Case Title: S Jagathrakshakan and Others v The Special Director
Case No: WP NO. 21096 of 2023
Decided on: 30th November, 2023
CORAM: THE HON’BLE JUSTICE N. SESHASAYEE
Facts of the Case
Section 4 of the Foreign Exchange Management Act (FEMA) was allegedly violated by Jagathrakshakan and other petitioners when they subscribed for 70 lakh shares in a Singaporean business and then transferred these shares to family members outside of India. In reaction to these accusations, the Authorized Officer—functioning as the Enforcement Directorate’s (ED) adjudicating authority—used Section 37A of the Act to request the confiscation of Jagathrakshakan’s property. But since the corporation had not requested payments for the shares, the Commissioner of Customs found after investigation that there was not enough proof to prove that any of the petitioners had paid for the shares. This ruling was challenged by the ED, which led to an appeal before the Appellate Authority.
Invoking Section 16(3) of FEMA, the Assistant Director of the ED simultaneously approached the Special Director of the ED regarding the same set of charges. All of the petitioners were given a notice to show cause, and they all complied. A corrigendum during these procedures changed the Act’s provisions from Section 13(2) to Section 13(1A), a change that was challenged in court. The petitioners argued that it was improper to start Section 16 proceedings in light of earlier judgements by a competent authority that disregarded any substantial evidence of a FEMA violation. They contended that the competent authority’s judgement of the deficiency of substantive material necessitated the application of Sections 13(1A) and 13(2), which functioned in separate domains. In response, the ED argued that the seizure findings did not always bar adjudication under Section 16 and emphasized FEMA’s autonomous nature, urging the court not to intervene in the designated remedial process under this fiscal statute.
Legal Provisions
In this case, the petitioner’s actions are bound by the legal provisions set forth in the Foreign Exchange Management Act (FEMA)
Issues
Is there sufficient evidence to substantiate the alleged violation of Section 4 of the Foreign Exchange Management Act (FEMA) by Jagathrakshakan and other petitioners, particularly in relation to the transfer of shares to family members outside India?
Do the different authorities within the Enforcement Directorate (ED), including the Authorized Officer and the Special Director, possess the necessary competence and jurisdiction to appropriately initiate actions and proceedings under specific sections of the Foreign Exchange Management Act (FEMA), such as Section 37A and Section 16(3)?
Courts analysis and decision
The court has granted permission to present all defences before the Adjudicating Authority. The court agreed with the respondents’ position, stating that the responsible authority’s competence is limited to investigating whether the assets of those who violate the Foreign Exchange Management Act (FEMA) should be seized. Crucially, the court made it clear that it does not have the authority to decide whether or not FEMA regulations have been broken. The court emphasised that the Act established two independent authorities: one to decide whether to seize the accused person’s assets in accordance with Section 16 read with Section 13, and the other to decide whether to rule on accusations made against them.
The court made it clear that the powers granted to the former cannot be derived from the actions of the latter authority. The court further stated that it is believed that the petitioners’ plea should not be considered at this time. The court emphasised that FEMA must be permitted to function within its established legal framework, highlighting its standing as an all-encompassing legal framework. As a result, the petitions were dismissed by the court, allowing Jagathrakshakan and the other petitioners to appear before the adjudicating body to defend themselves.
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Written by- Rupika Goundla
