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2010 (12) TMI 1050 - HC - Companies LawPenalty - NRE account - deposits were made by the persons other than the account holder, a show-cause notice was issued by the Directorate of Enforcement to the appellant Held that - deposits in foreign currency made by mandatee or any person other than account holder, in NRE account, prior to 31-7-1995 would not amount to infringement of provisions of sections 6(4), 6(5), 73(3), 49 and 9(1)(e), read with section 29B.8(c) of Exchange Control Manual, 1987. - prior to 31-7-1995, there had been no requirement clearly pointing out that deposits in NRI accounts could not be made by a person other than the NRI account holder themselves. Show-cause notice was issued after more than 8 years. Bank was not obliged to maintain record beyond 8 years in view of The Banking Companies (Period of Preservation of Records) Rules, 1985, notified on 29-3-1985, wherein maximum period of maintenance of records of all kinds of registers etc. has been stipulated as 8 years. In view of issuance of show-cause notice after about nine years, appellant had been prejudiced
Issues Involved:
1. Contravention of provisions of sections 6(4), 6(5), 73(3), 49, and 9(1)(e) of the Foreign Exchange Regulations Act, 1973 (FERA) read with section 29B.8(c) of the Exchange Control Manual, 1987. 2. Validity and legality of show-cause notices issued for deposits made by persons other than the account holders in NRE accounts. 3. Timeliness of the show-cause notices issued after a significant delay. Issue-Wise Detailed Analysis: 1. Contravention of Provisions of FERA and Exchange Control Manual: The appeals were directed against the orders of the Appellate Tribunal for Foreign Exchange, which upheld the penalties imposed by the Adjudicating Authority for contravention of sections 6(4), 6(5), 73(3), 49, and 9(1)(e) of FERA read with section 29B.8(c) of the Exchange Control Manual, 1987. The primary contention was that deposits in NRE accounts were made by persons other than the account holders, which was alleged to be against the guidelines laid down by the Reserve Bank of India (RBI). The Adjudicating Authority found that the banks accepted foreign currency deposits without verifying the source or ensuring it was deposited by the account holder, which was seen as a failure to comply with RBI guidelines. 2. Validity and Legality of Show-Cause Notices: The legality of the show-cause notices issued in 2002 for irregularities committed in 1993 was questioned. The court noted that similar show-cause notices had been issued to several banks, leading to numerous writ petitions. In previous cases, such as Citi Bank v. Union of India and Standard Chartered Bank v. Directorate of Enforcement, it was held that prior to 31-7-1995, there was no clear stipulation that deposits in NRE accounts could not be made by persons other than the account holders. The court reiterated that the requirement for deposits to be made by the account holders themselves was only clarified in 1995, thus the banks were not in violation of the provisions prior to that date. 3. Timeliness of Show-Cause Notices: The court also addressed the issue of the delay in issuing the show-cause notices, which were issued after more than eight years from the date of the alleged contraventions. According to The Banking Companies (Period of Preservation of Records) Rules, 1985, banks were not required to maintain records beyond eight years. The significant delay in issuing the notices prejudiced the banks, as they were not obligated to preserve relevant records for such an extended period. Consequently, the delay rendered the show-cause notices and subsequent adjudication proceedings untenable. Conclusion: In light of the foregoing reasons, the appeals were allowed, and the impugned orders were set aside. The court emphasized that prior to the 1995 clarification, there was no explicit requirement for deposits in NRE accounts to be made by the account holders themselves. Additionally, the delay in issuing the show-cause notices prejudiced the banks, further invalidating the proceedings.
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