V.S. Kotwal, J.@mdashRescinding of a contract between two parties and further mutual arrangement between them as regards the amount of compensation has given rise to this proceeding, involving a comparatively short but equally important point for consideration about the interpretation of certain provisions of the Foreign Exchange Regulations Act, 1947 which has again been amended by an Act of 1973.
2. The transaction takes one back to the year 1964 when the respondent, Messrs Shree Kanti Oil Mills (shortly called as ''Mills''), entered into a contract of sale and export of 1200 tons of Groundnut Extraction to Messrs European Grains and Shipping Company Ltd., London (shortly called as ''foreign Company''), and the same was struck through the brokers Messrs Marshal Produce Brokers Company. Bombay. After entering into the said contract, but before exporting the goods to foreign Company, the Mills had a better and lucrative offer for their product from another customer in the European market and therefore, they re-purchased the said commodity covered under the said contract from the said foreign Company and sold the said commodity to the new customer of Czechoslovakia. This was done with the consent and permission of the foreign Company. It was agreed between the parties that instead of the deal, certain amount of compensation shall be paid by the Mills to the foreign Company. Initially, there was certain correspondence which reveals that there was dispute between the parties over the amount of compensation, the manner of payment and the revenue of payment, However, ultimately through the intervention of the Solicitor''s firms on behalf of both the parties an arrangement was struck, under which a total amount of Rs. 51,000/- in Indian Currency was agreed to be paid by the Mills to one Shri M.G. Mansukhani an authorised person on behalf of the foreign Company in Bombay, in full and final settlement of the dispute over the transaction between the parties. This proposal of settlement was made by the Mills and was accepted by the foreign Company which is depicted in their letter dated November 28, 1967, which came to be confirmed by the Foreign Company and it appears that the said arrangement in the form of an agreement sprang out if this correspondence between the parties. This will assume importance when we consider the main question. It was stipulated in the agreement that though the Mills were prepared to pay the said amount of compensation further stipulation was that the amount was to be given to the said Shri Mansukhari not by way of payment as such, but only by way of deposit, and the third stipulation was that the said amount would be made payable to the foreign Company only after the requisite sanction of the Reserve Bank could be obtained. For that purpose, the Mills had undertaken to move the Reserve Bank officials which they actually did. By this time, no permission was accorded and ultimately, the parties agreed that from the moment, it would be the responsibility of the foreign Company to move the Reserve Bank authorities for getting requisite permission. From that point of view, an officer was entrusted by the foreign Company to follow up the matter and as such the Mills were absolved of the liability of getting the permission from the concerned authorities. It may be mentioned at this juncture itself that it is common ground that on the date this amount was deposited or paid as and by way of deposit to Shri Mansukhari by the Mills, no formal permission was actually accorded by the Reserve Bank and it is a further common ground that the foreign Company has so far not been credited with the said amount nor was any attempt made by Shri Mansukhani to make over that payment to the foreign Company. It is also a common ground that the said amount has been paid in India to a person residing in India and in Indian Currency. I am referring to these facts as the same will assume some importance.
3. Acting on the information and the credible intelligence received by the concerned officers of the Directorate of Enforcement, Ahmedabad Unit, a search was conducted on the premises of the said Oil Mills on 26th October, 1967. However, nothing incriminating was recovered, yet, after having been confronted with the information about the 1964 transaction made by the Mills with the foreign Company, the Partners of the Mills informed the officers about the said deal and about their depositing the said amount with Shri Mansukhani and it was also revealed that the Mills had entered and shown the said amount in their Ledger. This amount appears to be qualified as being the difference in the price and the prevailing market rates.
4. Armed with this information and the factual data, two, separate show cause notices were issued to the Mills alleging that they have contravened the provisions of section 5(1)(a) and 5(1)(b) of the Foreign Exchange Regulation Act, 1947, in that, the Mills had made a Company directly, or atleast for the credit of the said Foreign Company which falls in the category of ''Hon-resident in India'' and further, the Mills had acknowledged a debt so that a person residing outside India, gets a right create in his favour to receive the said amount. The first memorandum for the breach of Rule 5(1)(a) of the Act was issued on 18th May, 1972, while the second memorandum was separately issued on the same date for the breach of section 5(1)(b). Both these notice are on record and form part of this proceeding. The Mills, in response to these Notices, submitted details of the matter and contended that it was not a payment as such to foreign company or a payment to a person residing outside India, but, it was out-and-out an amount of deposit with a clear stipulation that the same shall be payable only after getting the requisite sanction or permission from the Reserve Bank. They also submitted that there is no question of acknowledgment of any debt, as there was no debt as such till the permission was granted and secondly, no right was created in favour of the foreign Company to receive the said payment. However, the said explanations did not find favour with the concerned authority, namely, the Additional Director of Enforcement, Enforcement Directorate, New Delhi, who rejected the same and held that there has been a clear contravention of the provisions contained in sections 5(1)(a) and 5(1)(b) of the Act and consequently, he was pleased to impose a penalty of Rs. 20,000/- for the breach of section 5(1)(b) and Rs. 5,000/- for the contravention of provision of section 5(1)(a). Thus, total penalty of Rs. 25,000/- was imposed on the respondent Mills by his order dated 19th September, 1975.
5. The respondent Mills preferred an appeal against the said order, being appeal No. 341 of 1975 before the Foreign Exchange Regulation Appellate Board, New Delhi, The learned Chairman of the said Board by his order dated March 24, 1977, allowed the said appeal, setting aside the order of the Additional Director of, Enforcement and quashing the said order of penalty. The Appellate Board, in terms, held that there has been no contravention of the provisions as contained in either of the two clauses of sub-section (1) of section 5. He illustrated the finding that really speaking, it was not a debt as such and secondly, no right was created in favour of the foreign Company to receive that amount till the requisite permission was granted by the Reserve Bank of India. He also observed that the amount was exactly by way of deposit and as such, it was not a payment to the credit of the foreign Company. In keeping with these findings, the said order of the Appellate Board came to be recorded.
6. The Union of India feeling, aggrieved by the said order, has filed an appeal in this Court, challenging the validity and legality of the said order of the Appellate Board. Shri Kachare, the learned Public Prosecutor for the appellants, has reiterated more or loss the same grounds which found favour with the Additional Director of Enforcement who had rejected the Mill''s contentions. Shri Kachare submitted that a plain reading of the two provisions contained in Clause (a) and (b) of Sub-section (1) of section 5, would admit of no inference in favour of the Mills. He-has further submitted that the very fact that the amount has been paid to Shri Mansukhani, indicates that it was accepted by Shri Mansukhani on behalf of the foreign Company and, therefore, it would amount either to payment to the foreign Company or atleast payment to the credit of the said foreign Company, as in evidenced by the entry in the accounts Company, in contravention of section 5(1)(a). His further lap of argument is that there is a clear acknowledgment of debt on the part of the Mills, as a result of which, a right was correspondingly created in favour of the foreign Company to receive the said amount and consequently, this would be a breach of the provisions contained in section 5(1)(b) of the Act. Shri Andhyarujina, the learned Counsel for the respondent Mills has reiterated the same points which has been canvassed before the Appellate Board. He has submitted that in the first instance, the amount was precisely by way of deposit and as such, it is not a payment. Secondly, it did not give rise to any actionable claim, nor did it create any right in favour of the foreign Company to recover this amount, unless and until, the requisite permission from the Reserve Bank was obtained. The learned Counsel also relied very strongly on the stipulation in the agreement itself that the payment is to be made to the foreign Company only after getting the permission from the Reserve Bank.
7. The aspects fall into a narrow compass. The parties rely on documents which are quite few. Then, we have on record the show-cause notices and replied thereto and some exchange of correspondence between the parties, Now some of the feature are beyond any pale of controversy. The Mills had entered into an agreement some time in the year 1964 with the foreign Company in question for the sale of Ground nut Extraction and it is further uncontroverted that the Mills, after having located a better prospective customer, who was prepared to offer a more lucrative price, entered into a further agreement with the same foreign Company for the re-purchase of the said commodity, which has thus been done with the consent and approval of the foreign Company. It is further a common ground that some haggling over the price, by way of compensation, took place between the parties. It is further a common ground that an agreement was struck between the parties under which it was contemplated that a total amount of Rs. 51,000/- was to be paid by the Mills to the foreign Company by was of compensation pending entirely on the difference in the market rates. This is reflected in the correspondence exchanged between the parties. It is further uncontroverted that before the agreement of November 1967 came into existence, the Mills had all along made strenuous efforts to mode the Reserve Bank for obtaining the permission, though unfortunately by that time, the permission was not granted. It is further a common ground that a clear stipulation has been made in the said agreement that since that moment, it was the responsibility of the foreign Company to move the Reserve Bank and from that point of view, the relevant documents and correspondence were entrusted to the foreign Company. In so far as these aspects are concerned, there is absolutely no controversy on either side.
8. In addition to these aspects, a reference may be made to a few other facts which are very relevant. It appears from the record and which is not controverted in this proceeding by either side that finally the Mills agreed to pay Rs. 51,000/- though the foreign Company was insisting on the payment of larger amount and that too, Poundsterling, and the further insistence was that the amount should be paid direct to the foreign Company itself. Now, the most significant feature is that the Mills were mindful and cautious enough not to accept this proposal and they came out with a clear defence at this stage itself that in no event, they will agree to that proposal and insisted that the payment would be made only in Indian currency, to a person residing in India, by way of deposit, and that too, to the tune of Rs. 51,000/- only. They also insisted that inspite of this ,the amount should not be transferred to the foreign Company unless and until, there is a formal and valid permission accorded by the Reserve Bank. This conduct on the part of the Mills is highly eloquent not only in establishing their bona fides but also, in properly interpreting the clause in the agreement of 28th November, 1967. It appears from the record that the foreign Company ultimately surrendered to this demand of the Mills, which has now been reflected in the ultimate agreement of November 1967. It therefore, follows and it is conclusively established that the Mills were not only reluctant but were firm in not making payment in a manner which would contravene provision of the Act in question. In other words, the Mills have obviously acted as a citizen who is conscious to abide by law and not only that but they incorporated a clear condition in the agreement that the amount would be paid only by way of deposit, to be paid over to the foreign Company only in the event of the permission having been granted by the Reserve Bank of India.
9. This takes us to the logical corollary of examining the agreement of 28th November, 1967. It is in the form of exchanging letters between the respective Solicitors of the Mills and the foreign Company. Exh . ''A'' is the letter by Messrs Gagrat and Company, Solicitors on behalf of the Mills to Messrs Mulla and Mulla and Craogie, Blunt and Caroe, who were acting as Solicitors on behalf of the foreign Company. A reference to the meeting between the parties in the presence of Shri Mansukhani, the authorised representative of the foreign Company, has been made therein. The two clauses incorporated in the said agreement may be reproduced here for a better reading of the same :---
"(1) That, your client''s claim was settled in a sum of Rs. 51,000/- which amount is to be received full and final settlement.
(2) That, our clients do send their cheque for Rs. 51,000/- in the name of Mr. M.G. Mansukhani, the authorised representative of your clients, and which amount will be kept by him in deposit and to be utilised and/or paid to your clients after obtaining approval of the Reserve Bank of India and complying with the Exchange Control Regulations under the provisions of the Foreign Exchange Regulation Act, 1947, Your clients or the said Mansukhani to Inform our clients of the approval obtained.''''
In the last paragraph, it is mentioned that so long the Mills were trying to obtain permission from the Reserve Bank, and from the moment it would be the responsibility of the foreign Company to move in that behalf and for that purpose, it has been clearly mentioned therein that the entire correspondence that ensued between the Mills and the Reserve Bank, is beginning entrusted to the foreign Company for doing the needful thereafter. It is made clear there in that the Mills moved in the matter with the Reserve Bank for securing permission in that behalf. This has been replied to by the foreign Company through their Solicitors-Messrs Mulla & Mulla & C.B. & C on 28th November, 1967 itself, which is Exh. ''B''. in which they stated as---
'''' We are instructed by our clients to confirm that what is stated in your letter, which we hereby do.''''
They, no doubt, made a grievance therein that they had not received the file containing correspondence that ensued between the Mills and the Reserve Bank of India. There is no such grievances thereafter and it appears to be a common ground that ultimately, they received the entire document and correspondence. At is apparent from the record, it has been done on 29th November. It is thus clear that all clauses, conditions and stipulations in the Mills letter have been accepted in toto by the foreign Company, and as such, these two letters from basis of an agreement and it has been referred to as an agreement throughout.
10. It thus follows that several stipulations which emerge out of this agreement are manifest, such as---
a) The amount of compensation was settled at Rs. 51, 000/-
b) This amount was paid only to Shri Mansukhani, a resident of India;
c) The amount was to be paid in India;
d) It was to be paid in Indian currency;
e) The amount was to be kept by Shri Mansukhani only by way of deposit;
f) It was to be utilised or to be paid over to the foreign company only after obtaining the approval of the Reserve Bank of India and after complying with the Exchange Control Regulations under the Act.
From the position there appears to be no escape. If that be so, then a further deduction it also inescapable. Thus, not only the amount was paid in Indian currency and to a person resident in India, but the same was paid with a clear stipulation that it was been paid only by way of deposit, with a further clarification and pre-requisite condition that it was not to be paid over to the foreign Company, nor was the foreign Company allowed to utilise that amount, till the permission by the Reserve Bank was granted. In other words the package was to remain with Shri Mansukhani as deposit amount till the permission was granted by the Reserve Bank and only thereafter, the foreign Company was entitled to receive the said amount, or even to, utilise the same. It thus follows, therefore, that this payment created no right, existent or contingent, in favour of the foreign company to make out any claim for that amount so long as the permission from the Reserve Bank was granted and till that time, the amount was only to be treated as and by way of deposit with a person residing in India and no liability would be cast on the Mills till the time that amount was credited to the foreign Company. From that point of view, Shri Andhyarujina is justified in submitting that this amount cannot be said to be a payment in that sense, either made to the foreign company or for the Credit of the foreign Company. There is a vast difference between the amount of deposit and the amount of payment that was made to Shri Mansukhani.
Section 5(1)(a) reads as---
''''(1) Save as may be provided in and in accordance with any general or special exemption from the provisions of this sub-section which may be granted conditionally or unconditionally by the Reserve Bank, no person in, or resident in India, shall---
a) make any payment to or for the credit of any person resident outside India :''''
It is thus clear from the earlier discussion and the record that it cannot be said that the Mills had made payment to the foreign Company itself, or made any payment for the credit of the foreign Company, or for any person who is resident outside India. It is manifestly clear that this was not a payment as such, but, it was a deposit to be held in abeyance till certain time particular formality was complied with a gone through. Looked from that angle, the agreement or settlement may, in a sense, be contingent of may remain ineffective, in that, the execution cannot be held to be matured, unless and until, the permission from the Reserve Bank would be obtained.
Section 5(1)(b) reads as :---
''''5. (1) Save as may be provided in and in accordance with any general or special exemption from the provisions of this sub-section which may be granted conditionally or unconditionally by the Reserve Bank, no person in or resident in India shall---
(b) draw, issue or negotiable any bill of exchange or promissory note or acknowledge any debt, so that, a right (whether actual or contingent), to receive a payment is created or transferred in favour of any person resident outside India;''''
It was sought to be argued on behalf of the State that there has been an acknowledgment of the debt, so that, a right to receive the payment is created or transferred in favour of the foreign Company. Shri Andhyarujina, on the contrary, submitted that the terminology used in this sub-section, as is obvious, is of the Negotiable Instruments, Act and that, all these requirements relate to the foreign negotiable instruments and therefore, employment of the word'' acknowledgement'' has got to be read in the context of the earlier words ''draw, issue or negotiable any bill of exchange or promissory note.'' The Learned Counsel, therefore, submitted that this is not an acknowledgment of any debt settled as such and that there was no question of executing any negotiable instrument between the parties. The question posed by the State in regard to the words---''whether actual or contingent''---referring to a right in favour of the foreign Company, the learned Counsel submitted that what is contemplated by these words is with reference to a right which would accrue in favour of the foreign Company after getting permission from the Reserve Bank and this accruing of the contingent right had got to be read in the context of the earlier terminology, such as, bill of exchange, etc., and the acknowledgment of debt in that behalf. This apart, more fundamental objection has been raised by Shri Andhyarujina that this is not a debt as such. For this purpose. The learned Counsel submitted that concept of notion of debt responders that it shall be an actionable claim, on the basis of which the other party can not lay its claim, but, also withdraw the said amount. The clear stipulation in the agreement wipes off the concept of debt, inasmuch as, it cannot be an actionable claim so long as the permission of the Reserve Bank is not obtained. The word ''Debt'' has been defined in Strouds Judicial dictionary in the following words---
''''Debt is a sum payable in respect of a liquidated money demand, recoverable by action. And, money payable on a contingency is not a debt.''''
The amount in question can never be termed as a debt, as it was given by way of deposit, and was to become payable only on a contingency. Reliance in then placed by Shri Andhyarunjina on Doraisami Padayachi v. Vaithilinga Padayachi, ILR (1917) Mad 31, and especially on the observations which confirm the opinion in the ultimate paragraph, wherein it has been observed that---
''''Assuming that the meaning of the letter was that the writer promised to pay the amount which might be found due by the arbitrator on taking the accounts of the partnership, we are clearly of opinion that this was not a promise to pay a debt; within the meaning of section 25 of the Indian Contract Act.''''
Further observations made in the said judgment, are in the following words---
''''We thing the word ''debt'', used in this context, must be taken to have been used in its ordinary meaning if a sum payable in respect of a money demand recoverable by action''''.
It is here, with reference to section 25 of the Indian Contracts Act that we get some assurance to the view propagated by the learned Counsel, as to what should be termed as a ''debt''. I may also, with advantage, refer to the ration in Whittaker v. Kerahaw, reported in 1890 ( XLV) LR C D 302 , wherein, it has been mentioned while repelling the argument, that there was no notice of any debt as such but it was only a notice of liability.'' Reference to section 16 of the Companies '' Act ha been made therein, under which the liability to pay up any part of the money due on a share becomes a debt only when in becomes payable according to the regulations of the company, i.e., when a call is made, and as such, it was a liability until a call was made, and it is only thereafter that it become a debt.'' It is thus rightly submitted by Shri Andhyarujina that both the conditions as contained in section 5(1)(b) must co-exist. In the first instance, there should be a debt as such; secondly, there should be acknowledgement of the debt, and lastly, which is an implied condition in the said provision, that such acknowledgment must give right to the foreign Company to lay their hands on the said amount, so that, they can recover it. Shri Andhyarujina, therefore, rightly submitted that both these aspects not only do not co-exist, but, they, are not existent at all. It is submitted and rightly so, that there is no right created in favour of the foreign Company, and much more important feature is that, in view of the clear stipulation in the agreement there could be no foundation for the foreign Company to lay their claim over the said amount, and, therefore, no right can be said to have been created in favour of the foreign Company, in respect of the said amount. The relevant entry in the Mills accounts will have to be considered and appreciated in this context.
11. Shri Andhyarunjina has also drawn my attention to the provisions of section 21 of the Act which correspond to section 47 of the New Act. The first sub-clause contemplates that no one is permitted to enter into a contract or agreement which would evade or avoid the operation of the provisions of this Act. Sub-clause (2) which is more relevant, stated that any provisions under this Act to the effect that a thing shall not be done without the permission of the Reserve Bank or the Central Government, shall not render invalid any agreement by any person do no that thing, if it is a term of the agreement that, thing shall not be done unless permission in granted. It further stated that it shall be an implied term of every contract that anything agreed to be done by any term of that contract, which is prohibited under the provisions of this Act except with the permission if the Reserve Bank or the Government, shall not be done unless such permission is granted. Sub-clause (3) refers to another contingency and it mentions that neither the provisions of this Act nor the terms in the contract that anything for which permission is required shall not be done without that permission, shall prevent legal proceedings being brought......, and the various sub-clause thereafter further stipulate certain exemptions, such as, the said provisions shall apply to sums required to be paid by any judgment or order of any Court. It is not necessary to go into the details of this sub-clause, as the only relevant sub-clause, is sub-clause No. (2). It is thus clear from the said sub-clause (2) which is reproduced more or less in details, that whenever a payment is dependent on the permission from the Reserve Bank and when it is provided in the Act itself that the same cannot be done without such a permission then, it is contemplated that it will not be allowed to be done unless such a permission is granted and the implied condition of the said agreement shall be presumed that the said payment shall not be made unless there is a permission from the Reserve Bank. This, therefore, again furnishes a clear answer to the charge leveled by the State. That the provision of section 21 have direct application to the provisions of section 5(1)(a) and (b), is not a matter of dispute. In
''''One accordingly finds that the plaintiff and the defendants entered into an agreement under which the defendants promised to pay the dollars to the plaintiff on a date which might and probably would, precede the date when, by the law of the country which governed the contract, the payment to the plaintiff could either be enforced or lawfully made. The provisions of section 33(1) are to be regarded as incorporated in the agreement and constitute an implied term thereof. An implied term has just as much force as a term that the parties express themselves, and in these circumstances, I am unable to see how, as a question of construction of the contract, the plaintiff could treat the defendants as in default of their promise to pay during such time as both parties agreed (by implication) that it should not (and lawfully could not) be performed. Taking the contract as a whole the parties agreed in my opinion, that the promise to pay should not be performed until Treasury permission had been obtained, and there could accordingly be no liability or default in respect of the promise until the requisite authority was received.''''
It has, therefore, been rightly submitted by Shri Andhyarujina that an implied term of the agreement or arrangement between the parties will have to be presumed, namely, that the agreement could be executed only after the permission was accorded. In that sense, it could be seen that there was no unconditional or unfettered acknowledgment of any amount. It is also clear that it was purely by way of deposit made to a person resident in India, and no right could be said to have been created in favour of the foreign Company until the permission was granted. The learned Counsel, therefore, submitted that the conduct of the respondent was in keeping with the best traditional commercial morality in the international market and they were very much conscious of their rights and liabilities and did not want to flout the provisions contained in the Act. This is obviously depicted in the endeavours made by two Solicitor''s Firms, which must be said to be laudable and to the credit of the said firms.
12. The Appellate Board has, therefore, rightly held that the provisions contained in section 5(1)(a) and 5(1)(b) are not attracted nor, is there any contravention as such. The bona fides on the part of the respondent Mills are fairly established and borne out on record. Their insistence on not to deal with the amount in any manner till requisite permission was granted, is eloquent. The entire episode has sprang out of an agreement dated 28th November, 1967. It, therefore forms the foundation of the proceedings and when there is a clear answer in the said foundation itself, then in my opinion, no liability can be cast on these respondents.
13. The Lower Appellate Authority has also referred to another shade, which is quite justified and relevant as also germane to the controversy. The Appellate Board observed that the facts did not constitute the actus reus of an act prohibited by law. According to it, what the two Solicitors did was to save unnecessary expenses and delay in collection and leading evidence about the market rates etc. essential in an action for damages for a breach of contract and having quantified the amount and handing it over to the bailee as such, the matters were to be left on that footing till the Reserve Bank granted the permission, and that the arrangement would have ceased to have effect if the permissions was not forth coming. The Appellate Board, therefore, treated the transaction as an arrangement arrived at through the Solicitors to settle the dispute without delay and without further complications and the amount was held by the person in the capacity of a bailee with the clear stipulation annexed that the arrangement would cease to have any effect if the requisite permission was not accorded. It is against this backdrop that the Appellate Board held that the transaction involved neither the concept of debt nor of an acknowledgment of debt. In conclusion, the Appellate Board observed as---"It is not the intention of the Foreign Exchange Regulation Act to prevent lawyers from undertaking pre-trial exercise calculated to facilitate speedier settlement of a dispute out of Court.'''' This aspect therefore would reinforce the submissions and plea of the respondents that the transaction, with its peculiarity is not embraced by the provisions of the said Act.
14. In this view of the matter, there is no substance in the contention raised on behalf of the State, and there was absolutely no justification for the Additional Director of Enforcement to impose any penalty, as there was no contravention. Looking to the spirit of the Act. It would appear that the dealings or the transactions of this nature should not be and are not covered by the said proceedings. It is only when the activities or the transactions are such, as are aimed at doing away with the foreign exchange and the resources of this country, that the provisions are attracted. Looked from that view also, the sprit if the Act does not attract the said provisions in the present case.
15. In the result, the appeal filed by the State stands dismissed and the order of the Foreign Exchange Appellate Board dated 24th March, 1977 quashing the order of the Additional Director of Enforcement imposing penalty of the respondent Oil Mills, is confirmed. Penalty, if already recovered, is directed to be refunded to the respondent.
