Summary
The Competent Authority under Section 37A(3) of FEMA refused to confirm a seizure of the appellants' assets because there was no 'reason to believe' that foreign securities were held in breach of Section 4, and the Directorate's appeal against that refusal was pending. The Supreme Court held that the High Court wrongly refused to entertain the writ against the show cause notice and wrongly treated the refusal as irrelevant. The Adjudicating Authority, relying on the High Court, had in effect overruled the Competent Authority while the appeal was pending. The Court set aside the High Court's orders and the adjudication order and directed that the appeal be decided first.
Issues
- Whether the appellants were disentitled to relief for suppressing that a final adjudication order had been passed on the show cause notice.
- Whether a writ petition against the show cause notice could be entertained when the Competent Authority had refused to confirm the seizure under Section 37A(3) of FEMA.
- What bearing an order under Section 37A refusing to confirm a seizure has on adjudication proceedings under Section 16 of FEMA, and whether Section 37A(4) applies where seizure is not confirmed.
- Whether the Adjudicating Authority could disregard the Competent Authority's order while the appeal against it was pending.
Provisions considered
- Section 37A(1) to (3), Foreign Exchange Management Act, 1999The Authorised Officer may seize equivalent assets in India on a 'reason to believe' that assets abroad are held in breach of Section 4. The Competent Authority then independently decides whether to confirm. The Court held that this review is a substantive evaluation, not a formality, and that a refusal to confirm is a finding that the 'reason to believe' was absent on the material. (¶¶ 25, 26, 27, 30, 31, 32)
- Section 37A(4), Foreign Exchange Management Act, 1999This sub-section keeps a confirmed seizure alive until adjudication ends and leaves the assets for the Adjudicating Authority's directions. The Court held that it deals only with a confirmed seizure, not one that was refused, and that the High Court applied it as if the seizure had been confirmed. (¶¶ 28, 29, 36)
- Section 37A(5), Foreign Exchange Management Act, 1999The Directorate's appeal to the Appellate Tribunal against the Competent Authority's refusal was pending. The Court directed that it be decided first, within two months. (¶¶ 10, 38, 40)
- Section 16, Foreign Exchange Management Act, 1999The show cause notice and the final adjudication order of 26.08.2024 were issued under this provision. The adjudication order was set aside and the proceedings were revived from the show cause notice stage, to continue after the appeal is decided. (¶¶ 11, 37, 39, 40)
- Article 226, Constitution of IndiaA writ against a show cause notice is ordinarily not entertained, but it may be in exceptional cases such as patent lack of jurisdiction, non-application of mind, prejudgment, abuse of process or breach of natural justice (relying on Union of India v. VICCO Laboratories). (¶¶ 32, 33)
Held
- The objection that the appellants suppressed the final adjudication order failed. Their pleadings disclosed that the show cause notice had ended in a final order, which they had appealed, so there was no lack of candour. (¶ 24)
- Section 37A of FEMA is a preventive measure that secures assets equivalent to foreign exchange or securities under scrutiny until adjudication. The Competent Authority's decision whether to confirm a seizure is a substantive evaluation of whether the material supports even a prima facie inference of contravention. (¶¶ 26, 27, 30)
- Section 37A(4) applies only where the seizure has been confirmed and does not deal with a case where confirmation is refused. A refusal for substantive reasons, if upheld in appeal, would bear on the outcome of the adjudication proceedings. (¶¶ 29, 36)
- The High Court should not have held that a writ against the show cause notice could not be entertained. Interference at that stage is allowed in exceptional circumstances, and on these peculiar facts rejecting the challenge as not maintainable was unjustified. (¶¶ 32, 33)
- The High Court's observations that the seizure proceedings had no implication for the final order effectively erased the Competent Authority's findings and decided in advance the pending appeal against them. (¶¶ 34, 35, 36)
- By relying on those observations and declaring that it disagreed with the Competent Authority's order while the Department's appeal against it was pending, the Adjudicating Authority effectively took over the role of the Appellate Authority. That course was contrary to law. (¶¶ 37, 38)
Result
Appeals disposed of. The Division Bench order of 23.07.2024, the Single Judge's order of 30.11.2023 and the adjudication order of 26.08.2024 imposing penalty and confiscation are set aside, and the proceedings are revived from the show cause notice stage. The Appellate Tribunal is to decide the appeal under Section 37A(5) by a reasoned order within two months. After that, the show cause notice proceedings may continue, uninfluenced by the observations of the High Court or of the Supreme Court.