FEMA | Non-Confirmation Of Seizure By Competent Authority Under S.37A Has Bearing On Adjudication Proceedings : Supreme Court

The Supreme Court on April 1 held that the non-confirmation of a seizure order under Section 37A of the Foreign Exchange Management Act, 1999 (FEMA) can have a significant bearing on subsequent adjudication proceedings, and that authorities cannot proceed in a manner that effectively nullifies or prejudges a pending statutory appeal.While stopping short of declaring adjudication proceedings automatically non est in every such case, the Court ruled that continuation of adjudication despite a reasoned refusal to confirm seizure, and while an appeal against that refusal is pending, may render the resulting order arbitrary and contrary to law.A bench comprising Justice Vikram Nath and Justice Sandeep Mehta set aside the Madras High Court judgments and the adjudication order imposing penalty and confiscation against the appellants, and directed that proceedings be revived from the stage of the show cause notice..Section 37-A of the FEMA Act ensures that the assets of a person suspected to be involved in foreign exchange or foreign security violations may be seized to the extent equivalent to such foreign exchange or foreign security, which may be under scrutiny of the Adjudicating Authority. The bench held that where the Competent Authority refuses to confirm seizure of assets under Section 37A, such a finding strikes at the very foundation of subsequent adjudication proceedings and cannot be ignored by the Adjudicating Authority. “…the Competent Authority declined to confirm the seizure by a well-reasoned order, thereby indicating that the material did not meet even this preliminary threshold. The refusal to confirm the seizure, therefore, reflects a considered finding that the foundational requirement of a “reason to believe” was not satisfied on the material available.”, the court observed. The case arose from allegations that J. Sundeep Anand, director of M/s. Accord Distilleries & Breweries Pvt. Ltd., had acquired shares in a Singapore-based entity without consideration and without obtaining approval from the Reserve Bank of India, allegedly in violation of Section 4 of the Foreign Exchange Management Act (FEMA). Acting on this, the Enforcement Directorate initiated two parallel proceedings: first, seizure proceedings under Section 37A, wherein assets were seized on the basis of a “reason to believe” that a contravention had occurred, and second, adjudication proceedings under Section 16, through issuance of a show cause notice alleging FEMA violations. However, by order dated February 3, 2021, the Competent Authority refused to confirm the seizure, holding that there was no material to establish even a prima facie contravention and that the “reason to believe” requirement was not satisfied. Despite this finding, the Adjudicating Authority proceeded with the show cause notice and ultimately passed a final order against the appellants. The High Court declined to interfere, leading to an appeal before the Supreme Court. Setting aside the impugned order, the judgment authored by Justice Mehta faulted the High Court's decision to justify the Adjudicating Authority's decision to proceed with the seizure proceedings, despite the Competent Authority's refusal to confirm the seizure. “The exercise undertaken by the Competent Authority is thus not an empty formality, but a substantive evaluation of whether the material on record is sufficient to sustain even a prima facie inference of contravention in relation to foreign exchange. In the present case, upon such evaluation, the Competent Authority declined to confirm the seizure by a well-reasoned order, thereby indicating that the material did not meet even this preliminary threshold. The refusal to confirm the seizure, therefore, reflects a considered finding that the foundational requirement of a “reason to believe” was not satisfied on the material available.”, the court observed.The Supreme Court clarified that adjudication proceedings are not automatically rendered non est merely because seizure has not been confirmed. However, it held that the effect of such non-confirmation cannot be disregarded, particularly when the department's appeal against the refusal is still pending.The Court emphasized that if the appellate authority ultimately affirms the refusal to confirm seizure, that decision would plainly have a bearing on the outcome of the adjudication proceedings.In this context, the Court found fault with the Adjudicating Authority for proceeding to impose penalty and confiscation while effectively discrediting the Competent Authority's order, even though the latter was under challenge before the appellate forum.It observed that undoing the order of the Competent Authority while the appeal against that order was pending effectively amounted to abdicating the powers of the appellate authorityAccordingly, the seizure proceedings against the appellant were set aside, and the matter was restored to the stage of the show cause notice, with a direction...

FEMA | Non-Confirmation Of Seizure By Competent Authority Under S.37A Has Bearing On Adjudication Proceedings : Supreme Court

Yash Mittal

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FEMA | Non-Confirmation Of Seizure By Competent Authority Under S.37A Has Bearing On Adjudication Proceedings : Supreme Court

Yash Mittal

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