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IN THE HIGH COURT OF JUDICATURE AT MADRAS
JUSTICE N. SESHASAYEE, J.
S. Jagathrakshakan – Petitioner
Versus
The Special Director Adjudicating Authority Directorate of Enforcement – Respondent
W.P. Nos. 21096, 21100, 21102, 21105, 21359 of 2023, W.M.P. Nos. 20491, 20493, 20496, 20498, 20499, 20500, 20502, 20504, 20764, 20767 of 2023
Decided On : 07-11-2023
FEMA - Foreign Exchange Management Act - Sections 4, 13(1A), 13(2), 16, 37A - The court discussed the provisions of the Foreign Exchange Management Act (FEMA), particularly Sections 4, 13(1A), 13(2), 16, and 37A. Section 4 prohibits Indian residents from holding foreign securities, while Section 13 outlines the consequences of violations, including confiscation of assets. The court interpreted that the Competent Authority's finding of no prima facie violation under Section 4 did not preclude the Adjudicating Authority from proceeding under Section 16, as the latter's inquiry is independent. The court emphasized that the statutory scheme of FEMA allows for separate proceedings for asset seizure and adjudication of violations, thus influencing its decision to dismiss the petitions.
Fact of the Case:
The petitioners, including a company and its directors, faced allegations of violating the Foreign Exchange Management Act (FEMA) by subscribing to shares in a Singapore-based company and transferring them to family members without necessary approvals. The Competent Authority found no prima facie evidence of violation, leading to a challenge against subsequent proceedings initiated by the Enforcement Directorate under Section 16 of FEMA.
Finding of the Court:
The court found that the Adjudicating Authority's proceedings under Section 16 were valid despite the Competent Authority's earlier finding. It held that the inquiry under Section 16 is independent and does not rely on the findings of the Competent Authority regarding asset seizure. The court concluded that the corrigendum issued by the Adjudicating Authority did not prejudice the petitioners' rights.
Issues: Whether the findings of the Competent Authority under Section 37A preclude the Adjudicating Authority from proceeding under Section 16 of FEMA; whether the corrigendum issued by the Adjudicating Authority affects the petitioners' rights.
Ratio Decidendi: The court established that the proceedings under Section 16 of FEMA are independent of the findings made under Section 37A regarding asset seizure. The statutory framework allows for separate inquiries, and the issuance of a corrigendum does not alter the foundational facts of the case, thus not infringing on the petitioners' rights.
Final Decision: The court dismissed all writ petitions, allowing the Adjudicating Authority to continue its inquiry under Section 16 of FEMA without interference.
ORDER :
1. The petitioners herein are a company, its directors and individuals, who among themselves are relations. They all face a single allegation that the petitioner in W.P. No. 21096 of 2023 had subscribed to 70.0 lakhs shares in certain M/s.Silver Park, a Singapore based company, registered as per the laws of Singapore, and that he had later transferred those shares to his wife and two children outside India.
2. These transactions have set in motion the consequences spelt out in Foreign Exchange Management Act,1999 (in short FEMA) against them. The allegation is that the petitioner in W.P. No. 21096 of 2023, inasmuch as he is an Indian citizen had held shares or to state it differently foreign securities in a Singapore based company, has contravened Sec. 4 of the Act, and inasmuch as his wife and children are transferees of those shares, who being citizens of India, and are holders of those shares also have contravened Section 4.
3. Pursuant to this, the Authorised Officer (Adjudicating Authority of Directorate of Enforcement) has moved the Competent Authority (the Commissioner of Customs) under Sec. 37A of the Act, for seizure of certain assets of these petitioners. The Competent Authority held an enquiry under Section 37A(3) of the Act, and came to a conclusion, vide its order dated 03.02.2021, that there is no proof that any of the petitioners have ever paid for any shares floated by M/s.Silver Park, since the company is not found to have made a call for the same. This order of the Competent Authority is now under challenge by the Enforcement Directorate, before the Appellate Authority (ATFE) constituted under Section 19 of the Act.
4. Along side the proceedings for attachment, on the same set of allegations, the Authorised Officer (this time, it is the Assistant Director of Enforcement Directorate) moved the Adjudicating Authority (the Special Director of Enforcement Directorate) under Section 16(3) of FEMA, pursuant to which a show-cause notice dated 22.12.2021 was issued to all the petitioners herein for an alleged violation of Sec.3, Sec.4 and Sec.8 and few allied Regulations. The petitioners have responded to the same. Midway through the proceedings, a corrigendum dated 13.03.2023 was issued to the show cause notice against the petitioners, and the corrigendum issued are now under challenge in all petitions.
Summary of Petitioner's Case:
5. The contention of the petitioners is that, when once the Competent Authority has recorded its finding in his order made under Sec. 37A that it has no material to conclude that the petitioners have violated Sec. 4 of the Act, there is no foundation for the proceedings under Sec.16 of the Act to take cognizance of the complaint which are founded on the same set of facts.
6.1 Introducing the legal framework, Mr. V. Raghavachari, the learned senior counsel appearing for the petitioners, submitted that:
(a) The Authorised Officer has moved the Competent Authority under Sec. 37A of the Act, alleging certain contravention of Sec. 4 of the Act. To be more specific, it is all about purchase of foreign securities and transfer of money for their purchase by Indian citizens. The Competent Authority is now required to give its opinion, and under Section 37A, the Authority is required to record its reason of its satisfaction over the suspicion that Sec. 4 has been contravened, and may proceed to order seizure of the property situated within India. Now while forming this opinion, or to concretize the suspicion on the basis of the materials placed before it by the Authorised Officer, the Competent Authority did not find anything even to prima facie believe that there has been contravention to Sec.4. In particular, the Competent Authority has held that there is no movement or transfer of funds outside India.
(b) It is in this setting, after the Competent Authority has passed its order, the same Authorised Officer with the same set of allegations moved the Adjudicating Officer under Sec. 16 of the Act.
AI
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