Imprisonment And Penalty Under Rera Realty Firm’s Directors, Partners And Officers, Beware!

BACKGROUND OF REAL ESTATE LAW

Real estate business, perceived to be non-transparent, is now
required to fall in line with stringent requirements of the Real Estate (Regulation
and Development) Act, 2016 (“RERA”).

Under RERA, real estate companies are required to furnish
exhaustive particulars to the regulator. Some of these are:

–  Promoters to do prior registration of
projects with the regulator before advertising, booking or selling apartments;

–   Each phase of a project must be registered
separately as a standalone;

–   Every application for completion certificate
should have minute details, including past project details, delivery status and
legal cases pending against the promoter;

–   Developer must be ready with approval and
commencement certificate, sanctioned plan and project details at all times.

Offences under RERA will attract serious consequences
including imprisonment in some cases. This is intended to deter promoters,
directors, partners and officers of the real estate concerns from indulging in
financial malpractices and cheating.

Recently, promoters of a well-known realty company were
arrested by the Economic Offences Wing (EOW) of the Delhi Police for alleged
fraud in their real estate project in which Rs. 363 crore were collected from
customers. It is alleged that the promoters siphoned Rs. 200 crore off their
project and stashed the same abroad. They have also been accused of duping
buyers who booked flats in their residential project.  

Nearing 1 May 2017, the implementation date of RERA,
the government notified the remaining sections of RERA on 19 April 2017. This
has put an end to the speculation about extension of implementation deadline.
Thus, RERA is viewed as a positive step and shows the government’s firm resolve
to protect home buyers’ interest.

RERA – A NEW LAW

RERA is a new legislation. Most of its provisions came into
force on 1 May 2016¹. Remaining provisions came into force on 1 May
2017². Thus, now all provisions are notified and the entire Act has
come into force by 1 May 2017. The following are the provisions that were
notified on 19 April to come into force on 1 May 2017. [The others were earlier
notified and came into force a year earlier on 1 May 2016].

(i)   Sections 3 to 10: Registration of real estate
projects and registrationof real estate agents.

(ii)  Sections 11 to 18: Functions and duties of
promoter.

(iii)  Section 19: Rights and duties of allottees

(iv) Section 40: Recovery of interest or penalty or
compensation and enforcement of order

(v)  Sections 59 to 70: Offences, penalties and
adjudication

(vi) Section 79: Bar of jurisdiction

(vii) Section 80: Cognisance of offences.

Section 69 of RERA which [has come into force on 1 May 2017]
deals with the liability of promoters, directors, partners and officers of the
realty companies, firms and other non-individual entities, came into force on 1
May, 2017.

Since RERA is new, its provisions including section 69 would
need to be interpreted on the basis of similarly worded provisions of other
legislations. For example, section 42 of the Foreign Exchange Management
Act, 1969 (FEMA) shows that the same is identically worded and corresponds
to section 69 of RERA. Accordingly, provisions of section 69 may be interpreted
by relying on the propositions concluded in the decisions rendered u/s. 42 of
FEMA or similarly worded sections in other laws.

1   See Notification
No. SO 1544 (E) [F No. O-17034/18/2009-11] dated
26 April, 2016

2   See
Notification No. 1216(E) [F No. O-17034/275/2017-H] dated
19 April, 2017

Offences under RERA are punishable under Chapter VIII thereof
(sections 59-68). The gist of the penal provisions is given below.

The persons liable to punishment would often involve
companies, partnership firms and association of individuals. As will be seen
from the abovementioned gist, the punishment is by way of stiff fine and in
four cases, also by way of imprisonment.

A partnership firm is merely a compendious description of its
partners. However, a company is a juristic entity distinct from its
shareholders¹. In case of a partnership, it may also be difficult to
link any partner directly with the offence committed by the firm. For this
reason, in the provisions of a statute dealing with offences, partnership firms
are treated as companies. In section 69, this is evident from the Explanation
which is extracted here:

________________________________________

1   Bacha F. Guzdar vs.
CIT (1955) 27 ITR 1 (SC)

“Explanation
— For the purpose of this section—

(i)  “Company” means any body corporate and
includes a firm or association of individuals; and

(ii) “Director”, in relation to a firm, means a
partner in the firm.”

In terms of the Explanation to section 69, a company
means a body corporate and includes a firm or association of individuals; and a
director in relation to a firm, means a partner in the firm. A firm is not a
distinct legal entity and, prima facie, proceedings cannot be initiated
against a firm. Under the Explanation, however, a firm is regarded as a
company for the purposes of this section and therefore, proceedings against a
firm would be valid.

It may be noted that the definition of “company” is inclusive
in nature and could be interpreted in wider manner so as to include even other
entities and persons.

GIST OF SECTION 69 OF RERA

Before section 69 is analysed in detail, it would be better
to review the gist of its provisions.

Section 69 deals with the offences committed by firms,
companies and association of individuals. A company has been defined to include
a firm or association of individuals for the purposes of this section. In terms
of section 69(1) and 69(2), therefore, the persons who are liable to be charged
with the offence committed by the company, firm, association, etc. would
include the following persons:

–  A person in charge of the business of the
company, firm, association, etc.;

–   A person who is responsible to the company,
firm, association, etc. for the conduct of its business;  

–   Director of the company;

–   Partner of the firm;

–   Secretary of the company;

–   Manager of the company, firm, association, etc.;

–   Any other officer of the company, firm,
association, etc.

If an offence under RERA is committed by a company, firm,
association, etc., both, the person in charge of the company firm,
association, etc. and the company, firm, association, etc. are
deemed to be guilty of such offence. The person charged with the offence,
however, will not be liable to punishment if he proves that the offence was
committed without his knowledge or that he had exercised all due diligence to
prevent commission of such offence. Where the offence has been committed by a
company with the consent or connivance of, or is attributed to any neglect of
secretary, director, manager or any other person in charge of the business of
the company, such person will also be deemed to be guilty of the offence and
liable to be proceeded against and punished accordingly.

RATIONALE UNDERLYING SECTION 69

Since a company is not a physical person, the pain of
punishment cannot be inflicted on it. Unlike an individual, the company does
not have mind that can be guilty of criminal intent. Hence, for a company,
punishment under RERA is not practical. It is, therefore, necessary to punish
the functionaries of the company, association, etc. whose duties,
responsibilities and conduct represent the policy of the company.

The Joint Committee of Parliament had also discussed the
spirit and content of the various clauses in the Bill (which was eventually
enacted into the repealed FERA) pertaining to vicarious liability of the
functionaries of company, etc. The following observations made by the
Joint Committee are enlightening:

“…..in corporations also, extent
of vicarious liability cannot be extended beyond the acts which are punishable
with fines. First, a clear distinction should
be made between vicarious liability of the master for acts of the servant, and
imputation of the actions of a person in the employment, or acting on behalf of
the Corporation which are properly imputable to the latter. Imputed liability is not vicarious but original
liability. The principles of vicarious responsibility has been developed in
the law of tort, because it has seemed socially and economically necessary to
hold the master – and that it is in many cases a corporation liable vis-à-vis
third parties for acts committed within his sphere of operations. The master is held liable to recover against his
servant. The law of tort is, however, concerned with the economic
adjustment of burdens and risks, and the principle of vicarious liability is
applicable to the criminal law only in so far as the criminal law is
approximated to the objectives of the law of tort i.e. where the law is
essentially concerned with the enforcement of certain objective standards of
conduct, through the imposition of fines, rather than with the individual guilt
of a person. This point to the area of strict responsibility which is largely,
though not entirely, co-extensive with the area of so-called public welfare
offences”. [Emphasis supplied]

PERSONS LIABLE TO IMPRISONMENT AND/OR FINE

A reference to the Explanation to section 69 of RERA
shows that the provisions of section 69 are applicable to the persons in charge
of the business of or responsible to the companies, partnership firms, body
corporates and any other associations of individuals. The word “includes”
in the definition of the “company” given in the Explanation seems to
expand the sweep of section 69 so as to also cover the other non-individual
entities, such as, trust, society, etc. Directors, partners, managers,
secretaries and other officers of the company, body corporate, associations of
individuals, trusts, societies, etc. would be covered by section 69 provided
any such person was regarded as “in charge of” or “responsible to”
the company for the conduct of its business. While the company would be primarily
liable for the consequences of the offence committed by it under RERA, the
director, partner, manager, secretary, other officer and functionaries of the
company, partnership, associations of persons, trust, society, etc.
would be vicariously liable for the offences committed under RERA by the
primary offender. Indeed, the charge of vicarious liability u/s. 69 can be
fastened on such functionary only after establishing that he was in charge of
or responsible to the company for the conduct of its business at the time
when the offence was committed by the company. A review of various
provisions of RERA shows that the business in real estate sector conducted in
the form of non-individual entities, such as, a company, a partnership firm,
AOP, trust, society, etc. would attract the vicarious liability provided
u/s. 69. Thus, the following persons connected with the real estate business
would be covered under the wide sweep of the vicarious liability provided u/s.
69 of RERA and would be punishable with fine and/or imprisonment, as the case
may be.

–   Promoters, directors, partners and officers
of realty companies, firms, etc., and builders, developers, etc.
engaged in the real estate business

–   Companies, firms and association, etc.
in the business of Real estate agents

–   Allottees of the plots, apartment, and
buildings

–   Architects

–   Engineers

–   Various entities defined as “person”
in section 2 [zg]

All the abovementioned persons concerned with or engaged in
the real estate business in the form of company, partnership firm, AOP,
society, trust and other non-individual entities and the functionaries of such
entities are covered under the wide sweep of section 69 of RERA and would be
punishable with fine and/or imprisonment, as the case may be.

Accordingly, show cause notices for the offence under RERA
may be issued to such functionaries in addition to the show cause notice issued
to the non-individual entities, i.e., company, partnership firm, AOP, trust,
society, etc.

LIABILITY OF THE PERSON-IN-CHARGEOF THE COMPANY, FIRM, ETC.

Section 69(1) deals with the directors, senior executives and
employees of the company and partners and key officers of partnership firms,
associations of individuals, etc. who are in charge of or responsible to
the company, firm, etc. for the conduct of its business. Where an
offence has been committed by a company under RERA, apart from the company
being liable for such offence, the person who was in charge of or was responsible
to the company for the conduct of its business at the time of such offence
is also liable to the penal consequences of the offence. The offence may be of
any provision of RERA. Indeed, the deeming provision that the offence has been
committed by such person is a matter of presumption. Such presumption can be
rebutted by establishing that the offence was committed without the knowledge
of the person or that he had exercised all due diligence to prevent the
commission of such offence. It is settled law¹ that a person, who
has failed to carry out a statutory obligation, cannot be punished unless he
either acted deliberately in defiance of law or was guilty of conduct
contumacious or dishonest or that he acted in conscious disregard of his
obligations.

In Girdharilal Gupta vs. D. N. Mehta², a
leading case on vicarious liability, it has been held by the Supreme Court that
such provision [Corresponding to section 69(1)] is a highly penal provision
since it makes the person in charge of or responsible to the company for the
conduct of its business, vicariously liable for the offence committed by the
company. Therefore, this section must be construed strictly. In other words, to
charge a person with vicarious liability for the impugned offence committed by a
company, it is necessary for the Department to establish the following:

__________________________________________________________

1   Hindustan Steel Ltd
v. State of Orissa (1972) 83 ITR 26 (SC).

2    AIR
1971 SC 28

–   at the time the offence was committed by the
company, the person was in charge of or was responsible to the company for the
conduct of the business of the company; or

–   the offence was committed with the consent or
connivance of the person; or

–  the offence was attributable to the neglect
of the person.

“PERSON-IN-CHARGE” –
CONNOTATION OF

The material expression in section 69(1) is the “person
in-charge of”. Connotation of this expression was examined by the Supreme Court in Girdharilal Gupta vs.
D. N. Mehta³. This expression has been explained by the
Supreme Court in following words.

“A person ‘in-charge’ must mean the person in overall control of the
day-to-day business of the company. This inference follows from the
wordings of s/s. (2). It mentions director, who may be a party to the policy
being followed by the company and yet not be
in-charge of the business of the company. Further, it mentions manager, who
usually is in charge of the business but not in overall charge. Similarly, the
other officers may be in charge of only some part of business”. (Emphasis
supplied)

In this connection, one may also note the decision of the
Delhi High Court in Umesh Modi vs. Dy Director⁴ in which
distinction has been drawn between the directors in charge of day to day
affairs of the company’s business and other directors who are not.

A person cannot be convicted of the offence merely because
he, as a partner, has a right to participate in the firm’s business under the
terms of the Partnership Deed⁵. When a person in charge of business
goes abroad, it would not mean that he ceases to be in charge, unless it is
established that he gave up the charge in favour of another person.

Similarly, it is only that partner/director who is in charge
of or responsible to the firm/company who could be made liable u/s. 69 and,
therefore, those partners who had not signed the relevant documents, say,
regarding exports, could not be visited with penalty concerning the offence
pertaining to export transactions⁶.

__________________________________________________

3   AIR 1971 SC 2162

4   [2015] 130 SCL 621
(Del)

5   State of Karnataka
vs. Pratap Chand (1981) 128 ITR 573 (SC).

6   Sofi
Carpets vs. Directorate of Enforcement (1990) 50 Taxman 439 (FERAB).

In the undernoted case¹, a company was found
guilty of contravention of FERA. Adjudication proceedings were initiated
against the company and also against the appellant in his capacity as a
director. On investigation, it was found that the bank certificate furnished
during the investigation showed that another director was exclusively in charge
of the company’s accounts. This certificate was, however, not brought on
record. The matter was remanded for identifying the director who was in charge
of and was responsible to the company for the conduct of its business. The
expression “person in charge of and was responsible to the company”, was
interpreted threadbare in the undernoted case² in which it was held
that the expressions “in charge of” and “responsible to” are
synonymous. A person in charge of the business was, thus, always responsible
therefor³.

DISTINCTIVE FEATURE OF SECTION 69

However, the said proposition is not applicable to section 69
of RERA because of the word “or” between the two expressions “was in charge
of” and “was responsible to” in section 69(1). To this extent, section
69 is different from the corresponding provisions in other laws, such as,
section 42 of FEMA, section 62 of Prohibition of Benami Property
Transactions Act, 1988. In those Acts, the word between the said two
expressions is “and” whereas in section 69 of RERA, it is “or” between the said
two expressions.

JOINT AND SEVERAL LIABILITY OF THE COMPANY AND THE PERSON-IN-CHARGE

The words “as well as” in section 69(1) clearly suggest that
the liability for the offence committed by the company is joint and several as
between the company and its director, partner or functionary who, at the time
the offence was committed, was in charge of and responsible to the company,
firm, etc. for the conduct of its business.

Accordingly, it would not be proper for the person charged
with the offence u/s. 69(1) to argue that the company should be charged first
and that his being charged for the same offence was conditional upon the
company being first so charged. This argument does not appear tenable because
the section does not lay down any condition that the person-in-charge of the
company cannot be separately charged for the offence committed by the company
when the company itself was not prosecuted. From the words “as well as”, it is
clear that each such person or any one of them may be charged separately or
alongwith the company, the only requirement for the same being that there
should be a finding that the offence was committed by the company⁴.

______________________________________________________

1   Biren N. Shah v. DE
(1999) 104 Taxman 496 (FERAB).

2   N. Sasikala v.
Enforcement Officer (1998) 93 CC 355 (Mad).

3   ANZ
Grindlays Bank, Bombay v. Directorate of Enforcement (1999) Cr LJ 2970 (Bom).

In the undernoted case⁵, the appellant was
mother–general of a registered society running a convent. She was charged with
contravention of certain FERA provision. On appeal, it was held that the
appellant could not be proceeded against for transactions made on behalf of a
registered society unless the society was found guilty of the contravention.
Similarly⁶, if the charge against the company itself was not
established, none of the directors of the company could be held liable.Thus, it
would be irrational to charge a person mentioned in that section with vicarious
liability independent of the proceedings to first charge the company for the
offence.

In Raman Narula vs. Director⁷, the Delhi
High Court has held that where no factual basis was laid by the Directorate for
alleging that the noticee was in-charge of and responsible to the company for
conduct of its business, he could not be held vicariously liable for the
alleged contravention by the company.

BURDEN OF PROOF – ON THE DEPARTMENT

A reading of section 69(1), the Proviso to section
69(1) and section 69(2) offers an interesting review of “burden of proof”.

Section 69(1) shows that the burden of proof is on the
Department to establish the following:

–  The company, firm, etc. has committed
offence of any provisions of RERA.

–  At the time the offence was committed, the
person charged with the offence was in charge of the company, firm, etc.
or

–   At the time the offence was committed, the
person was responsible to the company, firm, etc. for the conduct of its
business.

__________________________________________________________________________________________________

4   Sheoratan Agarwal
v. State of M P AIR 1984 SC 1824 (rendered in the context of the analogous
provisions of section 10 of the Essential Commodities Act, 1955). Per contra:
Union of India v. Annamalai (1987) 11 ECC 240 (Mad).

5   Nambibai Mary v.
Directorate of Enforcement (1990) 50 Taxman 534 (FERAB).11          N Sasikala v. Enforcement Officer
(1998) 93 CC 355 (Mad).

6   Shirin Sabbir
Rangwala (Mrs) v. Directorate of Enforcement (1991) 55 Taxman 39 (FERAB);
Nowrosjee Wadia Sons (P) Ltd v. Directorate of Enforcement (1999) 106 Taxman
551 (FERAB); Rakesh Jain v UoI [2015] 53 Taxmann.com 133 (Del).

7     [2014] 216 SCL
120 (Del)

Unless the Department discharges the burden of proving the above
facts, the Department’s action u/s. 69(1) would be ab initio void¹.

As regards the nature of
the burden of proof under the Proviso to section 69(1) and u/s. 69(2), a
reference may be made to the relevant synopsis headings (infra).

In the undernoted case²,
Special Director called the petitioner for personal hearing. Petitioner filed
writ petition contending that he had no role with regard to remittances and
receipts of foreign exchange in the conduct of IPL in 2009 in South Africa and
that a separate committee was set up to administer IPL with a separate bank
account to be operated by the Treasurer. On these facts, it was held that as
far as opening and operating bank account of IPL and obtaining permission of
Reserve Bank for making remittances or receipts of foreign exchange was
concerned, the petitioner was not in charge of and responsible for such
operational matters. Accordingly, it was considered necessary for adjudicating
authority to form the opinion whether the petitioner was at all covered by the
substantive part of section 42(1) of FEMA [section 69(1)].

Likewise, in the undernoted case³, the appellant
contended that he was not aware of the transaction in question as he was not
looking after day to day affairs of the company. The Department failed to prove
that the appellant was in charge of affairs of the company and he was also
looking after day to day affairs of the company including the transaction in
question. It was also noted that similar penalty on other directors was set
aside by the High Court. Accordingly, the penalty imposed on the appellant was
also set aside.

PRIVATE AGREEMENT – CANNOT OVERRIDE THE STATUTORY PROVISION

In the undernoted case⁴, there was a change in
ownership and management of a company pursuant to an agreement. The agreement
provided that all personal liabilities attached to the office of the managing
director or director will continue to be the personal liabilities of the
directors under whose charge the offence was committed and the incoming
directors were not responsible for the offence committed prior to the takeover.
On appeal by the incoming directors who contested the charge, it was held that
such term in the agreement cannot absolve the company and the present
management merely because the offence was committed before the present
management took over. It was held that the terms of the agreement could not
override statutory provisions as there is no estoppel against statute.

_____________________________________________________________________________________________________________________________

1   See Sayed Wahid vs.
Director of Enforcement (1988) 37 Taxman 16 (FERAB); See Also: Kavita Dogra vs.
Director (2014) 126 SCL 182 (Del).

2   Shashank Vyanktesh
Manohar vs. Union of India (2013) 122 SCL 317 (Bom)

3   Sanjay Dalmia vs.
Special Director (2014) 123 SCl 311 (ATFFE).

4   Iyer & Sons Pvt
Ltd vs. Directorate of Enforcement (1990) 53 Taxman 160 (FERAB).

EXERCISE OF DUE DILIGENCE – PROVISO GIVES BENEFIT OF DOUBT

In the undernoted case⁵, the Chairman of the appellant
company had given power-of-attorney to conduct the company’s business at the
time when contravention of a FERA provision took place. It was held that though
the Chairman would come within the meaning of “a person in charge of and
responsible to the company” for the conduct of its business at the time of
the contravention, he was entitled to the benefit of the Proviso to
section 68(1) [corresponding to the Proviso to section 69(1)] since he
had exercised all due diligence to prevent the contravention.

LIABILITY UNDER SECTION 69 IS NOT ABSOLUTE

In the undernoted case⁶ , the Supreme Court has
once again observed that while deciding the matter, it is open for the Court to
consider that the liability of the person is vicarious or that the offence was
committed without his knowledge or neglect.

Thus, even if the documents relied upon indicate that the
offence was committed, it would not be a ground for denying a person inspection
of all such documents⁷ .

ILLUSTRATIVE CASES

Having regard to the principles discussed above, some
illustrative cases may be reviewed in which the person-in-charge argued on
various grounds that he cannot be charged for the offence committed by the
company.

DIRECTOR

Director of a company may
be held liable by virtue of section 69(2) if the offence was committed with his
connivance and he had actively acquiesced in the commission of the offence¹.
Likewise, where the Director was duty-bound to supervise the sale of foreign
currency which was physically handled by his subordinate, the director can be
held liable for the offence arising from such sale².

_____________________________________________________________________

5   Pheroze Kudianavala
Pvt Ltd vs. Directorate of Enforcement (1991) 54
Taxman 164 (FERAB)

6   AIR 1971 SC 2162;
see also: Lalit Kumar Modi vs. Special Director (2014) 125 SCL 330 (Bom).

7   Lalit
Kumar Modi vs. Special Director  (2014)
125 SCL 330 (Bom); Shashank Vyanktesh Manohar vs. Union of India (2013) 122 SCL
317 (Bom)

The nature of liability of a director is merely vicarious.
Accordingly, a director cannot be held guilty³ without first, the
company being held guilty and that, too, after adducing reasons for invoking
his vicarious liability.

Section 69(1) extends the liability, by a deeming fiction,
only to such directors who, at the relevant time, were in charge of or were
responsible to the company for the conduct of its business. In the undernoted
case⁴, petitioners had ceased to be directors by the company on 14
November, 1997. This was disclosed in Form No. 32 filed with the Registrar of
Companies. The export proceeds were to be realised by the company for the year
ended 31 March 2008. It was held by the Delhi High Court that the contravention
in respect of such export receivable could take place only after 31 March 2008
by which time the petitioners ceased to be directors of the company. On this
ground, the submission of the petitioners (that the proceeding against them was
not sustainable in law), was accepted by the Delhi High Court by relying on the
decision of the Supreme Court in S.M.S. Pharmaceuticals Ltd vs. Neeta Bhalla⁵.

However, in ANZ Grindlays Bank Ltd vs. Director⁶,
the Supreme Court has held that even if the company cannot be punished, it does
not mean that the persons referred to u/s. 68(1), (2) of FERA [section 69(1),
(2)] cannot also be punished. Indeed, a Director who had ceased to be a
director as evidenced by form No. 32, cannot be said to be in charge of the
affairs of the company or responsible for the conduct of its business in
respect of the transactions after he ceased to be a director⁷.

_____________________________________________________________________________

1   Directorate of
Enforcement v. South India Viscose Ltd (1990) 50 Taxman 501 (FERAB).

2   Travels &
Rental (P) Ltd v. Director (2009) 92 SCL 211 (ATFE)

3   C R Das Gupta v.
Special Director (2000) 112 Taxman 608 (FERAB); Eupharma Laboratories Ltd v.
Enforcement Directorate (2000) 110 Taxman 469 (FERAB); Nowrosjee Wadia &
Sons P Ltd v. Director of Enforcement (1999) 106 Taxman 55‘; S P Singh v.
Director of Enforcement (1990) 104 Taxman 503 (FERAB).

4   Bhupendra V. Shah v.
Union of India – WP(C) 19881 of 2004, WP(C) 26 and WP(C) 1038 of 2005 decided
by Delhi High Court on 26 March 2010; M M Shah v. Dy Director (2010 104 SCL 79
(Bom)

5   (2005) 8 SCC 89.

6   (2005) 58 SCL 350
(SC).

7   Bhupendra
V. Shah v. Union of India (WP/C 19881/04 decided on 26-3-2010 by Delhi High
Court); M. M. Shah v. Dy Director (2010) 104 SCL 79 (Bom)

It is possible in some cases that a director is merely
concerned with laying down the policy for the company’s business and is not
concerned with the day to day or operational matters of the company. This
aspect was examined by the Allahabad High court in R. K. Khandelwal vs.
State⁸. In this decision, Allahabad High Court has observed that
there can be directors who merely lay down the policy and are not concerned
with the day to day working of the company.

Accordingly, the mere fact that a person is a director of the
company does not automatically make him liable for the offence committed by the
company particularly when the other ingredients of section 69(1) are not
established so as to make him vicariously liable. In this respect, a reference
may also be made to the Supreme Court decision in S M S Pharmaceuticals Ltd
vs. Neeta Bhalla⁹. In this case, the Supreme Court has
categorically held that the vicarious liability is cast on persons who may have
something to do with the transaction complained of and not on the basis of
merely holding a designation or office. It would depend on the role he plays
and not on his designation or status. The said decision was rendered in respect
of section 141 of the Negotiable Instruments Act but was held by the Bombay
High Court as applicable to section 42 of FEMA [section 69] as the wordings of
both the provisions are in pari uthoriz [see: Shashank Vyanktesh
Manohar vs. Union¹⁰ ].

MANAGING DIRECTOR

Normally, managing director is appointed by an agreement with
the company or by a resolution of the company or by the company’s Memorandum and
Articles of Association. These are the sources from which the managing director
derives the powers of management entrusted to him. Thus, if the managing
director is to be charged for the offence committed by the company, it would
not be sufficient for the Department to merely make an allegation to that
effect without anything more. For charging the managing director with the
vicarious liability u/s. 69(1), first of all, the burden of proof must be
discharged by the Department by adducing appropriate evidence. If, however, the
Department fails to bring sufficient evidence to discharge such burden, the
managing director cannot be charged for the offence committed by the company¹¹.
Where, however, the Managing Director was dutybound to supervise the sale of foreign
currency which was physically handled by his subordinate, the Managing Director
can be held liable for the offence concerning such sale¹ .

_______________________________________________________

8   [1964] 62 A L J 625

9   [2005] 63 SCL 93
(SC)

10  [2013] 37
taxmann.com 151 (Bom), para 35]

11   E
Merck (I) Ltd v. Director of Enforcement (1988) 39 Taxman 47 (FERAB).

However, a reference may be made to another decision² in
which managing directors of two companies which were charged with contravention
of FERA were deemed guilty of such contravention in terms of section 68(1)
[section 69(1)].

EX-DIRECTOR

In the undernoted case³, the company and its
ex-director were charged for failure to repatriate export proceeds. On appeal
by the ex-director, it was held that penalty on ex-director was justified since
he did not take reasonable steps to repatriate export proceeds. It was
particularly observed that he had not sought intervention of Indian and Russian
diplomatic authorities in time in respect of export proceeds receivable from
Russia.

In a similar situation, it was held by the Delhi High Court⁴
that the ex-director was not vicariously liable where there was no evidence to
show in what manner she was responsible to the company for the conduct of its
business. Where the show cause notice on the ex-director was served at the
address of the company at the time when he had ceased to be a director, it was
held that such service was not proper service and the Order based on such
improper service was unsustainable in law⁵.

NON-EXECUTIVE DIRECTOR

Can a director of the company who is not in full time
employment and who is not involved in the day-to-day management of the company
be charged with contravention by invoking section 69(2)? Having regard to the
aforesaid discussion on the principles of the burden of proof u/s. 69(2), the
answer is ‘no’. This answer has greater relevance to the professional
directors, independent directors and the nominees of the financial
institutions. The proposition that such director, simpliciter cannot be charged
with the offence committed by the company is fortified by the undernoted
decision of the Calcutta High Court⁶.

PROFESSIONAL/NOMINEE DIRECTOR

In the undernoted case⁷, the Bombay High Court
held that nominee/professional director cannot be vicariously held liable for
acts of commission or omission of subordinates.

1   Travels &
Rentals (P) Ltd v. Director (2009) 92 SCL 211 (ATFE)

2   Telco
Ltd v. Special Directorate of Enforcement (1991) 55 Taxman 85 (FERAB).

3   Dheklapara Tea
Company Ltd v. DE (1998) 100 Taxman 470 (FERAB).

4   Kavita Dogra v DoE
[2014] 126 SCL 182 (Del)

5   Shailendra Swarup v
Special Director [2015] 54 taxmann.com 79 (Del)

6   Bhagwati Prasad Khaitan v.
Special Director of Enforcement (1977) CrLJ 1821 (Cal).

PROPRIETOR

Business concerns are often floated in the names which may
not contain proprietor’s name. Ostensibly, therefore, the show cause notice may
be issued in the name of the concern as also in the name of the proprietor. The
moot point, however, is whether it was in order to invoke section 68(1) of FERA
[corresponding to 69(1)] at all? This question has been examined in the
undernoted case⁸ in which it was held that a proprietary concern and
its proprietor both are same. Hence, section 68(1) [section 69(1)] cannot be
invoked in case of a proprietary concern.

PARTNER

Can a partner be charged for the offence committed by the
firm? The answer appears to be ‘yes’. In principle and by analogy, vicarious
liability could be extended to contravention by partnership firms².
However, having regard to the Explanation defining the “company” and
“director”, coupled with the Proviso to section 69(1), a partner cannot
be charged unless the following two conditions are fulfilled.

Firstly, the Department has discharged the following
triple-burden of proof.

–  The partnership had committed offence of any
provision of RERA;

–   At the time when the offence was committed,
the partner was in charge of the business of partnership; or

–   At the time the offence was committed, the
partner was responsible to the partnership firm for the conduct of its
business.

Secondly, the partner was unable to prove that the
offence was committed without his knowledge or that he had exercised all due
diligence to prevent commission of the offence. Thus, where the non-resident
partners were fully aware of the affairs of the appellant firm as also the
affairs of the foreign buyers who were related to them, such non-resident
partners can be held vicariously liable for the offence¹⁰. On the
other hand, where the non-resident partner was employed abroad and had not
taken part in the day to day affairs of the firm, he could not be held liable
for the offence committed by the firm¹

_____________________________________________________________________________________________

7   M M Shah v. Dy
Director (2010) 104 SCL 79 (Bom)

8   Apex Exports &
Baljeet Singh v. DE (1997) 92 Taxman 452 (FERAB).

9   Brij Trading Co. v
Enforcement Directorate (2014) 126 SCL 118 (Del)

10  Simertex v.
Director (2006) 69 SCL 177 (ATFE).

.

Assuming that the Department succeeds in discharging such
triple-burden of proof, still if the partner is able to rebut the charge in
terms of the Proviso, he cannot be punished². Thus, penalty cannot
always be imposed on managing partner³.

However, where the firm is penalised for the offence, the
partners of the firm cannot be penalised again for the same offence since
partnership firm is just a compendious description for the partners
constituting the firm and the firm does not exist independently of the partners
particularly for the purposes for imputing the penal liability⁴.

In the undernoted case⁵, a partnership firm was
charged with failure to repatriate export proceeds. On investigation, it was
found that the partner in charge had taken “reasonable steps” to repatriate
export proceeds. On appeal, it was confirmed that reasonable steps were taken
to repatriate the export proceeds. It was held that reasonable steps taken by the
partner should be regarded as reasonable steps taken by the firm. It was also
held that, once the finding was reached that one partner had taken reasonable
steps to repatriate export proceeds, the charge cannot be sustained either
against the firm or against any other partner. The fact that the firm was
already penalised is also a factor to be weighed while deciding the liability
of partners under this section⁶.

In the last-mentioned case, the Court examined the
phraseology of section 140 of the Customs Act which was in pari uthoriz
with the relevant FERA provision (corresponding to section 69).

_____________________________________________________________________________

1   United Enterprises
v. Special Director (2002) 35 SCL 273 (ATFE)

2   Agarwal Trading Co
v. Asst Collector of Customs AIR 1972 SC 648; Girdhari Lal Gupta v. D N Mehta
AIR 1971 SC 28.

3   SRC Exports (P) Ltd
v. Director of Enforcement (2000) 112 Taxman 142
(FERAB); See also: Chhabra Handicrafts v. Deputy Director (2000) 111 Taxman 138
(FERAB).

4   K B.S.H. Export
House v. Director of Enforcement (1988) 41 Taxman 138 (FERAB). Tarak Nath Sen
v. Union of India AIR 1975 CAL 337; Mohan, Prop. Kandan Mohan Exports v.
Director (2009) 95 SCL 58 (ATFE);

     Jagmohan Tandon v.
Director (2003) 46 SCL 273 (ATFE); Garments India Exporters v. Director (2005)
62 SCL 276 (ATFE); Hathibhai Bulakhidas v. Director (2002) 36 SCL 764 (FERAB).

5   Lakshmi Garments v.
DE (1996) 86 Taxman 259 (FERAB).

6   Tarak Nath Sen v.
Union AIR 1975 Cal 337.

It may be noted that the nature of liability of a partner is
merely vicarious. Accordingly, a partner cannot be held guilty without the firm
being held guilty and that, too, after adducing proper reasons for invoking the
vicarious liability⁷.

SLEEPING PARTNER

Sleeping partners cannot be held liable for the offence
committed by the firm and penalties cannot be imposed on them⁸.

POWER-OF-ATTORNEY HOLDER

In case of proprietary concerns, it is usual for the
proprietor to delegate certain functions of business to others who are not his
employees but who act as his agents and act on his behalf in terms of the
power-of-attorney executed by the proprietor in their favour.

All acts of the holder of the power-of-attorney are done by
him in his capacity as mere agent of the proprietor. The responsibility for all
acts done by the agent rests on the proprietor. Accordingly, the concept of
joint and several liability cannot be invoked in such cases to fasten vicarious
liability u/s. 69(1) on the power-of-attorney holder⁹. However,
where the power-of-attorney holder is in full control of business of a
non-resident, he would be vicariously liable for the offence¹⁰.

EXPORT MANAGER – NOT A PERSON IN-CHARGE OF THE COMPANY

Generally, the show cause notice alleging non-repatriation of
export proceeds is issued to the export manager on the premise that he was the
person in charge of the export business. Is it possible for the export manager
to argue that he was not the person in charge of the business? This question
was considered in the undernoted case¹¹. In that case, a company
applied for permission to export certain machinery for participating in an
exhibition in USA. The permission was given on the condition that the machinery
will be re-imported. The company failed to re-import the machinery pursuant to
which the show cause notice was issued charging the company, its director and
the export-manager for the alleged contravention. Penalty was imposed on all
the three. While the company and its director paid the penalty, the
export-manager contended that he was not the person in charge of the company’s
affairs and accordingly, he could not be considered guilty even for abetment.

It was observed that in view of the provisions of section
68(2) of RERA [section 69(2)] the export manager could be held guilty only
if it was proved that the offence was committed with his consent or
connivance or was attributable to neglect on his part. It was also observed
that when the company had a managing director in charge of the company’s affairs,
the other functionaries could not be considered to be in-charge of the
company’s affairs. Accordingly, the penalty levied on the export manager was
set aside.

________________________________________________________________

7   Sumangal Enterprises
v. DE (1999) 104 Taxman 489 (FERAB).

8   Chhabra Handicrafts
v. Dy Director (2000) 111 Taxman 138 (FERAB).

9   Rajathi Agencies v.
Director of Enforcement (1988) 39 Taxman 56 (FERAB).

10  Simertex v. Director
(2006) 69 SCL 177 (ATFE)

11  R K Caprihan v.
Director of Enforcement (1988) 38 Taxman 23 (FERAB).

LEGAL REPRESENTATIVE

The liability u/s. 69(1) is on the person who, at the time
the offence was committed, was in charge of or was responsible to the company
for the conduct of its business. It is extremely arguable whether the legal
representatives of such person can be held liable by imputing such vicarious
liability. The tenor of section 69 also does not appear to suggest that if
there is any offence of any provisions of the Act by father, his legal
representatives would be vicariously liable for the same. This issue was
examined by the Madras High Court¹ where a sole proprietor was
charged for some offence. The proprietor’s sons had no interest in the
proprietary business of their father and had never taken part in its management
or control during the lifetime of their father. Accordingly, they argued that
they cannot be regarded as “the person in charge of and responsible for the
conduct of the business of” the proprietary concern. The lower authorities held
the sons liable for the offence which was alleged to have been committed by
their father. While deleting the penalty, the Court made the following
observations:

“There
is no provision in the Foreign Exchange Regulation Act that, if there is any
contravention of the provisions of the Act by the father, his legal
representatives would be vicariously liable and responsible for the same. The application of the doctrine of vicarious
liability in the criminal law may be described as actuated by necessity rather
than desirability. Criminal responsibility is generally regarded as being
essentially personal in character and it is with considerable diffidence that
the principle is accepted whereby a man may be found guilty and punished for an
offence which is actually committed by another.

One
member of a family is not vicariously liable for acts of another member merely
because of the family relationship. Thus one spouse is not liable for the
torts of the other, nor the parent for the
torts of the child if nothing more than relationship appears in the case.

___________________________________________________________________________________________________

1   P N P Thulkarunai
& Co v. Director, Enforcement Directorate (1969) 39 CC 101 (Mad).

Thus, the doctrine of vicarious
liability is not of general application in the field of statutory crimes.

They are no doubt heirs of their
father. But when they succeeded to the estate of their father, they formed
themselves into a partnership business. They never partook of any interest in
the sole proprietorship concern of their father. [Emphasis supplied]

WHEN DOES THE BURDEN OF PROOF SHIFT FROM THE DEPARTMENT?

The Proviso to section 69(1) deals with this issue.
Its language signifies two things.

Firstly, for invoking the Proviso, the
Department must discharge the initial burden of proof in terms of section
69(1). Thus, where there was no evidence to show in what manner the director
was responsible to the company for the conduct of its business and the facts
relevant to the director were not discussed in the Order, it was held that the
Department had failed to make out a case for vicarious liability². Secondly,
only after the Department discharges the burden of proof, the same would shift
to the person charged. The burden of proof so shifted is, however, rebuttable
and hence it is open to the person charged to prove the existence of any of the following two facts:

–  The offence was committed without his
knowledge; or

–  He had exercised due diligence to prevent the
commission of the offence.

It has been held³ that a mere averment that the
company had exercised due diligence or that the offence was committed without
the knowledge of the company or the officers responsible for the conduct of the
business would not suffice to establish a defence under the Proviso to
section 42(1) of FEMA [corresponding to Proviso to section 69(1)]. In
the absence of proper disclosure of the internal arrangements made by the
company to ensure proper conduct of the business according to the guidelines
framed, it was held that there indeed was failure to discharge the burden under
the Proviso to section 42(1) of FEMA [corresponding to Proviso to
section 69(1)].

__________________________________________________________

2   Kavita Dogra v. DoE
[2014] 126 SCL 182(Del)

3    V.
S. Ubhaykar v. Special Director (2012) 112 SCL 114 (Bom)

CONSIDERATIONS RELEVANT FOR SHIFTING THE BURDEN

What considerations should weigh the authorities for
ascertaining whether the person has discharged the burden which shifted to him
in terms of the Proviso? This question was considered by the Supreme
Court¹.

The Supreme Court held, among others, that in case of a
partnership firm, acting partner would be liable for the offence committed by
the firm and unless the acting partner proves that he was not aware of the
offence or that he had exercised due diligence to prevent it and the fact that
when the offence was committed, he was out of India would be of no avail.

MITIGATING FACTORS-MAY RESCUE PROMOTER, DIRECTOR, PARTNER,
ETC.

In the undernoted case², the appellant guest-house
had accepted rupees from foreigners in contravention of FERA. The partner and
manager of the guest-house were penalised u/s. 68(1), (2) of FERA [section
69(1), (2)]. The appellant pleaded that there was no mala fide
intention. The penalty against the partner was set aside in terms of the Proviso
to section 68(1) of FERA [Proviso to section 69(1)] on the ground
that he was not aware that the contravention was committed. Penalty on the
manager, too, was set aside on the basis of the following mitigating factors.

–  Contravention occurred unwittingly and
without awareness of the contravention.

–  The Department did not dispute that the
appellant fully co-operated with the Department.

–  There was no past history of contravention,
this being the first and the only one.

–   Appellant had not benefitted from the
contravention.

–  Appellant’s averment – that had he known the
correct legal requirement, he would have certainly complied with the same – was
not disputed by the Department.

It was observed that if all offenders are treated alike
without giving due weightage to the honest conduct of some of them, it may make
even honest persons dishonest.

______________________________________________________________________

1   Giridharilal Gupta
vs. D N Mehta AIR 1971 SC 28.

2   Sangam Guest House
vs. Dy Director [2002] 35 SCL 20 (ATFE)

Delhi High Court³ has held that mere fact that in
the opportunity notice given to the appellant, it was stated that the appellant
was in charge of and responsible for the day to day functioning is not enough
to discharge the initial burden cast on the Department to prove so. In that
case, neither in the order of Special Director nor of the Appellate Tribunal,
there was any finding that the appellant was in charge of and was responsible
for the day to day working of the company.

OFFENCE COMMITTED WITH CONNIVANCE OF PROMOTER, DIRECTOR,
PARTNER OR OFFICER

While section 69(1) deals with the persons who, at the time
of contravention, are in charge of or responsible to the company for the
conduct of its business, section 69(2) imposes liability on a functionary who
is a director, partner, manager, secretary or other officer. However, the
Department is required to prove not only the fact that the functionary
proceeded against was a director, partner etc. but also the fact that the
offence was committed either with the consent or connivance of such functionary
or is attributable to any neglect on his part. Unless both these facts are
established, the functionary would not be liable for punishment. Thus, in the
undernoted case⁴, a company was found guilty of receiving payment in
rupees from non-resident. The investigation showed that the payment was
received by the appellant. The adjudicating officer charged the appellant u/s.
68(2) of FERA [section 69(2)] on the ground that contravention took place with
his consent. On appeal, the finding of the adjudicating officer was confirmed
that the contravention took place with his consent so as to attract section
68(2). [section 69(2)].

NATURE OF BURDEN OF PROOF ON THE DEPARTMENT

The language of section 69(2) suggests that the burden of
proving the consent, connivance or neglect of the functionary lies on the
Department.

HOW WILL THE DEPARTMENT DISCHARGE SUCH BURDEN?

As regards “connivance”, it would be necessary for the
Department to establish that the offence was committed in the circumstances
showing that but for the reticence of the functionary, it was possible for him
to prevent the commission of such offence.

____________________________________________________________________________________

3   Parag Dalmia vs.
Special Director (2012) 115 SCL 57 (Del)

4   Bhupinder Singh vs.
DE [1997] 95 Taxman 315 (FERAB)

As regards “neglect”, the Department must first
ascertain as to what is the spectrum of the duties of director, partner,
officer, etc. This can be done by examining the letter of his appointment,
agreement, the resolution, etc. from which he derived the powers
exercised by him in discharge of his duties. Thereafter, the Department will
have to adduce evidence that it was possible for the functionary to do an act
in discharge of the duties assigned to him which in fact he did not.

SUMMATION : TWO ISSUES

While summing up the discussion on the liability of
promoters, directors, partners and officers of the realty companies, firms,
association, etc. following two issues deserve some further thought.

First, what is the distinction between the provisions
of section 69(1) and section 69(2)?

Second, is there any possibility of the peculiarly
structured real estate transactions triggering the provisions of Prohibition of
Benami Property Transactions Act, 1988 that came into force
retrospectively from 19 May 1988 ?

As regards the first issue, the principal distinction is that
u/s. 69(1), the burden of proof lies on the Department. Once the Department
discharges it, the Proviso shifts the burden to the person vicariously
charged with the offence.

On the other hand, section 69(2) casts the burden of proof on
the Department without the opportunity of shifting the same to the functionary
of the company vicariously charged thereunder.

As regards the
applicability of Prohibition of Benami Property Transactions Act, 1988,
one may note the following.

Real estate developers across India are currently in a
quandary over how to deal with properties they have aggregated over the years through
proxies.

Because of restrictive land ceiling laws, it was common for
real estate developers to amass land holdings through proxies—normally through
firms not directly controlled
or owned but funded by way of loan or subscription to share capital.

Despite the Benami Transactions (Prohibition) Act being
in force from 1988, not much attention was paid to the parcels of land acquired
by developers through proxies because the law had no implementing agency until
now and hence was rarely applied.

With the income-tax department now starting to crack the whip
on the transactions in which the actual beneficiary is different from the
registered owner, many real estate developers across India who have structured
the transactions through land aggregators are in a quandary.

In the run-up to 2016 November amendment to the benami law,
many real estate developers hurriedly “reversed” benami transactions by
transferring properties back to themselves from their proxies who previously
held them. But under the amended law, such ‘re-transfers’ are banned with
retrospective effect.

Of the 72 sections of the amended Benami Act, only
three came into force last year; the rest were made effective from 19 May 1988
through the 2016 November amendment.

Real estate developers claim that their acquisitions through
proxies should not be treated in the same manner as any other transaction aimed
at tax evasion or concealment of wealth. According to them, proxies were used
only to get past restrictive land ceiling laws.

Under the amended Benami law, people involved in benami
transactions face up to seven years in jail and confiscation of properties
without compensation.

The aim of the Benami Act is to curb black money. Real
estate developers will be in difficulty if it is used to take on land
aggregation through proxies.