2010 (9) TMI 223 - HC - Companies Law

Court overturns penalty on bank for Foreign Exchange Regulation Act violation due to lack of clarity on NRI account deposits

The Court accepted the appeal filed by the appellant bank, setting aside the penalty imposed for contravention of Foreign Exchange Regulation Act ... Penalty of ₹ 2,00,000 was imposed upon the appellant bank for contravention of the provisions of sections 6(4), 6(5), 73(3), 49 and 9(1)(e) of Foreign Exchange Regulation Act, 1973 read with Paras 29(B), 8(c) of Exchange Control Manual, 1987 Held that:- It is not disputed that petitioner was not supposed to preserve records for more than 8 years and present Show-Cause Notice was issued only after a period of about 10 years, the bank, therefore, could not make available records on certain deposits to the Adjudicating Authority. Moreover the Show-Cause Notice was primarily issued because the bank had accepted deposit in NRI account from a person other than the NRI himself. Thus the Show-Cause Notice and the consequent adjudication proceedings were not tenable and the liability of the bank to insist upon that only NRI should appear in person to make the deposits was not clear. This liability was clarified to the bank only in 1995 i.e. after impugned transaction. Appeal allowed.The order dated 14-5-2010 of the Tribunal is set aside Issues Involved:- Appeal against penalty imposed for contravention of Foreign Exchange Regulation Act, 1973 provisions.- Validity of show-cause notice issued for accepting foreign exchange deposit in NRI account.- Interpretation of Section 68 of FERA regarding liability for contraventions.- Consideration of judgments in similar matters by Division Bench of the Court.- Compliance with rules regarding maintenance of records by banks.- Comparison of different outcomes in similar show-cause notices issued to banks.Analysis:1. The appellant bank filed an appeal against a penalty imposed for contravention of various provisions of the Foreign Exchange Regulation Act, 1973. The penalty was upheld by the Appellate Tribunal for Foreign Exchange based on an order by the adjudicating authority. The contravention involved accepting foreign exchange deposits in NRI accounts through unauthorized persons, leading to the imposition of a penalty of Rs. 2,00,000. The appellant challenged the order on various grounds, including the consideration of past judgments by Division Benches of the Court in similar matters.2. The show-cause notice issued against the appellant highlighted the alleged contravention of accepting foreign exchange deposits in NRI accounts through unauthorized individuals. The notice referred to specific provisions of FERA and Exchange Control Manual, emphasizing the need for prior permission from the Reserve Bank of India for such transactions. The notice also invoked Section 68 of FERA, which establishes liability for contraventions on individuals responsible for the conduct of business of a company.3. The appellant argued that the show-cause notice was issued after a significant delay of about 10 years from the impugned transaction, making it challenging for the bank to provide all relevant records to the adjudicating authority. Additionally, the appellant contended that the requirement for only NRIs to make deposits in person was clarified by the Reserve Bank of India in 1995, after the transaction in question took place in 1992-93. This lack of clarity was a crucial point in the appeal.4. The Court considered previous judgments by Division Benches in similar cases involving show-cause notices issued to banks for similar contraventions. The Court noted discrepancies in outcomes, where in one case, only the NRI was penalized, while in the present case, both the NRI and the bank were penalized. The Court also highlighted the importance of compliance with rules regarding the maintenance of records by banks, emphasizing the limitations on record preservation up to 8 years.5. Ultimately, the Court accepted the appeal filed by the appellant bank, setting aside the Tribunal's order upholding the penalty. The Court concluded that the show-cause notice and the subsequent adjudication proceedings were not tenable based on the lack of clarity regarding the liability of banks in accepting deposits in NRI accounts through unauthorized individuals. The judgment emphasized the need for clarity in regulations and the timing of clarifications provided by regulatory authorities to determine liability accurately.