[Masala Bonds Case] Kerala High Court To Pass Order On Oct 10 in Pleas Challenging ED Summons Against Dr Thomas Issac & KIIFB Officers

The Kerala High Court on Friday heard two petitions filed by Kerala Infrastructure Investment Fund Board (KIIFB) and Former Finance Minister of Kerala Dr Thomas Issac challenging the summons issued by the Enforcement Directorate (ED) in connection with the investigation into the financial transactions of KIIFB. 

Justice V G Arun heard the contentions raised by various counsels appearing in the petitions at length and posted the matter for 10th October for orders. 

The Enforcement Directorate is probing the alleged violations of Foreign Exchange Management Act (FEMA) in the issuance of Masala Bonds in 2019.

The KIIFB has challenged the summons issued by the Ed in the exercise of the powers under 37 of FEMA read with 131(1) of the Income Tax Act, 1961 and Section 30 of CPC. A similar petition has been filed by Dr Issac.

When the matter was taken up today, the Counsel appearing for KIIFB submitted before the Court that the Enforcement Directorate's protracted investigation into the issuance of Masala bonds is detrimentally affecting infrastructure development plans in the state and that the Enforcement Directorate has been unable to make out any material reasons or suspicion for initiating the investigation.

The Enforcement Directorate, in their counter affidavit, had submitted that the probe against KIIFB had been initiated on the basis of a report submitted by the Comptroller and Auditor General (CAG) in March 2019. However, KIIFB contended before the Court that the same is impermissible in law, and the entire investigation deserves to be set aside on this ground alone. The Counsel also submitted that the allegations in the CAG report are incorrect and a mere afterthought, and it cannot be made a basis for the investigation. It was also pointed out that the Kerala Legislative Assembly had rejected the said remarks pertaining to KIIFB in the CAG Report.

Senior Counsel Siddharth Dave, appearing for Issac, sought for the quashing of summons issued by the Ed seeking his appearance in connection with the financial transactions of the KIIFB.

The Counsel submitted that the attempt of the ED is to initiate a "fishing and roving enquiry" by keeping the petitioner in dark about the real nature of the allegations. The Counsel submitted that the counter affidavit filed by the central agency, clearly indicates that no contravention as per Section 13 of FEMA has been established in such circumstances; the Counsel sought to quash the summons issued.

On the contrary, Additional Solicitor General of India, Senior Counsel S. V. Raju appearing for the ED, strongly objected the prayer for quashing of the summons issued by the ED.

ASG argued that the issuance of summons to record evidence in an ongoing investigation was the proper course envisaged under Section 37 of FEMA.

It was submitted that under Section 37 of FEMA, the officers of ED, not below the rank of Assistant Director, were empowered to exercise the power of investigation, the power of summons, search and seizure, and enforcing the attendance of any person for the purposes of investigation. ASG submitted that this power was identical to that vested upon the Income Tax Officer under Section 131 of the Income Tax Act.

ASG further submitted that it is a settled provision that the Court should not interfere at the stage of issuance of summons, and furthermore, a person summoned by ED could not challenge the issuance of summons.

The decision in K.A. Mansoor v. Assistant Director, ED, wherein it had been held by the Madras High Court that under Section 37 of FEMA, a person summoned by ED could not challenge the issuance of summons, was also relied upon by the ASG to strengthen their argument.

Additionally, the ASG also placed reliance upon the decision in V. Datchinamurthy & Anr. v. Assistant Director of Inspection (Intelligence), IT Department & Ors., wherein the Madras HC had held that "the issuance of summons will in no way affect the fundamental rights of a person as it is only for the preliminary investigation, and for production of documents before the authority for further investigation".

The ED has submitted that in the matter at hand, the summons had been issued at the preliminary stage of the investigation for the purposes of production of documents, and recording of oral evidence for further investigation, as per the procedure envisaged in FEMA.

It has also been averred that the same does not affect the rights of the person in any manner since its only for investigation purposes. In fact, the issuance of summons is also envisaged as being mandatory for the collection of evidence as part of any evidence under FEMA, the court was told.

The matter has been posted for 10th October for Orders. 

Case Title: Kerala Infrastructure Investment Fund Board (KIIFB) v. Director, Directorate of Enforcement and Dr T.M. Thomas Isaac v. The Deputy Director