2023 (12) TMI 442 - HC - FEMA

Validity of enquiry / investigation proceedings - taking cognizance of the complaint - Investment in foreign companies - violation of Sec.4 of FEMA - Competent Authority passed orders not to seize the assets of the petitioners - as alleged assessee 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. Adjudicatory Authority in his show cause notice has indicated that they would be proceeded against u/s 13(2) and enquiry into this is underway - Adjudicating Authority had issued a corrigendum dated 13.03.2023, altering the provision from Sec.13(2) to Sec.13(1A) - Competent Authority constituted under the Act had vide his proceedings dated 03.02.2021, had decided not to seize the assets of the petitioners on a finding that these petitioners did not violate Sec.4 of the Act. HELD THAT - Sec. 13 of the Act merely spells out the consequence of the violation of any of the provision of the Act, which includes Sec.4 embargo on a resident Indian, which mandates that no one who is resident in India shall hold foreign exchange or foreign securities outside India. The accusation which the petitioners herein now face is that they, as citizens and residents of India, are holding shares of a foreign company, and thus they have over stepped the line of prohibition under Sec.4. If the scheme of the statute is observed, Sec.13 comes into play only in the eventuality of the Adjudicating Authority entering a finding that the petitioners are guilty of the accusation which is now under enquiry. Set in the context, the corrigendum does not introduce any new set of allegations midway through an enquiry, but only put the petitioners on notice, that in the eventuality of they being found guilty of violating Sec.4, that the Adjudicating Authority might proceed against them under Sec.13(1A) consequence. Therefore, any alteration of provision regarding the consequence that may visit the petitioners will not, and cannot, prejudice the petitioners visa- vis the nature of accusation that they are now facing. Secondly, a close analysis of Sec.13 shows, it only provides a buffet of options to the Adjudicating Authority to choose from, on the course of action that the Authority may adopt when the stage is set for deciding the penal consequence of entering a finding of guilt. This situation is more akin to a Criminal Court altering a charge under Sec.216 Cr.P.C, without altering the facts constituting the accusation. The basic elements of principles of natural justice requires that the petitioners are put on notice on the possible course of action in the contemplation of the Adjudicatory Authority, if the petitioners are found guilty of the violation of Sec.4 On facts, the petitioners have entered appearance for a hearing on the notice of corrigendum, and that they have began participating in the proceedings. They are now given an opportunity to raise their objection before the Adjudicatory Authority. In a circumstance such as this what is the prejudice that has visited the petitioners which warrants an interference by this court? None. Here it is significant to note that in Raj Kumar Shivhare 2010 (4) TMI 432 - SUPREME COURT has held that FEMA is a self-contained code and remedial fora, the Act as created should not be bye-passed. Its now time to consider the merit of the arguments of the petitioners' counsel on the effect of the order of the Competent Authority passed under Sec.37-A of Act, releasing the properties of the petitioners from seizure. The reason which has formed the ground for the decision of the Competent Authority is that there are no materials to suggest that any money or foreign exchange has flown out of India to support the purchase of the shares in the Singapore based company. The fact that the Statute has created two independent authorities, one for adjudicating on the accusation under Sec.16 read with Sec.13, and the other for deciding on the seizure of assets of those who face the accusation, does not enable telescoping the effect of the what latter may do into the power vested in the former. What if the statute had vested both the powers in the same authority? Then the power of seizure will be construed as an interim arrangement in aid of final adjudication. And, the law is settled that the reasoning of an interim order will have zero potency to impact the reasoning for a final decision. The fact, that both these powers are vested in different Authorities, does not make the order passed by the Competent Authority vis-a-vis the seizure of assets any superior as to interfere with the power of adjudication of the Adjudicatory Authority. It is plainly a question on jurisdiction, and it cannot be expanded interpretatively. Secondly, if the reasoning of the Competent Authority in refusing to seize the property is considered, it focuses essentially on whether payment has been made by the petitioners for the purchase of shares in the Singapore based company, which is forbidden under Sec.3(b) of the Act. . The way statute has presented Sec.3 and Sec.4, it appears to create independent class of prohibitions. Now, if the reasoning of the Competent Authority is required to be transmitted into the adjudicatory process contemplated under Sec.16, as was canvassed by the petitioners, then it may involve a need to read Sec.3 into Sec.4. The permissibility of reading Sec.3 into Sec.4 requires to be considered independently, and the present stage is too premature for considering it. At any rate it cannot be considered in this proceedings, for, it was held in Raj Kumar Shivhare case supra FEMA is a complete Code, and it must be allowed its free space to work itself. The foregoing discussion leads this Court to the only conclusion That these petitions are not entertainable. Now it is time to resume the enquiry by the Adjudicating Authority. The petitioners will be entitled to take all such defences which they are entitled to take under law.

Summary

Issues Involved:
1. Alleged contravention of Section 4 of FEMA by petitioners.
2. Challenge to the order of the Competent Authority under Section 37A of FEMA.
3. Validity of the show-cause notice and corrigendum issued under Section 16 of FEMA.

Summary:

1. Alleged Contravention of Section 4 of FEMA:
The petitioners, a company and its directors, allegedly subscribed to and transferred shares of a Singapore-based company, violating Section 4 of FEMA. The Enforcement Directorate initiated proceedings under Section 16, issuing a show-cause notice for violations of Sections 3, 4, and 8 of FEMA.

2. Challenge to the Order of the Competent Authority under Section 37A:
The Competent Authority, after an inquiry under Section 37A(3), concluded there was no proof of payment for shares by the petitioners. This order was challenged by the Enforcement Directorate before the Appellate Authority (ATFE). Petitioners argued that the Competent Authority's finding negated the basis for further proceedings under Section 16.

3. Validity of the Show-Cause Notice and Corrigendum:
The petitioners contended that the Adjudicating Authority erred in issuing a show-cause notice and later a corrigendum altering the applicable section from 13(2) to 13(1A) of FEMA. They argued this indicated non-application of mind and was prejudicial. The court, however, found that the corrigendum did not introduce new allegations but merely clarified potential consequences under Section 13(1A) if found guilty, thus not prejudicing the petitioners.

Decision:
The court dismissed the writ petitions, stating that the Competent Authority's findings under Section 37A do not preclude the Adjudicating Authority from proceeding under Section 16. The court emphasized that FEMA is a self-contained code, and the petitioners could raise their defenses during the ongoing adjudication process. The petitions were dismissed, and the connected writ miscellaneous petitions were closed.