1. Appeals against penalties under Section 3(b) FEMA for making payments to overseas suppliers through hawala channels for undervalued imports. (Para 1 , 2 )
Back
Next 
2025 Supreme(Online)(ATFP) 13137
APPELLATE TRIBUNAL FOR FORFEITED PROPERTY
Balesh Kumar, Member, Rajesh Malhotra, Member
Smt. C. Lakshmi – Appellant
Versus
The Special Director Directorate of Enforcement Chennai – Respondent
FPA-FE-74/CHN/2020
Advocates:
For the Appellants/Petitioners: Prabhat Kumar, Pralabh Mathur
For the Respondents: Varun Mishra
For the Appellants/Petitioners: Prabhat Kumar, Pralabh Mathur
For the Respondents: Varun Mishra
Under FEMA, statements made under the Customs Act and documents seized thereunder are admissible if corroborated by independent evidence; retraction alone does not invalidate voluntary statements.
Headnote:(A) Foreign Exchange Management Act, 1999 - Sections 3(b), 13(1), 42 and 39 - Customs Act, 1962 - Section 138C - Indian Evidence Act, 1872 - Section 65B - Penalties for contravention of Section 3(b) for making payments to persons resident outside India through hawala channels - Under-valuation of imports and payment of differential amount through unauthorised channels.
(B) Evidentiary Principles - Statements recorded under Section 108 of the Customs Act, 1962 are deemed to be made in judicial proceedings and can be relied upon in FEMA adjudication - Retracted statements may be accepted if corroborated by independent material evidence - Documents seized under other laws, if produced from custody or control of the person, are admissible under Section 39 of FEMA - The FEMA is a self-contained code and strict observance of the Indian Evidence Act is not required in adjudication proceedings (Rule 4(5) of FEMA Adjudication Rules).
(C) Penalty - Reduction of penalty may be granted considering closure of business, financial hardship, and lesser role of directors - Directors who had no active role in the transactions are not liable under Section 42 of FEMA.
Facts of the case:
The appellants were involved in importing cemented carbide tips and hollow drill rods from China. Investigations by DRI and ED revealed that the actual value of imports was higher than the declared value; the difference was paid to Chinese suppliers through a hawala operator in India. Show cause notices alleged contravention of Section 3(b) of FEMA. Penalties of Rs.5 crore on the company and Rs.2 crore on the managing director were imposed, along with Rs.10 lakh each on two other directors. The appellants challenged the order on grounds of lack of independent FEMA investigation, reliance on retracted statements, and non-compliance with evidentiary requirements under the Customs Act and Evidence Act.
Findings of Court:
The tribunal found that independent investigation under FEMA was conducted, including recording statements under Section 37 of FEMA. The statements of the managing director were corroborated by documentary evidence recovered from his laptop, bank account analysis, and statements of family members. Retractions were not supported by evidence of coercion. The documents seized by DRI under the Customs Act were admissible under Section 39 of FEMA as they were seized from the custody of the appellant. The penalty on the two other directors was set aside as they had no involvement in the hawala operations. The penalty on the company and the managing director was reduced considering the circumstances.
Issues: (i) Whether the adjudicating authority could rely on investigations conducted by DRI under the Customs Act for FEMA proceedings? (ii) Whether retracted statements can form the basis of a finding of contravention? (iii) Whether documents recovered from electronic devices without complying with Section 138C of the Customs Act and Section 65B of the Evidence Act are admissible? (iv) Whether the directors who had no active role are liable under Section 42 of FEMA?
Ratio Decidendi: The tribunal held that statements recorded under the Customs Act can be used in FEMA proceedings as they pertain to the same transaction and are deemed judicial proceedings. Retracted statements are admissible if they are voluntary, corroborated by independent evidence, and not induced by threat or coercion. Documents seized from the appellant’s laptop under the Customs Act satisfy the condition of Section 39 of FEMA (seized from custody or control) and are admissible without strict compliance with the Evidence Act. Directors who had no say in the management and were mere signatories are not liable under Section 42 of FEMA. Result : Appeals partly allowed - Penalty on the managing director reduced to Rs.20,00,000/- and on the company reduced to Rs.15,00,000/-; appeals of the two other directors allowed, setting aside their penalties.
Legal Category Hierarchy
- foreign exchange management act
- practice and procedure
Table of Contents
2. Appellants argued lack of independent FEMA investigation and reliance on retracted statements; respondent argued voluntary admissions and corroborated evidence. (Para 3 , 4 , 5 , 6 , 7 , 8 , 9 , 10 )
3. Appeals partly allowed: penalties reduced for two appellants and set aside for two others. (Para 14 , 15 , 16 )
4. Can statements recorded under the Customs Act be relied upon in FEMA adjudication proceedings?
Yes, because Section 108 statements are deemed judicial proceedings and FEMA is a self-contained code; such statements can be used, especially when corroborated by independent evidence. (Para 11 , 13 )
5. Can a retracted statement be relied upon in FEMA proceedings?
Yes, if the statement was voluntary and corroborated by independent evidence; mere retraction does not make it involuntary. (Para 11 , 12 )
6. Can electronic evidence seized under the Customs Act be admitted in FEMA proceedings without compliance with Section 65B Evidence Act?
Yes, because Section 39 FEMA provides for presumption as to documents seized under any law, and FEMA adjudication is not bound by the Indian Evidence Act. (Para 13 )
7. Are directors who had no active role in the contravention liable under Section 42 FEMA?
No, they are not liable if they had no say in running the affairs and did not participate. (Para 15 )
FINAL ORDER
13.11.2025
This Order disposes of the Appeal Nos. FPA-FE-71/CHN/2020 filed by Dr. C. Manoharan, FPA-FE-72/CHN/2020 filed by M/s Nitish Tools Pvt. Ltd. (NTPL), FPA-FE-73/CHN/2020 filed by Smt. M. Thenmozhi, and FPA-FE-74/CHN/2020 filed by Smt. C. Lakshmi, against the Order No. SDE/SRO/CEZO/09/2020(SK) dated 28.07.2020 (Impugned Order) passed by the Special Director, Directorate of Enforcement, Government of India, Chennai. Penalties of Rs.5,00,00,000/- and Rs. 2,00,00,000/- have been imposed on NTPL and on the Appellant Dr. C. Manoharan respectively for contravention of Section 3 (b) of the Foreign Exchange Management Act, 1999 (FEMA) to the extent of Rs. 52,51,15,278/- and Rs.63,43,37,148/- respectively vide the Impugned Order. Further penalty of Rs. 10,00,000/- each has been imposed on Smt. Thenmozhi and Smt. C. Lakshmi for contravention of Section 3 (b) of FEMA read with Section 42 of FEMA.
2. Ld. Counsel for the Appellants stated that the allegation made in the Show Cause Notice (SCN) No. T-4/01/CEZO/SRO/2017 dated 10.02.2017 that the Appellant Shri C. Manoharan has paid amounts totaling Rs. 63,43,37,148/- (Rs. 52,51,15,278/- in respect of M/s Nitish Tools Pvt. Ltd. + Rs. 10,92,21,870/- in respect of M/s SSE-M/s Shree Sai Enterprises) to Shri Sunil of Coimbatore in India during the relevant period under the instructions of his overseas suppliers in China, for the credit of such Overseas suppliers and have thus had contravened the provisions of section 3(b) of FEMA, 1999 rendering himself liable to penalty under Section 13(1) of FEMA, 1999. The allegation related to under valuation of cemented carbide tips, carbide inserts and hollow drill rods imported from China. It was suspected that the difference between the actual price and the value declared to Customs, was paid to the exporter through Hawala.
3. Ld. Counsel for the Appellants argued that the Impugned Order has relied heavily on the investigation conducted by the Directorate of Revenue Intelligence (DRI) and the Order-in-Original passed by the Commissioner of Customs. He stated that 40 pages of the Impugned Order contains material collected by DRI. Since, the Impugned Order is based on the investigations conducted under the Customs Act the same is not sustainable in view of the Judgment in Jain Engineering Company vs. Enforcement Directorate [2016 (343) E.L.T. 149 (Del)]. The Judgment (supra) did not absolve the Respondent Directorate from the responsibility to conduct independent investigations for FERA violations and the admissions made in the Order of the Settlement Commission, could not be used to prove the allegations under FERA. Ld. Counsel denied that NTPL indulged in improper and illegal import. Ld. Counsel further argued that the evidences allegedly to have been recovered from the laptop were not sustainable as provisions of Section 138 C of the Customs Act, 1962 had not been adhered and the required certificate had not been produced. He asserted that the conditions under Sub- Section 2 of Section 138 C of the Customs Act, 1962 were not complied with. Ld. Counsel contended that the Respondent Directorate had failed to meet the requirements of Section 65 B of the Evidence Act.
4. Further, Ld. Counsel contended that there has been no corroboration of any of the evidences collected by DRI during the investigation. Ld. Counsel contended that the case of under valuation cannot be made merely on the basis of the statements which were recorded under duress. Reliance cannot be placed on the retracted statements. He stated that the investigation under FEMA could not bring forth independent evidence. Ld. Counsel contended that Shri Sunil, the alleged Hawala Dealer could not be located and the landlord in fact denied having rented his premises to any person known as Sunil. Ld. Counsel stated that the TT Remittances were neither verified by DRI nor by ED. Ld. Counsel also stated that the Order of the Commissioner of Customs in the case made by DRI has been under c
