NON-COMPLIANCE WITH PRE DEPOSIT REQUIREMENT FOR FILING APPEAL UNDER FEMA

Appeal to Appellate Tribunal

Section 19 of the Foreign Exchange Management Act, 1999 (‘FEMA’ for short) provides the procedure for filing appeal before the Appellate Tribunal constituted under the FEMA against the order of Adjudicating Authority. According to this Section, the Central Government or any person being aggrieved against the order of an Adjudicating Authority may file an appeal before the Appellate Tribunal in Form II, duly signed by the appellant.  The appellant, while filing the appeal, is to deposit the penalty amount with the authority authorised in this behalf. 

The second proviso to Rule 10 of the Foreign Exchange Management (Adjudication Proceedings and Appeal) Rules, 2000 (‘Rule’ for short) provides that if the   Appellate Tribunal is of the opinion that the deposit of such penalty would cause undue hardship to such person, the Appellate Tribunal may dispense with such deposit subject to such conditions as it may deem fit to impose so as to safeguard the realisation of penalty.

Waiver of depositing the penalty

The issue to be discussed in this article is as to whether the Appellate Tribunal may waive the pre deposit of the penalty in entirety while filing an appeal by the aggrieved person before the Appellate Tribunal.

The Calcutta High Court in M/s. Lords Polymer (I) Private Limited And Amit Saha Versus The Additional Directorate of Enforcement, Directorate of Enforcement (FEMA) Southern Regional. - 2026 (1) TMI 861 - CALCUTTA HIGH COURT, passed order dispensing with the depositing of the penalty as the penalty is amount is high to the extent of Rs.22 crores which is impossible for the appellant to pay.

In the above said case, the appellant is exporting iron ore fines.  The dispute raised in this appeal belonged to the year 2008.  In the said case the Adjudicating Authority observed that the appellant failed to repatriate the export proceeds to the tune of Rs. 21.70 crores alleging contravention of Section 7 and 8 of FEMA.  The exporters are liable to expatriate the export proceedings within the time stipulated under Section 8 of FEMA.  Section 8 of FEMA provides that where any amount of foreign exchange is due or has accrued to any person resident in India, such person shall take all reasonable steps to realise and repatriate to India such foreign exchange within such period and in such manner as may be specified by the Reserve Bank.

The Adjudicating Authority imposed a penalty of Rs.22 crores on the appellant for his contravention of the provisions of FEMA.  The appellant filed an appeal before the Appellate Tribunal against the order of imposition of penalty of Rs.22 crores. The appellant submitted before the Appellate Tribunal for a total waiver of the pre deposit of penalty amount of Rs.22 crores due to his undue hardship.  To substantiate the plea of ‘undue hardship’, the appellants placed on record uncontroverted evidence: the Company is a defunct entity, its bank accounts are classified as Non-Performing Assets (‘NPA’ for short), and it possesses no liquid assets to satisfy a demand of this magnitude. The Appellate Tribunal considered the prayer of the appellant. The Appellate Tribunal exercised significant leniency by waiving 90% of the penalty and emphasized that the Second Proviso mandates the Tribunal to ‘safeguard the realization of penalty.’  A total waiver, in the view of the Appellate Tribunal, would invite frivolous litigation and compromise Revenue interests. The Appellate Tribunal waived 90% of the penalty and directed the appellant to pay 10% of the penalty for entertaining its appeal.

Therefore, the appellant filed the present appeal before the High Court against the order of the Appellate Tribunal under Section 35 of the FEMA.  The appellant prayed before the High Court for the waiver of the entire amount of penalty. The appellant contended that once the Appellate Tribunal accepted the ‘poor financial condition’ as a fact, the demand for Rs.2.20 Crore became a demand for an impossibility.   The appellant invoked the maxim Impossibilium Nulla Obligatio Est (the law compels no one to do that which is impossible), arguing that demanding such a sum from an indigent litigant effectively shutters the doors of justice.  The appellant further contended that the Appellant Tribunal misconstrued the third Proviso of Section 19(1), erroneously treating a ‘statutory cap’ (designed to protect appellants) as a ‘statutory floor’ or mandatory minimum.

The Revenue contended that the right to appeal is not a fundamental right.  The Appellate Tribunal exercised significant leniency by waiving 90% of the penalty and emphasized that the Second Proviso mandates the Tribunal to ‘safeguard the realization of penalty’. The Revenue further contended that a total waiver would invite frivolous litigation and compromise Revenue interests.  Therefore, the order of the Appellate Tribunal directing the appellant to pay the 10% of penalty amount is a reasonable one. 

The High Court considered the submissions of the appellant and the Department. The High Court analysed the provisions of Section 19(1) of FEMA.  The High Court observed that Section 19(1) creates a tiered structure for pre-deposits, intended to balance Revenue interests with the rights of the aggrieved.  The Second Proviso of this section, the High Court observed that the said proviso acts as a ‘remedial valve,’ granting the Appellate Tribunal the power to ‘dispense with such deposit’ if it is of the opinion that the requirement would cause ‘undue hardship’.

The High Court further observed that the ‘undue hardship’ is not merely ‘hardship’, but a burden.  For an NPA declared entity with no liquid assets, a multi-million-rupee deposit is, prima facie, an undue hardship.  The High Court relied on the judgment of Supreme Court in Monotosh Saha Versus Special Director, Enforcement Directorate And Anr. - 2008 (8) TMI 9 - Supreme Court In the said case the Supreme Court held that the Appellate Tribunal must ensure that the remedy of appeal is not rendered ‘illusory’.  If a condition for appeal is impossible to fulfil, the right to appeal is effectively snatched away.

The High Court further observed that by acknowledging ‘poor financial condition’ while simultaneously demanding Rs.2.20 Crore from an NPA-classified entity, the Appellate Tribunal ‘took away with the left hand what it gave with the right’. By treating the 10% ceiling as a mandatory minimum despite a finding of hardship, the Tribunal failed to exercise its jurisdiction meaningfully.

The High Court was of the opinion that when an Appellate Tribunal finds an appellant is indigent, it must explore the ‘Middle Path.’ Safeguarding Revenue does not always necessitate a liquid cash deposit. The Second Proviso allows the Tribunal to impose ‘such conditions as it may deem fit,’ which includes alternative securities like Indemnity Bonds or Corporate Guarantees. 

Therefore, the High Court decided the appeal in favour of the appellant partly.  The High Court set aside the order of the Appellant directing the appellant company to pay Rs.2 lakhs and its director to pay Rs.10,000/- before the Appellate Tribunal.  On this payment the statutory requirement for filing appeal before the Appellate Tribunal stands fulfilled.  The High Court also directed the Appellate Tribunalto proceed to hear the main Appeal on its merits expeditiously.