Holding

Section 12(2) of the Foreign Exchange Regulation Act, 1947 applies to both "export for sale" and "export on sale" transactions, and Section 10 does not govern such export‑related foreign‑exchange earnings.

Summary

The Supreme Court examined whether Section 12(2) of the Foreign Exchange Regulation Act, 1947 applies only to sale proceeds of goods exported "for sale" or also to "exports on sale" where the sale is completed before export. The Court held that the phrase "no person entitled to sell or procure the sale of the said goods" is merely descriptive and does not limit the provision to pre‑export sales. Consequently, Section 12(2) covers both "export for sale" and "export on sale" transactions, ensuring that full export earnings are repatriated. The Court further ruled that Section 10 of the Act is irrelevant to export‑related foreign‑exchange earnings, as Section 12 provides a complete code for such matters. The appeal was allowed, the High Court order quashing the show‑cause notices was set aside, and the matter was remitted to the competent authority for appropriate action.

Issues considered

Whether Section 12(2) of the Foreign Exchange Regulation Act, 1947 applies only to goods exported "for sale" or also to goods exported "on sale" (i.e., after a sale has been completed before export).
Whether Section 10 of the Act has any application to foreign‑exchange earnings arising from export of goods in the context of completed sales.

Legislation cited

Foreign Exchange Regulation Act, 1947s. 10, s. 12(2), s. 12(6)

Subjects

Foreign Exchange Regulation ActSection 12(2)export on saleexport for salerepatriation of earningsstatutory interpretationReserve Bank of Indiaforeign exchange preservation

Judgment

M.G. WAGH & ORS. A
v.
JAY ENGINEERING WORKS LTD.

JANUARY 13, 1987

[M.P. THAKKAR AND K.N. SINGH, JJ.] B

Foreign Exchange Regulation Act of 1947, sections JO and 12
(2)-Scope and Interpretation of-Whether section 12(2) designed to·
prevent wholesale or partial evasion of repatriation of earnings from
export of goods covers only sale proceeds of goods exported 'for sale' or
to sale proceeds of goods exported 'on sale' in the context of safe.comp·
feted before export-Words and phrases-Meaning of the expression
c
'No person entitled to self or procure the sale of the goods.'

Section 12(2) of the Foreign Exchange Regulation Act, 1947 which
is designed to prevent wholesale or partial evasion of repatriation of
. earnings from export of goods is to the effect that 'where any export of D
goods has been made to which a notification under sub-section (I)
applies, no person entitled to sell, or procure the sale of the said goods
shall, except with the permission of the Reserve Bank ......... ". In
R. Ven'kata Subbu & Ors. v. The Directorate of Enforcement, Enforce-
ment Directorate, New Delhi & Anr., !LR Vol 3 Mad 1968 p. 18, the
; Madras High Court held that section 12(2) covers not only sale proceeds E
of goods eYported "for sale" but also "on sale" in the context of sales
completed before export, while the Calcutta High Court in the judg-
ment under appeal held that it covers sale proceeds of goods exported
"for sale'' only. In view of the conflict of the opinions, the present
appeal is by certificate.

-~
F
Allowing the appeal and remitting the matters to the Competent
Authority, the Court,
I
HELD: l. l The expression 'no person entitled to sell or procure
the sale of the said goods' cannot be so narrowly construed (as referable
to goods which have already been exported), so as to govern the scope of G
section 12(2) in such a truncated manner which renders it virtually
impotent in so far as transactions of 'exports on sale' are concerned.
Too much is being read into too little for no more laudable a purpose
than to paralyze the provision. The expression does not necessarily
induce one to the conclusion that the legislature wanted to prevent
abuse in the context of 'export for sale' only. The expression is mean· H

981
982 SUPREME COURT REPORTS [1987] 1 S.C.R.
,.._
ingful, relevant, and can co-exist in the context of abuse arising from
A
'exports on sale' from completed transactions as well. [98SH;1186B]

1.2 The said expression has been employed by the Legislature
merely in order to indentify the accountable persons and is merely
descriptive in that sense. The said expression does not restrict the op-
eration of the Act to the persons who have not yet sold the goods. One
\.
B
would have to take a quantum jump in order to conclude that persons
referred to in section 12(2) are the persons who have not yet sold the
goods hut are entitled to sell the goods in future merely because the
expression 'entitled to sell' has been employed. The persons who have 'iI ....
exported the goods to a foreign buyer, are not sought to be excluded
from the operation of section 12(2). Clause (a) in terms adverts to the
c sale of goods being delayed. Clause (b) of section 12(2) adverts to pay- 1
ment for the goods, otherwise than in the prescribed manner, and also
envisions a case where the payment does not represent the ftill amount
payable by the foreign buyer in respect of the goods. Clauses (a) and (b)
are compatible both with transactions of export on sale as also to trans-
D actions of export for sale. They are compatible with all transactions
pertaining to both types of sales. There is no warrant to assume that the
Legislature has not made any provision in order to ensure that the full
amount of the sale price is repatriated and foreign exchange earned
tJierefrom is not lost to the Nation regardless of whether it is in respect ),
of 'export on sale' or 'export for sale'. [986F; 987 A-Cl
E
1.3 The avowed and the evident object of section 12 is to ensure
that the Nation does not lose foreign exchange which is very much ~

essential for the economic survival of the Nation. The exporter cannot
be allowed to syphon away a part of the foreign exchange or to deprive
the Nation of the foreign exchange earned hy the exports. Such is the y
F philosophy of section 12. To take the view that the legitimate National
interest in the sphere of preservation of foreign exchange has relevance
only in the context of transactions of exports for sales and that the
t
Legislature exhibited total unconcern for the foreign exchange earned
in the context of transactions of completed sales or consignment sales, is
to attribute to the Legislature irrationality. And to impute to the Legis-
G lature that it did not know its job ina•much as it has tackled the prob·
lem only partially without any rational basis for excluding the transac·
lions of completed sales from the purview of the legislation which would t
substantially erode or defeat the purpose of the legislation. When it is
equally possible to take the view which would be conducive to the con-
clusion that there is no lacuna in the legislation, it would be unreason·
H able to take the view that the Legislature has left a lacuna either by
M.G. WAGH v. JAY ENG. WORKS LTD. 983

negligence or by lack of foresight or because it did not know its job. [987B-F]
A
2.1 Section IO has no application in respect of foreign exchange
earnings related to export of goods. Section I 0 is designed primarily to
impose an obligation on persons who have a right to receive any foreign
exchange from a person resident outside India. This section has nothing
to do with the foreign exchange earned by export of goods. The entire B
matter pertaining to payments for exported goods and the foreign ell·
change earnings arising therefrom has been dealt with in section 12
which is a complete Code in itself. Section 12 has been very carefully
designed. Every possible situation bas been conceived of and appro-
priate prophylactic measures to ensure the preservation of foreign ex-
change and prevention of syphoning off the foreign exchange, which is
very much essential to the economic life of the Nation have been embed- C
ded therein. The entire subject of foreign exchange earnings relatable to
export of goods has been specifically and specially dealt with in section
12. It would therefore he futile to search for an alibi in section IO merely
in order to support the plea that section 12 does not take within its fold
the foreign exchange earnings relatable to transactions of completed D
sales. [988A,E]

2.2 On a plain reading of section I 0, the matter pertaining to the
foreign exchange earned by exports in the context of completed sales
will not directly fall within the ambit of it. It will have to he strained
beyond the point of endurance in order to accommodate this aspect. E
Section IO is akin to a complementary provision which deals with pre-
servation of foreign exchange. which does not fall within a specific provi•
sion like section 12. What is more, if completed transactions are ex-
cluded from section 12, the purpose of the legislation will not he served,
because sub-section (6) of section 12 which has been designed to ensure
compliance with the provisions made in section 12(1) to section 12 (5) F
cannot he availed of. In that event, in regard to the persons who syphon
off foreign exchange earned out of the transactions in the context of a
completed sale or export on sale they cannot he dealt with under section
12(6) and no sanction to ensure compliance will he available. The Act
will he thus rendered toothless to ensure compliance with evasion in the
context of a completed sale. There is accordingly no compulsions of law, G
logic, or philosophy to adopt such a view. [988F; 989A-B]

R. Venkata Subba & Ors. v. The Director of Enforcement,
Enforcement Directorate, New Delhi & Anr., ILR Vol. 3 Mad. 1968 P.
18, approved.
H
984 SUPREME COURT REPORTS [1987] 1 S.C.R.

CIVIL APPELLATE JURISDICTION: Civil Appeal No 797
of 1976.

From the Judgment and Order dated I.\. 7. 1972 of the Calcutta
High Court in Appeal No. 59 of 197 l

B V.C. Mahajan, Mrs. Subhadra and C.V. Suhba Rao for the t
Appellants. ·

Harish N. Salve, Ravinder Narain, P.K. Ram, D.N. Mishra and
K. Sukumaran for the Respondent. f
The Judgment of the Court was delivered by
c
THAKKAR, J. Whether Section 12(2) 1 of Foreign Exchange
Regulation Act of 1947 (Act) designed to prevent wholesale or partial
evasion of repatriation of earnings from export of goods covers only
sale proceeds of goods exported "for sale" as held by the High Court
D of Calcutta by the judgment under appeal, or to sale proceeds of goods
exported "on sale" in the context of sales completed before export
also, as held by the Madras High Court2 and as contended by the
appellants is the problem.

E
I. "12(2) Where any export of goods has been made to which a notification under
sub-section (1) applies, no person erititled to sell, or procure the sale of the said
goods shall, except with the permissiOn of the Reserve Bank, do or refrain from
doing anything or take or refrain from taking any action which has the effect of
securing that-

(a) the sale of the goods is delayed to an extent which is unreasonable having regard
F to the ordinary course of trade, or ·

(b) payment for the goods is made otherwise than in the prescribed manner or does
not represent the full amount payable by the foreign buyer in respect of the goods,
subject to such deductions if any, as m.ay be allowed by the Reserve Bank, or is
delayed to such extent as aforesaid.

G Provided that no proceedings in respect o.f any contravention of this sub~section shall
be instituted unless the prescribed period has expired and payment for the goods
representing the full amount as aforesaid has not been made in the prescribed
manner."

2. R. Venkatasubbu and Ors. v. The Director of Enforcement, Enforcernent Directorate,
New Delhi and Anr.,· ILR Vol. JMAD 1968 p .. !8.
H
M.G. WAGH v. JAY ENG. WORKS LTD. [THAKKAR, J.) 985

> The learned Single Judge of the Calcutta High Court dismissed a
A
Writ Petition instituted by the Respondent-Company and refused to
quash two show cause notices dated November 5, 1966 issued under
Section 12 (2) of the Act as it stood at the material time on taking the
view canvassed by the appellants in this appeal. A Division Bench of
the High Court however allowed the appeal preferred by the
-f Respondent-Company, reversed the order of the learned Single Judge l3
dismissing the Writ Petition, and issued a Writ of Mandamus com-
manding the competent authorities under the Act (appellants herein)
to forbear from giving effect to the said notices and from commencing
- ,~ any proceedings pursuant thereto. The competent authorities under
, the Act have approached this Court by way of the present appeal by a
certificate under Article 133 (l)(a) of the Constitution of India. The
)' hub of the argument addressed by the respondent company, which c
found favour with the Calcutta High Court, but failed to impress the
Madras High Court, is the expression "no person entitled to sell or
procure the sale of the said good" employed by the legislature in the
opening part of Section 12(2) of the Act, which to the material extent
d~serves to be quoted:- D
" 12(2) Where any export of goods has been made to which
a notification under sub-section (I) applies, no person en-
titled to sell, or procure the sale of the said goods shall,
except with the permission of the Reserve Bank, do or
refrain from doing anything or take or refrain from taking E
any action which has the effect of securing that .... ,,

The argument runs thus:

Section 12 (2) of the Foreign Exchange Regulations Act
1942, on its plain terms, applies only to "persons" who are F
"entitled to sell or procure the sale of the said goods." The
word "entitled" governs the word "sell" as well as the ex-
pression "procure the sale of'. Further, both these expres-
sions are used with respect to the "said goods"-which
means the goods which have already been exported. It is in
these premises submitted that Section 12(2) applies only to G
such persons who are entitled to sell or procure the sale of
goods which have already been exported.

We are not impressed by this submission that the aforesaid ex-
pression can be so narrowly construed so as to govern the scope of
Section 12 (2) in such a truncated manner which renders it virtually H
986 SUPREME COURT REPORTS (1987] 1 S.C.R.

impotent in so far as transactions of "exports on sale" are concerned. A
A Too much is being read into too little for no more laudable a purpose
than to paralyze the provision. It appears to us that this expression
does not necessarily induce one to the conclusion that the legislature
wanted to prevent abuse in the context of 'exports for sale· only. The
expression is meaningful, relevant, and can co-exist in the context of ,
B abuse arising from 'exports on sale" from completed transactions as r
well. The expression "'no person entitled to sell. or procure the sale of
the said goods"" is merely descriptive of the person who is accountable
under the said provisions as has been held by the Madras High Court
in R. Venkata Subbu's case, I.LR. Vol. 3 Madras 1968 Page 18, 'k
which has made a correct meaningful. and purposeful approach with
which we unhesitatingly agree. The whole purpose is to ·identify" the
C accountable persons to prevent malpractises and ensure compliance. It -f
is conceivable that the exports might be made in the name of or
through the agency of a person other than the ·owner of goods· or the
person entitled to sell the goods arising out of an 'export on sale 1• In our
view, Anantaraman, CJ, who spoke for the Madras High Court in
D Venkatasubbu's case (supra) was right in taking the view that the
words "'no person entitled to sell or procure the sale of the goods" are
descriptive words which refer to the person in the capacity of the seller
of the goods or the person entitled to procure the sale of the goods
after the export of the goods has been made and that this expression ,i,.
does not necessarily imply that the export must be to a nominee of the
E consignor at the other end in pursuance to a contemplated transaction
of sale. We are therefore unable to accede to the submission urged on
behalf of the Respondent Company (original Writ Petitioner) that
Section 12 (2) can apply only to such persons who are entitled to sell or
procure the sale of goods which have already been exported for sale
and not to the exports made in pursuance to sales which have already
F been effected to a foreign buyer before the exports. In our opinion,
the said expression has been employed by the Legislature merely iu
order to identify the accountable persons and is merely descriptive in
that sense. The said expression does not restrict the operation of the
Act to the persons who have not yet sold the goods. One would have to
take a quantum jump in order to conclude that persons referred to in
G Section 12 (2) are the persons who have not yet sold the goods but are
entitled to sell the goods in future merely because the expression 'en-
titled to sell' has been employed. The persons who have exported the
goods to a foreign buyer, in our view, are not sought to be excluded
from the operation of section 12 (2). This conclusion is reinforced if
clauses (a) and (b) of Section 12(2) are taken into account. Clause (a) '
H in terms adverts to the sale of goods being delayed. Clause (b) of
Section 12(2) adverts to payment for the goods, otherwise than in the
M.G. W.AGH v. JAY ENG. WORKS LTD. (THAKKAR, J.J 987
J prescribed manner, and also envisions a case where the payment does
not represent the full amount payable by the foreign buyer in respect A
of the goods. Clauses (a) and (b) are compatible both with transactions
of export on sale as also to transactions of export for sale. They are
compatible with all transactions pertaining to both types of sales.
i There is no warrant to assume that the Legislature has not made any
provision in order to ensure that the full amount of the sale price is B
repatriated and foreign exchange earned therefrom is not lost to the
Nation regardless of whether it is in respect of 'export on sale' or
'export for sale'. The avowed and the evident object of Section 12 is to
-~ ensure that that the Nation does not lose foreign exchange which is very
much essential for the economic survival of the Nation. The exporter
cannot be allowed to syphon away a part of the foreign exchange or to
deprive the Nation of the foreign exchange earned by the exports. c
Such is the philosophy of Sec. 12. To take the view that the legitimate
National interest in the sphere of preservation of foreign exchange has
relevance only in the context of transactions of exports for sales and
that the Legislature exhibited total unconcern for the foreign exchange
earned in the context of transactions of completed sales .or consign- D
ment sales, is to attribute to the Legislature irrationality. And to
impute to the Legislature that it did not know its job inasmuch as it has
tackled the problem only partially without any rational basis for ex-
cluding the transactions of completed sales from the purview of the
legislation which would substantially erode or defeat the purpose of
the legislation. When it is equally possible to take the view which E
would be conducive to the conclusion that there is no lacuna in the
... legislation, it would be unreasonable to take the view that the Legisla-
ture has left a lacuna either by negligence or by lack of foresight or
because it did not know its job. In order to escape from the clutches of
this answerless argument learned counsel for the Respondent Com-
pany contended that in so far as completed sales are concerned, they F
would be governed by Section IO •and that the lacuna argument would
l. "10. Duty of persons entitled to receive foreign exchange etc. -(I) No person who
has a right to receive any foreign .exchange or to receive from a person resident
outside India a payment in .rupees shall, except with the general or special permission
of the Reserve Bank, do or refrain from doing anything or take or refrain from
taking any action which has the effect of securing- G
(a) that the receipt by him of the whole or part of that foreign exchange or payment
is delayed, or,
{b) that the foreign exchange or payment ceases in whole or in part to be receivable
by him.
(2) Where a person has failed to comply with the requirements of sub-section( I) in
relation to any foreign exchange or payment in rupees, the Reserve Bank may give to
him such directions as appear to be expedient for the purpose of securing the receipt H
of the foreign exchange or payment as the case may be."
988 SUPREME COURT REPORTS (1987) 1 S.C.R.
A A,_
accordingly lose significance. It is our firm opinion that Sec. lO has no
application in respect of foreign exchange earnings related to export of
gooos. Section lO is designed primarily to impose an obligation on
persons who have a right to receive any foreign exchange from a
person resident outside India. This section has nothing to do with the
B foreign exchange earned by export of goods. The entire matter per- t
iaining to payments for exported goods and the foreign exchange earn-
ings arising therefrom in our considred opinion, has been dealt with in
Section 12 which is a complete Code in itself. It would be an irrational

c
approach to make to hold that while Section 12 deals with payments
for exported goods and foreign exchange earnings arising therefrom in
all situations, it excludes from its purview one particular situation
r-
namely that arising in the context of failure to· repatriate the sale
-~~
proceeds of goods exported pursuant to a completed transaction of """r
sale. Evidently Section 12 has been very carefully designed. Every
possible situation has been conceived of and appropriate prophylactic
measures to ensure the preservation of foreign exchange and preven-
D tion of syphoning off the foreign exchange, which is very much essen-
tial to the economic life of the Nation, have been embeded.therein.
The entire subject of foreign exchange earnings relatable to export of
goods has been specifically and ·specially dealt with in Section 12. It
would therefore be futile to search for an alibi in Section lO merely in
order to support the plea that Section 12 does not take within its fold ~
E the foreign exchange earnings relatable to transactions of completed
sales. Pray what is the reason or the purpose for doing so? Why take
care to deal with 'all' matters pertaining to export of goods and foreign
exchange earnings therefrom in Section 12, but even so exclude ,..
foreign exchange earnings arising out of completed transaction of sale
from its scope and ambit? When there is a specific provision which can
F reasonably be interpreted to cover this aspect of foreign exchange
y
earnings also, be embodied in Section 12, which appears to us to be a (
complete Code in itself, why leave this important vital matter of no ~
less importance to be dealt with by section 10 which essentially deals
with foreign exchange receivable from individuals and has nothing to
do with export of goods? On a plain reading of Section 10, the matter
G pertaining to the foreign exchange earned by exports in the context of
completed sales will not directly fall within the ambi.t of it. It will have
to be strained beyond the point of endurance in order to accommodate }-
this aspect. Section lO is akin to a complementary provision which
deals with preservation of foreign exchange which does not fall within
a specific provision like Section 12. What is more, if completed trans-
H actions are excluded from Section 12, the purpose of the legislation
M.G. WAGH v. JAY ENG. WORKS LTD. [TIIAKKAR, J.) 989
).. wiU not be served, because sub-section (6) of Section 12 1 which has
been designed to ensure compliance with the provisions made in Sec- A
tion 12 (1) to Section 12(5) cannot be availed of. In that event, in
regard to the persons who syphon off foreign exchange earned out of
the transactions in the context of a completed sale or export on sale
they cannot be dealt with under Section 12 (6) and no sanction to
~ ensure compliance will be available. The Act will be thus rendered B
toothless to ensure compliance with evasion in the context of a comp-
leted sale. There is accordingly no compulsion of law, logic, or phi-
losophy, to adopt such a view.
:.
-~
We accordingly allow this appeal and set aside the order of the
y High Court quashing the show cause notices impugned in the Writ c
Petition by the original Writ Petitioner. The matter will now go back
to the competent authority for proceeding in accordance with law.
The competent authority will extend the time for showing cause to the
Respondent-Company and after affording a reasonable opportunity of
hearing, proceed to pass appropriate orders in accordance with· law as D
may be called for by the relevant records and the material and such
materials as may have been produced, before him in the light of the
cause shown by the Respondent-Company on merits in response to the
show cause notice. It will be open to the competent authority to pass
f appropriate order uninhibited by any observations which may have
been made by the High Court touching the facts or merits of the case E
or in regard to the incidental matters. We issue this direction having
.... regard to the fact that it was in the first instance for the competent
authority to form an opinion on merits on the basis oi the relevant
material in so far as the factual aspect was concerned. Since the High
y Court was quashing the notice on a jurisdictional issue there was no
occasion for making any observation to.uching the facts of the case or F
~ the merits of the other contentions incidental thereto. We also wish to
make it clear that the question regarding the validity or otherwise of
the views expressed by the High Court in regard to points other than
the aforesaid point regarding the applicability of Section 12(2) have
been kept open for decision in future as and when an occasion arises.
G
~ 12(6) "For the purpose of ensuring compliance with the provisions of this section and
any orders or directions made thereunder, the Reserve Bank may require any
person making any export of goods to which a notification under sub-section ( 1)
applies to exhibit contracts with his foreign buyer or other evidence to show that
the full amount payable by the said buyer in respect of the goods has been, or will
within the prescribed period be, paid in the prescribed manner."
H
990 SUPREME COURT REPORTS [1987] 1 S.C.R.

A We should not be understood as having pronounced on these matters
one way or the other.

We, therefore, allow this appeal, set aside the order passed by
the High Court and dismiss the Writ Petition instituted by the Respon-
B dents, with liberty to the parties to raise all contentions on facts and
law barring the contention that Section 12(2) of the Act is not at-
tracted. No order as to costs.

S.R.
Appeal allowed. r ._

-

/