The Hon’ble Karnataka High Court (“KHC”) in the matter of Mrs. Joyce Lynn Peters v. Reserve Bank Of India and others (Writ Petition No. 26425 of 2017) (“Judgement”), held that an application for compounding under Section 15 (Power to compound contravention) of the Foreign Exchange Management Act, 1999 (“FEMA”) cannot be rejected on the basis of Rule 11 of Foreign Exchange (Compounding Proceedings) Rules, 2000 (“Compounding Rules”).

Facts
Mrs. Joyce Lynn Peters (“Petitioner”), pursuant to the complaint dated February 25, 2011 made by deputy director of Enforcement Directorate (“ED”), was issued a show cause notice dated April 6, 2011 (“SCN”) alleging violation of the provisions of Section 6(3)(d) (Capital account transactions) of the FEMA read with the provisions of Foreign Exchange (Borrowing or Lending in Foreign Exchange) Regulations, 2000. After receiving the SCN, the Petitioner applied for compounding of the contravention before the Reserve Bank of India (“RBI”) and the ED (“Respondents”). However, the Petitioner’s application was returned by letter dated September 22, 2011 by the Respondents on the ground that compounding was not permissible when adjudicatory proceedings for contravention were being initiated. The Petitioner responded by contending that the return of said application is unsustainable as the pendency of adjudicatory proceedings cannot be a ground for declining the request for compounding.

Subsequently, since no decision was taken by the Respondents thereon, the Petitioner filed a writ petition before the co-ordinate bench of the KHC. The KHC, by judgment dated November 5, 2015, permitted the Petitioner to file another application before the Respondents within two weeks and directed the Respondents to consider the same. Accordingly, after some period of delay, the Petitioner filed another application before the Respondents (“Application”). The Application was also rejected by the Respondents stating that since the Petitioner had filed appeal against the adjudicatory order, Rule 11 of the Compounding Rules would come in the way of the Application being treated favourably (“Impugned Reply to Application”). Rule 11 of the Compounding Rules states that no contravention shall be compounded if an appeal has been filed under Section 17 or Section 19 of the FEMA. Aggrieved by the Impugned Reply to Application, the Petitioner filed a writ petition before the KHC challenging the Impugned Reply to Application.

Issues

• Whether the Petitioner had made the Application for compounding beyond the period prescribed by the co-ordinate bench of the KHC. (“Issue I”)
• Whether the pendency of appeal preferred by the Petitioner bars the compounding of contravention, as provided under Section 15 of the FEMA. (“Issue II”)
• Whether the Respondents can rely upon Rule 11 of the Compounding Rules for rejecting Petitioner’s Application for compounding. (“Issue III”)

Observations of the Karnataka High Court

Issue I
The KHC observed that the Petitioner filed the Application after expiry of two weeks given by the co-ordinate bench of the KHC, however, the application was rejected by the Respondents on the ground of pendency of appeal and not on the ground of delayed filing. The Impugned Reply to Application is a statutory order and the validity of such order made by the statutory authorities has to be adjudged on the reasons assigned in the very order itself. Even otherwise, the KHC stated that since the earlier application was wrongly returned, the filing of subsequent Application needs to be treated as having revived the earlier application.

Issue II
The KHC stated that pendency of appeal cannot be construed as a bar under Section 15 of the FEMA as one cannot ignore that there is a limitation period prescribed by law for filing of appeals and since the request for condoning delay is ordinarily treated in discretion, an anxious litigant ordinarily does not risk the prospects of his appeal. The KHC further added that since the application for compounding is also a matter of discretion, it may so happen that the Petitioner may lose the application and may be without remedy of appeal, if such rejection takes place after long. Therefore, the subsequent filing of appeal cannot be construed as a bar under Rule 11 of the Compounding Rules for consideration of compounding application on its intrinsic merits, under Section 15(1) of the FEMA.

Issue III
The Respondents submitted before the KHC that since Rule 11 of the Compounding Rules has not been put in challenge, it was not open to them to disobey the mandate of the said rule. The KHC, rejecting the said contention, stated that, the Compounding Rules is a piece of subordinate legislation and it has been a settled position of law that a delegate cannot transcend the delegation of power. In other words, the rule making authority cannot promulgate a rule which travels beyond the scope of delegation.

Section 15(1) of the FEMA, inter alia, provides that any contravention under Section 13 of the FEMA may, on an application made by the person committing such contravention, be compounded within 180 days from the date of receipt of application by the ED and the officers of the RBI, as may be authorised in this behalf by the Central Government in such manner as may be prescribed. The KHC stated that the use of the word ‘any’ in Section 15 of the FEMA indicates that it has been used in a wider sense to mean ‘one and all’ contraventions and if the Parliament intended a restrictive meaning, it would have indicated the same expressly or by necessary implication. It was further observed that sub-section (2) of Section 15 of the FEMA intends to give quietus to the proceedings or further proceedings, once the contravention is compounded under sub-section (1) of Section 15 of the FEMA, as the said provision uses the expression ‘no proceeding or further proceeding’. Further, giving contextual meaning to the words, ‘proceeding’ means an adjudicatory proceeding which is triggered pursuant to the complaint followed by a show cause notice, and the term ‘further proceeding’ shall mean the appellate proceeding in which the order made in the adjudicatory proceeding is put in challenge.

The KHC, analysing the effect of Section 15 of the FEMA, stated that the net effect of compounding under Section 15(1) of the FEMA, is all pervasive abatement of any proceeding, adjudicatory or appellate, involving the contravention of Section 13 of the FEMA, and an argument to the contrary cannot be sustained without manhandling the text of sub-sections (1) and (2) of Section 15 of the FEMA. Therefore, the Respondents could not have rejected the Petitioner’s application under Section 15 of the FEMA on the basis of the text of Rule 11 of the Compounding Rules. The KHC added that while deciding the rights of citizens, a court has to ascertain the correct position of law by looking into the text of the legislation and of the sub- ordinate legislation, if any, and, in fiscal legislations, the provisions enacting such schemes are construed with a ‘pragmatic leniency’, subject to all just exceptions.

The KHC summarised the issues of the case by stating that where a sub-ordinate legislation is shown to have been made incompetently or otherwise repugnant to the provisions of the parent act, the same cannot be taken cognizance of and pressed into service to defeat a legitimate claim of the citizen. An aggrieved citizen who is otherwise entitled to relief under the provisions of a parent legislation cannot be sent back empty-handed by the writ court telling that a sub-ordinate legislation which literally runs counter to the Parliamentary intent, comes in his way. A sub-ordinate legislation has to be subservient to the provisions of the parent act and needs to be construed consistent with the statutory object and if it runs repugnant to the plain text of the provisions of the parent act, a writ court cannot attach significance thereto and such a sub-ordinate legislation cannot hijack the statutory object.

Decision of the Karnataka High Court
In view of the above, the KHC held that the endeavour of the Respondents to sustain the Impugned Reply to Application by relying upon Rule 11 of the Compounding Rules does not yield fruit and they are only seeking shelter under a leaking umbrella. The writ petition succeeded and a writ of certiorari was issued quashing the Impugned Reply to Application. The matter was remitted back to the Respondents for consideration afresh, in accordance with law and within a period of eight weeks.

VA View:
In this Judgement, the KHC has rightly held that a delegated legislation cannot curtail the scope of the parent legislation and the pendency of adjudicatory or the appellate proceeding is not indicated as a bar to the invoking of the compounding provision, which in a sense enacts an amnesty scheme.

The KHC, relying on the principles of interpretation of statutes, held that rule of law is one of the basic features of our Constitution which envisages the administration of justice in accordance with law and a purported subordinate legislation which is promulgated without competence or contrary to the parental provisions, cannot be treated as law or as source of law. This Judgement would greatly contribute to interpretation of subordinate legislations in light of their parental provisions and interpretation of compounding provisions of various statutes.

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