc year 2007 and granite cutting tools were imported for four to five times ffom M/s.Quanzhou Zahongzhihztti Diamond Tool Co. LtrL. China, by under 2 I RY,J CMSA 32 & 33 2014 valuing the prices and the difference totally amounting to uSD 4 lakhs approximately. The amount in Indian currency was paid to one prakash from Begum Bazar, who used to pay the same to one Hukum in Chennai for onward palment to the suppliers in China. An amount equivalent to USD 80,000/- was paid to said prakash of Begum Bazar in October, 2007 and amount equivalent to 250 usD was sent through a friend for payment to the suppliers at china. The documents which were seized in the premises of appellanrT.v. Madhusudhan Rao contain the actual c&F prices quoted by the supplier. The said prices were given by the supplier,s representatives when they visited India. The said prices related to the year 2006 and they were subsequently reduced by 5% to r0% of the actuar price. while so, the value declared to the customs were 25 to 50olo less than the actual value. The amounts were paid in personal capacity of appellant-T.v. Madhusudhan Rao as there was no segregation of the amount between various concerns looked after by him and that the appellant-B. Sanjay had signed the papers for opening of the concern.

4. Further, on the basis of the said complaint the Adjudicating Authority issued show cause notice No.T-4l5-Hyd/2009 (scN-II) dated

23.11.2009 followed initiating formal proceedings against both the appellants under the Act. In the said proceedings, both the appellants were 3 \\ \. --I .:.... -.- -r-r1 RY,J c ,{sA 32 & 33 2014 \ ! given an opportunity to appear and were permitted to bt defended by their respective counsel.

5. After considering the evidence on record and ttt defence taken by the appellants, the Adjudicating Authority passed tlr Order (Original) No.SDEiSKS/Vll9lz}ll, dated 13.i0.2011, holding t Lat the appellants indulged in use of non-banking channel for transfer of fr rds overseas while conducting business of import of stone cutting tools by 4ls. Vasavi Impex and that the appellants have contravened Section 3 (l) of the Act for entering into financial transactions in India for creatioLt lf right to acquire foreign exchange of USD 2,17,2511- (equivalent to Fr.1,10,79,a31-) by persons outside India. In view of the said findingr;, the Adjudicating Authority imposed penalty of Rs.55,00,000/- on each I 'the appeliants as proprietor and authorized signatory of lvl/s.Vasavi Int ,ex under Section l3(1) of the Act. Further, an amount of Rs.5,00,(n 0/- seized at the residence of appellant-T.V.Madhusudhan Rao being fc,r nd to be involved in contravention of Section 3 (d) of the Act was confir;r ated. It is further held that Section 42 of the Act cannot be invoked and t te penalty amount was directed to be deposited within 45 days from the rl te of receipt copy ofthe said order. 4 RY,J CMSA 32 & 33 20t4

6. Aggrieved by the said order, the appellants filed appeals in Appeal Nos.132 and 133 of 2011 before the Appellate Tribunal along with applications seeking to waive the pre-deposit. The Appellate Tribunal after considering the case of the appellants ordered to pay 30o/o of the penalty amount in cash and to furnish bank guarantee for remaining 7 0o/o by each of them individuatly to stay the recovery of penalty till disposat of the appeal within one month from the date of receipt of copy of such order. Aggrieved by the same, the present Civil Miscellaneous Second Appeals are preferred.

7. In the grounds of appeal, the case of the appellant-B.Sanjay is that except for lending his name and investing Rs.3,00,000i- he was never involved in any transaction of M/s.Vasavi Impex and therefore, Sections 3 (d) and 42 ol the Act are not applicable to him. More-so, M/s.Vasavi Impex is not a company registered under Companies Act, 1956. Further, the appellants pteaded that the values of the imports were correctly stated before the customs and the same was not verified by the customs. The value of imported goods was compared with the value of the other importers and no evidence is produced to said effect. No opportunity was given to appellant-B.Sanjay to cross-examine the other appellant-T.V Madhusudhan Rao and therefore, there was no opportunity to establish that 5 RY,J o 4sA 32 & 33 2014 \, \ the appellant-B. Sanjay was not involved in activities a; ociated with trade in M/s. Vasavi Impex. While the Appellate Tribuna has prima facie concluded that the business was closed and Income lax Returns filed indicate that the appellants would suffer hnancial hardsh : in case waiver is not granted, the Appellate Tribunal directed the appella 1ts to pay 30o/, of penalty in cash and furnish Bank Guarantee for the res: )f the 70% within one month. It is contended that the Appellate Tribunal I r one hand arrived at conclusion that directing to pay penalty would caus,: financial hardship on the other hand directed for payment of 30% in cash and 70Yo through Bank Guarantee. The appellants pleaded that no opporl rnity was given to them for conducting personal hearing and therefore, t:l :re is violation of principles of natural justice. On the aforementirl Led grounds, the appellants prayed that the order of the Appellate Tribu I Ll be set aside and grant l00o/o waiver of the pre-deposit of penalty and tl rect the Appellate Tribunal to hear the appeal without insisting on pre-deprr it of penalty.

8. Leamed counsel for the appellants argued tha the provisions of Section 3 (d) of the Act are not applicable to the appell nt-B.Sanjay as he was not involved in any of the activities of IWs.Vr avi Impex. The statement of appellant-T.V. Madhusudhan Rao does not Cisclose about the involvement of appeilant-B. Sanjay in the transacti r rs of M/s.Vasavi 6 RY,J CMSA 32 & 33 2014 Impex. The appellant-B.Sanjay is not aware of any payments in contravention of provisions of the Act. While so, the Directorate of Enforcement relied upon the documents relating to the year 2006, when M/s.Vasavi Impex was established in the year 2007. The contemporaneous imports were made at lower prices than those declared by M/s.Vasavi Impex. Even the domestic sale price of lWs.Vasavi Impex was more than the prices at which the other importers sold the identical goods. The allegations made by the Directorate of Enforcement are not corroborated with material evidence to bring home culpability with respect to allegation of undervaluation of imports or payrnent through illegal channels. The document dated 01.09.2007 which contains actual prices available in the files recovered from the appellant-T.V. Madhusudhan Rao was ignored. It is further argued that the Enforcement Directorate alleges payment of Indian currency by the appellants to one Prakash of Begum Bazar for onward payment to one Hukum at Chennai for onward payment to the China suppliers through hawala means. However, there is no evidence on record to establish the transaction of money from Prakash to Hukum to China suppliers. It is argued that only when there is evidence to show palment to China suppliers through hawala means, the allegation against the appellants can be proven. Since there is no evidence on record, it is argued that the penalty ordered by the Adjudicating Authority and 7 RY,J (rt {sA 32 & 33 2014 directions of the Appellate Tribunal to deposit 30% olth , same in cash and providing Bank Guarantee for rest of the 70o/o is unsustai Lable.

9. In support of their case, leamed counsel for tlu appellants relied upon the judgment of Bombay High Court in Vaseem qbal Kapadia v. Union of Indiar, wherein it is held that the directic r to deposit total amount of penalty and to furnish bank guarantee for the ralance ol'the sum adjudicated and demanded, in effect and in substance m l ns denial of stay.

10. Further, in Virender Kumar Yadav v. Union o India2, the Delhi High Court held that the Tribunal while considering a ry application for waiver ofdeposit is to take into account firstly the existr rce of primafacie case. It is further held that the Court can exercise its . r risdiction to grant waiver when the pre-deposit can cause undue hard; ip and therefore, directed for cornplete dispense with from pre-deposit tf any amount of penalty for hearing ofthe appeal. I 1. Reliance is placed by the leamed counsel for th appellants in the case between ND Investments v. Union of India'r of [,r mbay High Court, wherein it is held that imposition of a condition and ol',; sh deposit of 40Y" of the amount awarded and imposed as penalty and giv I g Bank Guarantee 'zors lzl tnar :or- aHc 'zoog (a)rprr 822 - DHc 'zots 1a1 Tvr z:o- arc 8 RY,J CMSA 32 & 33 2014 of 600 for the balance, in the given facts and circumstances and peculiar to these cases, does not meet the ends ofjustice.

12. In NUs. Union Enterprises v. Union of Indiaa, the Calcutta High Court held that if sustainability of the adjudicating order is itself in doubt then dispensation, on ground of undue hardship should be granted. Likewise, in Priya Shah v. Enlorcement Directorates, High Court of Delhi held that when no material is placed to establish that the appellant actually operated the account in question, as such the matter was remanded back to the Tribunal to hear the appeal without insistence of the deposit of penalty. 1 3. Further, reliance is placed on Mohinder Kakar v. Assistant Director of Enforcement6, the said judgment is not applicable to the facts of the present appeals as in the said matter the subject matter is whether where charge is based on valuation o[any imported item, that valuation has to be based on competent evidence so as to substantiate charge and it cannot be a matter of statement of person proceeded against or of any other person. Reliance is also placed on the judgment in the case of Union of India v. Adani ExportsT, the same is also not applicable because the said o zor+ (s) ttvtr gg- cHc t Manu/oElrz lslzoos t lzoool rrz raxuAN 602 (FERAB) ' zooz (u) rvr rs - sc 9 RY,J c 4sA 32 & 33 2014 .,J matter is about refund of confiscated amount and thc I resent appeals are filed seeking waiver of the pre-deposit. The judgm: n in Mohtesham Mohd. Ismail v. Special Director, Enforcement l.ti :ectorate 8, relied upon by the learned counsel for the appellants is also rr t applicable as the issue dealt with therein is about Special Director appoi ,ted under the Act can himself prefer appeal before the High Court against r re order passed by the Tribunal/Board

14. Learned counsel for the appellants lastly relied u I rn the judgment in M/s. Bathina Technologies (India) Ltd., v. Spc :ial Director of Enforcemente, wherein the High Court of Andhra Prir, esh at Amaravati, held that a reading of Section 19 of the FEN,I^ shows that the considerations for dispensing with pre-deposit undcr this provision is different from the similar relief under the other enactrr rnts. It is further hetd that it would be competent for the Court in exerci.; of its jurisdiction to grant waiver of pre-deposit since in such a case requ ring a pre-deposit itself would amount to undue hardship. Having regarrl to the facts of the said case, pre-deposit was dispensed with subject to execution of undertaking before the appellate authority within eight veeks from date of the order. 'zoot ltoltvr zz3- sc 'c.v't.5.A.No.7 0f 2015, decided on 07.05.2025 10 RY,J CMSA 32 & 33 20t4 15. Learned counsel for the respondent argued that the Adjudicating Authority has considered case of both the parties by giving opportunity to both the appellants to put-forth their respective defence and only thereafter, passed the order imposing penalty. Similarly, the Appellate Tribunal considered the contentions of the appellants and passed the impugned order directing the appellants to deposit 30%o cash and to furnish Bank Guarantee of rest of 70o/o penalty amount respectively. Hence, interference by this Court is unwarranted.

16. In support of his contentions learned counsel for the respondent relied upon the judgment of High Court of Delhi in Special Director of Enforcement v. Anil Agarwalro, wherein it is hetd that the question which Court has to consider is the correctness and propriety of the Tribunal's impugned order granting complete exemption from the requirement of pre- deposit which is other-wise mandatory. In the said judgment, reference is made to the judgment of the Hon'ble Supreme Court of India in Benara Valves Ltd. v. CCErr, Monotosh Saha v. Special Director, Enforcement Directorater2 and Union of India v. Adani Exports Ltd.13, wherein it is held that importance of respecting the legislative mandate of pre-deposit, of 'o wc 1C1No.tza67 of 2006 and batch, decided on 31.03.2009 " 1z0061 t: scc a+7 " 2oo8 1tt1 scaLe eot " zooz 1ta1 scc zoz 7l *1 \] RY,J ct tsA 32 & 33 20t4 assessed, or penal amounts, wherever prescribed, as :reconditions for appellate remedies. Further, it is held that the structurr: of several statues granting discretion to the tribunal or appellate bodies. n such instances appears to be driven by the logic ofexistence ofundue ht dship. 17 . Further reliance is placed on the judgment of BonLr ay High court in Rajkumar Shivhare v. union of lndiara, wherein it is r :ld that ordinarily a writ petition against the order of the Tribunal on an apJ,J cation fbr r.vaiver of pre-deposit would not be maintainable. Further, refer. ce is macle ro the judgrnent of the Hon'ble Supreme Court of India in K,: an V. parekhrs, wherein it is held as follows: "27. [n this context, reference can usefully be macle, o the judgmcnt of this Court in Benara Values Ltd. v. Commissioner o C6p11s1 lxs15. (2006) li SCC 347. In that case, a two Judge Bench int rpreted Section 35-F of the Centra[ Excise Act, 1944, which is pari rr.r.eria to Sectio. t9(1) oi the Act, referred to the judgments in Siliguri vlunicipalrty v. Amalendu Das (1984) 2 SCC 436, Samarias Trading (tr . (p) Lid. ;. S. Samuel ( 1984) 4 SCC 666, Commissioner of Central Ii cise v. Dunlop India Ltd. ( I 985) I SCC 260 and observed: "Two significant expressions used in the provisior r: are ,.undue hardship to such person" and ..safeguard the inte.ests of the Revenue". Therefore, while dealing with the ap1,J cation tu.in requirements of considerations i.e. consideraiic r of undue hardship a,spect and imposition of conditions to r;r feguard the interests ofthe Revenue have to be kept in vierv. As noted above there are two important expressio I r in Section 35-F. One is undue hardship. This is a matter with r the special knowledge of the applicant for waiver and has to bt established Is FERA Appeal No 18 of 2012, decided on Civil Appeal No.10301 of 2011, dated 29_11.2011 72 =)/ RY,J CMSA 32 & 33 20t4 by him. A mere assertion about undue hardship would not be sufficient. It was noted by this Court in S. Vasudeva v. State of Kamataka that under Indian conditions expression "undue hardship" is normally related to economic hardship. "Undue" which means something which is not merited by the conduct of the claimant, or is very much disproportionate to it. Undue hardship is caused when the hardship is not warranted by the circumstances. For a hardship to be "undue" it must be shown that the particular burden to observe or perform the requirement is out of proportion to the nah.re of the requirement itself, and the benefit which the applicant would derive fiom compliance with it. The word "undue" adds something more than just hardship. It means an excessive hardship or a hardship greater than the circumstances warrant. The other aspect relates to imposition of condition to safeguard the interests of the Revenue. This is an aspect which the Tribunal has to bring into focus. It is for the Tribunal to impose such conditions as are deemed proper to saleguard the interests of the Revenue. Therefore, the Tribunal while dealing with the application has to consider materials to be placed by the assessee relating to undue hardship and also to stipulate conditions as required to safeguard the interests ofthe Revenue,""

18. The entire gamut of facts of the case show that the appellant- B.Sanjay is proprietor of lWs.Vasavi Impex and he has given authorization to appellant-T.V.Madhusudhan Rao to run day to day activities of the proprietorship concem i.e., appellant-T.V.Madhusudhan Rao is the authorized signatory of M/s.Vasavi Impex. Both the appellants have not disputed with the aforementioned stand taken by them respectively. However, on the basis of the complaint of the Assistant Director, Directorate of Enforcement, Hyderabad Zonal Office, show-cause notice 13 dated 23.1 1.2009 in File No.T-4l5-HYDl2009 (SCN-Il) \ as issued to both .\.] \,-: \. RY,J (lv SA 32 & 33 2014 the appellants. Thereafter, proceedings were ini .i lted before the Adjudicating Authority and opportunity was given to boJ the appellants to appear before the Adjudicating Authority to put-fortl their respective defence. On the basis of the statements giv: L by appellant- T.V.Madhusudhan Rao coupled with documents seized th ring the search in the residential premises of appellanrT.V.Madhur r dhan Rao, the Adjudicating Authority held that both the appellants hav: indulged in under valuation of imporr goods i.e., stone cutting tools by sh l ving l0ol' to 25oh less of the actual value. It is held that the said findings i ; not based on the statement of appellant-T.V.Madhusudhan Rao, but s based on the statement which is inconformity with the documents at [,i qe 5 and l5 of the file marked 'b' seizcd from residence of appellanrT.\'.tr [adhusud]ran Rao The tacts revealed by the appetlant-T.V.Madhusudhan lao corresponded with the contents of the documents seized during search

19. The missing links are that the person named Prt <ash, who was in Begum Bazar and who was in contact with one Hukun in Chennai were not identified. Further, there is no evidence on beha f of the overseas supplier about acrual prices of the stone cutting tools However, on the basis of the statement of the appellant-T.V.MadhustLr han Rao and the t4 RY,J CMSA 32 & 33 2014 documents seized, it is held that the appellants herein have indulged in under valuation of imported goods and transfer of amounts through non- banking channels. Therefore, were found to have contravened provisions of the Act and as such penalty of Rs.55,00,000i- each was imposed and amount of Rs.5,00,000/- seized al the residence ol appellant- T,V.Madhusudhan Rao was confiscated.

20. When an appeal was preferred along with stay petition before the Appellate Tribunal, the Appellate Tribunal considered whether there is prima facie case and undue hardship. Irrespective of the arguments made, according to the Appellate Tribunal, there was a question whether photocopies of the documents seized showing calculations which is at intemal page l5 onwards can be relied upon for establishing as to whether the appetlants indulged in use of non-banking channels for transfer of funds overseas in the conduct of business of import of stone cutting tools by M/s. Vasavi Impex and whether without arraying the company as a party, the appellants can be held liable for the alleged contravention of the provisions of the Act. On the basis of the aforementioned grounds, it is held that there is prima facie case. However, with respect to Iinancial status to make prior deposit, it is stated that copies of Income Tax Returns filed show that the business of the company was closed in the year 2008 and therefore, the 15 appellants may suffer great hardship if they are not lranted u'aiver to limited extent and therefore, the impugned order drr ed 20.08.2014 is RY,J 0IsA 32 & 33 20t4 passed

21. 'l'he facts considered by the Appellate Tribunal vhile adjudicating stay petition are that there is prima facie case on behal 'of the appellants and that M/s.Vasavi lmpex was closed in the year 1008. When the proprietary concern is closed in the year 2008 and the bu;iness is no longer functional directing the appellants to make pre-deposit rl penalty in their individual capacity would definitely cause undue hards rip. Horvever, as per guidelincs laid down by the Hon'ble Supreme Cour. undue hardship of the individuals has to be considered, but vrs-ri-vrs rec,) ,ery of penalty as and when the appeal is disposed ol and the appellants re fbund liable to pay the penaltY.

22. In the circumstances, since the proprietary concl n i.e., M,'s.Vasavi Impex has been closed down considering the indir dual risk of the appellants modifying the orders passed by the Appella e Tribunal would meet the ends of the justice. Considering the facts iurr circumstances of this case, this Court is of the considered opinion hat directing the appellants to furnish Bank Guarantee towards 50% of t re penaltv amount and waiving deposit ol'rest of the 50% would meet the t:r ds of.justice 16 RY,J CMSA 32 & 33 2014

23. In the result, the Civil Miscellaneous Second Appeals are partly allowed by setting aside the order dated 20.08.2014 passed by the Appellate Tribunal by waving of pre-deposit of 50% of the penalty amount and directing the appellants to furnish Bank Guarantee for remaining 50'/, of the penalty amount each within one month from the date of receipt of copy of this order. Consequently, the recovery of penalty amount against the appellants shall remain stayed till disposal of the appeals before the Appeltate Tribunal. There shall be no order as to costs. Miscellaneous applications, ifany, pending shall stand closed. \ To, //TRUE COPY// SD/. I NAGA LAKSHMI JOINT REGISTRAR SECTION OFFICER

1. The Appellate Tribunal for Foreign Exchange, New Delhi. 2. One CC to Sri Y. Sreenivasa Reddy, Advocate [OPUC] 3. One CC to Sri Anil Prasad Tiwari Standing counsel for directorate of Enforcement for Respondent IOPUC]

4. Two CD Copies DL/PSL ?fr L7 HIGH COURT RY, J DATED:2111112O25 COMMON JUDGMENT CMSA.Nos.32 and 33 of 2014 ;;ffi- .^ .J, o(J Ii !l /1,]lr I ).-. + * ^ '- il1-an:' z(_ -t- PARTLY ALLOWING THE CMSAS \$. ) \v 1,\