Shanti Prasad Jain And Another vs Director Of Enforcement, Foreign...

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: supreme-court

Case Number: Civil Appeal No. 617 of 1961

Decision Date: 4 October 1962

Coram: K.N. Wanchoo, Bhuvneshwar P. Sinha, P.B. Gajendragadkar, K.C. Das Gupta, J.C. Shah

In the matter titled Shanti Prasad Jain and another versus Director of Enforcement, Foreign Exchange Regulation, the Supreme Court of India delivered its judgment on 4 October 1962. The decision was written by Justice K.N. Wanchoo and the bench also included Justices Bhuvneshwar P. Sinha, P.B. Gajendragadkar, K.C. Das Gupta and J.C. Shah. The appeal, recorded as Civil Appeal No. 617 of 1961, was taken by special leave from the order dated 27 October 1960 issued by the Foreign Exchange Regulation Appellate Board, New Delhi. The case concerned the application of Section 9, read with Section 23, of the Foreign Exchange Regulation Act, 1947 (Act 7 of 1947), together with the Notification dated 25 March 1947 issued under that provision. The citation of the judgment appears in the All India Reporter as 1964 AIR 1023 and in the Supreme Court Reports Supplement (1) 514 of 1963. The central issue was whether the words “or who may hereafter become the owner of any foreign exchange” contained in the Notification were within the scope of Section 9, and what period of time was prescribed for offering such foreign exchange for sale after acquisition of ownership.

The factual backdrop involved the first appellant, a businessman, traveling abroad with his wife, the second appellant, on a business trip that lasted two months. The first appellant had been authorized to possess foreign exchange amounting to US $337 and US $1,410, whereas the second appellant was not allotted any foreign exchange, under the representation that a foreign company would bear her expenses. Upon returning to Delhi after three months, customs officials discovered on the first appellant’s person traveller’s cheques valued at US $2,590. The Director of Enforcement concluded that the appellants had received US $3,500 as a gift, were owners of that amount, and had violated Section 9 of the Act together with the 25 March 1947 Notification by failing to make an offer for sale of the foreign exchange within one month of becoming owners. Consequently, the Director forfeited traveller’s cheques totalling US $1,990 and imposed a penalty of Rs 18,000 on the first appellant under Section 23. The Appellate Board affirmed the Director’s order. The Supreme Court held that Section 9 applied not only to foreign exchange owned at the commencement of the Act but also to foreign exchange acquired subsequently. It reasoned that the phrase “or who may hereafter become the owner of any foreign exchange” was not ultra vires the section but was implicitly incorporated to give effect to the purpose of the Notification, which required an offer for sale to be made within one month of acquisition of ownership, not within one month of arrival in India.

The record showed that the appeal was filed by counsel representing the appellants before the Appellate Board in New Delhi, identified as Appeal No. 61 of 1960. The respondents were represented by their own counsel. The judgment was delivered on 4 October 1962 by Justice Wanchoo. The matter before the Court was an appeal against an order issued by the Foreign Exchange Regulation Appellate Board, and the Court set out the factual background leading to the dispute.

Appellant No. 1 travelled to Europe and the United States for business purposes, accompanied by his wife, Appellant No. 2. The first appellant held the position of Chairman of Sahu Jain Limited. The couple departed India on 30 June 1958, visited several European countries including West Germany, and reached the United States on 5 August 1958. Their return journey began on 22 September 1958, and they arrived back in Delhi on 1 October 1958. The first appellant had been authorised to obtain foreign exchange amounting to £337, which corresponded to Rs. 4,500, and US $1,410, equivalent to Rs. 6,750. The authorising authority had informed Sahu Jain Limited that this sanction was conditional upon the trip not exceeding a two‑month period. The second appellant was not granted any foreign exchange in her own name, but her travel was approved on the basis that a United States company would bear all expenses of her visit.

Upon their arrival in Delhi on 1 October, Customs officials discovered that the first appellant was in possession of traveller’s cheques valued at US $2,590. The cheques were seized and subsequently handed over to the Enforcement Directorate on the direction of a magistrate. The appellants were then required to submit detailed information concerning their overseas itinerary and the origin of the seized cheques. It was apparent that the value of the seized cheques exceeded the amount of United States dollars that had been sanctioned to the first appellant. The appellants explained that traveller’s cheques worth US $1,500 had been received as gifts from Maschinenbau Schoiz and Company of West Germany, and further traveller’s cheques worth US $1,000 had been received as gifts from Chemiobau and Dr. A. Zieren, also of West Germany. An additional sum of US $1,000 was said to have been received from Hans Tobeason, Inc., a firm based in New York. They further clarified that of the total seized amount, traveller’s cheques amounting to US $1,990 represented the unspent portion of the two German gifts, while the remaining traveller’s cheques worth US $600 constituted the unspent balance of the foreign exchange that had been sanctioned when the appellant left India. The appellants also asserted that the entire US $1,000 received from the New York source had been spent while they were in the United States. After considering this explanation, the Director of Enforcement issued notices to the appellants requiring them to show cause why adjudication proceedings should not be initiated against them for alleged violation of the relevant provisions.

In this case the Court examined the applicability of section 9 of the Foreign Exchange Regulation Act, No VII of 1947, together with the notification dated 25 March 1947 issued under that provision. The notices issued to the appellants asserted that they had failed to sell foreign exchange amounting to US $3,500, which they had acquired abroad, within one month of becoming owners of that exchange, as required by section 9 of the Act and the said notification. The appellants responded to the notice by reiterating essentially the same explanation they had previously given, namely that the foreign exchange had been received as gifts from foreign entities. On the basis of that explanation the Director of Enforcement conducted adjudication proceedings, concluded that the sum of US $3,500 had indeed been received by the appellants as a gift and that they were the owners of the amount, and held that because they had not offered to sell the foreign exchange as mandated by section 9 and the notification, they were liable to penalties for contravening section 9. Consequently, the Director ordered the forfeiture of travellers’ cheques to the extent of US $1,990 found with the appellants and imposed a penalty of Rs 18,000 on the first appellant under section 23 of the Act, while no penalty was imposed on the second appellant.

The appellants subsequently appealed to the Appellate Board, contending that they were not owners of the foreign exchange because the money had been given to them merely to defray their expenses in the United States and that the foreign companies had intended the funds to be spent on their behalf rather than to pass ownership to the appellants. They further argued that the notification was ultra vires section 9 of the Act, asserting that it extended beyond the scope of the provision by regulating not only foreign exchange owned or held at the time of the notification but also any foreign exchange that might later come into a person’s ownership. Additional contentions were raised before the Appellate Board, but those matters had not been raised before this Court in view of the earlier Supreme Court judgment in Shanti Prasad Jain v. Director of Enforcement (1963) 2 SCR 297. Thus, two questions required consideration: whether the appellants were owners of the foreign exchange and whether the notification was ultra vires section 9 of the Act. Both questions were decided against the appellants by the Appellate Board, which affirmed the Director’s order. The appellants then obtained special leave to appeal to this Court, bringing the matter before it.

The Court held that the question of ownership was already settled by the concurrent findings of fact of the Director of Enforcement and the Appellate Board. The Appellate Board observed that the appellants’ contention that they were not owners of the foreign exchange was an ingenious but unacceptable argument. The appellants had attempted to portray the foreign exchange as merely a conduit for spending on behalf of the foreign firms, yet the Board correctly noted that the money had been received by the appellants as a gift, notwithstanding the original purpose of using it for their United States trip.

In the present matter the appellants attempted to argue that, although they had actually received the foreign exchange, they were merely spending the money on their own behalf as agents of three foreign companies that had supplied the funds for their expenses while in the United States. The Appellate Board correctly observed that the foreign exchange given to the appellants was nothing more than a gift that they had received, and noted that the appellants themselves had initially admitted that the amounts were received as a gift. Only subsequently did they advance the inventive argument that, despite having received the money, they were acting as agents of the three companies for the purpose of spending it on themselves. The Board found this explanation to be absurd and held that the appellants had indeed received the foreign exchange as a gift, even though the purpose of the gift might have been to defray the expense of their trip to the United States of America. Moreover, the Board pointed out that the money was given to the appellants outright, a conclusion supported by the fact that the appellants offered the amount found on them on 1 October 1958 for sale through the Reserve Bank, and again on 25 October 1958. This conduct leaves no doubt that the appellants became the owners of the foreign exchange. Having established ownership, the Court turned to the principal issue raised before it, namely whether the notification issued under section 9 of the Foreign Exchange Regulation Act, 1947, was ultra vires. Section 9, in the portion relevant to the appeal, provides that the Central Government may, by notification in the Official Gazette, order every person residing in India who owns or holds foreign exchange specified in the notification to offer it, or cause it to be offered, for sale to the Reserve Bank on behalf of the Central Government or to any person authorized by the Reserve Bank, at a price fixed by the Central Government but not less than the market rate at the time of sale. The provision further allows the Central Government, by the same notification or another order, to exempt any persons or class of persons from the operation of such order. The notification dated 25 March 1947, made pursuant to this power, stated: “In exercise of the powers conferred by section 9 of the Foreign Exchange Regulation Act, 1947 (VII of 1947), the Central Government is pleased to direct that every person resident in India who owns or who may hereafter become the owner of any foreign exchange, whether held in India or abroad, expressed in the currency of any country or territory specified in the schedule annexed to this Order, shall, before the expiration of one month from the date of this Order, or, in the case of a person hereafter becoming such owner, within one month of the date of his becoming, offer such foreign exchange or cause it to be offered for sale to an authorised dealer authorised by the Reserve Bank for the purpose…”. The contention advanced by the appellants was that the scope contemplated by section 9 is limited to persons who own or hold foreign exchange, and therefore the notification exceeded the statutory authority. The Court examined this contention in light of the factual findings and the wording of the statute and the notification.

The order stipulated that any person who, within one month of the date of the order or, if acquiring ownership thereafter, within one month of such acquisition, owned foreign exchange specified in the schedule, must offer that foreign exchange for sale to a dealer authorised by the Reserve Bank. The sale had to be made for rupees at the rate then authorised by the Reserve Bank pursuant to sub‑section (2) of section 4 of the Foreign Exchange Regulation Act for conversion of the foreign currency into Indian currency. The order expressly exempted foreign exchange already held by authorised dealers within the scope of their authority, persons authorised by the Reserve Bank to hold foreign exchange for business or other purposes, and non‑citizens of India who had obtained Reserve Bank permission under the schedule that listed the United States of America and the Philippine Islands. The appellants argued that section 9 was intended only to require owners of foreign exchange on the date of the notification to offer it for sale, and that it did not extend to persons who became owners after that date. The court rejected this contention, observing that the language of the section required every person who owned or held the foreign exchange specified in the notification to offer it for sale, without limiting the requirement to the date of the notification. The purpose of allowing a notification was to give the Central Government discretion to decide, based on the foreign exchange situation at a particular time, which currencies would be subject to the sale requirement; for example, a notification might direct that United States dollars be offered for sale while leaving English pounds excluded. Consequently, the provision applied both to foreign exchange owned at the commencement of the Act and to foreign exchange acquired thereafter. Counsel for the appellants conceded that section 9 was not confined solely to foreign exchange held by persons resident in India on the date the Act came into force, but maintained that although the section applied to later acquisitions, the notification itself could only refer to foreign exchange owned at the time of its issuance. The court found no merit in this view, emphasizing that the Act is a permanent statute and that section 9 unequivocally obliges every person holding or owning foreign exchange specified in any notification, irrespective of when the ownership arose, to offer it for sale as directed.

The Court observed that the phrase “or who may hereafter become the owner of any foreign exchange” inserted in the notification exceeded the authority granted by section 9 of the Act, because that language would limit the notification’s effect to foreign exchange owned or held only up to the date on which the notification was issued. The Court declared that it could not accept this narrow construction of section 9. It noted that the Act is a permanent piece of legislation and that section 9 unmistakably requires every person who holds or owns foreign exchange specified in a notification made under the provision to offer that exchange for sale in the manner prescribed. The Court further explained that the wording of the section is not restricted solely to foreign exchange owned or held by persons on the date the Act was passed; rather, the provision also embraces foreign exchange that may be owned or held by successors after the Act has come into force, and such foreign exchange must be offered for sale whenever a notification covering it is issued. Although the specific words “who may hereafter become the owner of any foreign exchange” do not appear in the text of section 9, the Court held that the section’s language is clear and implicitly includes persons who acquire foreign exchange after the enactment of the statute. Consequently, the notification’s purpose is primarily to identify the categories of foreign exchange that must be offered for sale. By employing the words “or who may hereafter become the owner of any foreign exchange,” the present notification merely makes explicit an implication that was already contained in the statutory provision. The Court stressed that even if the disputed clause had been omitted from the notification, the substantive meaning would remain unchanged, because the remaining language of the provision already covers both past and future ownership and holding of foreign exchange. The added clause, therefore, serves only to clarify the position and nothing more. Moreover, the Court warned that accepting the appellants’ argument would lead to the absurd result that a new notification would have to be issued daily in order to give effect to the purpose of section 9, which is to regulate foreign exchange that any person might own or hold at the time the Act became operative as well as foreign exchange that any person may acquire thereafter. Such an interpretation, producing a startling and impractical consequence, could not be endorsed. In sum, the Court reiterated that the language of section 9 is plain and applies not only to foreign exchange owned or held at the moment the Act commenced but also to foreign exchange that may be owned or held at any point thereafter, and that the notification’s role is essentially to specify the kind of foreign exchange that may have to be offered for sale under the section.

In this case the Court observed that the purpose of section 9 is to require that foreign exchange which may have to be offered for sale under that provision be dealt with according to the notification. The Court concluded that the notification exceeded the power granted by section 9, rendering it ultra vires. Because the notification is ultra vires, the Court noted that there is no dispute that the appellants violated section 9 together with the notification, given the factual finding that United States dollars amounting to three thousand five hundred were gifted to the appellants and consequently became their property. The appellants argued that the notification merely required them to make an offer to sell the foreign exchange within one month after their return to India, and they contended that they had complied with that requirement. The Court rejected that argument, stating that the notification expressly obliges a person to make the offer within one month of becoming the owner of the foreign exchange, not within one month of returning to the country. The Court further held that there is no basis for interpreting the notification to allow a one‑month period measured from the time of return when the foreign exchange was acquired while the person was abroad. Accordingly, the notification demands an offer to sell within one month of acquisition of ownership. The Court observed that the appellants faced no obstacle to making such an offer within the prescribed period, yet they failed to do so. Consequently, the Court found that the appellants clearly contravened the notification read with section 9 of the Act. The appellants also contended that the penalty imposed was excessively harsh. The Court noted that this issue had already been examined by the Appellate Board and found no reason to depart from the Board’s determination. The Court added that the first appellant, who serves as Chairman of Sahu Jain Limited, holds a position of responsibility and it is not expected that a person of such standing would violate the statutory provisions. Accordingly, the Court dismissed the appeal, ordered costs, and entered the order of dismissal.