Suspicion can trigger seizure where seizure order is after application of mind... Karnataka High Court upholds Sec 37A of FEMA

Tracking down and bringing back the wealth which ultimately belongs to country is the abiding commitment to country. To hold the provisions related to this broad purpose as manifest with arbitrariness, it has to be demonstrated as such against the presumption which is otherwise. As the matter of black money again heats up in the country with amendment to PMLA Act, this issue was dealt with in great detail by The Hon’ble Karnataka High Court when deciding upon the vires of Section 37A and which may be a precedent in other such cases, especially where Tracking down and bringing back the wealth of Country is concerned. The Court has dealt with the history of Section 37A which needs to be understood by professionals while dealing with such cases which it seems would now be dealt with more frequently.

The finance minister in his Budget 2015 speech while highlighting key features of the new Black Money law mentioned that Concealment of income and assets and evasion of tax in relation to foreign assets will be prosecutable with punishment of rigorous imprisonment, a non-compoundable offence, no recourse to the Settlement Commission and a penalty at 300% of tax. Simultaneously he mentioned that FEMA 1999 is amended to the effect that if any foreign exchange, foreign security or any immovable property situated outside India is held in contravention of the provisions of this Act, then action may be taken for seizure and eventual confiscation of assets of equivalent value situated in India; Accordingly, Clause 168 of Finance Bill 2015 inserted Sec. 37A to the Foreign Exchange Management Act 1999, which was thereafter enacted. This was done post a Special Investigation Team (SIT) was appointed to unearth black money stashed abroad, and to analyse classified information received from countries. Section 37A was introduced after having passed through elaborate scrutiny and hence The Hon’ble Karnataka High Court in the a most discussed case of XIAOMI TECHNOLOGY INDIA PRIVATE LIMITED VERSUS UNION OF INDIA, DIRECTORATE OF ENFORCEMENT COMMISSIONER OF CUSTOMS (APPEALS-I) , CHENNAI AND OTHERS - 2023 (6) TMI 250 - KARNATAKA HIGH COURT has refused to hold it arbitrary. The company had questioned the constitutional validity of Section 37A while challenging the ED’s April 2022 action of seizing ₹5,551.27 crore lying in company’s bank accounts. The ED had seized the amount on the allegation that the company had sent foreign currency equivalent to ₹5,551.27 crore to three foreign–based entities, which include one Xiaomi group entity, in the guise of royalties in violation of FEMA.

Again the question was whether a mere Suspicion may trigger seizure or there has to be a ‘reason to believe’. The Court answered this by holding that Seizure by itself is not final. There are several procedures after such seizure. Meanwhile, the court gave liberty to the company to file an appeal before the Appellate Tribunal under Section 37A(5) challenging the seizure order passed by the competent authority.