Emphasising that continuation of adjudication by the Directorate of Enforcement despite a reasoned refusal to confirm seizure under the Foreign Exchange Management Act, 1999 (FEMA) is contrary to law, the Supreme Court has clarified that the Adjudicating Authority, by undoing the order of the Competent Authority even while the appeal against the said order is pending, tantamount to abdicating the powers of the Appellate Authority. Accordingly, the Court declared the orders of the High Court and the final adjudication order passed by the Adjudicating Authority as arbitrary and contrary to law, and set them aside.
The Court directed that the Appellate Authority shall first decide the appeal preferred by the Department against the order of the Competent Authority under Section 37A(5) of FEMA, and pursuant to the disposal of the appeal, the proceedings arising out of the SCN may be commenced and taken to their logical conclusion.
A Two-Judge Bench of Justice Vikram Nath and Justice Sandeep Mehta observed that although ordinarily a writ petition against an SCN may not be entertained, the said proposition is not an inviolable rule. Interference at the stage of SCN is permissible in exceptional circumstances, such as where the notice suffers from patent lack of jurisdiction, reflects non-application of mind, is issued with a pre-determined or premeditated approach, amounts to an abuse of the process of law, or results in a violation of the principles of natural justice. The Bench noted that the rejection of the challenge laid by the appellants to the SCN on the ground of non-maintainability was not justified in the peculiar facts of the case at hand.
The Bench observed that Section 37A(4) of FEMA is restricted to an order of the Competent Authority confirming seizure of equivalent assets and the continuance thereof till the disposal of the adjudication proceedings. The said provision literally does not deal with a situation where the seizure has not been confirmed. The refusal to confirm the seizure reflects a considered finding that the foundational requirement of a ‘reason to believe’ was not satisfied on the material available.
Further, the Bench noted that the High Court repeatedly referred to the effect of the seizure order and impliedly effaced the findings recorded by the Competent Authority while refusing to confirm the seizure, thereby foreclosing the outcome of the appeal pending before the appellate authority. Hence, the Bench observed that in case the finding of the Competent Authority refusing to confirm the seizure for substantive reasons stands affirmed in appeal, manifestly, the same would have a bearing on the outcome of the adjudication proceedings.
Briefly, the appellants, M/s. Accord Distilleries & Breweries Pvt Ltd. and its Directors, were alleged to have acquired 70 lakh shares of M/s. Silver Park International, a Singapore-based company, without consideration and without the requisite approval of the Reserve Bank of India, in violation of Section 4 of the Foreign Exchange Management Act, 1999 (FEMA) read with the Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004. The shares were subsequently transferred to the wife and children of the Director, J. Sundeep Anand, without regulatory approval. Consequently, the Authorised Officer seized the properties of the appellants vide order under Section 37A(1) of FEMA.
The Competent Authority, exercising powers under Section 37A(3) of FEMA, rejected the prayer for confirmation of seizure, and concluded that there was no proof that any of the appellants had ever paid for the shares, and thus no contravention of Section 4 was made out. The Directorate of Enforcement challenged this order before the Appellate Tribunal under SAFEMA, which remains pending.
Parallelly, the Adjudicating Authority issued a Show Cause Notice (SCN) under Section 16(3) of FEMA, followed by a corrigendum. The appellants challenged the SCN and corrigendum before the Madras High Court, arguing that the SCN was non est since the Competent Authority had recorded categoric findings of lack of basis for seizure. The Single Judge and the Division Bench of the High Court dismissed the petitions and intra-court appeals, respectively. Subsequently, the Adjudicating Authority passed a final adjudication order, imposing penalty and ordering confiscation of the property.
Appearances:
AOR E. Sudarsanan, along with Advocates K. Suresh and Rajendra Singvi, for the Appellants
ASG Anil Kaushik, AOR Arvind Kumar Sharma, along with Advocates Zoheb Hussain, Arkaj Kumar, Bhuvan Kapoor, and Animesh Upadhyay, for the Respondents
