Delhi High Court Sets Aside FEMA Confiscation For Lack Of Reasons, Upholds Penalty

The Delhi High Court has set aside confiscation orders passed under the Foreign Exchange Management Act, 1999 (FEMA), holding that such action cannot be sustained in the absence of reasons.

A Division Bench of Justices Navin Chawla and Ravinder Dudeja partly allowed a batch of appeals filed against orders of the Appellate Tribunal for Foreign Exchange, which had affirmed penalties as well as confiscation of funds lying in Non-Resident (Non-Repatriable) Rupee (NRNR) accounts.

The case arose from show cause notices issued to the appellants alleging contravention of FEMA provisions and the Foreign Exchange Management (Deposit) Regulations, 2000.

Enforcement Directorate had alleged that the appellants, while residing abroad, had opened NRNR accounts and later obtained loans against those deposits, which were used to open fresh NRNR accounts in violation of the regulatory framework.

The Adjudicating Authority had imposed penalties and also ordered confiscation of the amounts lying in the NRNR accounts. The Appellate Tribunal upheld these findings, prompting the present appeals.

The court also noted that the loan transactions had already been repaid through the maturity proceeds of the NRNR accounts.

The High Court rejected the appellants' contention that any violation of the relevant regulations would apply only to authorised dealers (banks) and not account holders. It held that obligations under the FEMA framework extend to both the authorised dealer and the account holder, and violations can attract penalties against both.

“While Regulation 5(1)(iv) of the Regulations permits an Authorised Dealer to accept a deposit under the NRNR Account, such an account can be opened only by a person who is a resident outside India and through the funds remitted from outside India. The obligation cast is, therefore, both on the Authorised Dealer as also on such person who owns the account. A violation of the same in terms of Section 13(1) of FEMA would therefore attract a penalty for both, that is, the Authorised Dealer as also the account holder,” it observed.

However, the Court found merit in the appellants' challenge to the confiscation of funds. It noted that Section 13(2) of FEMA vests discretion in the adjudicating authority to order confiscation, but such discretion must be exercised with reasons.

“the confiscation in addition to the penalty can be imposed under Section 13(1) of FEMA and may be ordered by the Adjudicating Authority “if he thinks fit”. The Adjudicating Authority is exercising a quasijudicial function and therefore, is bound to give reasons for the exercise of the discretion vested in it under Section 13(2) of FEMA. The Adjudicating Authority has, therefore, to conclude, by giving reasons for the same, as to why, in the given facts, imposition of a penalty alone will not suffice and in addition to the penalty, the property deserves to be confiscated,” the Court said.

As such, finding that in the present case neither the Adjudicating Authority nor the learned Appellate Tribunal has given any reasons for directing confiscation of the property, the Court upheld the penalties but quashed the directions for confiscation. 

The Court also declined to remand the matter for fresh consideration, noting the long passage of time since initiation of proceedings.

For Appellants: Advocates R.K. Handoo, Yoginder Handoo, Ashwin Kataria,Garvit Solanki, Gaurav Vishwakarma, Aditya Aggarwal,.

For Respondent: Advocates Arkaj Kumar, SC with Aakarsh Mishra, Vaishanavi Bhargava, Akshat Khanna and Karsh Sarosh Rebelo, Advs.