Foreign Exchange Management Act, 2002

1. IDBI Trusteeship Services Limited v. Hubtown Ltd

Citation: Supreme Court, Civil Appeal No.10860 of 2016 dated 15.11.2016

Facts
 FMO, a non-resident foreign entity, made an investment into an Indian company, Vinca Developer Private Limited (Vinca)
by way of compulsorily convertible debentures (CCPS) and equity shares.
 The CCPS were to convert into 99% of the voting shares of Vinca. The proceeds of the investment were further invested
by Vinca in its wholly owned subsidiaries, Amazia Developers Private Limited (Amazia) and Rubix Trading Private
Limited (Rubix) by way of optionally convertible debentures (OPCDs) bearing a fixed rate of interest.
 IDBI Trusteeship Services Ltd. (Debenture Trustee) was appointed as a debenture trustee in relation to the OPCDs, acting
for the benefit of Vinca. Hubtown Limited (Hubtown) also issued a corporate guarantee in favour of the Debenture
Trustee to secure the OPCDs.
 Amazia and Rubix defaulted on the OPCDs and Hubtown, being called upon to pay under the guarantee, failed to do
so. Accordingly the Debenture Trustee filed a summary suit against Hubtown in the Bombay High Court.
Question of law
Under which circumstances a defendant may be granted leave to defend in a suit for summary judgment?
Bombay HC
1. The Bombay High Court granted Hubtown an unconditional leave to defend in the summary suit.
2. The order of the High Court proceeded on the premise that the various transactions including the CCPS and OPCDs
should be construed as a whole, since the court was of the view that they constituted a colourable device for providing
assured return to the foreign investor, which according to the High Court was violative of the FEMA guidelines.
3. The Bombay High Court found that since Vinca would be owned by FMO upon conversion of the CCDs, by virtue of the
fixed return on the OPCDs, FMO was indirectly obtaining a fixed return on its investment (which is not allowed under
certain circumstances in the FEMA guidelines).
4. The court further held that the investors, having participated in the illegality, could not seek the assistance of the court
to recover amounts invested illegally.
Supreme Court
1. The court noted that the investment was made by FMO in Vinca for subscription to shares as well as compulsorily
convertible debentures. This transaction was not violative of the FEMA regulations.
2. The investment made by Vinca in Amazia and Rubix by way of OPCDs was also prima facie in compliance with FEMA
regulations. Further, once the corporate guarantee was invoked, a payment made under the corporate guarantee would
be a transaction between residents. At this stage also prima facie again, there was no infraction of the FEMA regulations.
3. The court further held since FMO was to become a 99% holder of Vinca after the requisite time period had elapsed,
FMO would at that stage have the ability to utilise the funds received pursuant to the overall structure in India. Again
prima facie there would have been no breach of FEMA regulations. At the stage that FMO wishes to repatriate such
funds, RBI permission would be necessary. If RBI permission were not granted (and therefore the amounts were retained
in India), then again there would be no infraction of FEMA regulations.
4. The Supreme Court further examined the different categories of defences that a judge should keep in mind before
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 granting an unconditional leave to defend in a summary suit. The court held that in the present case, the defence of
the defendant was in the realm of ‘plausible but improbable’ as the defendants had initially serviced the OPCDs before
occurrence of the default and also there was no prima facie breach of the FEMA regulations. The court accordingly
directed Hubtown to deposit the principal amount claimed under the guarantee as a precondition to defend the suit.

2. Cruz City I Mauritius Holdings v. Unitech Limited

Citation: Delhi High Court, EX.P.132/2014, dated 11.04.2017

Facts
 Cruz City 1 Mauritius Holdings (Cruz City) filed a petition in the Delhi High Court for enforcement of an arbitral award
rendered under the rules of the London Court of International Arbitration (Award).
 This required Unitech Limited (Unitech) and Burley Holding Limited (Burley), a wholly owned subsidiary of Unitech, to
pay Cruz City the pre-determined purchase price of all of Cruz City’s equity shares in a joint venture (incorporated in
Mauritius) pursuant to:
1. A “put option” exercised by Cruz City against Burley.
2. A keep-well agreement (which was in the nature of a guarantee) whereby Unitech was to make the necessary financial
contribution in Burley to enable it to meet its obligations.
 However, when that award was sought to be enforced before the Delhi High Court, Unitech claimed that the
enforcement of award is impressible under FEMA as it is against public policy.
Question of law
Whether violation of any regulation or any provision of FEMA would ipso jure offend the public policy of India?
Key Ratio Decidendi
The Delhi High Court critically examined the scope of the “public policy” exception under section 48 of the Arbitration
& Conciliation Act, 1996 and considered “whether violation of any regulation or any provision of FEMA would ipso jure
offend the public policy of India”.
The court held that “the width of the public policy defense to resist enforcement of a foreign award, is extremely narrow.
And the same cannot be equated to offending any particular provision or a statute.”
“It plainly follows from the above that a contravention of a provision of law is insufficient to invoke the defence of public
policy when it comes to enforcement of a foreign award. Contravention of any provision of an enactment is not synonymous
to contravention of fundamental policy of Indian law. The expression fundamental Policy of Indian law refers to the
principles and the legislative policy on which Indian Statutes and laws are founded. The expression "fundamental policy"
connotes the basic and substratal rationale, values and principles which form the bedrock of laws in our country. The
expression "fundamental policy of law" must be interpreted in that perspective and must mean only the fundamental
and substratal legislative policy and not a provision of any enactment.”
Hence, foreign arbitral award can be enforced in India pertaining to put options, exit at assured return, and guarantee
arrangements and the provisions of FEMA and related regulations cannot be claimed as defense by Indian parties

3. NTT Docomo Inc. v. Tata Sons Ltd

Citation: Delhi High Court, O.M.P.(EFA)(COMM.) 7/2016, dated 28.04.2017

Facts
 In 2009, NTT Docomo Inc. (Docomo), Tata Sons Ltd. (Tata) and Tata Teleservices Ltd. (TTSL) entered into a shareholders'
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 agreement. Under the agreement, Tata was required to find a buyer for Docomo's shares in TTSL, in the event that TTSL
failed to meet certain performance parameters.
 The sale price was required to be the higher of (i) the fair value of the shares; or (ii) 50% of the price at which Docomo
had purchased the shares. The clause was intended to give Docomo downside protection on its investment.
 In 2014, Docomo exercised this right and called upon Tata to find a buyer for its shares in TTSL. Tata argued that it was not
under an unconditional obligation, and that it had the option to decide whether to find a buyer or to buy the shares itself.
Having chosen to buy the shares itself, the 'special permission' of the RBI was required, since the value of the shares
had fallen. Tata argued that since the 'special permission' of the RBI was not forthcoming, it was not liable to purchase the
shares under the contract.
 In a unanimous award, a three-member arbitral tribunal rejected this argument and held that Tata was under an unqualified
obligation to perform. It held that the impediment to Tata's performance was factual rather than legal, and that the contract
could be performed even without the special permission of the RBI. The tribunal then proceeded to award damages to
Docomo to the extent of USD 1.17 billion along with interest and costs.
 The amount of damages represented the amount that Docomo would have received had Tata performed the contract.
Since Tata did not pay the amounts awarded, Docomo filed an enforcement petition in the Delhi High Court.
 While Tata resisted the enforcement initially, the parties ultimately reached a compromise, and filed consent terms with
the Court, essentially giving effect to the award. During the course of the proceedings, the RBI impleaded itself in these
proceedings, and argued that neither the award nor the consent terms should be given effect since it would lead to a violation
of foreign exchange regulations.
Question of law
The primary issue in dispute before the Delhi High Court was the legitimacy of RBI’s objections to the Award’s enforcement.
Delhi High Court
1. The Court analysed Section 48(1) along with Section 2(h) of the Arbitration and Conciliation Act, 1996 (the “Arbitration
Act”) and concluded that there is no provision envisaged under the Arbitration Act which permits intervention by an entity
that is not a party to the award, to oppose enforcement of an arbitral award.
2. The Court then considered Order XXIII Rule 3 of the CPC which provides that a compromise must be lawful. The Court
held that the mere fact that a statutory body’s power and jurisdiction might be discussed in an adjudication or an Award
will not confer locus standi on such body or entity to intervene in those proceedings. At the same time, the RBI will,
just as any other entity, be bound by an award interpreting the scope of its powers and any of its regulations subject to
it being upheld by a Court when challenged by a party to the award. It also held that the RBI does not have the locus
to challenge the decision of a court / arbitral tribunal interpreting Indian regulations in a contractual dispute. Thus, for
instance, if an arbitral tribunal determined that the RBI's permission was not required for a particular payment, it was not
open to the RBI to challenge such determination.
3. The Court then went on to examine the validity of the arbitral award. It agreed with the interpretation of the tribunal in
holding that Tata's obligations were capable of performance without the special permission of the RBI. It also held that
the tribunal's interpretation of FEMA was not improbable, and did not violate Indian public policy. The Court opined that
there were no provisions in FEMA that absolutely prohibited a contractual obligation from being performed. It only envisaged
a grant of special permission of the RBI.
4. The Court held that it was correctly observed by the AT that Clause 5.7.2 of SHA was legally capable of performance
even without the special permission of the RBI because such permission could be generally obtained under sub-regulation
9(2) of FEMA where shares of an Indian company are transferred between two non-resident entities. With regard to the
legality of the Award, the Court agreed with the AT and stated that it was rightly pointed by the AT that the clauses of
SHA were in consonance with the provisions of Indian law and therefore the grounds under Section 48 of Arbitration Act
could also not be attracted. Docomo invested US $2.5 billion and would just receive half of that amount as Award, thus
making it neither perverse nor improbable.

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5. Lastly, the Court examined the validity of the compromise terms agreed between the parties, and held that they were
enforceable as well. In coming to this finding, the Court placed considerable emphasis on the importance of giving effect
to contracts entered into by Indian entities while attracting international investors and building goodwill in the international
arena.

4. Venture Global v. Tech Mahindra

Citation: Supreme Court, Civil Appeal No. 17753-17755 of 2017 dated 01.11.2017

Facts
The case arose out of an international commercial arbitral award rendered in London in 2006, pursuant to a Joint Venture
Agreement (JV) between Venture Global, an American company and Tech Mahindra. In keeping with the terms of this JV,
the award held that there was an ‘event of default’ at Venture Global’s behest and directed that it transfer its 50% share in the
JV to Tech Mahindra at book value. Following enforcement proceedings at the High Court level, the matter was taken up on
appeal by the Supreme Court. Two main issues were framed
– whether the patent illegality standard was to be applied in this case and whether a violation of the Foreign Exchange
Management Act (FEMA) arising out of the share transfer directed by the arbitral tribunal would render the award unenforceable
in India on public policy grounds.
Question of law
What is the applicability of the “patent illegality” limb of public policy to international commercial arbitrations?
Whether an award that merely violates Indian municipal law would be rendered unenforceable under this ground?
Key Ratio Decindi
The 2015 Amendment to the Arbitration Act which provided that the patent illegality standard would not apply to international
commercial arbitrations did not apply to this case, since proceedings commenced much before the Amendment (which applies
only prospectively). With the patent illegality standard therefore applicable to the foreign award in this case, the Associate
Builders standard (that is only applicable to domestic awards post-2015) was applied in this case.
Violation of certain provisions of the Foreign Exchange Management Act (‘FEMA’), the Indian Penal Code (‘IPC’) and the
Companies Act themselves would also render the award unenforceable on public policy grounds raises alarm bells.

The court relied on the judgement of Renusagar v. General Electric wherein it was held that any FERA violation, however
technical, would render an international commercial arbitral award unenforceable on public policy grounds.

5. Mr. S. Bhaskar vs Enforcement Directorate FEMA

Citation: Karnataka High Court, M.F.A. No. 4546/2004 (FEMA) dated 17.03.2011

Facts
On 9.10.2002, the appellant was found in illegal possession of US $20,000/-. The Deputy Director, Enforcement Directorate
after holding an enquiry found the appellant guilty of contravening Section 3(a) of the Act and accordingly passed the order
dated 29.01.2003 referred to above by imposing a penalty of ` 50,000/- on the appellant under Section 13(1) of the Act; the
penalty of ` 50,000/- imposed was directed to be adjusted from the seized US
$20,000/- and the balance amount was ordered to be released to the appellant. The Deputy Director thought it fit not to exercise
the power under Section 13(2) of the Act to confiscate the foreign currency involved in the offence.
Being aggrieved by the aforesaid order, the respondent-Enforcement Directorate carried the matter to the Appellate Tribunal
for Foreign Exchange, New Delhi by filing a Revision Petition under Section 19(6) of the Act. The Appellate Tribunal, on
consideration of the matter, found that the power exercised by the Deputy Director was contrary to law and accordingly by
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the order impugned herein has set aside the order of the Deputy Director in so far as it related to release of the foreign currency
by ordering confiscation of the seized currency of US $20,000/- after adjustment of the penalty of ` 50,000/- imposed by the
Deputy Director
Question of law
Whether the Appellate Tribunal was justified in law in modifying the order of the Deputy Director dated 29.01.2003 by directing
confiscation of the foreign currency of US $20,000/- after adjusting the penalty of ` 50,000/- therefrom?
Key Ratio Decidendi
Section 13 of the Act speaks of penalties; both the sub-Sections provide for imposition of different kinds of penalty. A
plain reading of the Section would show that imposition of a penalty under sub-Section (1) will not bar exercise of power
under sub-Section (2) to confiscate any currency in respect of which the contravention has taken place. The power of
confiscation conferred under sub-Section (2) is in addition to the power to impose penalty under sub-Section (1). Therefore,
it is perfectly open to the Adjudicating Authority to exercise power under sub-Section (2) in addition to exercise of power under
sub-Section (1). In other words, it is open to the Adjudicating Authority to impose any penalty as provided under sub- Section
(1) as well as directing confiscation of currency/security/money or property in respect of which the contravention has taken place.
On the facts of the case, the Deputy Director was not right in exercising his discretion in ordering release of the seized
foreign currency. It is relevant to state that possession of the foreign currency of US $20,000/- by the appellant was admittedly
illegal; he had not traced his possession of the foreign currency to any legitimate source of acquisition.

6. Union of India & Ors vs M/s Premier Limited

Citation: Supreme Court, Civil Appeal No. 3529 of 2008, dated

Facts
 On 01.05.1991, a memorandum to show cause notice was issued by the Special Director to respondent Nos. 2, 3 and 4,
namely, M/s. Godrej Industries Ltd and its two Directors (R-3 and R-4) for allegedly committing contravention of Sections
9(1)(a), 9(1)(c) and Section 16(1) of the Foreign Exchange Regulation Act, 1973 (hereinafter referred to as “FERA”)
in respect of imports and exports of certain commodities made with two foreign parties, viz., M/s. Fingrain, S.A., Geneva
and M/s. Continental Grain Export Corporation, New York during the year 1977-78.
 During the pendency of the proceedings, FERA was repealed with effect from 01.06.2000. It was, however, replaced
by Foreign Exchange Management Act, 1999 (hereinafter referred to as “FEMA”).
 On 05.12.2003, an adjudication order was passed by the Deputy Director of Enforcement under FEMA read with FERA
in relation to the show cause notice dated 01.05.1991. By this order, penalty of ` 15,50,000/- was imposed on M/s.
Godrej Industries Ltd. and its two Directors for contravening the provisions of Sections 9(1)(a) and 9(1)(c) read with
Section 16(1) of FERA.
 On 15.01.2004, the respondent Nos. 2 to 4 felt aggrieved by the adjudication order dated 05.12.2003 and filed appeal
before the Special Director (Appeals) under Section 17 of FEMA.
 On 08.09.2004 and 08.11.2004, the Special Director (Appeals) dismissed the appeals as being not maintainable. He
held that the Special Director (Appeals) has no
jurisdiction to hear the appeals against the adjudication order passed under Section 51 of FERA.
 Respondent Nos. 2 to 4 felt aggrieved by orders dated 08.09.2004 and 08.11.2004 and filed writ petitions before the High
Court of Bombay at Mumbai. By impugned common order, the High Court allowed the writ petitions and quashed the
orders of the Special Director (Appeals). The High Court held that the appeals filed by respondent Nos. 2 to 4 before
the Special Director (Appeals) against the adjudication order dated 05.12.2003 were maintainable in as much as the
Special Director (Appeals) possessed the jurisdiction to decide the appeals on merits.
Question of law

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 If the Adjudicating Officer has passed an order after the repeal of FERA in the proceedings initiated prior to 01.06.2000,
whether an appeal against such order will lie before the “Special Director (Appeals)” under Section 17 of FEMA or before
the “Appellate Tribunal” under Section 19 of FEMA.
Key Ratio Decidendi
Section 49(5)(b) of FEMA deals with repeal and saving in relation to the action taken and to be taken under FERA, 1973.
Reading of this Section shows that the legislature has equated the Appellate Board constituted under FERA with the
Appellate Tribunal constituted under FEMA for disposal of the appeals filed under Section 52(2) of FERA against an
order passed under Section 51 of FERA which were pending before the Appellate Board as on 01.06.2000. Such appeals
stood transferred from the Appellate Board to the Appellate Tribunal for their disposal in accordance with law.
The reason as to why a specific provision for transfer of such pending appeals was made for their disposal from the
Appellate Board to the Appellate Tribunal was that the Appellate Board constituted under FERA stood dissolved by
Section 49(1) of FEMA with effect from 01.06.2000.
It is this dissolution of the Appellate Board, which necessitated the legislature to make a corresponding provision in
the new Act (FEMA) so that the consequences arising out of the dissolution of the Appellate Board constituted under
FERA is taken care of by another appellate authority constituted under the FEMA and all pending appeals are
automatically transferred to the Appellate Board for their disposal under FEMA.
➢ So far as Section 49(5)(b) of FEMA is concerned it specifically provides that the appeals filed under Section
52(2) of FERA against the order passed under Section 51 of FERA will be decided by the Appellate Tribunal
under FEMA.
➢ So far as Section 81(c) of FERA, 1973 is concerned, it deals with Repeal and Saving of
FERA, 1947. Clause (c) of Section 81 specifically provides that all the appeals filed under Section 23 of
FERA, 1947, whether pending on the date of Repeal or/and those filed after the repeal of FERA, 1947,
shall be disposed of by the Appellate Board constituted under FERA, 1973.
While Section 49(5)(b) of FEMA is not worded alike Section 81(c) of FERA, yet, in our view, it shows the
intention of the legislature that all such appeals have to be heard by the Appellate Board under the FERA.
The legislative intent contained in Section 81(c) can be taken into account for interpreting the relevant
provisions of FERA and FEMA for deciding the question which is the subject matter of this appeal.

7. Vodafone International Holding (VIH) v. Union of India (UOI)

Citation: Supreme Court, Civil Appeal No. 733 of 2012 dated 20.01.2012

Facts
Vodafone International Holding (VIH) and Hutchison telecommunication international limited or HTIL are two non-
resident companies. These companies entered into transaction by which HTIL transferred the share capital of its
subsidiary company based in Cayman Island i.e. CGP international or CGP to VIH. VIH or Vodafone by virtue of this
transaction acquired a controlling interest of 67 percent in Hutch is on Essar Limited or HEL that was an Indian Joint
venture company (between Hutchinson and Essar) because CGP was holding the above 67 percent interest prior
to the above deal. The Indian Revenue authorities issued a show cause notice to VIH as to why it should not be
considered as “assesse in default” and thereby sought an explanation as to why the tax was not deducted on the sale
consideration of this transaction. The Indian revenue authorities thereby through this sought to tax capital gain
arising from sale of share capital of CGP on the ground that CGP had underlying Indian Assets. VIH filed a writ
petition in the High Court challenging the jurisdiction of Indian revenue authorities. This writ petition was dismissed by
the High Court and VIH appealed to the Supreme Court which sent the matter to Revenue authorities to decide
whether the revenue had the jurisdiction over the matter. The revenue authorities decided that it had the jurisdiction
over the matter and then matter went to High Court which was also decided in favour of Revenue and then
finally Special Leave petition was filed in the Supreme Court.
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 Question of law
Whether the Indian revenue authorities had the jurisdiction to tax an offshore transaction of transfer of shares
between two non-resident companies whereby the controlling interest of an Indian resident company is acquired by
virtue of this transaction?

Key Ratio Decidendi

Corporate structures
➢ Multinational companies often establish corporate structures or affiliate subsidiaries or joint ventures for various
business and commercial purposes and these are primarily aimed to yield better returns to the investors and help in
progress of the company.
➢ And therefore the burden is entirely upon the revenue to show that such incorporation, consolidation, restructuring
has been affected for fraudulent purpose so as to defeat the law or evade the taxes.
Overseas companies
➢ Many overseas companies invest in countries like Mauritius, Cayman Island due to better opportunities of
investment and these are undertaken for sound commercial and sound legitimate tax planning and not to conceal
their income or assets from home country tax jurisdiction and India have recognised such structures.
➢ These offshore transactions or these offshore financial centres do not necessarily lead to the conclusion that these
are involved in tax evasion.
Holding and Subsidiary Companies
➢ The companies act have recognized that subsidiary company is a separate legal entity and though holding company
control the subsidiary companies and respective business of the company within a group but it is settled principle
that business of subsidiary is separate from the Holding company.
➢ The assets of subsidiary companies can be kept as collateral by the parent company but still these two are distinct
entities and the holding company is not legally liable for the acts of subsidiaries except in few circumstances where
the subsidiary company is a sham.
➢ The Holding company and subsidiary companies may form pyramid of structures whereby the subsidiary company
may hold controlling interest in other companies forming parent company.
Shares and controlling interest
➢ The transfer of shares and shifting of controlling interest cannot be seen as two separate transactions of transfer of
shares and transfer of controlling interest.
➢ The controlling interest is not an identifiable or a distinct capital asset independent of holding of shares and is
inherently a contractual right and not property right and cannot be considered as transfer of property and capital
assets unless the Statue stipulates otherwise.
➢ The acquisition of shares may carry acquisition of controlling interest which is purely commercial concept and tax is
levied on transaction and not on its effect.
Role of CGP
➢ CGP was already part of HTIL corporate structure and sale of CGP share was a genuine business transaction and
commercial decision taken interest of investors and corporate entity and not a dubious one.
The site of shares of CGP
➢ Shares of CGP were registered in Cayman Island and law of Cayman also does not recognize multiplicity of
registers and hence site of shares and transfer of shares is situated in Cayman and shall not shift to India.
Extinguishment of rights of HTIL in HEL

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 ➢ The transfer of CGP share automatically resulted in host of consequences that included transfer of controlling interest
and controlling interest cannot be dissected from CGP share without legislative intervention.
➢ Upon transfer of shares of the holding Company, the controlling interest may also pass on to the purchaser along
with the shares and this Controlling interest might have percolated down the line to the operating companies but
that controlling interest is still inherently remains contractual and not a property right unless otherwise is provided by
the statue.
➢ The acquisition of shares may carry the acquisition of controlling interest and this is purely a commercial concept
and the tax can be levied only on the transaction and not on its effect and hence, consequently, on transfer of CGP
share to Vodafone, Vodafone got control over eight Mauritian Company and this does not mean that the site of CGP
share has shifted to India for the purpose of charging capital gains tax.
Hence, Sale of CGP share by HTIL to Vodafone or VIH does not amount to transfer of capital assets within the
meaning of Section 2 (14) of the Income Tax Act and thereby all the rights and entitlements that flow from shareholder
agreement etc. that form integral part of share of CGP do not attract capital gains tax.

8. Kanwar Natwar Singh vs Director Of Enforcement & Anr.

Citation: Supreme Court, Civil Appeal No. 8601 of 2010 dated 05.10.2010

Facts
Natwar Singh & Jagat Singh were alleged to have dealt in and acquired Foreign Exchange totaling US $8,98,027 in respect
of some Iraq oil contracts in contravention of FEMA.
A notice was issued asking Natwar Singh to show-cause why an inquiry should not be held against them. In response,
Natwar Singh demanded that the Adjudicating Authority furnish “copies of all documents in … possession in respect of the
instant case, including the 83000 documents allegedly procured by one Virender Dayal”.
The Adjudicating Authority furnished copies of the documents as were relied upon by it but declined to furnish copies of
other documents and decided to hold an inquiry in accordance with FEMA. This non-furnishing of “all documents” was
challenged by Natwar Singh in the Delhi High Court which dismissed the challenge.
Question of law
Whether a noticee served with show cause notice under Rule 4(1) of the Foreign Exchange Management (Adjudication
Proceedings and Appeal) Rules, 2000 (hereinafter referred to as ‘the Rules’) is entitled to demand to furnish all the documents
in possession of the Adjudicating Authority including those documents upon which no reliance has been placed to issue a
notice requiring him to show cause why an inquiry should not be held against him?
Key Ratio Decidendi
The extent of applicability of principles of natural justice depends upon the nature of inquiry, the consequences that may visit
a person after such inquiry from out of the decision pursuant to such inquiry. The right to fair hearing is a guaranteed right. Every
person before an Authority exercising the adjudicatory powers has a right to know the evidence to be used against him.
However, the principles of natural justice do not require supply of documents upon which no reliance has been placed
by the Authority to set the law into motion. Supply of relied on documents based on which the law has been set into
motion would meet the requirements of principles of natural justice.
The concept of fairness is not a one way street. The principles of natural justice are not intended to operate as roadblocks
to obstruct statutory inquiries. Duty of adequate disclosure is only an additional procedural safeguard in order to ensure the
attainment of the fairness and it has its own limitations. The extent of its applicability depends upon the statutory framework.
The only object of Natwar Singh’s unreasonable insistence for supply of all documents was obviously to obstruct the
proceedings and he has been able to achieve that object as is evident from the fact that the inquiry initiated as early as in

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the year 2006 still did not even commence.
Furthermore, observations of Courts are not to be read as Euclid’s theorems nor as provisions of the statute. The observations
must be read in the context in which they appear. A line or a word in a judgment cannot be read in isolation or as if interpreting
a statutory provision to impute a different meaning to the observations.

9. S.K. Chief Enforcement vs Videocon

International Ltd.

Citation: Supreme Court, Appeal (crl.) 175 of 2007 dated 25.01.2008

Facts
The Foreign Exchange Regulation Act, 1973 (FERA) was repealed with effect from 01.06.2000 on coming into force of the
Foreign Exchange Management Act, 1999 (FEMA). Section 49(3) of FEMA says that “notwithstanding in any other law…., no
Court shall take cognizance of an offence under the repealed Act……after expiry of a period of two years from the date of
coming into force of FEMA.”
A complaint under FERA was filed, taken cognizance of on May 24, 2002 and issue of summons also was ordered on the same
day making the process returnable on 07.02.2003. Process, however was issued on February 3, 2003.
On these facts the High Court equated taking cognizance with issue of process and held the complaint to be barred under
Section 49(3) of FEMA
Question of law
Whether issuance of process in a criminal case is one and the same thing or can be equated with taking cognizance by a
Criminal Court? And if the period of initiation of criminal proceedings has elapsed at the time of issue of process by a Court,
the proceedings should be quashed as barred by limitation?
Key Ratio Decidendi
The expression “cognizance” has not been defined in the Code. But the word (cognizance) is of indefinite import. It has no
esoteric or mystic significance in criminal law. It merely means “become aware of” and when used with reference to a court
or a Judge, it connotes “to take notice of judicially”. It indicates the point when a court or a Magistrate takes judicial notice of
an offence with a view to initiating proceedings in respect of such offence said to have been committed by someone.
The Supreme Court further held that “taking cognizance” does not involve any formal action of any kind. It occurs as soon as a
Magistrate applies his mind to the suspected commission of an offence. Cognizance is taken prior to commencement of
criminal proceedings. Taking of cognizance is thus a sine qua non or condition precedent for holding a valid trial. Cognizance
is taken of an offence and not of an offender. Whether or not a Magistrate has taken cognizance of an offence depends on the
facts and circumstances of each case and no rule of universal application can be laid down as to when a Magistrate can be
said to have taken cognizance.
In the case on hand, it is amply clear that cognizance of the offence was taken by the Chief Metropolitan Magistrate, Mumbai
on May 24, 2002, i.e., the day on which the complaint was filed, the Magistrate, after hearing the counsel for the department,
took cognizance of the offence and passed the necessary order. Undoubtedly, the process was issued on February 3, 2003. In
our judgment, however, it was in pursuance of the cognizance taken by the Court on May 24, 2002 that a subsequent action
was taken under Section 204 under Chapter XVI. Taking cognizance of offence was entirely different from initiating
proceedings; rather it was the condition precedent to the initiation of the proceedings. Order of issuance of process on February
3, 2003 by the Court was in pursuance of and consequent to taking cognizance of an offence on May 24, 2002.
The High Court, in our view, therefore, was not right in equating taking cognizance with issuance of process and in holding that
the complaint was barred by law and criminal proceedings were liable to be quashed. The order passed by the High Court, thus,
deserves to be quashed and set aside.

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