Madras High Court Refuses To Set Aside ED's Show Cause Notice To DMK MP S. Jagathrakshakan Over FEMA Violations

Upasana Sajeev

5 Dec 2023 1:34 PM GMT

  • Madras High Court Refuses To Set Aside EDs Show Cause Notice To DMK MP S. Jagathrakshakan Over FEMA Violations

    The Madras High Court recently dismissed a plea by DMK MP S. Jagathrakshakan challenging the proceedings initiated against him and his family under the Foreign Exchange Management Act, 1999 ("FEMA"). Justice N Seshasayee observed that the objections raised by Jagathrakshakan could not be considered at the present stage, and allowed taking of all the defenses before the...

    The Madras High Court recently dismissed a plea by DMK MP S. Jagathrakshakan challenging the proceedings initiated against him and his family under the Foreign Exchange Management Act, 1999 ("FEMA").

    Justice N Seshasayee observed that the objections raised by Jagathrakshakan could not be considered at the present stage, and allowed taking of all the defenses before the Adjudicating authority.

    The allegation against Jagathrakshakan (and other petitioners) was that he had subscribed to 70 lakh shares in a Singapore-based company and later transferred those shares to his wife and two children outside India in violation of Section 4 of FEMA. Following this, the Authorised Officer (Adjudicating Authority of ED) moved the Commissioner of Customs under Section 37A of the Act for seizure of Jagathrakshakan's assets.

    After enquiry, the commissioner concluded that there was no proof that any of the petitioners ever paid for any shares since the company had not called for the same. This order was challenged by the ED before the Appellate Authority.

    While these proceedings were going on, the Assistant Director of ED, on the same set of allegations, moved the Special Director of ED (Adjudicating Authority) under Section 16(3) of FEMA and a show cause notice was issued to all petitioners to which they responded. Midway through the proceedings, a corrigendum was issued altering the provisions from Section 13(2) to Section 13(1A) of the Act which was challenged before the court.

    Jagathrakshakan and other petitioners argued that once a competent authority had already recorded that there was no material to conclude a violation of FEMA, there was no foundation to take cognizance of the complaint under Section 16 of FEMA for the same set of facts.

    It was further argued that both Section 13(1A) and 13(2) operate in two different spheres. It was also submitted that for both sections to operate, there must be some material, while in the present case, the competent authority had held that there was not even prima facie material to show a violation of Section 4.

    The ED, on the other hand, argued that the competent authority's findings were only concerning seizure of property and that did not ipso facto imply that the same can be telescoped for adjudication under Section 16. It was also argued that FEMA was a code in itself, and the court should not interfere when a remedial fora was created under a fiscal statute.

    The court agreed with the respondents' submission and observed that jurisdiction of the competent authority was limited to holding an enquiry on whether the assets of those in violation of FEMA should be seized and it did not extend to adjudicating on the violations of the provisions.

    β€œThe 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,” the court observed.

    The court also noted that the present stage was too premature for considering the petitioners' plea and FEMA being a complete code must be allowed to work in its free space. Thus, the court dismissed the petitions allowing Jagathrakshakan and other petitioners to take their defenses before the adjudicating authority.

    Counsels for Petitioners: V Raghavachari, Senior Counsel assisted by Advocate R Sivaraman

    Counsels for Respondent: Additional Solicitor General AR L Sundaresan assisted by SPP Rajnish Pathiyil for R1 & R2

    Citation: 2023 LiveLaw (Mad) 383

    Case Title: S Jagathrakshakan and Others v The Special Director

    Case No: WP NO. 21096 of 2023


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