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PETITIONER: SUPERINTENDENT  AND  REMEMBRANCER  OF  LEGAL  AFFAIRS,  WEST

       Vs.

RESPONDENT: GIRISH KUMAR NAVALAKHA & ORS.

DATE OF JUDGMENT03/03/1975

BENCH: MATHEW, KUTTYIL KURIEN BENCH: MATHEW, KUTTYIL KURIEN RAY, A.N. (CJ) KRISHNAIYER, V.R. GUPTA, A.C.

CITATION:  1975 AIR 1030            1975 SCR  (3) 802  1975 SCC  (4) 754

ACT: Constitution of India, 1950, Art. 14--Purpose of  challenged classification  in doubt--Concept of ’Purpose’ and  ’similar situations’, when can be resorted to--Legislature if can  be given benefit of doubt about its purpose. Constitution   of  India,  1950,  Art.   14--Under-inclusive classification  meaning of--Under-inclusive  classification, when permissible. Foreign  Exchange  Regulation  Act,  1947,  Section  23--Two different  procedures for dealing with persons  contravening the  Act--Benefit of inquiry by Director of Enforcement  not available   to   persons   dealt  with   under   s.   23(IA) --Classification, if unreasonable.

HEADNOTE: The  respondents  were tried for having  committed  offences under  S.  4(3),  20(3)  and  22  of  the  Foreign  Exchange Regulation Act, 1947 read with s. 120-B of the Indian  Penal Code  and  s.  23 of’ the Act.   The  Court  discharged  the respondents  in  view of the decision of the High  Court  of Calcutta in M/s Serajuiddin & Co. and Ors. v. Union of India and  Ors.  Civil Rules Nos. 2183 (W) of 1966 and cases  Nos. 1998 and 1999 of 1963 decided on 16-9-1971, holding that  s. 23(AI)  was violative of Art. 14 of the  Constitution.   The appellant  filed  a  revision petition  against  the  order, before  the High Court.  The High Court concurred  with  the decision  of  the trial Court and  dismissed  the  revision. This  appeal,  by  special  leave,  is  against  that  order dismissing the revision, It was contended for the respondents that s. 23 provides for two  different procedures for dealing with contravention  of the provisions of the Act.  That is to say, persons who have contravened the provisions specified in s. 23(1)(a) and  are found  guilty by the Director of Enforcement need  not  face prosecution  in  a  criminal court if  the  Director  is  of opinion that the penalty he is empowered to impose would  be adequate   punishment,  whereas,  the  persons  alleged   to contravene the other provisions of the Act have  necessarily to  face prosecution in criminal court without  being  given the benefit of an inquiry by the Director of Enforcement and

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the  opportunity  to the delinquents to  convince  him  that imposition  of penalty by him would be  adequate  punishment even  if they are found guilty.  The classification made  in s. 23(1) is under-inclusive and is, therefore, unreasonable. Allowing the appeal, HELD  : (i) When the purpose of a challenged  classification is in doubt, the courts attribute to the classification  the purpose thought to be most probable.  Instead of asking what purpose or purposes the statute and other materials reflect, the   court  may  ask  what   constitutionally   permissible objective  this statute and other relevant  materials  could plausibly  be construed to reflect.  The latter approach  is the proper one in economic regulation cases.  The  decisions dealing  with economic regulation indicate that courts  have used the concept of ’purpose’ and ’similar situations’ in  a manner  which give considerable leeway to  the  legislature. This  approach  of  judicial restraint  and  presumption  of constitutionality requires that the legislature is given the benefit of doubt about its purpose. [805H-806C] (ii) Often times the courts hold that tinder-inclusion  does not deny the equal protection of laws under Article 14.   In strict theory, this involves an 803 abandonment  of  the  principle  that  classification   must include  all who are similarly situated with respect to  the purpose.  This under-inclusion is often explained by  saying that the legislature, is free to remedy parts of a  mischief or to recognize degrees of evil and strike at the harm where it thinks it most :acute.  There are two main considerations to   justify  an  under-inclusive  classification.    First, administrative necessity.  Second, the legislature might not be  fully  convinced  that the particular  policy  which  it adopts  will  be fully successful or wise.  Thus  to  demand application  of  the policy to all whom it  might  logically encompass would restrict the opportunity of a state to  make experiment.  These techniques would show that some sacrifice of absolute equality may be required in order that the legal system may preserve the flexibility to evolve new  solutions to social and economic problems. [806E; H.807B] Missouri  &. and T. Rly. v. May, (1903) 194 U.S. 267  at  p. 269  and  Gujarat  v. Ambica, Mills A.I.R.  1974  S.C.  1300 referred to. (iii)  The  experience of the Government  was  that  persons contravening  the  provisions  of the Act  specified  in  s. 23(1)(a)  invariably  escaped without  punishment.:  firstly because,  successful prosecution of these offences  in  many cases was not possible for want of legal evidence;  secondly because,  the  criminal courts were not  equipped  with  the training,  expertize and experience necessary to  deal  with the  intricate and ingenious methods adopted by the  persons contravening them.  The Government, therefore, thought  that imposition  of  penalty by departmental  adjudication  would prove  a  more effective means of ,checking these  types  of foreign-exchange offences as against the previous system of’ prosecution  of  all  offences on the basis  of  the  strict standard  of proof required for  criminal  prosecution-which proof  was,  by  and  large,  so  much  within  the  special knowledge  of the offender and so much out of the reach  .of the department. [808D-F] The  basis of classification was that in cases  where  there was   likelihood  of  getting   sufficiently   unimpeachable evidence as, for instance. in cases involving  contravention of  sections 14, 13(2), 15, 18 etc., where the Reserve  Bank of India as a specialized agency comes into the picture  and be  in  possession of relevant materials, those  cases  were

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left  to be- dealt with under s. 23(IA) by criminal  courts. The classification made in s. 23(IA) is, therefore, not dis- criminatory. [808H;-809E]

JUDGMENT: CRIMINAL APPELLATE JURISDICTION: Criminal Appeal No. 203  of 1973. Appeal  by special leave from the Judgment and  Order  dated the 14th March, 1973 of the Calcutta High Court in  Criminal Revision No. 613 of 1972. L.  N.  Sinha, Solicitor-General.  G. L. Sanghi  and  Girish Chandra for the Appellant. A.  K.  Sen  Mrs.  Liela Seth and  U.  K.  Khaitan  for  the Respondents. The Judgment of the Court was delivered by MATHEW, J. The respondents were tried before the  Presidency Magistrate,  11th Court for having committed offences  under sections  4(3),  20(3)  and  22  of  the  Foreign   Exchange Regulation  Act,  1947 (hereinafter called ’the  Act’)  read with S. 120-B of the Indian Penal Code and S. 23 of the Act. The Court discharged the respondents in view of the decision of the High Court-of Calcutta in M/s.  Serajuddin & Co-  and Others v. Union of India and Others(1) holding that S. (1)  Civil Rules Nos. 2183 (W), 2184 (W) of 1966  and  cases Nos. 1998 and 1999 of 1963 decided on 16-9-1971. 804 23(IA)  was  violative of Article, 14 of  the  Constitution. The  appellant filed a revision petition against the  order, before  the  High  Court.   The  Court  concurred  with  the decision  of  the trial Court and  dismissed  the  revision. This appeal, by special leave, is against that order. The  question for consideration is whether S. 23(1A) of  the Act violates Article 14 of the Constitution. Section  23 (1) as it originally stood in the  Act  provided that whoever contravenes any of the provisions of the Act or of  any  rule, direction or order made thereunder  shall  be punishable with imprisonment for a term which may extend  to two  years or with fine, or with both, and any Court  trying any such contravention may, if it thinks fit and in addition to any sentence which it may impose for such  contravention, direct that any currency, security, gold or silver or  goods or other property in respect of which the contravention  has taken place shall be confiscated.  Section 23 was amended in 1950 and 1952.  We are not concerned with those  amendments. In  1957,  the section was further amended  by  the  Foreign Exchange  Regulation  (Amendment) Act, 1957 (Act No.  39  of 1957).     This   amendment   provided   for    departmental adjudication   in  respect  of  contravention   of   certain provisions  of  the  Act.  The section as  amended  read  as under:               "23(1)   If   any   person   contravenes   the               provisions of s. 4, s. 5, s. 9 or  sub-section               (2)  of  s. 12 or of any  rule,  direction  or               order made thereunder, he shall-               (a)  be liable to such penalty  not  exceeding               three times the value of the foreign  exchange               in  respect  of which  the  contravention  has               taken   place,   or  five   thousand   rupees,               whichever  is more, as may be adjudged by  the               Director   of   Enforcement  in   the   manner               hereinafter provided or,               (b) up on conviction by a Court, be punishable               with imprisonment for a term which may  extend

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             to two years, or with fine or with both,               (IA) Whoever contravenes-               (a)  any of the provisions of this Act  or  of               any rule, direction or order made  thereunder,               other  than those referred to  in  sub-section               (1)  of  this section and s.  19  shall,  upon               conviction  by  a court,  be  punishable  with               imprisonment  for a term which may  extend  to               two years, or with fine or with both.               (b)  any direction or order made under  s.  19               shall,   upon  conviction  by  a   Court,   be               punishable  with fine which may extend to  two               thousand rupees." By  s. 23D it was provided that the Director of  Enforcement shall  for the purpose of adjudicating under clause  (a)  of sub-section (1) of s. 23 805 hold an inquiry after notice to the person proceeded against and impose a penalty, but if at any stage of the inquiry  he is of opinion that having regard to the circumstances of the case,  the  penalty he is empowered to impose would  not  be adequate,  he shall, instead of imposing a penalty,  file  a complaint in writing to the Court. The argument of the respondents was that s. 23 provides  for two  different procedures for dealing with contravention  of the  provisions of the Act; that while persons  contravening the provisions of the Act specified in s. 23(1) (a) have  to be  dealt with by the Director of Enforcement in  the  first instance and need face trial in criminal court only if he is of  opinion that having regard to circumstances of the  case the penalty he is empowered to impose would not be adequate, the persons contravening the other provisions of the Act are liable  to be prosecuted in the first instance  in  criminal court without an injury by the Director of Enforcement which would  give them the possibility to escape prosecution in  a criminal  court.   In  other words  the  argument  was  that persons who have contravened the provisions specified in  s. 23  (I)  (a)  anti  are found  guilty  by  the  Director  of Enforcement need not face prosecution in a criminal court if the Director is of opinion, that the penalty he is empowered to impose would be adequate punishment, whereas, the persons alleged  to contravene the other provisions of the Act  have necessarily  to face prosecution in criminal  court  without being  given  the benefit of an inquiry by the  Director  of Enforcement  and  the  opportunity  to  the  delinquents  to convince  him  that imposition of penalty by  him  would  be adequate punishment even if they are found guilty. The question, therefore, is whether persons contravening the provisions specified in s. 23 (I) (a) are similarly situated with  persons contravening the other provisions of  the  Act with respect to the purpose or object of the Act or  whether by  reason of the nature of the offences resulting from  the contravention of the provisions specified in s. 2 3 (I)  (a) the  persons  contravening them form a class  by  themselves distinct from the persons contravening the other  provisions of  the Act and therefore the legislative judgment  to  deal with  them  under a different procedure was  justified  with reference to the ultimate purpose of the Act. The preamble provides the key to the general purpose of  the Act.  that  purpose is the regulation of  certain  payments, dealings  in foreign exchange and securities and the  import and  export  of  currency and bullion in  the  economic  and financial interest of India.  The general purpose or  object of  the Act given in the preamble may not show the  specific purpose  of the classification made in s. 23(1) (a)  and  s.

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23(1A).  Supreme Court has therefore to ascribe a purpose to the statutory classification and coordinate the purpose with the more general purpose of the Act and with other  relevant Acts and public policies.  For achieving this the Court  may not  only  consider  the language of s. 23  but  also  other public  knowledge about the evil sought to be remedied,  the prior law, the statement of the purpose of the change in the prior  law and the internal legislative history.   When  the purpose  of  a challenged classification is  in  doubt,  the courts attribute to the classification the purpose 806 thought to be Most probable.  Instead of asking what purpose or  purposes  the statute and other materials  reflect,  the court  may ask what constitutionally  permissible  objective this statute and other relevant materials could plausibly be construed  to reflect.  The latter approach, is  the  proper one  in  economic regulation cases.  The  decisions  dealing with economic regulation indicate that courts have used  the concept  of ’purpose’ and ’similar situations’ in  a  manner which  give  considerable leeway to the  legislature.   This approach   of   judicial  restraint   and   presumption   of constitutionality requires that the legislature is given the benefit of doubt about its purpose.  How far a court will go in  attributing a purpose which though perhaps not the  most probable  is at least conceivable and which would allow  the classification to stand depends to a certain extent upon its imaginative power and its devotion to the theory of judicial restraint. At  this  stage,  it is necessary to sharpen  the  focus  to understand  the  real  grievance  of  the  respondents.   As already  indicated, their submission is that since they  are similarly situated with persons contravening the  provisions of the Act specified in s. 23 (1) (a), they should have been included  in  that  class and dealt  with  by  the  Director Enforcement  in the first instance so that they  might  also have  the  benefit  of  inquiry by  him  with  the  possible advantage  of escaping with penalty even if they  are  found guilty  of the offences.  Their grievance therefore is  that the classification made in s. 23 (1) is under-inclusive  and is, therefore, unreasonable. Often  times the courts hold that under-inclusion  does  not deny  the  equal protection of laws under  Article  14.   In strict theory, this involves an abandonment of the principle that  classification  must  include all  who  are  similarly situated with respect to the purpose.  This under  inclusion is often explained by saying that the legislature is free to remedy  parts of a mischief or to recognize degrees of  evil and strike at the harm where it thinks it most acute. The Courts have recognised the very real difficulties  under which legislatures operate-difficulties arising out of  both the  nature  of the legislative process and of  the  society which legislation attempts perennially to reshape- and  they have refused to strike down indiscriminately all legislation embodying     classificatory    inequality    here     under consideration.   Mr. Justice Holmes, in urging tolerance  of under-inclusive    classifications,   stated    that    such legislation  should not be disturbed by the Court unless  it can  clearly  see that there is no fair reason for  the  law which  would not require with equal force its  extension  to those whom it leaves untouched. See Missouri K. and T.  Rly. v. May(I).  What, then, are the fair reasons for  non-exten- sion  ? What should a court do when it is faced with  a  law making  an under-inclusive classification in areas  relating to economic and tax matters’? There  are  two main considerations to  justify  an  Linder-

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inclusive classification.  First, administrative  necessity. Second,  the legislature might not be fully  convinced  that the particular policy which it adopts (1) (1903) 193 U. S. 1967 at p. 269. 807 will   be  fully  successful  or  wise.   Thus   to   demand application  of the policy to, all whom it  might  logically encompass would restrict the opportunity of a state to  make experiment.  These techniques would show that some sacrifice of absolute equality may be required in order that the legal system may preserve the flexibility to evolve new  solutions to social and economic problems.  The gradual and piece-meal change is often regarded as desirable and legitimate  though in  principle it is achieved at the cost of  some  equality. It  would  seem that in fiscal and  regulatory  matters  the court   not  only  entertains  a  greater   presumption   of constitutionality  but also, places the burden on the  party challenging  its validity to show that it has no  reasonable basis for making the classification.  This was the  approach of  this Court in State of Gujarat v. Ambica Mills(1).   The Court said :               "The  piecemeal approach to a general  problem               permitted by under-inclusive  classifications,               appears  justified when it is considered  that               legislative  dealing  with  such  problems  is               usually   an  experimental  matter.    It   is               impossible to tell how successful a particular               approach  may  be,  what  dislocations   might               occur,  what evasions might develop, what  new               evils  might  be  generated  in  the  attempt.               Administrative  expedients must be forged  and               tested.    Legislators,   recognizing    these               factors,  may wish to proceed cautiously,  and               courts.   must  allow  them  to  do   so   (37               California Rev. 341)." The background of the amendment of s. 23 of the Act will  be relevant   for  appreciating  the  reason  for  making   the distinction between the two classes of contraventions.  From April, 1949 to December, 1952, the Reserve Bank was handling all  cases including those relating to unauthorized  import, export  of  gold and silver.  The Bank  had  an  enforcement section.   In  1952, the Central Government  authorised  the Customs  and  Central  Excise officers  to  investigate  and prosecute  cases if import or export of gold and  silver  in contravention  of the provisions relating to them.  In  May, 1956, the Central Government took over the work relating  to enforcement,  i.e., the residuary work done by  the  Reserve Bank  other  than those entrusted to  Custom.%  Department.A Directorate of Enforcement was set up in May, 1956 with  the idea that there should be a specialized agency to deal  with specified  categories of offences.  Between April, 1949  and April  1956,  when  the duty of  enforcement  was  with  the Reserve Bank, the Bank had completed investigation in  about 200  cases but prosecutions could be launched in respect  of 66   cases  only  and  out  of  these  60  cases  ended   in convictions.  No prosecution could be launched in respect of other cases in view of the fact that evidence legally neces- sary  to secure conviction in a court was  not  forthcoming. When the work was transferred to the Enforcement Directorate of the Ministry of Finance, its experience was also similar. From May, 1956 till about 1957, the Directorate had  handled 832  cases.   But  prosecutions could be  launched  only  in respect  of 32 cases.  This Was due to the fact  that  legal evidence necessary for establishing the cases beyond (1) A.I.R. 1974 S.C. 1300.

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808 doubt  in a court of law was not forthcoming partly  because it  was  difficult  to secure  cooperation  of  the  foreign collaborators in getting the incriminating documents against the  suspects  and  partly  because  the  banks  in  foreign countries were under no obligation to furnish statements  of accounts  maintained  by the suspects in them.   Faced  with this  difficulty, the Government had to consider other  ways of  enforcing  the provisions of the Act  more  effectively. The Government, after considering the pros and cons  decided to  provide  for departmental enquiry  and  adjudication  of contravention  of  certain  provisions  of  the  Act  by  an authority  specially constituted for that purpose.   In  the statement  of  Objects and Reasons to the  Foreign  Exchange Regulation Bill, 1957, it was stated ;               ". . . The most important of these  amendments               is the one providing for departmental  inquiry               an  adjudication of foreign exchange  offences               by  an authority constituted by Government  on               the Sea Customs Act." In short, the reason for the amendments made in 1957 was the experience gained in the working of the Act till then.  That experience  was that persons contravening the  provision  of the  Act  specified  in s. 23  (1)  (a)  invariably  escaped without punishment : firstly because, successful prosecution of these offences in many cases was not possible for want of legal, evidence; secondly because, the criminal courts  were not  equipped  with the training, expertize  and  experience necessary  to deal with the intricate and ingenious  methods adopted by the persons contravening them. The Government therefore thought that imposition of  penalty by  departmental adjudication would prove a  more  effective means  if checking these types of foreign-exchange  offences as  against  the  previous  system  of  prosecution  of  all offences  on  the  basis of the  strict  standard  of  proof required  for  criminal prosecution which proof was  by  and large, so much within the special knowledge of the  offender and  so much out of the reach of the department.  It may  be noted  that after the amendment in 1957, further  amendments of  s. 23 were made in 1964 whereby sections 10,  17,  18(A) and  18(B)  were  also  brought within  the  purview  of  s. 23(1)(a).   The  introduction of these  sections  within  s. 23(1)(a) was the result of further experience gained  during the  succeeding  years.   It was only on the  basis  of  the experience gained by the working of the Act that a  decision could  be  taken  about the classification  of  offences  in respect  of which a trial by a court would be expedient  and those in respect of which summary procedure visualized by s. 23(1) (a) might be necessary. Generally   speaking,   therefore,   the   basis   of    the classification was that in cases where there was  likelihood of  getting  sufficiently  unimpeachable  evidence  as,  for instance, in cases involving contravention ,of sections  14, 13(2),  15, 18, etc., where the Reserve Bank of India  as  a specialized  agency  comes  into  the  picture  and  be   in possession ,of relevant materials, those cases were left  to be dealt with under s.23(1A) by criminal courts. 809 In paragraph 17 of the affidavit of Shri M. L. Sharma, Under Secretary,  Ministry  of  Finance,  Department  of  Economic Affairs,  filed  with  the permission  of  this  Court,  the reasons  why the legislature selected the  contravention  of certain  provisions of the Act for being dealt with  by  the criminal  courts  in  the first  instance  have  been  fully stated. According to that affidavit, broadly speaking, the

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classes of offenceswhich  have been brought under  sections 23(1) and 23A are what maybe    termed   as    ’primary’ offences and those brought under s.23(1A)may  be  termed as  ’secondary’ offences. Primary offences are  those  which need detection and action at executive or field level by the concerned  specialized  agency.  There is greater  need  fur taking deterrent measures in respect of these offences.   It is  not  a  question of the seriousness or  gravity  of  the offences.  Both primary and secondary offences may be  grave or serious and involve large amounts.  But the difference is that  primary offences are distinguished by the  volume  and areas  of  incidence and may need greater  deterrence  which sometimes  may lie in large pecuniary penalty and  sometimes in criminal punishment by way of imprisonment.  A delinquent who  has  become  an insolvent may not  feet  any  deterrent effect however large the pecuniary penalty may be and such a case may call for a sentence of imprisonment.  In respect of secondary  offences there are heady  built-in  institutional checks  laid  down by the Reserve Bank or  other  Government agencies.  As indicated above, where contraventions do  take place in regard to, other sections, there would normally  be adequate or reasonable documentary evidence, etc., and these will facilitate prosecution in courts of law. We  do. not think that there is any merit in the  contention that the classification made in s.23(lA) is  discriminatory. Even according to the respondents, it is the  classification made  in  s.23(1)(a)  which  is  under  inclusive  and   is, therefore,  unreasonable.   If this Court were_  to  declare that  the  classification  made in s. 23 (1)  (a)  is  under inclusive  and therefore unreasonable, the result  would  be that  contraventions  of  the  provisions  specified  in  s. 23(1)(a) would also fall within s. 23(1 A) and would have to be  dealt with by the Criminal Court--a  consummation  which the respondents devotedly want to avoid. We  do  not think that the High Court was right  in  holding that s. 23(1A) was bad.  We set aside the order of the  High Court and allow the appeal. V.M.K.                                    Appeal allowed. 810