Xiaomi Technology India Private ... vs Union Of India

6 . MRS.B.YAMUNA DEVI COMMISSONER OF CUSTOMS (APPEALS-I), CHENNAI [COMPETENT AUTHORITY UNDER SECTION 2(gg) OF FEMA] 60, RAJAJI SALAI CUSTOM HOUSE CHENNAI - 600 001. ... RESPONDENTS

(BY SRI M.B.NARGUND, ADDITIONAL SOLICITOR GENERAL A/W SRI MADHUKAR DESHPANDE, ADVOCATE FOR RESPONDENTS)

THIS WRIT PETITION IS FILED UNDER ARTICLE 226 OF THE CONSTITUTION OF INDIA PRAYING TO HOLD THAT SECTION 37A OF THE FEMA IS ULTRA VIRES THE CONSTITUTION OF INDIA, 1950 AS INFRINGING ARTICLES 14, 19, 20, 21 READ WITH ARTICLE 300A AND 301 OF THE CONSTITUTION OF INDIA 1950; ALTERNATIVELY, READ DOWN THE WORD SUSPECTED AS USED IN SECTION 37A(1) OF FEMA AS INFRINGING ARTICLES 14, 19, 20 AND 21 READ WITH ARTICLES 300AE AND 301 OF THE CONSTITUTION OF INDIA, 1950 AND ALSO LAY DOWN GUIDELINES FOR IMPLEMENTATION OF SECTION 37A OF FEMA AND ETC.,

THIS WRIT PETITION HAVING BEEN HEARD AND RESERVED FOR ORDERS ON, COMING ON FOR PRONOUNCEMENT THIS DAY, THE COURT MADE THE FOLLOWING:- 4

ORDER

The petitioner-Xiaomi Technology India Private Limited

(hereinafter referred to as 'the Company' for short) has knocked at

the doors of this Court questioning the constitutional validity of

Section 37A of the Foreign Exchange Management Act, 1999 ('the

Act' for short) and has sought certain consequential prayers of

quashment of seizure order under Section 37A(1) and confirmation

order of such seizure under Section 37A(3) of the Act.

2. Shorn of unnecessary details, facts germane to be noticed

are as follows:-

The petitioner claims to be a Private Limited Company

incorporated under the provisions of the Companies Act, 2013 and

it further claims that the Board of Directors of the petitioner/

Company is constituted only of Indian citizens. More than 1500

employees and around 50,000 Indian families are directly or

indirectly dependent on the business of the petitioner who, as

claimed by the petitioner, are Indian citizens. The petitioner gets

incorporated as a Private Limited Company on 7-10-2014 as a 5

subsidiary of Xiaomi Singapore Private Limited and Xiaomi H.K.

Limited and is engaged in the business of procurement, supply and

distribution of Xiaomi products in India which is popularly referred

to as 'MI'. The business of the petitioner includes mobile phones,

smart phones, mobile phone accessories and peripherals, smart

watches, televisions, network component devices, laptops,

computers, television accessories and the list goes on. The

petitioner operates as a re-seller/distributor of mobile phones and

related products in India. It is mainly in the distribution segment.

3. The petitioner claims to be purchasing locally manufactured

smart phones for re-sale from third party Indian manufacturers,

import spare parts, accessories, mobile phones and other products

from its group entities viz., Xiaomi H.K. Limited and Zhuhai Xiaomi

Communication Company Limited. The petitioner claims to be the

largest smart phone brand in India having 1,500 employees

working under it. The petitioner claims to be regularly filing its

income tax returns and is assessed to income tax even up to 2018-

19 and the petitioner in addition to paying income tax is also 6

subjected to investigation by Customs Department and other

entities. This does not concern the petition.

4. In the month of February, 2022 the petitioner claims to

have become aware of summons dated 4-01-2022 addressed to

one Mr. Nitin Ajage in the office of the petitioner. The summons was

issued under Section 37(1) and 37(3) of the Act read with Section

131 (1) of the Income Tax Act, 1961. The petitioner claims that

the summons came to the attention of the petitioner Company

around February 2022 and due to third wave of COVID-19, no

further steps were taken to take the summons forward. The 3rd

respondent/Assistant Director, Directorate of Enforcement issues

second summons on 25-02-2022 again on one Mr. Manu Jain who is

said to have resigned from the Company and finally the Company

had to comply with the submission of documents as was sought by

the Directorate of Enforcement which was done by 08th March,

2022.

5. The 2nd respondent/Directorate of Enforcement initiated

investigation against the petitioner following the inputs from the 7

Income Tax Department relating to certain remittances of royalty

made by the petitioner to certain foreign entities viz., (i) Qualcomm

Inc. and Qualcomm Tech Inc. and (ii) Beijing Xiaomi Mobile

Software Company Limited. The royalty that is paid to Qualcomm

Inc. Qualcomm Tech Inc., USA and Beijing Xiaomi Mobile Software

Company Limited forms the fulcrum of the present lis. Qualcomm

Inc. and Qualcomm Technologies Inc. (referred to as "Qualcomm"

for short) are the leading wireless technology innovators including

code division multiple access technology. Qualcomm has developed

certain valuable leading intellectual property across a number of

areas which are foundational to mobile experiences.

6. The petitioner claims to be the beneficiary of Qualcomm's

proprietary and licensed intellectual property particularly standard

essential patents that are used in mobile phones sold by it. The

petitioner claims that it, therefore, pays royalty for use of these

essential patents to Qualcomm as the patents are essential for

functioning of mobile phones in telecommunication network, be it

3G, 4G or LTE standards. The royalty payments for these licensed

intellectual property rights including the patents are based upon 8

Subscriber Unit License Agreement. The Subscriber Unit License

Agreement ('SULA' for short) was entered into between Xiaomi Inc.,

China and Qualcomm, USA. This was amended and assigned to

Xiaomi Communications Co. Limited by way of assignment and

amendment agreement. Therefore, from 01-10-2013 the

agreement was between Qualcomm Inc., Xiaomi Communications

Co. Limited and Xiaomi Inc. and Xiaomi Corporation. Thereafter the

assignment agreement dated 1-04-2015 was entered into between

Qualcomm Inc., Xiaomi Communications Co. Ltd., (China) and

Xiaomi Corporation (Cayman Islands). The assignment agreement

took note of the earlier assignment agreement regarding existence

of SULA between Qualcomm Inc. and Xiaomi Inc./Xiaomi

Technology Co. Ltd. The trail of payment of royalty moves through

agreements, assignments, amendment agreements and SULA.

From 2010 to 2014 till the establishment of the petitioner/Company

royalty was being paid through Xiaomi Communications Co. Ltd.,

China. From 2013-14 onwards the royalty moved out from the

nation through the petitioner company. The petitioner claims to be

paying royalty to Qualcomm at the net selling price of mobile

phones sold in India pursuant to the afore-mentioned agreement.

9 7. The petitioner is said to have access to proprietary

intellectual property relating to software and hardware technologies

from Beijing Xiaomi Mobile Software Co. Ltd. under the license and

royalty agreement with effect from 01-04-2017 for the purpose of

supplying, distributing, marketing and promoting Xiaomi products in

India. Beijing Xiaomi Mobile Software Company Limited is a limited

liability company established under the laws of mainland China

which is involved in software and hardware development and is

responsible for product research, design and development for the

entire Xiaomi group. The petitioner has charted the royalties that

are paid to Qualcomm and to Beijing Xiaomi Mobile Software

Company Limited from 2016. It is contended that on each of the

dates of appearance of the petitioner's representatives during the

investigation by the Directorate of Enforcement, documents and

information were sought and were furnished and certain statements

were also taken from the officers of the petitioner Company.

8. The office bearers of the Company admitted that royalty

appears to have been paid by Xiaomi Technology India Private

Limited as per the directions of certain persons in the Xiaomi group.

10 On 29-04-2022, the Directorate of Enforcement communicates a

mail to the petitioner informing it of seizure of `5551,27,15,824/-

under Section 37A of the Act from the current bank account of the

petitioner. This is the impugned seizure order in the petition. The

seizure order notices that there were reasons to believe that the

royalty paid by the petitioner to Qualcomm is foreign exchange held

outside India by the group. The reason for seizure was on the

ground that the respondent/Directorate of Enforcement found

during the course of investigation that no agreement or legal basis

was available for remitting the money by the petitioner. Royalty

was not a part of the product cost. No work order or purchase order

was placed. No intellectual property rights were received. Based

upon the impugned seizure, seizure order was passed on 29th April

2022 invoking Section 37A(1) of the Act.

9. The petitioner files a petition before this Court calling in

question an order of seizure / freezing dated 29-04-2022. This

Court initially grants an interim order of permitting operation of the

account for particular purposes. Later, this Court in terms of its

order dated 05-05-2022 on the ground that the seizure order under 11 Section 37A(1) of the Act is yet to be confirmed by the appropriate

authority under Section 37A(3) of the Act, confirmed / clarified the

interim order dated 05-05-2022 as clarified on 12-05-2022, to

continue during the pendency of the confirmation proceedings. On

the aforesaid score, the writ petition comes to be disposed.

10. After the disposal of the petition, the confirmation of the

seizure order dated 29-04-2022 comes to be passed by the 6th

respondent. It is the seizure order dated 29-04-2022 and the

confirmation order dated 19-09-2022 of the seizure of

`5551,27,15,824/- is what drives the petitioner to this Court in the

subject petition. While raising a challenge to the seizure order and

the confirmation order, the petitioner has also challenged the

constitutional validity of Section 37A of the Act, as the impugned

proceedings are initiated and are sought to be continued under

Section 37A of the Act.

11. Heard Sri Udaya Holla, learned senior counsel for the

petitioner along with Sri Aditya Vikram Bhat, Sri Deepak Chopra,

Sri Harpeet Singh, Smt. Radhika V. and Sri Mithel Reddy, learned 12

counsel for the petitioner and Sri M.B.Nargund, learned Additional

Solicitor General along with Sri Madhukar Deshpande, learned

counsel for the respondents.

12. The learned senior counsel Sri Udaya Holla appearing for

the petitioner would contend that Section 37A of the Act suffers

from manifest arbitrariness as it gives unbridled, uncanalised and

unguided power, as mere suspicion can lead to seizure order being

passed and there are no guidelines to determine what could be

reason to believe, which makes the statute becoming violative of

Article 14 of the Constitution of India. In support of the said

contention, the learned senior counsel would place reliance upon

the following judgments:-

(i) KHAN CHAND v. THE STATE OF PUNJAB AND ANOTHER1 and

(ii) THE STATE OF PUNJAB AND ANOTHER v. KHAN CHAND2.

He would contend that merely on the basis of suspicion, if certain

acts are permitted to be carried on in the manner in which it is

1 ILR 1966(2) P & H 794 (FB) 2 (1974) 1 SCC 549 13

done, it would lead to arbitrariness, as according to the learned

senior counsel, suspicion is antithesis of reason. He would seek to

place reliance on the following judgments to buttress this

submission:-

(i) CHARLES K.SKARIA AND OTHERS v. DR. C. MATHEW AND OTHERS3;

(ii) EBRAHIM VAZIR MAVAT v. STATE OF BOMBAY AND OTHERS4 and

(iii) M.G. ABROL v. AMICHAND VALLAMJI5.

Elaborating the aforesaid submission, it is contended that Section

37A of the Act suffers from manifest arbitrariness and

unreasonableness which would be grounds enough to strike down

Section 37A of the Act to be unconstitutional, as manifest

arbitrariness is one of the ground that can be the basis for striking

down a provision to be unconstitutional. To buttress the said

submission, he would seek to place reliance upon the following

judgments:-

(i) SHAYARA BANO v. UNION OF INDIA AND OTHERS6; 3 (1980) 2 SCC 752 4 AIR 1954 SC 229 5 1960 SCC OnLine Bom.34 14

(ii) GRAND KAKATIYA SHERATON HOTEL AND TOWERS EMPLOYEES AND WORKERS UNION v. SRINIVASA RESORTS LIMITED AND OTHERS7;

(iii) AIR INDIA v. NERGESH MEERZA AND OTHERS8;

(iv) STATE OF MAHARASHTRA AND ANOTHER v. INDIAN HOTEL AND RESTAURANTS 9 ASSOCIATIOIN AND OTHERS ;

(v) RADHA KRISHAN INDUSTRIES v. STATE OF HIMACHAL PRADESH AND OTHERS10;

(vi) INTERNET AND MOBILE ASSOCIATION OF INDIA v. RESERVE BANK OF INDIA11 and

(vii) DEPUTY COMMISSIONER OF INCOME TAX AND ANOTHER v. PEPSI FOODS LIMITED12.

Since attachment/freezing of the amount aforementioned is

even before any order could be passed or any judgment could be

delivered on the allegations so made against the petitioner, it

becomes a drastic and draconian power available at the hands of

the Directorate of Enforcement to attach any property. In support

6 (2017) 9 SCC 1 7 (2009) 5 SCC 342 8 (1981) 4 SCC 335 9 (2013) 8 SCC 519 10 (2021) 6 SCC 771 11 (2020) 10 SCC 274 12 (2021) 7 SCC 413 15

of this submission, the learned senior counsel would place reliance

upon the following judgments:-

(i) RAMAN TECH. AND PROCESS ENGG. CO. AND ANOTHER v. SOLANKI TRADERS13 and

(ii) RADHA KRISHAN INDUSTRIES (supra).

The learned senior counsel would emphasise on the words

"hold" and "acquire" that are found in Section 37A or Section 4 of

the Act. He would contend that "hold" would mean lawfully held and

"acquire" would mean, to become owner of the property. He would

submit that the payment of royalty is not held by the petitioner nor

he has acquired any property. Therefore, the soul of Section 37A

and Section 4 of the Act are inapplicable to the petitioner. Reliance

is placed upon the following judgments to drive home the said

contention:-

(i) BHUDAN SINGH AND ANOTHER v. NABI BUX AND ANOTHER14;

(ii) GOVERNMENT OF A.P. v. H.E.H. THE NIZAM, HYDERABAD15 and

13 (2008) 2 SCC 302 14 (1969) 2 SCC 481 15 (1996) 3 SCC 282 16

(iii) DEVI DAS GOPAL KRISHNAN ETC. v. STATE OF PUNJAB AND OTHERS16.

13. On the other hand, the learned Additional Solicitor

General would seek to refute every one of the submissions made by

the learned senior counsel to contend that the writ petition insofar

it raises challenge to the constitutional validity of Section 37A of the

Act is concerned, is not maintainable, as a Company which has its

genesis in China cannot be seen to challenge laws made in India

under the Constitution, in the garb of it being projected as being

manifestly arbitrary. If the petition is not maintainable on

constitutional validity, the other grounds with regard to the power

under Section 37A of the Act need not be gone into. In support of

this submission, the learned Additional Solicitor General, would

place reliance upon the following judgments:-

(i) RAJ KUMAR SHIVHARE v. ASSISTANT DIRECTOR, DIRECTORATE OF ENFORCEMENT AND ANOTHER17;

(ii) STATE OF MAHARASHTRA AND OTHERS v. GREATSHIP (INDIA) LIMITED18; 16 AIR 1967 SC 1895 17 (2010) 4 SCC 772 18 2022 SCC OnLine SC 1262 17

(iii) INDO-CHINA STEAM NAVIGATION CO.LTD. v. JASJIT SINGH, ADDITIONAL COLLECTOR OF CUSTOMS, CALCUTTA AND OTHERS19;

(iv) POWER MEASUREMENT LIMITED v. UTTAR PRADESH POWER CORPORATION LIMITED AND OTHERS20 and (v) STAR INDIA (P) LTD. v. TELECOM REGULATORY AUTHORITY OF INDIA AND OTHERS21.

The learned Additional Solicitor General would refute the

submissions with regard to Section 37A being unguided and

uncanalised power and seeks to demonstrate that there are

safeguards in the section itself which does not become arbitrary by

any stretch of imagination. He would place reliance upon the

judgment rendered by the Apex Court in the case of VIJAY

MADANLAL CHOUDHARY v. UNION OF INDIA22 to buttress his

submission that the power conferred under Section 37A cannot be

held to be arbitrary. The learned Additional Solicitor General would

further emphasise on the fact that the intention of the Legislature in

bringing in the amendment to the Act in the year 2015 was to

19 AIR 1964 SC 1140 20 2003 SCC OnLine All 109 21 2007 SCC OnLine Del.951 22 2022 SCC OnLine SC 929 18

tackle the menace of black money being parked outside the nation,

in the garb of business, like how the petitioner has managed and,

therefore, it cannot be held to be arbitrary or otherwise. It is only

regulatory. He would contend that the Delhi High Court in the case

of J.SEKAR v. UNION OF INDIA23 and the Apex Court in the case

of ATTORNEY GENERAL FOR INDIA AND OTHERS v.

AMRATLAL PRAJIVANDAS AND OTHERS24 have clearly

delineated the concept of reasons to believe which would straight

away go against the contention of the petitioner. He would contend

that judicial review in economic matters is extremely limited as is

held by the Apex Court in the case of PRINCIPAL DIRECTOR OF

INCOME-TAX (INVESTIGATION) AND OTHERS v. LALJIBHAI

KANJIBHAI MANDALIA25. It is further contended that under

Section 37A(4) of the Act, the seizure order is mandated till

adjudication proceedings. He would contend that between

05.05.2022 and 03.10.2022 the petitioner Company has utilised

Rs.1594 crores which has to be returned back, as it was subject to

confirmation proceedings, as was directed by this Court in the

23 2018 SCC OnLine Del.6523 24 (1994) 5 SCC 54 25 Civil Appeal No.4081 of 2022 decided on 13-07-2022 19

earlier round of litigation. He would submit that a direction for such

return should be the outcome in favour of the respondents after

dismissing the petition.

14. The learned senior counsel for the petitioner in reply to

the submissions so made by the learned Additional Solicitor General

would contend that the petitioner is a Company that is incorporated

in India, though it is a subsidiary of a Company in Beijing and China

and all transactions have happened in India. Income tax, as also,

GST is paid and, therefore, it does not become a Company alien for

this Court to dismiss the writ petition on the ground that the

petitioner has no locus to challenge the constitutional validity of

Section 37A of the Act. The learned senior counsel would admit and

contend that freedom under Article 19 of the Constitution of India

may not be available to a non-citizen as it is citizens centric, but

Articles 14 and 21 are not citizens centric. Therefore, the petition

would be maintainable for considering the constitutional validity of

Section 37A of the Act on the ground of manifest arbitrariness and

violation of Articles 14 and 21 of the Constitution of India. He

would, therefore, submit that the petition be allowed and Section 20 37A of the Act be held to be unconstitutional and consequently

quash the seizure order and its confirmation order.

15. I have given my anxious consideration to the submissions

made by the learned senior counsel appearing for petitioner,

learned Additional Solicitor General and the learned counsel

appearing for respondents and have perused the material on

record. In furtherance whereof, the following issues arise for my

consideration:

I. Whether the writ petition would be maintainable on the prayer that is sought i.e., to hold Section 37A of the Act to be unconstitutional on the ground that it is manifestly arbitrary and violative of Article 14 of the Constitution of India?

II. Whether Section 37A of the Act gives uncanalised and unguided power on it suffering from absence of safeguards? and

III. Whether the order passed by the authorized officer suffers from non-application of mind?

Issue No.I:

Whether the writ petition would be maintainable on the prayer that is sought i.e., to hold Section 37A of the Act to be unconstitutional on the ground that it is 21

manifestly arbitrary and violative of Article 14 of the Constitution of India?

16. Since submissions and contra submissions are with regard

to constitutional validity of the Act and maintainability of the writ

petition in which challenge is to the vires of Section 37A of the Act

and those submissions cutting at the root of the matter, I deem it

appropriate to consider maintainability of the petition qua the

challenge to the constitutional validity of Section 37A of the Act at

the outset.

17. The constitutional validity of Section 37A of the Act is

called in question by the petitioner. The petitioner is a Company,

though registered in India, it is incorporated under the provisions of

the prevailing Companies Act as obtaining in the People's Republic

of China. The subsidiary companies are many in number, one of

them is incorporated in India under the Companies Act, 1956.

Therefore, a Company which has its roots in a country outside India

can maintain a petition challenging the constitutional validity of any

laws of this country on the ground that it violates its fundamental 22

rights is the question that requires to be answered. Therefore, it

becomes germane to notice Articles 14, 19 and 21. They read as

follows:

"14. Equality before law.--The State shall not deny to any person equality before the law or the equal protection of the laws within the territory of India.

19. Protection of certain rights regarding freedom of speech, etc.--(1) All citizens shall have the right--

(a) to freedom of speech and expression;

(b) to assemble peaceably and without arms;

(c) to form associations or unions or co-operative societies;

(d) to move freely throughout the territory of India;

(e) to reside and settle in any part of the territory of India; and

(f) * * *

(g) to practice any profession, or to carry on any occupation, trade or business.

(2) Nothing in sub-clause (a) of clause (1) shall affect the operation of any existing law, or prevent the State from making any law, in so far as such law imposes reasonable restrictions on the exercise of the right conferred by the said sub-clause in the interests of the sovereignty and integrity of India,] the security of the State, friendly relations with foreign States, public order, decency or morality or in relation to contempt of court, defamation or incitement to an offence.

(3) Nothing in sub-clause (b) of the said clause shall affect the operation of any existing law in so far as it imposes, or prevent the State from making any law imposing, in the interests of the sovereignty and integrity of India or public order, reasonable restrictions on the exercise of the right conferred by the said sub-clause.

(4) Nothing in sub-clause (c) of the said clause shall affect the operation of any existing law in so far as it imposes, 23

or prevent the State from making any law imposing, in the interests of the sovereignty and integrity of India or public order or morality, reasonable restrictions on the exercise of the right conferred by the said sub-clause.

(5) Nothing in sub-clauses (d) and (e) of the said clause shall affect the operation of any existing law in so far as it imposes, or prevent the State from making any law imposing, reasonable restrictions on the exercise of any of the rights conferred by the said sub-clauses either in the interests of the general public or for the protection of the interests of any Scheduled Tribe.

(6) Nothing in sub-clause (g) of the said clause shall affect the operation of any existing law in so far as it imposes, or prevent the State from making any law imposing, in the interests of the general public, reasonable restrictions on the exercise of the right conferred by the said sub-clause, and, in particular, nothing in the said sub-clause shall affect the operation of any existing law in so far as it relates to, or prevent the State from making any law relating to,--

(i) the professional or technical qualifications necessary for practising any profession or carrying on any occupation, trade or business, or

(ii) the carrying on by the State, or by a corporation owned or controlled by the State, of any trade, business, industry or service, whether to the exclusion, complete or partial, of citizens or otherwise.

21. Protection of life and personal liberty.--No person shall be deprived of his life or personal liberty except according to procedure established by law."

Article 14 is a part of Part-III of the Constitution of India. Part-III

deals with fundamental rights. Article 14 directs that the State

shall not deny to any person equality before the law or equal

protection of the laws within the territory of India. Article 19 deals 24

with right to freedom. Article 19(1) mandates that all citizens shall

have a right as enumerated under Articles 19(1)(a) to (g). Article

21 again directs that no person shall be deprived of his life or

personal liberty except according to procedure established by law.

18. On a reading of the aforesaid Articles, the inference that

could be gathered when read in tandem, is that Article 14 directs

that no person shall be denied equality before the law. Article 21

directs that no person shall be deprived of his life or personal

liberty. Article 19 directs that all citizens shall have the right as

enumerated under the said Article. Therefore, Articles 14 and 21

are 'person centric' and Article 19 is 'citizen centric'. Freedom

as enumerated under Article 19 is available only to citizens of this

country and not to any outsider. Therefore, right to freedom of

speech and expression; right of assemble; right to form

associations or unions; right to move freely throughout the territory

of India; right to reside and settle in any part of India and right to

practice any profession or carry on any trade or business are all

available for citizens only albeit they being available with imposition

of reasonable restrictions. No outsider can claim that his 25

fundamental right under Article 19 is violated. Same does not go

with Article 14 or Article 21. They depict that it is 'any person'

would include 'every person'. Therefore, on the touchstone of the

very depiction in the Article, it is germane to notice the contentions

advanced by the petitioner qua the constitutional validity of Section

37A of the Act. Before embarking upon consideration on merits of

the matter, I deem it appropriate to notice the judgments rendered

by the Apex Court and other constitutional Courts. The High Court

of Delhi in the case of THOMSON-Csf AND OTHERS v.

NATIONAL AIRPORT AUTHORITY OF INDIA AND OTHERS 26

has held as follows:

"14. Article 14 of the Constitution embodies the principles of equality before law and equal protection of laws. The protective umbrella of the equality clause is available to all persons. While the fundamental rights conferred by Articles 15, 16, 19 and 29 can be invoked by citizens alone, rights created by Article 14 by its terms are guaranteed to the individual or person. Therefore Article 14 of the Constitution can be invoked by an individual irrespective of the fact that he is a foreigner or a citizen or an alien or it is an artificial person.

15. Like a citizen, a foreigner is also entitled to avail the personal rights which are enshrined in Article 14 of the Constitution. In Basheshar Nath v. Commissioner of Income-tax, Delhi and Rajasthan1959 SC 149, (1) the Supreme Court laid down that the benefit of Article 14 is not limited to

26 AIR 1993 Del.252 26

citizens alone but is also available to any person within the territory of India.

16. The first respondent did not dispute the applicability of Article 14 to any person, whether a foreigner or a citizen, within the territory of India, but its contention was that under Article 19(1)(g), the first and third petitioners have no fundamental right to carry on any trade, business or profession in this country and the plea of the petitioners under Article 14 of the Constitution cannot be considered by itself and they will, have to fall back upon the fundamental right guaranteed by Article 19(1)(g) of the Constitution. For this submission Mr. Venugopal sought sustenance from the decision of the Supreme Court in Indo China Steam Navigation Co. Ltd. v. Jasjit Singh, Additional Collector of Customs Calcutta AIR 1964 SC 1140 (2) and relied upon the following observations of the court:

"There is one more point which must be mentioned before we part with this appeal. Mr. Choudhary attempted to argue that if mens rea was not regarded as an essential element of S. 52A, the said section would be ultra vires Articles 14, 19 and 31(1) and as such, unconstitutional and invalid. We do not propose to consider the merits of this argument, because the appellant is not only a company, but also a foreign company, and as such, is not entitled to claim the benefits of Article 19. It is only citizens of India who have been guaranteed the right to freedom enshrined in the said article. If that is so, the plea under Article 31(1) as well as under Article 14 cannot be sustained for the simple reason that in supporting the said two pleas, inevitably the appellant has to fall back upon the fundamental right guaranteed by Article 19(1)(f)."

17. This decision has no application to the present matter. In the above case the ship of the appellant, which was a foreign company, was confiscated by custom authorities under Section 167(12A) read with Section 189 of the Customs Act, 1878 for violation of Section 52A thereof as large quantities of contraband namely, gold bars were discovered from the ship. The Argument based on Article 14 was that if Section 52A 27

contravenes Article 19(1)(f), it may be open to a citizen of India to contend that his vessel cannot be confiscated even if it had violated the provisions of Section 52A and this would result in discrimination. Thus, claim to inequality was based on application of Article 19(1)(f) to the citizen and non-application thereof to a foreigner. The court, therefore, while negating the argument held that inequality was the necessary consequence of the fact that Article 19 is confined to citizens alone and so the plea that Article 14 is contravened also must take in Article 19 if, it had to succeed. In this regard it was observed as follows:

"It may be that if Section 52A contravenes Article 19(1)(f), a citizen of India may contend that his vessel cannot be confiscated even if it has contravened S. 52A, and in that sense, there would be inequality between the citizen and the foreigner, but that inequality is the necessary consequence of the basic fact that Article 19 is confined to citizens of India, and so, the plea that Article 14 is contravened also must take in Article 19 if it has to succeed. The plain truth is that certain rights guaranteed to the citizens of India under Article 19 are not available to foreigners and pleas which may successfully be raised by the citizens on the strength of the said rights guaranteed under Article 19 would therefore, not be available to foreigners."

18. It is significant to note that in the present case Article 14 is being invoked by the petitioners without falling back upon Article 19(1)(g).

19. In order to appreciate whether Article 14 as pleaded in the instant case is available to the first and third petitioners to challenge the decision of the NAA, it would be necessary to refer to the various nuances of Article 14 of the Constitution.

20. Article 14 prohibits hostile discrimination of any person by the State. It is well settled that Article 14 ensures that the State metes out just, fair and reasonable treatment within the territory of India to every individual. It inhabits the State from acting arbitrarily since arbitrariness is anti-thesis of 28

equality and comes into play whenever the exercise of power by the State of its instrumentality is contaminated by arbitrariness and mala-fides. Absence of arbitrary exercise of power is the first essential rule upon which the foundation of Article 14 rests. Therefore, discretion when conferred on an executive authority must be contained within clearly defined limits, and the decision must not be inspired by humor, whim or caprice but is required to be informed by reason, which must proceed on the principles of equality, justice, fair play and application of known principles and rules and in general such a decision should be predictable. Besides the authority must act in furtherance of national interest, which should be the paramount consideration in matters affecting the country and large sections of the society.

... .... ...

35. In the present case the Consortium was entitled to legitimately expect that their bid would be fairly considered on its merits. The access to the court will not be denied to them for making a grievance that they were not treated fairly and the merits of their bid were disregarded by the first respondent and it also failed to give due weight and consideration to their reasonable and legitimate expectation; which resulted in arbitrariness. The decision of the respondent to allot the contract to the third respondent is open to judicial scrutiny not for testing the merits of the inter-se bids but for being judged and tested in the light of Article 14.

36. It will be a strange logic to suggest that discretion of the State cannot be controlled by judicial review in case of a contract where competing parties are foreigners even though the Constitution does not inhibit the scrutiny by the court, father the position is that any executive action can be called in question in a court of law on the ground that the action is wanting in quality of reasonableness and lacking in element of fairness and public interest.

37. It is trite saying that when citizens are the bidders the grant of contract to one must be in public interest and in conformity with various aspects of Article 14, there is no reason why the same criteria may not be applied with equal vigour, where bidders are foreigners. In latter case grant of a contract or largess to one may not merely affect the competing parties but may also effect the 29

entire country if the same is given in disregard of national interest and standards and norms laid down in Article 14 of the Constitution. Let us examine a case of two competing parties vying for a contract, one being a foreigner and the other being an Indian. In the event of the contract being granted to a foreigner, the Indian party indubitably can challenge the grant when the contract contravenes Article 14. Now for the reverse case where the contract is won by an Indian party, can it be justifiably contended that the foreigner who was in the run, will not be able to challenge the same though the action of the authority suffered from vide of arbitrariness. In the latter case there is no reason why the court should not use judicial review to scrutinise the action to see whether it is inconformity with Article 14 or falls foul of it. Access to, the court in all circumstances should be available. Courts cannot tolerate a less exacting standard of judicial review in case of a contract where a foreigner is a competing party. Rights whether of a citizen or a foreigner conferred by Article 14 of the Constitution cannot be swept away except by a cataclysm. Consortium therefore can ask the Court to see whether the action of the first respondent measures up to the various dimensions of Article 14 and demolish it if it falls short of the same. The various principles referred heretofore, also form part of the administrative law and can stand independently even de hors Article 14 of the Constitution.

38. The Supreme Court in G.J. Fernandez (Supra) while dealing with this aspect observed as follows;

"It may be noted that this rule, though supportable also as emanation from Article 14 does not rest merely on that Article. It has an independent existence apart from Article 14. It is a rule of administrative law which has been judicially evolved as a check against exercise of arbitrary power by the executive authority. If we turn to the judgment of Mr. Justice Frankfurter and examine it, we find that he has not sought to draw support for the rule from the equality clause of the United States Constitution, but evolved it purely as a rule of administrative law. Even in England, the recent trend in administrative law is in that direction as is evident from what is stated at pages 540-541 in Prof. Wade's 30

Administrative Law 4th Edition. There is no reason why we should hesitate to adopt this rule as a part of our continually expanding administrative law."

39. Therefore, these judicially evolved principles of the Administrative Law can be resorted to without recourse to Article 14 or for that matter Article 19 of the Constitution to knock out an act of the executive which is made arbitrarily and on irrelevant considerations. The Consortium can also avail of these principles to call in question the decision of the first respondent.

40. There has always been a current of opinion to the effect that there should be a universal standard of treatment of individuals whether nationals or foreigners. Article 7 of the United Nations Declaration of Human Rights, 1948 declares that all persons are equal before law and are entitled without any discrimination to equal protection of laws. Again Article 14 of the international Covenant on Civil and Political Rights 1966 states, inter alia, that all persons shall be equal before the Courts and tribunals.

41. Having regard to the foregoing, we overrule the preliminary objection. We however hasten to add that we should not be understood to be laying down that the State should be unmindful of the national interest in case of grant of contracts to foreigners. In such contracts national interest has to be given primacy. Acting within the bound of reasonableness it may be legitimate for the State to take into considerational national priorities and considered trade and foreign policies for awarding contracts to foreigner."

(Emphasis supplied)

A five judge Bench of the Apex Court in the case of SHAYARA

BANO (supra) has held as follows:

"71. In this view of the law, a three-Judge Bench of this Court in K.R. Lakshmanan v. State of T.N. [K.R. Lakshmanan v. State of T.N., (1996) 2 SCC 226] struck down a 31

1986 Tamil Nadu Act on the ground that it was arbitrary and, therefore, violative of Article 14. Two separate arguments were addressed under Article 14. One was that the Act in question was discriminatory and, therefore, violative of Article 14. The other was that in any case the Act was arbitrary and for that reason would also violate a separate facet of Article 14. This is clear from para 45 of the said judgment. The judgment went on to accept both these arguments. Insofar as the discrimination aspect is concerned, this Court struck down the 1986 Act on the ground that it was discriminatory in paras 46 and 47. Paras 48 to 50 are important, in that this Court struck down the 1986 Act for being arbitrary, separately, as follows: (SCC pp. 256-57)

"48. We see considerable force in the contention of Mr Parasaran that the acquisition and transfer of the undertaking of the Club is arbitrary. The two Acts were amended by the 1949 Act and the definition of "gaming"

was amended. The object of the amendment was to include horse-racing in the definition of "gaming". The provisions of the 1949 Act were, however, not enforced till the 1974 Act was enacted and enforced with effect from 31-3-1975. The 1974 Act was enacted with a view to provide for the abolition of wagering or betting on horse-races in the State of Tamil Nadu. It is thus obvious that the consistent policy of the State Government, as projected through various legislations from 1949 onwards, has been to declare horse-racing as gambling and as such prohibited under the two Acts. The operation of the 1974 Act was stayed by this Court and as a consequence the horse-races are continuing under the orders of this Court. The policy of the State Government as projected in all the enactments on the subject prior to 1986 shows that the State Government considered horse- racing as gambling and as such prohibited under the law. The 1986 Act on the other hand declares horse-racing as a public purpose and in the interest of the general public. There is apparent contradiction in the two stands. We do not agree with the contention of Mr Parasaran that the 1986 Act is a colourable piece of legislation, but at the same time we are of the view that no public purpose is being served by acquisition and transfer of the undertaking of the Club by the Government. We fail to understand how the State Government can acquire and 32

take over the functioning of the race-club when it has already enacted the 1974 Act with the avowed object of declaring horse-racing as gambling? Having enacted a law to abolish betting on horse-racing and stoutly defending the same before this Court in the name of public good and public morality, it is not open to the State Government to acquire the undertaking of horse-racing again in the name of public good and public purpose. It is ex facie irrational to invoke "public good and public purpose" for declaring horse-racing as gambling and as such prohibited under law, and at the same time speak of "public purpose and public good" for acquiring the race- club and conducting the horse-racing by the Government itself. Arbitrariness is writ large on the face of the provisions of the 1986 Act.

49. We, therefore, hold that the provisions of the 1986 Act are discriminatory and arbitrary and as such violate and infract the right to equality enshrined under Article 14 of the Constitution.

50. Since we have struck down the 1986 Act on the ground that it violates Article 14 of the Constitution, it is not necessary for us to go into the question of its validity on the ground of Article 19 of the Constitution."

(emphasis supplied)"

The Apex Court refers to its earlier judgment in the case of K.R.

LAKSHMANAN V. STATE OF T.N. AND ANOTHER reported in

(1996)2 SCC 226 to hold that the validity of a statute can be

examined on the touchstone of Article 14 of the Constitution of

India on the ground of manifest arbitrariness and

unreasonableness. On the other hand, the Apex Court in the case 33

of INDO-CHINA STEAM NAVIGATION COMPANY LIMITED

(supra) has held as follows:

"35. There is one more point which must be mentioned before we part with this appeal. Mr Choudhary attempted to argue that if mens rea was not regarded as an essential element of Section 52-A, the said section would be ultra vires Articles 14, 19 and 31(1) and as such, unconstitutional and invalid. We do not propose to consider the merits of this argument, because the appellant is not only a company, but also a foreign company, and as such, is not entitled to claim the benefits of Article 19. It is only citizens of India who have been guaranteed the right to freedom enshrined in the said article. If that is so, the plea under Article 31(1) as well as under Article 14 cannot be sustained for the simple reason that in supporting the said two pleas, inevitably the appellant has for fall back upon the fundamental right guranteed by Article 19(1)(f). The whole argument is that the appellant is deprived of its property by operation of the relevant provisions of the Act and these provisions are invalid. All that Article 31(1) provides is that no person shall be deprived of his property save by authority of law. As soon as this plea is raised, it is met by the obvious answer that the appellant has been deprived of its property by authority of the provisions of the Act and that would be the end of the plea under Article 31(1) unless the appellant is able to take the further step of challenging the validity of the act, and that necessarily imports Article 19(1)(f). Similarly, when a plea is raised under Article 14, we face the same position. It may be that if Section 52-A contravenes Article 19(1)(f), a citizen of India may contend that his vessel cannot be confiscated even if it has contravened Section 52-A, and in that sense, there would be inequality between the citizen and the foreigner, but that inequality is the necessary consequence of the basic fact that Article 19 is confined to citizens of India, and so, the plea that Article 14 is contravened also must take in Article 19 if it has to succeed. The plain truth is that certain rights guaranteed to the citizens of India under Article 19 are not available to foreigners and pleas which may successfully be raised by the citizens on the strength of the said rights guaranteed under Article 19 would, therefore, not be available to foreigners. That being so, we see no substance in the argument that if Section 52-A is 34

construed against the appellant, it would be invalid, and so, the appellant would be able to resist the confiscation of its vessel under Article 31(1). We ought to make it clear that we are expressing no opinion on the validity of Section 52-A under Article 19(1)(f). If the said question were to arise for our decision in any case, we would have to consider whether the provisions of Section 52-A are not justified by Article 19(5). That is a matter which is foreign to the enquiry in the present appeal."

A Division Bench of Allahabad High Court in a Judgment reported in

POWER MEASUREMENT LIMITED (supra) has held as follows:

"14. As such Art. 19(1)(d) and (e) are unavailable to foreigners because those rights are conferred only on the citizens. Certainly, the machinery of Art. 14 cannot be invoked to obtain that fundamental right. Rights under Arts. 19(1)(d) and (e) are expressly, withheld to foreigners.

15. After giving anxious consideration to the facts of the case and the submissions made by the learned counsel for the parties, we are of the opinion that the foreigners also enjoy some fundamental right under the Constitution of this country but the same is confined to Art. 21 of the Constitution i.e. life and liberty and does not include the rights guaranteed under Art. 19 of the Constitution, which are available only to the citizens of this country. Fundamental rights, which are available to the citizens of this country, cannot be extended to non- citizen through Art. 14 of the Constitution.

16. In the present case, learned counsel for the petitioner claims violation of Art. 14 in the matter of awarding bid by the respondent-Corporation. In our view, violation of Art. 14 is to be examined under the back-drop of the facts that the petitioner has applied for tender in respect of supply, installation, testing and commissioning of O. 2S Accuracy Class Static Electronic Trivector Energy 35

Meters but the Power Corporation after making enquiry and the preference of the domestic company over the foreign company, took a decision to grant tender to respondent No. 5. In these circumstances, the petitioner cannot claim violation of Art. 14 independently but the same is to be read with Art. 19(1)(g) of the Constitution, which is confined to the citizens of the country alone."

(Emphasis supplied)

The Apex Court in the case of INDO-CHINA STEAM NAVIGATION

CO.LTD., (supra) while considering the submission with regard

challenge to Section 52-A of the Sea Customs Act, 1878 for it to be

violative of Articles 14, 19 and 31 of the Constitution has held that

it could not be challenged by an outsider. The challenge therein

was with regard to Article 19(1)(f) coupled with Articles 14 and 31.

The Court answers that in the garb of invoking Articles 14 and 31

what is challenged is the purport of the Act qua Article 19.

Therefore, the Court holds that Article 19 would not be available to

any person, who is not a citizen of this country. Same goes with

the Division Bench judgment of Allahabad High Court where at

para-14 it is clearly held that Article 19(1)(d) and (e) are

unavailable to foreigners because these rights are conferred only on

the citizens. Rights under Article 19 are withheld expressly to 36

foreigners. The Division Bench also holds that it is of the opinion

that foreigners enjoy some fundamental rights of this country but

the same are confined to Article 21 of the Constitution of India

which deals with life and liberty and does not include the rights

guaranteed under Article 19 of the Constitution. The question

therein was right to free trade under Article 19(1)(g) and,

therefore, held that it was available only to Indian citizens and not

to foreigners.

19. On a coalesce of the judgments rendered by the Apex

Court and that of different constitutional Courts what would

unmistakably emerge is that Articles 14 and 21 of the Constitution

of India, the nation's Grundnorm would be available to every person

and they are not restricted to the citizens of the country only.

However, Articles 15, 16 and 19 are restricted only to citizens of

this country. The challenge in the case at hand is on the ground

that the provision is unreasonable or manifestly arbitrary, both of

which would come within the ambit of Article 14 of the Constitution

of India and the petition challenging the constitutional validity on

the ground that it is manifestly arbitrary and violative of Article 14 37

or unreasonable, again being violative of Article 14, are all

maintainable contentions before the constitutional Courts of the

country as they are 'person centric' and not 'citizen centric'.

Therefore the first issue that has arisen for consideration qua

maintainability is answered in favour of the petitioner holding the

petition to be maintainable qua the challenge.

Issue No.II:

Whether Section 37A of the Act gives uncanalised and unguided power on it suffering from absence of safeguards.?

20. To answer this issue it is germane to notice the genesis of

Section 37A i.e., clauses of the amendment of the year 2015 which

comes about on 09.09.2015. On February 28, 2015 the Finance

Minister renders his Budget Speech in the Parliament. It, insofar as

it is germane for the present lis as spoken, reads as follows:

"3. In the last nine months, the NDA Government headed by Prime Minister Shri Narendra Modi, has undertaken several significant steps to energize the economy. The credibility of the Indian economy has been re-established. The world is predicting that it is India's chance to fly.

Kuch to phool khilaye humne, aur kuch phool khilane hai

Mushkil yeh hai bag me ab tak, kaante kai purane hai 38

... ... ...

95. Taxation is an instrument of social and economic engineering. Tax collections help the Government to provide education, healthcare, housing and other basic facilities to the people to improve their quality of life and to address the problems of poverty, unemployment and slow development. To achieve these objectives, it has been our endeavour in the last nine months to foster a stable taxation policy and non- adversarial tax administration. A very important dimension to our tax administration is the fight against the scourge of black money. A number of measures have already been taken in this direction. I propose to do much more.

... ... ...

99. While finalising my tax proposals, I have adopted certain broad themes, which include:

A. Measures to curb black money; B. Job creation through revival of growth and investment and promotion of domestic manufacturing and 'Make in India'; C. Minimum government and maximum governance to improve the ease of doing business; D. Benefits to middle class taxpayers; E. Improving the quality of life and public health through Swachch Bharat initiatives; and F. Stand alone proposals to maximise benefits to the economy. ... ... ...

101. In the last 9 months several measures have been initiated in this direction. A major breakthrough was achieved in October, 2014 when a delegation from the Revenue Department visited Switzerland and the Swiss authorities agreed to (a) provide information in respect of cases independently investigated by the Income-tax Department; (b) confirm genuineness of bank accounts and provide non-banking information; (c) provide such information in a time bound manner; and

(d) commence talks with India for Automatic Exchange of Information between the two countries at the earliest.

39 Investigation into cases of undisclosed foreign assets has been accorded the highest priority, resulting in detection of substantial amounts of unreported income. For strengthening collection of information from various sources domestically, a new structure is being put in place which includes electronic filing of statements by reporting entities. This will ensure seamless integration of data and more effective enforcement.

102. Tracking down and bringing back the wealth which legitimately belongs to the country is our abiding commitment to the country. Recognising the limitations under the existing legislation, we have taken a considered decision to enact a comprehensive new law on black money to specifically deal with such money stashed away abroad. To this end, I propose to introduce a Bill in the current Session of the Parliament.

103. With your permission, Madam Speaker, I would like to highlight some of the key features of the proposed new law on black money.

(1) Concealment of income and assets and evasion of tax in relation to foreign assets will be prosecutable with punishment of rigorous imprisonment upto 10 years. Further,

• this offence will be made non-compoundable;

• the offenders will not be permitted to approach the Settlement Commission; and

• penalty for such concealment of income and assets at the rate of 300% of tax shall be levied.

(2) Non filing of return or filing of return with inadequate disclosure of foreign assets will be liable for prosecution with punishment of rigorous imprisonment up to 7 years.

(3) Income in relation to any undisclosed foreign asset or undisclosed income from any foreign asset will be taxable at the maximum marginal rate. Exemptions or 40

deductions which may otherwise be applicable in such cases, shall not be allowed.

(4) Beneficial owner or beneficiary of foreign assets will be mandatorily required to file return, even if there is no taxable income.

(5) Abettors of the above offences, whether individuals, entities, banks or financial institutions will be liable for prosecution and penalty.

(6) Date of Opening of foreign account would be mandatorily required to be specified by the assessee in the return of income.

(7) The offence of concealment of income or evasion of tax in relation to a foreign asset will be made a predicate offence under the Prevention of Money-laundering Act, 2002 (PMLA). This provision would enable the enforcement agencies to attach and confiscate unaccounted assets held abroad and launch prosecution against persons indulging in laundering of black money.

(8) The definition of 'proceeds of crime' under PMLA is being amended to enable attachment and confiscation of equivalent asset in India where the asset located abroad cannot be forfeited.

(9) The Foreign Exchange Management Act, 1999 (FEMA) is also being amended to the effect that if any foreign exchange, foreign security or any immovable property situated outside India is held in contravention of the provisions of this Act, then action may be taken for seizure and eventual confiscation of assets of equivalent value situated in India. These contraventions are also being made liable for levy of penalty and prosecution with punishment of imprisonment up to five years."

(Emphasis supplied) 41

Tracking down and bringing back the wealth which ultimately

belongs to the country is the abiding commitment to the country is

what was the foundation that came about for amendment to the

Act. Clause 9 supra makes specific reference to the Act. The Act

was sought to be amended to the effect that if any foreign

exchange, foreign security or any immovable property situated

outside India is held in contravention of the provisions of the Act,

then action may be taken for seizure and eventual confiscation of

assets of equivalent value situated in India. Pursuant to this, the

Finance Act, 2015 comes about, in which amendment to the Act is

also envisaged. Section 142 of the Finance Act, 2015 deals with

the genesis of Section 37A which later becomes an amendment to

the Act by insertion of Section 37A. Therefore, it is germane to

notice Section 37A. Section 37A reads as follows:

"37A. Special provisions relating to assets held outside India in contravention of Section 4.--(1) Upon receipt of any information or otherwise, if the Authorised Officer prescribed by the Central Government has reason to believe that any foreign exchange, foreign security, or any immovable property, situated outside India, is suspected to have been held in contravention of section 4, he may after recording the reasons in writing, by an order, seize value equivalent, situated within India, of such foreign exchange, foreign security or immovable property:

42 Provided that no such seizure shall be made in case where the aggregate value of such foreign exchange, foreign security or any immovable property, situated outside India, is less than the value as may be prescribed.

(2) The order of seizure along with relevant material shall be placed before the Competent Authority, appointed by the Central Government, who shall be an officer not below the rank of Joint Secretary to the Government of India by the Authorised Officer within a period of thirty days from the date of such seizure.

(3) The Competent Authority shall dispose of the petition within a period of one hundred eighty days from the date of seizure by either confirming or by setting aside such order, after giving an opportunity of being heard to the representatives of the Directorate of Enforcement and the aggrieved person.

Explanation.--While computing the period of one hundred eighty days, the period of stay granted by court shall be excluded and a further period of at least thirty days shall be granted from the date of communication of vacation of such stay order.

(4) The order of the Competent Authority confirming seizure of equivalent asset shall continue till the disposal of adjudication proceedings and thereafter, the Adjudicating Authority shall pass appropriate directions in the adjudication order with regard to further action as regards the seizure made under sub-section (1):

Provided that if, at any stage of the proceedings under this Act, the aggrieved person discloses the fact of such foreign exchange, foreign security or immovable property and brings back the same into India, then the Competent Authority or the Adjudicating Authority, as the case may be, on receipt of an application in this regard from the aggrieved person, and after 43

affording an opportunity of being heard to the aggrieved person and representatives of the Directorate of Enforcement, shall pass an appropriate order as it deems fit, including setting aside of the seizure made under sub-section (1).

(5) Any person aggrieved by any order passed by the Competent Authority may prefer an appeal to the Appellate Tribunal.

(6) Nothing contained in Section 15 shall apply to this section."

(Emphasis supplied)

Section 37A brings about certain special provisions relating to

assets held outside India in contravention of Section 4. Section 4

reads as follows:

"4. Holding of foreign exchange, etc.--Save as otherwise provided in this Act, no person resident in India shall acquire, hold, own, possess or transfer any foreign exchange, foreign security or any immovable property situated outside India."

(Emphasis supplied)

Section 4 deals with holding of foreign exchange, it directs that no

person resident in India shall acquire, hold, own, possess or

transfer any foreign exchange, foreign security or any immovable

property situated outside India. Therefore, the acquisition, holding,

owning, possessing or transfer of any foreign exchange from India,

to outside India, would become an offence under Section 37A of the 44

Act. Section 4 directs prohibition of any funds being transferred

outside India. Sub-section (1) of Section 37A mandates that upon

receipt of any information, if the Authorised Officer 'has reason to

believe' that any foreign exchange, foreign security or any

immovable property situated outside India is suspected to have

been held in contravention of Section 4, the Authorized Officer may

after recording reasons in writing, by an order seize value

equivalent of funds available in India. Sub-section (2) of Section

37A mandates that seizure along with relevant material is to be

placed before the Competent Authority appointed by the

Government not below the rank of Joint Secretary to Government

of India by the Authorized Officer within 30 days from the date of

seizure.

21. The Competent Authority has some obligation in terms of

sub-sections (3) and (4) of Section 37A. The Competent Authority

is to dispose of the petition within a period of 180 days from the

date of seizure, after giving an opportunity of being heard to the

representatives of the Directorate of Enforcement and the

aggrieved person. Sub-section (4) mandates that the Competent 45

Authority confirming seizure shall continue such seizure till the

disposal of adjudication proceedings and thereafter the Adjudicating

Authority is to pass appropriate directions as regards seizure that is

made. Sub-section (5) permits any person aggrieved by the order

of the Competent Authority to prefer an appeal before the Appellate

Tribunal. This is the broad frame work of the Act i.e., Section 37A.

Whether the said provision is unconstitutional, for it suffering from

manifest arbitrariness and unreasonableness as alleged, is what is

to be considered. Manifest arbitrariness, is trite, is on a higher

pedestal than that of the word 'arbitrariness'. The Courts have

interpreted the tests that are to be considered while declaring a

provision of law to be unconstitutional on the ground that it is

manifestly arbitrary.

22. The Apex Court in plethora of judgments has laid down

parameters for striking down a legislation on the ground of manifest

arbitrariness. To strike down a provision on manifest arbitrariness,

the arbitrariness should be on a higher pedestal and as the

nomenclature suggests, it must be manifest. I deem it appropriate

to notice the judgments relied on by the learned senior counsel 46

representing the petitioner, in order to buttress his submission that

the impugned provision is manifestly arbitrary.

Authorities relied on by the petitioner:

23. The Apex Court in the case of SHAYARA BANO (supra)

has held as follows:

"87. The thread of reasonableness runs through the entire fundamental rights chapter. What is manifestly arbitrary is obviously unreasonable and being contrary to the rule of law, would violate Article 14. Further, there is an apparent contradiction in the three-Judge Bench decision in McDowell [State of A.P. v. McDowell and Co., (1996) 3 SCC 709] when it is said that a constitutional challenge can succeed on the ground that a law is "disproportionate, excessive or unreasonable", yet such challenge would fail on the very ground of the law being "unreasonable, unnecessary or unwarranted".

The arbitrariness doctrine when applied to legislation obviously would not involve the latter challenge but would only involve a law being disproportionate, excessive or otherwise being manifestly unreasonable. All the aforesaid grounds, therefore, do not seek to differentiate between State action in its various forms, all of which are interdicted if they fall foul of the fundamental rights guaranteed to persons and citizens in Part III of the Constitution."

It was held by the Apex Court, that triple talak was manifestly

arbitrary in the sense that marital tie cannot be broken capriciously

and whimsically by a Muslim man without an attempt to

reconciliation to save it. It was further held that form of talak was 47

violative of fundamental rights enshrined in Article 14 of the

Constitution. The Apex Court strikes down triple talak on the very

specific grounds of manifest arbitrariness, unreasonableness,

capricious and whimsical. Those were the parameters laid down by

the Apex Court to strike down a legislation on manifest

arbitrariness. The Apex Court a little earlier in INDIAN HOTEL

AND RESTAURANTS ASSOCIATION (supra) has held as follows:

"113. The Preamble of the Constitution of India as also Articles 14 to 21, as rightly observed in the Constitution Bench judgment of this Court in I.R. Coelho [(2007) 2 SCC 1] , form the heart and soul of the Constitution. Taking away of these rights of equality by any legislation would require clear proof of the justification for such abridgment. Once the respondents had given prima facie proof of the arbitrary classification of the establishments under Sections 33-A and 33-B, it was the duty of the State to justify the reasonableness of the classification. This conclusion of ours is fortified by the observations in Laxmi Khandsari [(1981) 2 SCC 600] , wherein this Court observed as follows: (SCC pp. 609-10, para 14)

"14. We, therefore, fully agree with the contention advanced by the petitioners that where there is a clear violation of Article 19(1)(g), the State has to justify by acceptable evidence, inevitable consequences or sufficient materials that the restriction, whether partial or complete, is in public interest and contains the quality of reasonableness. This proposition has not been disputed by the counsel for the respondents, who have, however, submitted that from the circumstances and materials produced by them the onus of proving that the restrictions are in public interest and are reasonable has been amply discharged by them."

48 114. In our opinion, the appellants herein have failed to satisfy the aforesaid test laid down by this Court. The counsel for the appellant had, however, sought to highlight before us the unhealthy practice of the customers showering money on the dancers during the performance, in the prohibited establishments. This encourages the girls to indulge in unhealthy competition to create and sustain sexual interest of the most favoured customers. But such kind of behaviour is absent when the dancers are performing in the exempted establishments. It was again emphasised that it is not only the activities performed in the establishments covered under Section 33-A, but also the surrounding circumstances which are calculated to produce an illusion of easy access to women. The customers who would be inebriated would pay little heed to the dignity or lack of consent of the women. This conclusion is sought to be supported by a number of complaints received and as well as case histories of girl children rescued from the dance bars. We are again not satisfied that the conclusions reached by the State are based on any rational criteria. We fail to see how exactly the same dances can be said to be morally acceptable in the exempted establishments and lead to depravity if performed in the prohibited establishments. Rather it is evident that the same dancer can perform the same dance in the high class hotels, clubs, and gymkhanas but is prohibited of doing so in the establishments covered under Section 33-A. We see no rationale which would justify the conclusion that a dance that leads to depravity in one place would get converted to an acceptable performance by a mere change of venue. The discriminatory attitude of the State is illustrated by the fact that an infringement of Section 33-A(1) by an establishment covered under the aforesaid provision would entail the owner being liable to be imprisoned for three years by virtue of Section 33-A(2). On the other hand, no such punishment is prescribed for establishments covered under Section 33-B. Such an establishment would merely lose the licence. Such blatant discrimination cannot possibly be justified on the criteria of reasonable classification under Article 14 of the Constitution of India.

... ... ...

Is the impugned legislation ultra vires Article 19(1)(g)?

49 124. It was submitted by the learned counsel for the appellants that by prohibiting dancing under Section 33-A, no right of the bar owners for carrying on a business/profession is being infringed. (See Fertilizer Corpn. Kamgar Union [(1981) 1 SCC 568 : AIR 1981 SC 344] .) The curbs are imposed by Sections 33-A and 33-B only to restrict the owners in the prohibited establishments from permitting dance to be conducted in the interest of general public. Since the dances conducted in establishments covered under Section 33-A were obscene, they would fall in the category of res extra commercium and would not be protected by the fundamental right under Article 19(1)(g). The submission is also sought to be supported by placing a reliance on the reports of PRAYAS and Shubhada Chaukar. The restriction is also placed to curb exploitation of the vulnerability of the young girls who come from poverty-stricken background and are prone to trafficking.

125. In support of the submission, the learned counsel relied on a number of judgments of this Court as well as the American courts, including Municipal Corpn. of the City of Ahmedabad [(1986) 3 SCC 20] , wherein it was held that the expression "in the interest of general public" under Article 19(6) inter alia includes protecting morality. The relationship between law and morality has been the subject of jurisprudential discourse for centuries. The questions such as: Is the development of law influenced by morals? Does morality always define the justness of the law? Can law be questioned on grounds of morality? and above all, Can morality be enforced through law?, have been the subject-matter of many jurisprudential studies for over at least a century and a half. But no reference has been made to any such studies by any of the learned Senior Counsel. Therefore, we shall not dwell on the same.

126. Upon analysing the entire fact situation, the High Court has held that dancing would be a fundamental right and cannot be excluded by dubbing the same as res extra commercium. The State has failed to establish that the restriction is reasonable or that it is in the interest of general public. The High Court rightly scrutinised the impugned legislation in the light of observations of this Court made in Narendra Kumar [AIR 1960 SC 430 : (1960) 2 SCR 375] , 50

wherein it was held that greater the restriction, the more the need for scrutiny. The High Court noticed that in the guise of regulation, the legislation has imposed a total ban on dancing in the establishments covered under Section 33-A. The High Court has also concluded that the legislation has failed to satisfy the doctrine of direct and inevitable effect. (See Maneka Gandhi case [(1978) 1 SCC 248] .) We see no reason to differ with the conclusions recorded by the High Court. We agree with Mr Rohatgi and Dr Dhavan that there are already sufficient rules and regulations and legislation in place which, if efficiently applied, would control if not eradicate all the dangers to the society enumerated in the Preamble and the Statement of Objects and Reasons of the impugned legislation.

127. The activities of the eating houses, permit rooms and beer bars are controlled by the following regulations:

(i) The Bombay Municipal Corporation Act;

(ii) The Bombay Police Act, 1951;

(iii) The Bombay Prohibition Act, 1949;

(iv) The Rules for Licensing and Controlling Places of Public Entertainment, 1953;

(v) The Rules for Licensing and Controlling Places of Public Amusement other than Cinemas;

(vi) And other orders as are passed by the Government from time to time.

128. The restaurants/dance bar owners also have to obtain licences/permissions as listed below:

(i) Licence and registration for eating house under the Bombay Police Act, 1951;

(ii) Licence under the Bombay Shops and Establishment Act, 1948 and the rules made thereunder;

(iii) Eating house licence under Sections 394, 412-A, 313 of the Bombay Municipal Corporation Act, 1888;

(iv) Health licence under the Maharashtra Prevention of Food Adulteration Rules, 1962;

51 (v) Health licence under the Mumbai Municipal Corporation Act, 1888 for serving liquor;

(vi) Performance licence under Rules 118 of the Amusement Rules, 1960;

(vii) Premises licence under Rule 109 of the Amusement Rules;

(viii) Licence to keep a place of public entertainment under Section 33(1) clauses (w) and (y) of the Bombay Police Act, 1951 and the said Entertainment Rules;

(ix) FL III licence under the Bombay Prohibition Act, 1949 and Rule 45 of the Bombay Foreign Liquor Rules, 1953 or a Form E licence under the Special Permits and Licences Rules for selling or serving IMFL and beer;

(x) Suitability certificate under the Amusement Rules.

129. Before any of the licences are granted, the applicant has to fulfil the following conditions:

(i) Any application for premises licence shall be accompanied by the site plan indicating inter alia the distance of the site from any religious, educational institution or hospital.

(ii) The distance between the proposed place of amusement and the religious place or hospital or educational institution shall be more than 75 m.

(iii) The proposed place of amusement shall not have been located in the congested and thickly populated area.

(iv) The proposed site must be located on a road having width of more than 10 m.

(v) The owners/partners of the proposed place of amusement must not have been arrested or detained for anti-

social or any such activities or convicted for any such offences.

(vi) The distance between two machines which are to be installed in the video parlour shall be reflected in the plan.

52 (vii) No similar place of public amusement exists within a radius of 75 m.

(viii) The conditions mentioned in the licence shall be observed throughout the period for which the licence is granted and if there is a breach of any one of the conditions, the licence is likely to be cancelled after following the usual procedure.

130. The aforesaid list, enactments and regulations are further supplemented with the regulations protecting the dignity of women. The provisions of the Bombay Police Act, 1951 and more particularly Section 33(1)(w) of the said Act empowers the licensing authority to frame rules:

"licensing or controlling places of public amusement or entertainment and also for taking necessary steps to prevent inconvenience to residents or passers-by or for maintaining public safety and for taking necessary steps in the interests of public order, decency and morality."

131. Rules 122 and 123 of the Amusement Rules, 1960 also prescribe conditions for holding performances:

"122.Acts prohibited by the holder of a performance licence.--No person holding a performance licence under these Rules shall, in the beginning, during any interval or at the end of any performance, or during the course of any performance, exhibition, production, display or staging, permit or himself commit on the stage or any part of the auditorium--

(a) any profanity or impropriety of language;

(b) any indecency of dress, dance, movement or gesture;

Similar conditions and restrictions are also prescribed under the performance licence:

*** 53

The licensee shall not, at any time before, during the course of or subsequent to any performance, exhibition, production, display or staging, permit or himself commit on the stage or in any part of the auditorium or outside it:

(i) any exhibition or advertisement whether by way of posters or in the newspapers, photographs of nude or scantily dressed women;

(ii) any performance at a place other than the place provided for the purpose;

(iii) any mixing of the cabaret performers with the audience or any physical contact by touch or otherwise with any member of the audience;

(iv) any act specifically prohibited by the Rules."

132. The Rules under the Bombay Police Act, 1951 have been framed in the interest of public safety and social welfare and to safeguard the dignity of women as well as prevent exploitation of women. There is no material placed on record by the State to show that it was not possible to deal with the situation within the framework of the existing laws except for the unfounded conclusions recorded in the Preamble as well as the Statement of Objects and Reasons. [See State of Gujarat v. Mirzapur Moti Kureshi Kassab Jamat [(2005) 8 SCC 534 : AIR 2006 SC 212] wherein it is held that: (SCC p. 573, para 75) the standard of judging reasonability of restriction or restriction amounting to prohibition remains the same, excepting that a total prohibition must also satisfy the test that a lesser alternative would be inadequate.] The Regulations framed under Section 33(1)(w) of the Bombay Police Act, more so Regulations 238 and 242 provide that the licensing authority may suspend or cancel a licence for any breach of the licence conditions. Regulation 241 empowers the licensing authority or any authorised police officer, not below the rank of Sub- Inspector, to direct the stoppage of any performance forthwith if the performance is found to be objectionable. Section 162 of the Bombay Police Act empowers a competent authority/Police Commissioner/ District Magistrate to suspend or revoke a 54

licence for breach of its conditions. Thus, sufficient power is vested with the licensing authority to safeguard any perceived violation of the dignity of women through obscene dances.

133. From the objects of the impugned legislation and amendment itself, it is crystal clear that the legislation was brought about on the admission of the police that it is unable to effectively control the situation in spite of the existence of all the necessary legislation, rules and regulations. One of the submissions made on behalf of the appellants was to the effect that it is possible to control the performances which are conducted in the establishments falling within Section 33-B; the reasons advanced for the aforesaid only highlight the stereotype myths that people in upper strata of society behave in orderly and moralistic manner. There is no independent empirical material to show that propensity of immorality or depravity would be any less in these high-class establishments. On the other hand, it is the specific submission of the appellants that the activities conducted within the establishments covered under Section 33-A have the effect of vitiating the atmosphere not only within the establishments but also in the surrounding locality. According to the learned counsel for the appellants, during dance in the bars the dancers wore deliberately provocative dresses. The dance becomes even more provocative and sensual when such behaviour is mixed with alcohol. It has the tendency to lead to undesirable results. Reliance was placed upon State of Bombay v. R.M.D.Chamarbaugwala [AIR 1957 SC 699] , Khoday Distilleries Ltd. v. State of Karnataka [(1995) 1 SCC 574] , State of Punjab v. Devans Modern Breweries Ltd. [(2004) 11 SCC 26] , New York State Liquor Authority v. Bellanca [69 L Ed 2d 357 : 452 US 714 (1981)] and R. v. Quinn [(1962) 2 QB 245 : (1961) 3 WLR 611 : (1961) 3 All ER 88 (CCA)] to substantiate the aforesaid submissions. Therefore, looking at the degree of harm caused by such behaviour, the State enacted the impugned legislation.

134. We are undoubtedly bound by the principles enunciated by this Court in the aforesaid cases, but these are not applicable to the facts and circumstances of the present case. In Khoday Distilleries Ltd. [(1995) 1 SCC 574] , it was held that there is no fundamental right inter alia to do trafficking in women or in slaves or to carry on business of exhibiting and 55

publishing pornographic or obscene films and literature. This case is distinguishable because of the unfounded presumption that women are being/were trafficked in the bars. State of Punjab v. Devans Modern Breweries Ltd. [(2004) 11 SCC 26] dealt with liquor trade, whereas the present case is clearly different. The reliance on New York State Liquor Authority [69 L Ed 2d 357 : 452 US 714 (1981)] is completely unfounded because in that case endeavour of the State was directed towards prohibiting topless dancing in an establishment licensed to serve liquor. Similarly, R. v. Quinn [(1962) 2 QB 245 : (1961) 3 WLR 611 : (1961) 3 All ER 88 (CCA)] dealt with indecent performances in a disorderly house. Hence, this case will also not help the appellants. Therefore, we are not impressed with any of these submissions. All the activities mentioned above can be controlled under the existing regulations.

135. We do not agree with the submission of Mr Subramanium that the impugned enactment is a form of additional regulation, as it was felt that the existing system of licence and permits were insufficient to deal with problem of ever-increasing dance bars. We also do not agree with the submissions that whereas exempted establishments are held to standards higher than those prescribed; the eating houses, permit rooms and dance bars operate beyond/below the control of the regulations. Another justification given is that though it may be possible to regulate these permit rooms and dance bars which are located within Mumbai, it would not be possible to regulate such establishments in the semi-urban and rural parts of the Maharashtra. If that is so, it is a sad reflection on the efficiency of the licensing/regulatory authorities in implementing the legislation.

136. The end result of the prohibition of any form of dancing in the establishments covered under Section 33-A leads to the only conclusion that these establishments have to shut down. This is evident from the fact that since 2005, most if not all the dance bar establishments have been literally closed down. This has led to the unemployment of over 75,000 women workers. It has been brought on the record that many of them have been compelled to take up prostitution out of necessity for maintenance of their families. In our opinion, the impugned 56

legislation has proved to be totally counter-productive and cannot be sustained being ultra vires Article 19(1)(g)."

The Apex Court holds prohibition of performance of dance at eating

houses, prohibition of rooms or beer bars, as unconstitutional as it

would infringe upon the rights of citizens under Article 19 of the

Constitution of India and consequently it becoming illegal on the

touchstone of Article 14 of the Constitution of India. The Apex Court

in the case of INTERNET AND MOBILE ASSOCIATION OF

INDIA (supra) has held as follows:

"9. Article 19(1)(g) challenge and Proportionality

193. The next ground of attack is on the basis of Article 19(1)(g). Any restriction to the freedom guaranteed under Article 19(1)(g) should pass the test of reasonableness in terms of Article 19(6). It is contended by the petitioners that since access to banking is the equivalent of the supply of oxygen in any modern economy, the denial of such access to those who carry on a trade which is not prohibited by law, is not a reasonable restriction and that it is also extremely disproportionate. It is further contended that the right to access the banking system is actually integral to the right to carry on any trade or profession and that therefore a legislation, subordinate or otherwise whose effect or impact severely impairs the right to carry on a trade or business, not prohibited by law, would be violative of Article 19(1)(g). Reliance is placed in this regard on the decisions of this Court in (i) Mohd. Yasin v. Town Area Committee, Jalalabad [Mohd. Yasin v. Town Area Committee, Jalalabad, (1952) 1 SCC 205 : 1952 SCR 572 :

AIR 1952 SC 115] , where it was held that the right under Article 19(1)(g) is affected when "in effect and in substance", the impugned measures brought about a total stoppage of 57

business, both, in a commercial sense and from a practical point of view, even though there was no prohibition in form and

(ii) Bennett Coleman & Co. v. Union of India [Bennett Coleman & Co. v. Union of India, (1972) 2 SCC 788] , where this Court held that the impact and not the object of the measure will determine whether or not, a fundamental right is violated. It is further contended, on the strength of the decision in Mohd.

Faruk v. State of M.P. [Mohd. Faruk v. State of M.P., (1969) 1 SCC 853] , that the imposition of restriction on the exercise of a fundamental right may be in the form of control or prohibition and that when the exercise of a fundamental right is prohibited, the burden of proving that a total ban on the exercise of the right alone may ensure the maintenance of the general public interest, lies heavily upon the State. It was held in the said decision that a law which directly infringes the right guaranteed under Article 19(1)(g) may be upheld only if it is established that it seeks to impose reasonable restrictions in the interest of the general public and a less drastic restriction will not ensure the interest of the general public.

... ... ...

195. There can also be no quarrel with the proposition that banking channels provide the lifeline of any business, trade or profession. This is especially so in the light of the restrictions on cash transactions contained in Sections 269-SS and 269-T of the Income Tax Act, 1961. When currency itself has undergone a metamorphosis over the centuries, from stone to metal to paper to paperless and we have ushered into the digital age, cashless transactions (not penniless transactions) require banking channels. Therefore, the moment a person is deprived of the facility of operating a bank account, the lifeline of his trade or business is severed, resulting in the trade or business getting automatically shut down. Hence, the burden of showing that larger public interest warranted such a serious restriction bordering on prohibition, is heavily on RBI.

... ... ...

207. But nevertheless, the measure taken by RBI should pass the test of proportionality, since the impugned Circular has almost wiped the VC exchanges out of the industrial map of the country, thereby infringing Article 19(1)(g). On the question of proportionality, the learned counsel for the petitioners relies upon the four-pronged test summed up in the 58

opinion of the majority in Modern Dental College & Research Centre v. State of M.P. [Modern Dental College & Research Centre v. State of M.P., (2016) 7 SCC 353 : 7 SCEC 1] These four tests are (i) that the measure is designated for a proper purpose, (ii) that the measures are rationally connected to the fulfilment of the purpose,

(iii) that there are no alternative less invasive measures and (iv) that there is a proper relation between the importance of achieving the aim and the importance of limiting the right. The Court in the said case held that a mere ritualistic incantation of "money laundering" or "black money" does not satisfy the first test and that alternative methods should have been explored.

208. Let us now see whether the impugned Circular would fail the four-pronged test. In fact, the Privy Council originally set forth in Elloy de Freitas v. Permanent Secy. of Ministry of Agriculture, Fisheries, Lands & Housing [Elloy de Freitas v. Permanent Secy. of Ministry of Agriculture, Fisheries, Lands & Housing, (1999) 1 AC 69 : (1998) 3 WLR 675 (PC)] , only a three-fold test, namely, (i) whether the legislative policy is sufficiently important to justify limiting a fundamental right, (ii) whether the measures designed to meet the legislative objective are rationally connected to it and (iii) whether the means used to impair the right or freedom are no more than is necessary to accomplish the objective. These three tests came to be known as De Freitas test. But a fourth test, namely, "the need to balance the interests of society with those of individuals and groups"

was added by the House of Lords in Huang v. Secy. of State for Home Deptt. [Huang v. Secy. of State for Home Deptt., (2007) 2 AC 167: (2007) 2 WLR 581: 2007 UKHL 11] These four tests were more elaborately articulated by the Supreme Court of United Kingdom in Bank Mellat v. Her Majesty's Treasury (No. 2) [Bank Mellat v. Her Majesty's Treasury (No. 2), 2014 AC 700 :

(2013) 3 WLR 179 : 2013 UKSC 39] .

... ... ... VII. Climax

225.1. Therefore, in the light of the above discussion, the petitioners are entitled to succeed and the impugned Circular 59

dated 6-4-2018 is liable to be set aside on the ground of proportionality. Accordingly, the writ petitions are allowed and the Circular dated 6-4-2018 is set aside. The Statement dated 5-4-2018, though challenged in one writ petition, is not in the nature of a statutory direction and hence the question of setting aside the same does not arise."

(Emphasis supplied)

What was called in question before the Apex Court was the

measures taken by the Reserve Bank of India regulating its entities

by directing not to deal with virtual currency or provide services for

facilitating any person dealing with virtual currency. The

parameters were again laid down by the Apex Court for

examination and holding those circulars bad on the ground of

proportionality.

24. The Apex Court in the case of RADHA KRISHAN

INDUSTRIES (supra) has held as follows:

"31. A body of precedent has emerged in the High Courts on the exercise of the power under Section 83 of the CGST Act [akin to the State GST Act ("the SGST Act")]. The shared learning which emerges from these decisions of the High Court needs recognition. In Valerius Industries v. Union of India [Valerius Industries v. Union of India, 2019 SCC OnLine Guj 6866 : (2019) 30 GSTL 15] , the Gujarat High Court laid down the principles for the construction of Section 83 of the SGST/CGST Act. The High Court noted that a provisional attachment on the basis of a subjective satisfaction, absent any 60

cogent or credible material, constitutes malice in law. It further outlined the principles for the exercise of the power: (SCC OnLine Guj para 53)

"53. ... (1) The order of provisional attachment before the assessment order is made, may be justified if the assessing authority or any other authority empowered in law is of the opinion that it is necessary to protect the interest of Revenue. However, the subjective satisfaction should be based on some credible materials or information ... It is not any and every material, howsoever, vague and indefinite or distant, remote or far- fetching, which would warrant the formation of the belief.

(2) The power conferred upon the authority under Section 83 of the Act for provisional attachment could be termed as a very drastic and far-reaching power. Such power should be used sparingly and only on substantive weighty grounds and reasons.

(3) The power of provisional attachment under Section 83 of the Act should be exercised by the authority only if there is a reasonable apprehension that the assessee may default the ultimate collection of the demand that is likely to be raised on completion of the assessment. It should, therefore, be exercised with extreme care and caution.

(4) The power under Section 83 of the Act for provisional attachment should be exercised only if there is sufficient material on record to justify the satisfaction that the assessee is about to dispose of wholly or any part of his/her property with a view to thwarting the ultimate collection of demand and in order to achieve the said objective, the attachment should be of the properties and to that extent, it is required to achieve this objective.

(5) The power under Section 83 of the Act should neither be used as a tool to harass the assessee nor should it be used in a manner which may have an 61

irreversible detrimental effect on the business of the assessee.

(6) The attachment of bank account and trading assets should be resorted to only as a last resort or measure. The provisional attachment under Section 83 of the Act should not be equated with the attachment in the course of the recovery proceedings.

(7) The authority before exercising power under Section 83 of the Act for provisional attachment should take into consideration two things : (i) whether it is a revenue neutral situation, (ii) the statement of "output liability or input credit". Having regard to the amount paid by reversing the input tax credit if the interest of the Revenue is sufficiently secured, then the authority may not be justified in invoking its power under Section 83 of the Act for the purpose of provisional attachment."

(emphasis supplied) ... ... ...

49. Now in this backdrop, it becomes necessary to emphasise that before the Commissioner can levy a provisional attachment, there must be a formation of "the opinion" and that it is necessary "so to do" for the purpose of protecting the interest of the government revenue. The power to levy a provisional attachment is draconian in nature. By the exercise of the power, a property belonging to the taxable person may be attached, including a bank account. The attachment is provisional and the statute has contemplated an attachment during the pendency of the proceedings under the stipulated statutory provisions noticed earlier. An attachment which is contemplated in Section 83 is, in other words, at a stage which is anterior to the finalisation of an assessment or the raising of a demand. Conscious as the legislature was of the draconian nature of the power and the serious consequences which emanate from the attachment of any property including a bank account of the taxable person, it conditioned the exercise of the power by employing specific statutory language which conditions the exercise of the power. The language of the statute indicates first, the necessity of the formation of opinion by the Commissioner; second, the formation of opinion before 62

ordering a provisional attachment; third the existence of opinion that it is necessary so to do for the purpose of protecting the interest of the government revenue; fourth, the issuance of an order in writing for the attachment of any property of the taxable person; and fifth, the observance by the Commissioner of the provisions contained in the rules in regard to the manner of attachment. Each of these components of the statute are integral to a valid exercise of power. In other words, when the exercise of the power is challenged, the validity of its exercise will depend on a strict and punctilious observance of the statutory preconditions by the Commissioner. While conditioning the exercise of the power on the formation of an opinion by the Commissioner that "for the purpose of protecting the interest of the government revenue, it is necessary so to do", it is evident that the statute has not left the formation of opinion to an unguided subjective discretion of the Commissioner. The formation of the opinion must bear a proximate and live nexus to the purpose of protecting the interest of the government revenue.

50. By utilising the expression "it is necessary so to do"

the legislature has evinced an intent that an attachment is authorised not merely because it is expedient to do so (or profitable or practicable for the Revenue to do so) but because it is necessary to do so in order to protect interest of the government revenue. Necessity postulates that the interest of the Revenue can be protected only by a provisional attachment without which the interest of the Revenue would stand defeated. Necessity in other words postulates a more stringent requirement than a mere expediency. A provisional attachment under Section 83 is contemplated during the pendency of certain proceedings, meaning thereby that a final demand or liability is yet to be crystallised. An anticipatory attachment of this nature must strictly conform to the requirements, both substantive and procedural, embodied in the statute and the rules. The exercise of unguided discretion cannot be permissible because it will leave citizens and their legitimate business activities to the peril of arbitrary power. Each of these ingredients must be strictly applied before a provisional attachment on the property of an assessee can be levied. The Commissioner must be alive to the fact that such provisions are not intended to authorise Commissioners to make pre-emptive 63

strikes on the property of the assessee, merely because property is available for being attached. There must be a valid formation of the opinion that a provisional attachment is necessary for the purpose of protecting the interest of the government revenue.

51. These expressions in regard to both the purpose and necessity of provisional attachment implicate the doctrine of proportionality. Proportionality mandates the existence of a proximate or live link between the need for the attachment and the purpose which it is intended to secure. It also postulates the maintenance of a proportion between the nature and extent of the attachment and the purpose which is sought to be served by ordering it. Moreover, the words embodied in sub-section (1) of Section 83, as interpreted above, would leave no manner of doubt that while ordering a provisional attachment the Commissioner must in the formation of the opinion act on the basis of tangible material on the basis of which the formation of opinion is based in regard to the existence of the statutory requirement. While dealing with a similar provision contained in Section 45 [ Section 45 (1) provides as follows:"45. Provisional attachment.--(1) Where during the tendency of any proceedings of assessment or reassessment of turnover escaping assessment, the Commissioner is of the opinion that for the purpose of protecting the interest of the government revenue, it is necessary so to do, he may by order in writing attach provisionally any property belonging to the dealer in such manner as may be prescribed."] of the Gujarat Value Added Tax Act, 2003, one of us (Hon'ble M.R. Shah, J.) speaking for a Division Bench of the Gujarat High Court in Vishwanath Realtor v. State of Gujarat [Vishwanath Realtor v. State of Gujarat, 2015 SCC OnLine Guj 6564] observed: (Vishwanath Realtor case [Vishwanath Realtor v. State of Gujarat, 2015 SCC OnLine Guj 6564] , SCC OnLine Guj para 26)

"26. Section 45 of the VAT Act confers powers upon the Commissioner to pass the order of provisional attachment of any property belonging to the dealer during the pendency of any proceedings of assessment or reassessment of turnover escaping assessment. However, the order of provisional attachment can be passed by the Commissioner when the Commissioner is of the opinion 64

that for the purpose of protecting the interest of the Government Revenue, it is necessary so to do. Therefore, before passing the order of provisional attachment, there must be an opinion formed by the Commissioner that for the purpose of protecting the interest of the Government Revenue during the pendency of any proceedings of assessment or reassessment, it is necessary to attach provisionally any property belonging to the dealer. However, such satisfaction must be on some tangible material on objective facts with the Commissioner. In a given case, on the basis of the past conduct of the dealer and on the basis of some reliable information that the dealer is likely to defeat the claim of the Revenue in case any order is passed against the dealer under the VAT Act and/or the dealer is likely to sale his properties and/or sale and/or dispose of the properties and in case after the conclusion of the assessment/reassessment proceedings, if there is any tax liability, the Revenue may not be in a position to recover the amount thereafter, in such a case only, however, on formation of subjective satisfaction/opinion, the Commissioner may exercise the powers under Section 45 of the VAT Act."

(emphasis supplied) ... ... ...

76.4. The power to order a provisional attachment of the property of the taxable person including a bank account is draconian in nature and the conditions which are prescribed by the statute for a valid exercise of the power must be strictly fulfilled.

76.5. The exercise of the power for ordering a provisional attachment must be preceded by the formation of an opinion by the Commissioner that it is necessary so to do for the purpose of protecting the interest of the government revenue. Before ordering a provisional attachment the Commissioner must form an opinion on the basis of tangible material that the assessee is likely to defeat the demand, if any, and that therefore, it is necessary so to do for the purpose of protecting the interest of the government revenue."

65 The Apex Court, on the summary of the findings, observes that the

power to order a provisional attachment of properties of the taxable

person including a bank account is draconian in nature and the

conditions which are prescribed by the statute for a valid exercise of

power must be strictly fulfilled. It is further held that exercise of

power for ordering provisional attachment must be preceded by the

formation of opinion by the Commissioner that it is necessary to do

so for the purpose of protecting the interest of Government

revenue. The examination of the case in RADHA KRISHAN

INDUSTRIES was on the touchstone of the application of

attachment as violative of human rights, as also, constitutional right

under Article 300A of the Constitution of India. It, therefore,

becomes germane to notice the summary itself which reads as

follows:

"E. Summary of findings

76. For the above reasons, we hold and conclude that:

76.1. The Joint Commissioner while ordering a provisional attachment under Section 83 was acting as a delegate of the Commissioner in pursuance of the delegation effected under Section 5(3) and an appeal against the order of provisional attachment was not available under Section 107(1).

66 76.2. The writ petition before the High Court under Article 226 of the Constitution challenging the order of provisional attachment was maintainable.

76.3. The High Court has erred in dismissing the writ petition on the ground that it was not maintainable.

76.4. The power to order a provisional attachment of the property of the taxable person including a bank account is draconian in nature and the conditions which are prescribed by the statute for a valid exercise of the power must be strictly fulfilled.

76.5. The exercise of the power for ordering a provisional attachment must be preceded by the formation of an opinion by the Commissioner that it is necessary so to do for the purpose of protecting the interest of the government revenue. Before ordering a provisional attachment the Commissioner must form an opinion on the basis of tangible material that the assessee is likely to defeat the demand, if any, and that therefore, it is necessary so to do for the purpose of protecting the interest of the government revenue.

76.6. The expression "necessary so to do for protecting the government revenue" implicates that the interests of the government revenue cannot be protected without ordering a provisional attachment.

76.7. The formation of an opinion by the Commissioner under Section 83(1) must be based on tangible material bearing on the necessity of ordering a provisional attachment for the purpose of protecting the interest of the government revenue.

76.8. In the facts of the present case, there was a clear non-

application of mind by the Joint Commissioner to the provisions of Section 83, rendering the provisional attachment illegal.

76.9. Under the provisions of Rule 159(5), the person whose property is attached is entitled to dual procedural safeguards:

67 (a) An entitlement to submit objections on the ground that the property was or is not liable to attachment; and

(b) An opportunity of being heard.

There has been a breach of the mandatory requirement of Rule 159(5) and the Commissioner was clearly misconceived in law in coming into conclusion that he had a discretion on whether or not to grant an opportunity of being heard.

76.10. The Commissioner is duty-bound to deal with the objections to the attachment by passing a reasoned order which must be communicated to the taxable person whose property is attached.

76.11. A final order having been passed under Section 74(9), the proceedings under Section 74 are no longer pending as a result of which the provisional attachment must come to an end.

76.12. The appellant having filed an appeal against the order under Section 74(9), the provisions of sub-sections (6) and (7) of Section 107 will come into operation in regard to the payment of the tax and stay on the recovery of the balance as stipulated in those provisions, pending the disposal of the appeal."

25. There are other cases where the Apex Court considers the

challenge of legislation on the touchstone of manifest arbitrariness

and has turned it down. The Apex Court in the case of K.S.

PUTTASWAMY v. UNION OF INDIA27 observes as follows:

"310. While it intervenes to protect legitimate State interests, the State must nevertheless put into place a robust regime that ensures the fulfilment of a threefold requirement.

27 (2017) 10 SCC 1 68

These three requirements apply to all restraints on privacy (not just informational privacy). They emanate from the procedural and content-based mandate of Article 21. The first requirement that there must be a law in existence to justify an encroachment on privacy is an express requirement of Article 21. For, no person can be deprived of his life or personal liberty except in accordance with the procedure established by law. The existence of law is an essential requirement. Second, the requirement of a need, in terms of a legitimate State aim, ensures that the nature and content of the law which imposes the restriction falls within the zone of reasonableness mandated by Article 14, which is a guarantee against arbitrary State action. The pursuit of a legitimate State aim ensures that the law does not suffer from manifest arbitrariness. Legitimacy, as a postulate, involves a value judgment. Judicial review does not reappreciate or second guess the value judgment of the legislature but is for deciding whether the aim which is sought to be pursued suffers from palpable or manifest arbitrariness.

The third requirement ensures that the means which are adopted by the legislature are proportional to the object and needs sought to be fulfilled by the law. Proportionality is an essential facet of the guarantee against arbitrary State action because it ensures that the nature and quality of the encroachment on the right is not disproportionate to the purpose of the law. Hence, the threefold requirement for a valid law arises out of the mutual interdependence between the fundamental guarantees against arbitrariness on the one hand and the protection of life and personal liberty, on the other. The right to privacy, which is an intrinsic part of the right to life and liberty, and the freedoms embodied in Part III is subject to the same restraints which apply to those freedoms."

(Emphasis supplied)

The Apex Court holds that existence of law is an essential

requirement to a nation; the requirement is a need in terms of 69

legitimate State aim; it is needed to ensure that the law does not

suffer from manifest arbitrariness in pursuit of the legitimate State

aim. Legitimacy, as a postulate, involves a value judgment, judicial

review does not re-appreciate or second guess the value judgment

of the legislature, but, it is for deciding whether the aim which is

sought to be pursued suffers from palpable or manifest

arbitrariness. The 9 Judge Bench of the Apex Court considers the

parameters of a legislation or the pursuit towards such legislation to

be suffering from palpable or manifest arbitrariness. Therefore,

there is presumption that the legislation does not suffer from any

arbitrariness, unless it is palpable or manifestly demonstrable of

such arbitrariness.

26. The Apex Court later in SWISS RIBBONS (P) LIMITED

v. UNION OF INDIA28 has held as follows:

77.NCLAT has, while looking into viability and feasibility of resolution plans that are approved by the Committee of Creditors, always gone into whether operational creditors are given roughly the same treatment as financial creditors, and if they are not, such plans are either rejected or modified so that the operational creditors' rights are safeguarded. It may be seen that a resolution plan cannot pass muster under Section 30(2)(b) read with Section 31 unless a minimum payment is

28 (2019) 4 SCC 17 70

made to operational creditors, being not less than liquidation value. Further, on 5-10-2018, Regulation 38 has been amended.

Prior to the amendment, Regulation 38 read as follows:

"38. Mandatory contents of the resolution plan.--(1) A resolution plan shall identify specific sources of funds that will be used to pay the--

(a) insolvency resolution process costs and provide that the insolvency resolution process costs, to the extent unpaid, will be paid in priority to any other creditor;

(b) liquidation value due to operational creditors and provide for such payment in priority to any financial creditor which shall in any event be made before the expiry of thirty days after the approval of a resolution plan by the adjudicating authority; and

(c) liquidation value due to dissenting financial creditors and provide that such payment is made before any recoveries are made by the financial creditors who voted in favour of the resolution plan."

Post amendment, Regulation 38 reads as follows:

"38. Mandatory contents of the resolution plan.--(1) The amount due to the operational creditors under a resolution plan shall be given priority in payment over financial creditors.

(1-A) A resolution plan shall include a statement as to how it has dealt with the interests of all stakeholders, including financial creditors and operational creditors, of the corporate debtor."

The aforesaid Regulation further strengthens the rights of operational creditors by statutorily incorporating the principle of fair and equitable dealing of operational creditors' rights, together with priority in payment over financial creditors.

78. For all the aforesaid reasons, we do not find that operational creditors are discriminated against or that Article 14 has been infracted either on the ground of 71

equals being treated unequally or on the ground of manifest arbitrariness."

(Emphasis supplied)

The Apex Court holds that while looking into viability and feasibility

of resolution, plans that are approved by the Committee of

Creditors, whether would pass muster under Section 30(2)(b) r/w

Section 31 of the Insolvency and Bankruptcy Code. The argument

that it was manifestly arbitrary comes to be rejected, as the Apex

Court did not find that the operational creditors are discriminated

against or that Article 14 has been infracted either on the ground of

equals being treated unequally, or on the ground of manifest

arbitrariness.

27. The Apex Court in the case of PIONEER URBAN LAND

AND INFRASTRUCTURE LIMITED v. UNION OF INDIA29 has

held as follows:

"43. Shri Shyam Divan relying upon Nagpur Improvement Trust v. Vithal Rao [Nagpur Improvement Trust v. Vithal Rao, (1973) 1 SCC 500] SCC para 26 and Subramanian Swamy v. CBI [Subramanian Swamy v. CBI, (2014) 8 SCC 682 : (2014) 6 SCC (Cri) 42 : (2014) 3 SCC (L&S) 36] SCC paras 44, 58 and 68 argued that the object of the amendment is itself discriminatory in that it seeks to insert into

29 (2019) 8 SCC 416 72

a "means and includes" definition a category which does not fit therein, namely, real estate developers who do not, in the classical sense, borrow monies like banks and financial institutions. According to him, therefore, the object itself being discriminatory, the inclusion of real estate developers as financial debtors should be struck down. We have already pointed out how real estate developers are, in substance, persons who avail finance from allottees who then fund the real estate development project. The object of dividing debts into two categories under the Code, namely, financial and operational debts, is broadly to sub-divide debts into those in which money is lent and those where debts are incurred on account of goods being sold or services being rendered. We have no doubt that real estate developers fall squarely within the object of the Code as originally enacted insofar as they are financial debtors and not operational debtors, as has been pointed out hereinabove. So far as unequals being treated as equals is concerned, homebuyers/allottees can be assimilated with other individual financial creditors like debenture holders and fixed-deposit holders, who have advanced certain amounts to the corporate debtor. For example, fixed-deposit holders, though financial creditors, would be like real estate allottees in that they are unsecured creditors. Financial contracts in the case of these individuals need not involve large sums of money.

Debenture holders and fixed-deposit holders, unlike real estate holders, are involved in seeing that they recover the amounts that are lent and are thus not directly involved or interested in assessing the viability of the corporate debtors. Though not having the expertise or information to be in a position to evaluate feasibility and viability of resolution plans, such individuals, by virtue of being financial creditors, have a right to be on the Committee of Creditors to safeguard their interest. Also, the question that is to be asked when a debenture holder or fixed-deposit holder prefers a Section 7 application under the Code will be asked in the case of allottees of real estate developers -- is a debt due in fact or in law? Thus, allottees, being individual financial creditors like debenture holders and fixed-deposit holders and classified as such, show that they are within the larger class of financial creditors, there being no infraction of Article 14 on this score.

... ... ... ...

73 50. It was also argued that the UNCITRAL Legislative Guide, from which most of the provisions of the Code derive their succour, have also been breached. This is for the reason that financial contracts being different from operational contracts, the one should not be confused with the other. Also, treatment of similarly situated creditors should be the same, and as allottees are like operational creditors, they should not be treated as financial creditors. We have already answered these questions in the context of discrimination and manifest arbitrariness and have found that, in point of fact, real estate allottees are really in the nature of financial creditors, and thus the UNCITRAL Legislative Guide has been followed, and not breached. Equally, it was argued that creating new creditors' rights in insolvency law, as opposed to recognising existing creditors' rights, will infract the UNCITRAL Legislative Guide. As will be pointed out hereinbelow, since allottees of real estate projects have always been subsumed within Section 5(8)(f), no new rights or claims have been created. It was also contended that since allottees are then said to have no expertise or knowledge in the working of the corporate debtor, they cannot participate effectively in the Committee of Creditors, and should therefore be kept out. The same answer as has been given hereinabove i.e. that allottees, like individual financial creditors who are already on the Committee of Creditors, are to have a voice in determining the corporate debtor and their own future. This contention, therefore, also fails."

(Emphasis supplied)

Later, the Apex Court in the case of MANISH KUMAR v. UNION

OF INDIA30 has held as follows:

"23. Shri Piyush Singh, learned counsel for the petitioners would submit that once the right is conferred to make an application, then it cannot come conditioned

30 (2021) 5 SCC 1 74

with threshold limit as is provided in the impugned provisos. Secondly, he would point out that there is manifest arbitrariness. That apart, he would also contend that there is hostile discrimination qua other corporate debtor.

The builder who is a corporate debtor, in other words, is given a more favourable treatment than other corporate debtors which is afflicted with the vice of hostile discrimination. He also complained of both under and over inclusiveness in the impugned provisions. Next, the learned counsel submits that the very object is discriminatory. Drawing our attention to both Chitra Sharma v. Union of India [Chitra Sharma v. Union of India, (2018) 18 SCC 575] and Pioneer [Pioneer Urban Land & Infrastructure Ltd. v. Union of India, (2019) 8 SCC 416 : (2019) 4 SCC (Civ) 1] , he would highlight that having regard to the background in which the rights of the homebuyer were recognised as being one of that of a financial creditor, the amendment is clearly impermissible. He would also submit that having regard to the stand taken by the Government in the case before this Court, in particular, Pioneer [Pioneer Urban Land & Infrastructure Ltd. v. Union of India, (2019) 8 SCC 416 : (2019) 4 SCC (Civ) 1] , the principles of promissory estoppel will apply and prevent enactment of the impugned provisions. He would expatiate and submit that the conditions which have been imposed render the remedy illusory.

... ... ...

25. Shri Piyush Singh, learned counsel pointed out that the real estate owners do not take any loan from financial institutions. They raise capital exclusively from the allottees virtually. In such circumstances, to put this threshold limit is clearly impermissible. He drew our attention to the judgment of the Court in Motilal Padampat Sugar Mills Co. Ltd. v. State of U.P. [Motilal Padampat Sugar Mills Co. Ltd. v. State of U.P., (1979) 2 SCC 409 : 1979 SCC (Tax) 144] , to buttress his submission regarding availability of principles of promissory estoppel. There is manifest arbitrariness in the provisions. He complained that the RERA has not been constituted in all the States. He also made an attempt at pointing out the perception that the amendment is to confer an unmerited advantage on the builder. This he purported to do by drawing our attention to an article in a newspaper. He essentially projected this argument as a thinly disguised argument of malice against the law giver. He also sought to draw support from the judgment of this Court 75

in Nagpur Improvement Trust v. Vithal Rao [Nagpur Improvement Trust v. Vithal Rao, (1973) 1 SCC 500] . He reiterated the principle of hostile discrimination. The learned counsel drew our attention to the definition of the word "allottee" in RERA. It is here that he complained of the provision being under inclusive and over inclusive. The legislature, he points out, should have waited and at best could have acted if there is impeachable and empirical evidence warranting such a drastic incursion into the vested right of the homebuyer. He also highlights that in law there can only be one default. A homebuyer who before the amendment could by himself set the law into motion, is now left at the mercy of similarly circumstanced persons which itself is rendered impossible by the absence of an information generating mechanism which is accessible.

... ... ...

434. The doctrine of fairness, indeed, has been present in the mind of the courts, whenever a law, described as retrospective, comes up for interpretation with or without a challenge to the law. In the context of a challenge, on the ground of manifest arbitrariness, the test to be applied has been articulated as to whether it is capricious, irrational, does not disclose any principle, betrays absence of proportionality or whether it is excessive. We must also not lose sight of the fact that the law in question is an economic measure.

435. This is a case where the law giver has not left anything to speculation or doubt. We have already indicated about the effect of the proviso mandating the compulsory withdrawal of the application. We are of the view that this is a case, where the law, in question, is retrospective, in that, contrary to the requirement in the law, at the time, when the application was filed, a new requirement is placed, even though, it is sought to be done by superimposing this condition, not at the time, when the application was filed, which really is the relevant time to determine the question of maintainability of the application, with reference to what the law provided in regard to who can move the application but at the stage of the new law.

436. However, we cannot also lose sight of the fact that the legislature has power to impair and take away vested rights. The limitation that flows, however, is from 76

both Articles 14 and 19 read with Article 21. It flows from the doctrine that the action of the State must be fair and reasonable. The question, as to validity of the retrospective law, is a matter to be judged on a consideration of the facts, the period of time, over which the retrospective law operates, the impact of the law on the vested rights, the public interest, the nature of the right, which is the subject-matter of the law and the terms of the law.

437. The nature of the right involved in this case, is the right of the financial creditors to move an application under Section 7. Though, Section 7 confers a right upon the financial creditor to file the application, the proceedings are one in rem. We have already dealt with the scope of the Code and the consequences it can produce on the stakeholders and also the real estate project. The legislature was faced with the situation, where it felt that the requirement, as to maintainability of the application under Section 7, must, in regard to pending applications, be modified in the manner done. There is a determining principle, namely, the perception from experience about how the entire object of the Code would stand jeopardised if applications already filed could go on even when a fair and reasonable number of kindred souls are not available to support it. Once there is a principle, it cannot be capricious, excessive or disproportionate unless we find that the time given under the proviso is manifestly arbitrary. A vested right under a statute can be taken away by a retrospective law. A right given under a statute can be taken away by another statute. We cannot ignore the fact that there was considerable public interest behind such a law. The sheer numbers, in which applications proliferated, combined with the results it could produce, cannot be brushed aside as an irrational or capricious aspect to have been guided by in making the law. Being an economic measure, the wider latitude available to the law giver, cannot be lost sight of."

(Emphasis supplied) 77

The Apex Court in the case of MANISH KUMAR (supra) at

paragraphs 23 and 25 notices the submissions of the petitioner

therein who had contended that certain provisions would suffer

from manifest arbitrariness. The Apex Court rejects those

submissions from paragraphs 434 to 437. The Apex Court holds

that there is nothing capricious, unfair, unreasonable and vague to

hold that the provisions would be manifestly arbitrary. The Apex

Court clearly holds that manifest arbitrariness can be a ground to

strike down legislation only if it is irrational or capricious inter alia.

The above were the cases where the Apex Court has rejected the

challenge to the legislations on the ground of manifest

arbitrariness.

28. It now becomes germane to consider whether Section

37A of the Act, which is called in question, suffers from any

arbitrariness or arbitrariness, that is palpable and demonstrably

manifest. The reasons so submitted by the petitioner seeking a

declaration that Section 37A of the Act is unconstitutional are that

the provision gives unbridled, unfettered, unguided, uncanalised,

power to attach bank accounts on mere suspicion, without any 78

reason to believe, and attachment of bank account does violate

right to property under Article 300A of the Constitution of India.

29. The dominant submission is that there are no checks and

balances in the power that can be exercised under Section 37A of

the Act. I decline to accept the said submission on sheer

examination of the said provision. Section 37A of the Act, which

was given life in the year 2015, has six sub-sections. Sub-section

(1) of Section 37A empowers the authorized officer prescribed by

the Central Government who has reason to believe that any foreign

exchange, foreign security or any immovable property, situated

outside India, is suspected to have been held in contravention of

Section 4, he may after recording the reasons in writing by an

order, seize value equivalent, situated within India, of such foreign

exchange, foreign security or immovable property. Sub-section (1)

has several aspects upon receipt of information or otherwise.

Therefore, there should be information and it should be by the

prescribed officer of the Central Government. He should have

reasons to believe and suspicion of a property to have been held in

contravention of Section 4. The order of seizure under sub-section 79

(1) will be only after recording of reasons in writing and it shall be

only of value equivalent that is situated in India.

30. Sub-section (2) mandates that the order of seizure along

with the material shall be placed before the Competent Authority,

again appointed by the Central Government within 30 days from

the date of such seizure. Therefore, the first rung of check is by

the Competent Authority not below the rank of Joint Secretary to

Government to examine the seizure which would be placed before

the authority within 30 days of such seizure. Sub-section (3)

mandates that the Competent Authority shall dispose of the petition

within a period of 180 days from the date of seizure, by either

confirming or setting aside such order of seizure. While doing so, an

opportunity of being heard should be granted to the aggrieved

person and representatives of the Directorate of Enforcement.

31. Sub-section (4) mandates that the order of the competent

authority confirming seizure of equivalent asset shall continue till

the disposal of adjudication proceedings and thereafter the

Adjudicating Authority would pass appropriate orders or directions 80

in the adjudication order with regard to further action qua the

subject matter i.e., the seizure made under sub-section (1). The

proviso to Section 37A (4) permits that at any stage of the

proceedings under the Act if the aggrieved person discloses the fact

of such foreign exchange, foreign security or immovable property

and brings it back to India, then the Competent Authority or the

Adjudicating Authority on receipt of such application from the

aggrieved person, after following the principles of natural justice

shall pass appropriate orders as he deems fit including setting aside

of the seizure under sub-section (1). Sub-section (5) mandates that

any person aggrieved by any order of the competent authority may

prefer an appeal to the Appellate Tribunal. Against the order of the

Appellate Tribunal judicial review shall be available before this

Court. These are the broad contours of safeguards under Section

37A of the Act. It is not, a rung or two rungs, of safeguards and

checks, but it is at every rung. The seizure order under sub-section

(1) to become final has to pass muster through several ladders of

administrative, quasi judicial and judicial review. In the considered

view of this Court, Section 37A cannot be declared to be unguided,

unfettered, unbridled, uncanalised, whimsical or irrational and can 81

be acted upon only on suspicion in terms of Section 4 of the Act.

Suspicion may trigger seizure. Seizure by itself is not final. There

are several procedures after such seizure. Therefore, the

submission that it is manifestly arbitrary is to be noted only to be

rejected, as the very submission is fundamentally flawed.

32. The other submission is concerning the description that

the seizure can be of value equivalent situated within India of such

foreign exchange, foreign security or immovable property. This very

submission is negatived by a three Judge Bench of the Apex Court

in the case of VIJAY MADANLAL CHOUDHARY (supra). The Apex

Court delineating 'value equivalent jurisprudence', on identical

provisions under the Prevention of Money Laundering Act, has held

as follows:

"6. Mr. Kapil Sibal, learned senior counsel appearing for the private parties/petitioners in the concerned matter(s) submitted that the procedure followed by the ED in registering the Enforcement Case Information Report is opaque, arbitrary and violative of the constitutional rights of an accused. It was submitted that the procedure being followed under the PMLA is draconian as it violates the basic tenets of the criminal justice system and the rights enshrined in Part III of the Constitution of India, in particular Articles 14, 20 and 21 thereof.

... ... ...

82 75. The next contention is regarding the definition of "proceeds of crime" and use of value thereof, defined under Section 2(1)(u) of the PMLA. It is argued that it can be categorised into three types namely : one - property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence; or, two - the value of such property that is property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence; and third - where such property is taken on field outside the country, then the property equivalent in value held within the country or abroad.

... ... ...

250. The other relevant definition is "proceeds of crime"

in Section 2(1)(u) of the 2002 Act. This definition is common to all actions under the Act, namely, attachment, adjudication and confiscation being civil in nature as well as prosecution or criminal action. The original provision prior to amendment vide Finance Act, 2015 and Finance (No. 2) Act, 2019, took within its sweep any property (mentioned in Section 2(1)(v) of the Act) derived or obtained, directly or indirectly, by any person "as a result of" criminal activity "relating to" a scheduled offence (mentioned in Section 2(1)(y) read with Schedule to the Act) or the value of any such property. Vide Finance Act, 2015, it further included such property (being proceeds of crime) which is taken or held outside the country, then the property equivalent in value held within the country and by further amendment vide Act 13 of 2018, it also added property which is abroad. By further amendment vide Finance (No. 2) Act, 2019, Explanation has been added which is obviously a clarificatory amendment. That is evident from the plain language of the inserted Explanation itself. The fact that it also includes any property which may, directly or indirectly, be derived as a result of any criminal activity relatable to scheduled offence does not transcend beyond the original provision. In that, the word "relating to" (associated with/has to do with) used in the main provision is a present participle of word "relate" and the word "relatable" is only an adjective. The thrust of the original provision itself is to indicate that any property is derived or obtained, directly or indirectly, as a result of criminal activity concerning the scheduled offence, the same be regarded as proceeds of crime. In other words, property in whatever form 83

mentioned in Section 2(1)(v), is or can be linked to criminal activity relating to or relatable to scheduled offence, must be regarded as proceeds of crime for the purpose of the 2002 Act. It must follow that the Explanation inserted in 2019 is merely clarificatory and restatement of the position emerging from the principal provision [i.e., Section 2(1)(u)].

... ... ...

299. We find force in the stand taken by the Union of India that the objectives of enacting the 2002 Act was the attachment and confiscation of proceeds of crime which is the quintessence so as to combat the evil of money-laundering. The second proviso, therefore, addresses the broad objectives of the 2002 Act to reach the proceeds of crime in whosoever's name they are kept or by whosoever they are held. To buttress this argument, reliance has been placed on the dictum in Attorney General for India and Raman Tech. & Process Engg. Co. v. Solanki Traders.

300. The procedural safeguards provided in respect of provisional attachment are effective measures to protect the interest of the person concerned who is being proceeded with under the 2002 Act, in the following manner as rightly indicated by the Union of India:

i. For invoking the second proviso, the Director or any officer not below the rank of Deputy Director will have to first apply his mind to the materials on record before recording in writing his reasons to believe is certainly a sufficient safeguard to the invocation of the powers under the second proviso to Section 5(1) of the 2002 Act. ii. There has to be a satisfaction that if the property involved in money-laundering or 'proceeds of crime' are not attached "immediately", such non-attachment might frustrate the confiscation proceedings under the 2002 Act. iii. The order passed under Section 5(1) of the 2002 Act is only provisional in nature. The life of this provisional attachment order passed under Section 5(1) of the 2002 Act is only for 180 days, subject to confirmation by an independent Adjudicating Authority.

84 iv. Under Section 5(2) officer passing provisional attachment order has to immediately forward a copy of this order to the Adjudicating Authority in a sealed envelope. v. Under Section 5(5) of the 2002 Act, the officer making such order must file a complaint before the Adjudicating Authority within 30 days of the order of provisional attachment being made.

vi. Section 5(3) of the 2002 Act provides that the provisional attachment order shall cease to have effect on the expiry of the period specified in Section 5(1) i.e. 180 days or on the date when the Adjudicating Authority makes an order under Section 8(2), whichever is earlier. vii. Under Section 8(1), once the officer making the provisional attachment order files a complaint and if the Adjudicating Authority "has a reason to believe that any person has committed an offence under Section 3 or is in possession of the proceeds of crime", the Adjudicating Authority may serve a show cause notice of not less than 30 days on such person calling upon him to indicate the sources of his income, earning or assets or by means of which he has acquired the property attached under Section 5(1) of the 2002 Act.

viii. The above SCN would require the noticee to produce evidence on which he relies and other relevant information and particulars to show cause why all or any of the property "should not be declared to be the properties involved in money-laundering and confiscated by the Central Government".

ix. Section 8(2) requires the Adjudicating Authority to consider the reply to the SCN issued under Section 8(1) of the 2002 Act. The Section further provides to hear the aggrieved person as well as the officer issuing the order of provisional attachment and also take into account "all relevant materials placed on record before the Adjudicating Authority". After following the above procedure, the Adjudicating Authority will record its finding whether all the properties referred to in the SCN are involved in money-laundering or not.

x. While passing order under Section 8(2) read with Section 8(3) there are two possibilities which might happen:

85 a. the Adjudicating Authority may confirm the order of provisional attachment, in which case again, the confirmation will continue only up to i. the period of investigation not exceeding 365 days, or ii. till the pendency of any proceedings relating to any offence under the 2002 Act or under the corresponding law of any other country before the competent Court of criminal jurisdiction outside India.

b. Adjudicating Authority may disagree and not confirm the provisional attachment, in which case attachment over the property ceases.

xi. Under Section 8(4) of the 2002 Act, upon confirmation of the order of provisional attachment, the Director or other officer authorized by him shall take the possession of property attached.

xii. Under Section 8(5) of the 2002 Act, on the conclusion of a trial for an offence under the 2002 Act if the Special Court finds that the offence of money-laundering has been committed it will order that the property involved in money-laundering or the property which has been involved in the commission of the offence of money- laundering shall stand confiscated to the Central Government.

xiii. However, under Section 8(6) if the Special Court on the conclusion of the trial finds that no offence of money- laundering has taken place or the property is not involved in money-laundering it will release the property which has been attached to the person entitled to receive it. xiv. Under Section 8(7), if the trial before the Special Court cannot be conducted because of the death of the accused or because the accused is declared proclaimed offender, then the Special Court on an application of the Director or a person claiming to be entitled to possession of a property in respect of which an order under Section 8(3) is passed either to confiscate the property or release the property to the claimant, after considering the material before it.

xv. Under Section 8(8), when a property is confiscated, Special Court may direct the central government to 86

restore the property to a person with the legitimate interest in the property, who may have suffered a quantifiable loss as a result of money-laundering. Provided that the person must not have been involved in money-laundering and must have acted in a good faith and has suffered a considerable loss despite taking all reasonable precautions.

xvi. The order passed by the Adjudicating Authority is also subject to appeal before the Appellate Tribunal which is constituted under Section 25 of the 2002 Act. Thus, the Adjudicating Authority is not the final authority under the 2002 Act as far as the attachment of proceeds of crime or property involved in money-laundering is concerned. xvii. Any person aggrieved of an order confirming the provisional attachment order can file an appeal before the Appellate Tribunal under Section 26(1) of the 2002 Act. The Appellate Tribunal on receipt of an appeal after giving the parties an opportunity of being heard will pass an order as it thinks fit either confirming or modifying or setting aside the provisional attachment order appealed against.

xviii. Further, the order passed by the Appellate Tribunal is further appealable before the High Court under Section 42 of the 2002 Act on any question of fact or question of law arising out of the order passed by the Appellate Tribunal.

301. It is, thus, clear that the provision in the form of Section 5 provides for a balancing arrangement to secure the interest of the person as well as to ensure that the proceeds of crime remain available for being dealt with in the manner provided by the 2002 Act. This provision, in our opinion, has reasonable nexus with the objects sought to be achieved by the 2002 Act in preventing and regulating money-laundering effectively. The constitutional validity including interpretation of Section 5 has already been answered against the petitioners by different High Courts. We do not wish to dilate on those decisions for the view already expressed hitherto.

... ... ...

87 304. The other grievance of the petitioners is in reference to the stipulation in sub-section (4) of Section 8 providing for taking possession of the property. This provision ought to be invoked only in exceptional situation keeping in mind the peculiar facts of the case. In that, merely because the provisional attachment order passed under Section 5(1) is confirmed, it does not follow that the property stands confiscated; and until an order of confiscation is formally passed, there is no reason to hasten the process of taking possession of such property. The principle set out in Section 5(4) of the 2002 Act needs to be extended even after confirmation of provisional attachment order until a formal confiscation order is passed. Section 5(4) clearly states that nothing in Section 5 including the order of provisional attachment shall prevent the person interested in the enjoyment of immovable property attached under sub-section (1) from such enjoyment. The need to take possession of the attached property would arise only for giving effect to the order of confiscation. This is also because sub-section (6) of Section 8 postulates that where on conclusion of a trial under the 2002 Act which is obviously in respect of offence of money-laundering, the Special Court finds that the offence of money-laundering has not taken place or the property is not involved in money-laundering, it shall order release of such property to the person entitled to receive it. Once the possession of the property is taken in terms of sub-section (4) and the finding in favour of the person is rendered by the Special Court thereafter and during the interregnum if the property changes hands and title vest in some third party, it would result in civil consequences even to third party. That is certainly avoidable unless it is absolutely necessary in the peculiar facts of a particular case so as to invoke the option available under sub-section (4) of Section 8.

... ... ...

367. Applying the principle underlying this decision, we have no hesitation in rejecting the challenge to Section 44 as unconstitutional being violative of Articles 14, 20(3) and 21 of the Constitution."

(Emphasis supplied) 88

Therefore, the submission that Section 37A is vague deserves to be

rejected. It further becomes germane to notice the judgment of the

Apex Court in the case of RAJ KUMAR SHIVHARE (supra) wherein

the Apex Court has held as follows:

"15. It is thus clear that Chapter V of FEMA, read with the aforesaid Rules, provides a complete network of provisions adequately structuring the rights and remedies available to a person who is aggrieved by any adjudication under FEMA.

... .... ...

29. By referring to the aforesaid schemes under different statutes, this Court wants to underline that the right of appeal, being always a creature of a statute, its nature, ambit and width has to be determined from the statute itself. When the language of the statute regarding the nature of the order from which right of appeal has been conferred is clear, no statutory interpretation is warranted either to widen or restrict the same.

... ... ...

31. When a statutory forum is created by law for redressal of grievance and that too in a fiscal statute, a writ petition should not be entertained ignoring the statutory dispensation. In this case the High Court is a statutory forum of appeal on a question of law. That should not be abdicated and given a go-by by a litigant for invoking the forum of judicial review of the High Court under writ jurisdiction. The High Court, with great respect, fell into a manifest error by not appreciating this aspect of the matter. It has however dismissed the writ petition on the ground of lack of territorial jurisdiction.

32. No reason could be assigned by the appellant's counsel to demonstrate why the appellate jurisdiction of the High Court under Section 35 of FEMA does not provide an efficacious remedy. In fact there could hardly be any reason since the High Court itself is the appellate forum.

89 ... ... ...

35. In this case, liability of the appellant is not created under any common law principle but, it is clearly a statutory liability and for which the statutory remedy is an appeal under Section 35 of FEMA, subject to the limitations contained therein. A writ petition in the facts of this case is therefore clearly not maintainable."

(Emphasis supplied)

The Apex Court holds that the Act is a complete code by itself.

Though was rendered at a point in time when Section 37A was not

in existence, the entire enactment was considered by the Apex

Court.

33. On a coalesce of the judgments relied on by the petitioner

and others that are quoted hereinabove, as also the reasons

rendered by this Court, what would unmistakably emerge is that

Section 37A of the Act does not suffer from any manifest

arbitrariness for this Court to strike it down on any of the grounds

urged by the petitioner. The purpose behind the amendment is

already quoted, and checks and balances available, under Section

37A are also quoted and analysed. Therefore, the second point that

arose for consideration is answered against the petitioner.

90 Issue No.III::

Whether the order passed by the authorized officer suffers from non-application of mind?

34. In the teeth of the aforesaid findings on issues 1 and 2,

what remains to be considered is, whether the petition would be

maintainable in the light of the statutory remedy available for the

petitioner to approach the Appellate Tribunal under sub-section (5)

of Section 37A of the Act. The petitioner was already before this

Court in Writ Petition No.9182 of 2022. This Court declined to

entertain the petition and directed the petitioner to approach the

Appellate Tribunal under sub-section (5) of Section 37A. It is a

statutory remedy of filing an appeal against the order of the

Competent Authority who confirms the seizure order passed by the

Authorised Officer. Despite the statutory remedy of appeal being

available, it is not the case that no writ petition would be

maintainable. But, the writ petition would not become

entertainable, as it is the discretionary remedy that this Court

would exercise to entertain a petition or otherwise even if it is

maintainable, in the light of the aforesaid reasons and the statutory 91

mandate of filing an appeal, the petition would not merit any

consideration, as any further observation by this Court qua merit of

the matter would seriously prejudice the case of the petitioner

before the Appellate Tribunal.

35. The only reason that is projected by the petitioners to

knock at the doors of this Court despite the remedy of filing an

appeal before the Appellate Tribunal being appealable under sub-

section (5) of Section 37A of the Act is that the order of the

Competent Authority affirming seizure by the Authorised Officer

does not bear application of mind. It is trite law that application of

mind is discernible from any order, if the order contains reasons for

passing one, it would have been an altogether different

circumstance if there were no reasons recorded in writing by the

Competent Authority for this Court to hold that the order suffered

from non-application of mind. The order is neither cryptic nor

perfunctory. It is in great detail. It runs into more than 250 pages.

It is not the number of pages that matters, but the content in those

pages which clearly indicate application of mind. I decline to accept

the submission that the order suffers from non-application of mind 92

on perusal of the entire content in the order. Every submission of

the petitioner is noted, considered threadbare and answered by the

Competent Authority. The Competent Authority has not left any

wood on the tree. Therefore, the order does not suffer from non-

application of mind, as is sought to be projected and contended by

the petitioner. Therefore, the only circumstance which the petitioner

projects apart from challenging the constitutional validity for

entertainment of the subject writ petition tumbles down, as the

order of the Competent Authority does bear the stamp of

application of mind through the order. Therefore, it is for the

petitioner to avail of the remedy of filing an appeal before the

Appellate Tribunal.

SUMMARY:

(i) The challenge to the constitutional validity of Section 37A of the Act by the petitioner is held to be maintainable and entertainable, on the fulcrum of the allegation that it is violative of Article 14 of the Constitution of India, as Article 14 is person centric, whereas fundamental rights under Articles 15, 16, 19 and 25 are citizen centric. Wherefore, a non-citizen can challenge certain laws of the nation on the ground that 93

it is violative of Article 14 of the Constitution of India and the challenge would be restrictable only to the tenets of Article 14 of the Constitution of India.

(ii) The challenge to the constitutional validity of Section 37A of the Act is rejected, as Section 37A does not suffer from any manifest arbitrariness on any ground whatsoever.

(iii) The petitioner is at liberty to avail of the statutory remedy of filing an appeal before the Tribunal under sub-section (5) of Section 37A of the FEMA.

36. For the aforesaid reasons, the following:

ORDER

(i) The Writ Petition is rejected.

(ii) The rejection of the petition would not come in the way of the petitioner availing of the remedy of appeal under Section 37A(5) of the Act, in accordance with law.

(iii) In the event the petitioner would file an appeal within 30 days from the date of receipt of copy of this order, the same shall be considered by the Appellate Tribunal, in accordance with law.

94 (iv) All contentions of the parties except the ones answered hereinabove shall remain open.

Pending applications, if any, would also stand disposed, as a

consequence.

Sd/-

JUDGE

bkp