Receipt Of Indian Rupees From NRE Account Not “Foreign Exchange Dealing” Under FERA: Delhi High Court

The Delhi High Court on 30 April held that receipt of Indian currency from a Non-Resident External (NRE) account does not amount to “dealing in foreign exchange” under Section 8(1) or Section 8(2) of the Foreign Exchange Regulation Act, 1973 (FERA).

A Division Bench of Justices Navin Chawla and Ravinder Dudeja set aside a penalty imposed on Prakash Chandra Yadav and allowed his appeal. It observed:

“In the present case, the allegation against the appellant is not of dealing in foreign exchange or of exchanging the same, but of receiving an amount in Indian Rupees from an NRE account of Mr. Akbar Veerji. The same cannot amount to a violation of Section 8(1) of FERA.”

The case arose out of transactions of 1992, when Non-Resident Indian Akbar Veerji deposited foreign exchange into his NRE account with Canara Bank. The deposits included cash and remittances in US dollars, aggregating over USD 1,49,500.

From this account, a cheque of Rs 30 lakh was issued to Yadav. The Enforcement Directorate alleged that the transaction violated Section 8(1) of FERA, which prohibits dealing in foreign exchange without prior permission of the Reserve Bank of India.

The proceedings included both penalty action under Section 50 of FERA and criminal prosecution. While the criminal case ended in Yadav's acquittal in 2017, the penalty proceedings continued, leading to the imposition of Rs 5 lakh penalty in 2004, which was later upheld by the Tribunal in 2024.

Yadav challenged the penalty, contending that he received only Indian currency and not foreign exchange, and therefore no violation of Section 8(1) was made out. He argued that the Tribunal had misread the provision.

The Enforcement Directorate, however, submitted that Yadav was aware that the funds originated from an NRE account and that this amounted to a contravention of Section 8(1). It also relied on Section 8(2), arguing that the transaction involved unauthorised conversion of currency.

The High Court examined Section 2(h) of FERA, which defines “foreign exchange” to include foreign currency and instruments payable in foreign currency. The Court noted that the cheque issued to Yadav was payable only in Indian rupees.

It held that Section 8(1) prohibits dealing in foreign exchange without RBI permission, but Yadav neither acquired nor dealt in foreign exchange; he received only Indian currency.

The Bench further observed that the explanation to Section 8(1), which deems deposit of foreign exchange with another person as lending, was inapplicable as no foreign exchange was lent or held by Yadav. It also held that Section 8(2) had no relevance, as there was no allegation of unauthorised conversion of currency.

Relying on the fact that the criminal court had already acquitted Yadav and had observed that NRE account transactions operate through Indian rupee payments by cheque in India, the Court found no basis to sustain the penalty.

The Bench set aside the Tribunal's order dated 29 May 2024 and directed refund of the penalty amount already deposited within four weeks.

Accordingly, the High Court allowed the appeal with no order as to costs.