Seizure Under 37A FEMA Cannot Continue After Repatriation Of Foreign Exchange: SAFEMA Tribunal

On 14 May, the Appellate Tribunal under the Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act (SAFEMA) held that seizure of an equivalent asset in India under Section 37A of the Foreign Exchange Management Act (FEMA) cannot continue once the resident no longer holds the overseas asset and the equivalent foreign exchange value has been repatriated to India.

A Bench comprising Members Balesh Kumar and Rajesh Malhotra allowed the appeal filed by Devendra N. Desai and set aside the Enforcement Directorate's (ED) seizure order dated 2 March 2020 concerning his Mumbai property, which had been attached as an equivalent-value asset linked to an alleged undisclosed Dubai property. It observed:

“We therefore conclude that the action taken by the Respondent Directorate in effecting seizure has met its purpose as provided for Section 37A of FEMA. The property held abroad is no longer held by the Appellant, and the foreign exchange that accrued abroad has since been repatriated in its equivalent value. Therefore, in view of the provisions of the Proviso of Section 37A (4) of FEMA, we set aside the seizure of the said property in India of the Appellant.”

The dispute arose from a Dubai apartment purchased in 2012 in the name of Desai and his family members. The apartment was acquired for AED 7,79,000 through payments made by family friend Siddarth Kandpile as consideration for construction consultancy services rendered by Desai.

The ED alleged that foreign exchange equivalent to AED 9,14,000, comprising the value of the property and rental income, was being held abroad in contravention of Section 4 of FEMA. Invoking Section 37A, the agency seized Desai's Mumbai property valued at Rs. 1,77,63,590 as an equivalent-value asset. The agency further alleged that Desai had failed to disclose the overseas flat and had not obtained approval from the Reserve Bank of India (RBI).

During the proceedings, Desai stated that he had subsequently transferred the Dubai property back to Kandpile without consideration and that the equivalent value of the foreign asset had been repatriated to India. He relied on a remittance of about Rs. 1.86 crore, equivalent to AED 9,14,000, received as a gift from his daughter, a United States citizen.

The ED contended that the later remittance received as a gift had no demonstrated nexus with the original foreign asset or the export proceeds that had accrued to Desai for consultancy services. The competent authority accepted the ED's case and confirmed the seizure order, leading to the present appeal.

Before the Tribunal, Desai argued that the seizure could not continue in view of the proviso to Section 37A(4) because the foreign property had been transferred back and the equivalent value had already been brought into India.

He further contended that Section 37A could not apply retrospectively because the Dubai property was acquired in 2012, whereas the provision came into force in 2015.

The Tribunal rejected the contention on retrospectivity and held that the relevant consideration under Section 37A was not the date of acquisition of the foreign asset, but whether the resident continued to hold the asset after the provision came into force. Since Desai and his family members continued to hold the Dubai property after 2015, the Tribunal held that Section 37A applied.

It further held that the ED had established a prima facie basis to invoke Section 37A. However, it clarified that adjudication proceedings would finally determine whether any FEMA contravention had occurred.

The Bench also found that Desai and his family members no longer held the overseas property and that the equivalent foreign exchange value had been remitted to India. It observed that communications from Kandpile and Desai's daughter supported the explanation regarding the remittance and that the ED had placed no contrary material on record.

Further, it observed that Section 37A aims to secure foreign exchange, foreign security, or foreign immovable property held abroad by Indian residents through seizure of equivalent assets in India. It held that the statutory purpose had already been achieved in the present case.

Accordingly, the Tribunal set aside the seizure order dated 2 March 2020 while granting liberty to the ED to continue adjudication proceedings against Desai for alleged FEMA contraventions during the period he held the foreign asset.

For the Appellant: Mr. Khushal Thakur, Advocate Mr. Ankush Bhardwaj, Advocate For the Respondent: Mr. Shoumendu Mukherji, Advocate