NRE account deposits by mandatee before 31-7-1995 were not a clear contravention; delayed notices also caused prejudice.

Before 31-7-1995, deposits into NRE accounts made by a mandatee or other person were not clearly prohibited under the Foreign Exchange Regulations Act, 1973 and the Exchange Control Manual, 1987, so such deposits could not be treated as a contravention merely because the account holder was not personally present. The article also notes that show-cause notices issued after more than eight years were prejudicial where bank records were required to be preserved only for a maximum of eight years. On that basis, delayed initiation of proceedings was said to vitiate the adjudication and the penalties could not be sustained.

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Issues: (i) Whether, prior to 31-7-1995, deposits in NRE accounts made by a mandatee or any person other than the account holder attracted liability under the Foreign Exchange Regulations Act, 1973 and the Exchange Control Manual, 1987. (ii) Whether the impugned proceedings were unsustainable because the show-cause notices were issued after an inordinate delay, when bank records were no longer required to be preserved.

Issue (i): Whether, prior to 31-7-1995, deposits in NRE accounts made by a mandatee or any person other than the account holder attracted liability under the Foreign Exchange Regulations Act, 1973 and the Exchange Control Manual, 1987.

Analysis: The issue had already been considered in earlier decisions dealing with the same regulatory framework and the same class of NRE deposits. The governing position was that, before the clarification introduced on 31-7-1995, there was no clear requirement that foreign currency deposits into an NRE account had to be made only by the account holder personally. On that footing, deposits made by a mandatee or other person could not, for the earlier period, be treated as a contravention merely on the ground that the account holder was not physically present.

Conclusion: The issue was answered in favour of the appellant. The deposits made before 31-7-1995 did not, by that fact alone, constitute a breach attracting the imposed penalties.

Issue (ii): Whether the impugned proceedings were unsustainable because the show-cause notices were issued after an inordinate delay, when bank records were no longer required to be preserved.

Analysis: The notices were issued after more than eight years from the relevant transactions. The applicable record-preservation regime required banks to maintain records only up to a maximum period of eight years. The delayed initiation of proceedings therefore caused prejudice to the appellant and undermined the fairness of the adjudicatory process.

Conclusion: The issue was answered in favour of the appellant. The proceedings were vitiated by delay and resulting prejudice.

Final Conclusion: The penalty orders and the appellate tribunal's affirmance could not be sustained, and the appeals succeeded.

Ratio Decidendi: Where the regulatory requirement was not clearly in force for the relevant period, and proceedings were initiated after the period for mandatory record preservation had expired, penalties for past NRE deposits could not be sustained.

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