2010 (1) TMI 610 - HC - FEMA

High Court rules in favor of respondent, releases confiscated currency

The High Court upheld the Tribunal's decision to quash the order of confiscation and release the confiscated Indian currency. It was determined that the ... Seizure of sale proceeds of foreign currency – Respondents sold foreign currency to another full-fledged money changer duly licensed by the RBI against pay orders received from them - pay orders received were credited into the account of the respondent - DRI effected the seizure of the credit balance lying in the credit of the respondent – respondent themselves were not involved in the smuggling activities of selling of foreign currency – Held that: - if one turns to the findings recorded by the Tribunal, the Tribunal was perfectly justified in holding that the order of the Commissioner ordering confiscation was the order in contradiction. At one stage, the Commissioner has rightly interpreted Section 121 of the Act holding that it can only be applied to the immediate proceeds of the goods smuggled. However, while applying the provisions of Section 121 to the factual aspects of the case, the Commissioner committed an error which was rightly spotted by the Tribunal. The Tribunal was perfectly justified in holding that the amounts seized which was lying in the bank could not be considered to be a sale proceeds of the smuggled foreign currency. Issues Involved:1. Whether the Indian currency lying in the bank account represented the sale proceeds of smuggled foreign currency.2. Whether the foreign currency obtained from the Indian currency was smuggled.3. Whether the amounts seized could be considered as sale proceeds of smuggled goods under Section 121 of the Customs Act.4. Whether the Tribunal was justified in quashing the order of confiscation and releasing the confiscated Indian currency.Detailed Analysis:Issue 1: Representation of Sale Proceeds of Smuggled Foreign CurrencyThe Customs Department issued a show cause notice alleging that the amounts of Rs. 42,37,750/- and Rs. 18,79,350/- lying in the respondent's bank accounts represented the sale proceeds of smuggled foreign currency. The respondent-LKP argued that these amounts were obtained through legitimate transactions as a full-fledged money changer licensed by the RBI, selling foreign currency to another licensed money changer, Hotel Zam Zam. The Tribunal found that the amounts seized were not tainted and were obtained in the regular course of business transactions.Issue 2: Smuggled Foreign CurrencyThe Customs Department contended that the foreign currency obtained from the Indian currency was smuggled. They argued that the foreign currency sold by the respondent to Hotel Zam Zam was later smuggled to Dubai. The respondent-LKP maintained that their transaction was bona fide and that they had no knowledge of any smuggling activities. The Tribunal concluded that the Indian currency confiscated was the sale proceeds of foreign currency that was not smuggled, and the respondent-LKP was not involved in any smuggling activities.Issue 3: Application of Section 121 of the Customs ActSection 121 of the Customs Act stipulates that sale proceeds of smuggled goods are liable to confiscation if the seller had knowledge or reason to believe that the goods were smuggled. The Tribunal observed that the transaction between the respondent-LKP and Hotel Zam Zam was legitimate and bona fide, and the pay orders received were not smuggled goods. The Tribunal held that Section 121 could only be applied to the immediate sale proceeds of smuggled goods, and since the transaction was bona fide, the amounts seized could not be considered sale proceeds of smuggled goods.Issue 4: Tribunal's Justification in Quashing the Order of ConfiscationThe Tribunal quashed the order of confiscation by the Commissioner, noting that the amounts lying in the bank could not be considered sale proceeds of smuggled foreign currency. The Tribunal found that the respondent-LKP's transaction was legitimate and that the Indian currency received was not the immediate proceeds of smuggled goods. The High Court upheld the Tribunal's decision, agreeing that the amounts seized were not sale proceeds of smuggled goods and that the respondent-LKP had no involvement in smuggling activities.Conclusion:The High Court concluded that the Tribunal was justified in quashing the order of confiscation and releasing the confiscated Indian currency. The Court found that the amounts seized were obtained through legitimate transactions and were not the sale proceeds of smuggled goods. The appeal was dismissed, and the modified question of law was answered in favor of the respondent-LKP and against the Revenue.