2020 (7) TMI 839 - HC - FEMA

Validity of communication issued to Kotak Mahindra Bank as well as HDFC Bank under FEMA - communication directed the banks to stop operations in certain accounts to prevent withdrawal that could affect the investigation - As stated three accounts mentioned therein are suspected to be involved in a case under FEM - Appellants pointed out that the learned Single Judge has held that the impugned communication has lost its efficacy by virtue of Section 132 (8A) of the Income Tax Act, 1961 as the period of sixty days has expired. HELD THAT - On a plain reading of Section 37 of the FEMA it is clear that sub-sections (1) and (2) confer a power to carry out an investigation for the contravention referred to in Section 13. An officer who is empowered to carry out the investigation is conferred with all the powers which are conferred under the Income Tax authorities under the said Act of 1961 and is entitled to exercise the said powers. That is the specific provision of sub-section (3) of Section 37 of the said Act of 1999. Therefore, the investigating officer by exercising the power under Section (3) of Section 37 could have taken recourse to the provisions of Section 132 of the Act of 1961 by passing a specific order. The communication directing the banks to stop operation of the accounts could have been based on an order passed under sub-section (3) of Section 132 of the Act of 1961. However, it is an accepted position that even an order under sub-section (3) of Section 132 putting a restraint on the operation of the accounts was not at all passed. Therefore, it is not necessary to interfere with the impugned order, inasmuch as the admitted position which emerges today is that there was no order passed by the investigating officer in exercise of the powers under sub-section (3) of Section 37 read with Section 132 of the Act of 1961. Therefore, there was no order of freezing of the accounts. Only on this ground, we decline to entertain this appeal and the same is disposed of.

Summary

Issues:
Challenge to communication dated 5th October, 2018 under the Foreign Exchange Management Act, 1999 and Income Tax Act, 1961.

Analysis:
The respondent filed a writ petition challenging a communication issued by the appellants to two banks suspecting involvement in a case under the Foreign Exchange Management Act, 1999 (FEMA). The communication directed the banks to stop operations in certain accounts to prevent withdrawal that could affect the investigation. The appellants appealed against the Single Judge's finding that the communication lost efficacy due to the expiration of the sixty-day period under Section 132(8A) of the Income Tax Act, 1961. The appellants confirmed that no specific order under Section 132 of the Income Tax Act was served to the respondent. The High Court noted that Section 37 of FEMA empowers officers to investigate contraventions and exercise powers similar to Income Tax authorities. However, the investigating officer did not pass any order under Section 132 of the Income Tax Act to freeze the accounts. As a result, the High Court declined to entertain the appeal, stating that no freezing order was issued, and upheld the Single Judge's decision. The High Court clarified that its decision did not prevent the investigating officer from exercising powers under Section 37 of FEMA in the future.

This judgment primarily deals with the lack of a specific freezing order under Section 132 of the Income Tax Act, 1961, despite a communication directing banks to stop operations in certain accounts under the Foreign Exchange Management Act, 1999. The court emphasized that the investigating officer did not pass an order under Section 132, which was necessary to freeze the accounts. As a result, the High Court upheld the Single Judge's decision, stating that without a freezing order, there was no legal basis to interfere with the communication issued to the banks. The court clarified that its decision did not prevent future actions by the investigating officer under Section 37 of FEMA.