Natural justice in FEMA penalties requires disclosure of adverse material; unproved contravention cannot sustain quasi-penal action.

In quasi-penal FEMA adjudication, adverse correspondence and bank replies could not be used against the noticee unless disclosed and put to it; the penalty orders were therefore vitiated for breach of natural justice. On merits, the Court found the alleged contravention was not established convincingly, as contemporaneous material supported the assessee's case and the record did not adequately prove non-import or non-submission of documents. The penalties were consequently unsustainable, the adjudication and appellate orders were set aside, and the deposited amounts were directed to be refunded.

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Issues: (i) Whether the penalty orders were vitiated for breach of natural justice because the adjudicating authority relied on undisclosed correspondence and bank replies; (ii) Whether the alleged contravention of FEMA was established on merits so as to justify the penalties imposed.

Issue (i): Whether the penalty orders were vitiated for breach of natural justice because the adjudicating authority relied on undisclosed correspondence and bank replies.

Analysis: The adjudication was founded substantially on correspondence between the enforcement authority and the authorised dealer, but the assessee was never furnished those materials or given an opportunity to meet them. In quasi-penal proceedings, adverse material intended to be used against a noticee must be disclosed and put to it before an order is passed. The assessee's request for copies was also not met. Reliance on undisclosed material, without confrontation and opportunity to respond, offended the principles of natural justice.

Conclusion: The penalty orders were vitiated by breach of natural justice and could not stand.

Issue (ii): Whether the alleged contravention of FEMA was established on merits so as to justify the penalties imposed.

Analysis: The Court found that the assessee had produced contemporaneous material indicating that the exchange control copies of bills of entry had been submitted in relation to the remittances in question, and that the matter involved old transactions with delayed inquiry. The proceedings were treated as quasi-criminal in nature, requiring the department to establish the violation convincingly. The material on record raised serious doubt as to non-import or non-submission, and the absence of timely reminders or reliable proof from the authority weakened the case for penalty. The Court held that the circumstances did not justify sustaining the finding of contravention.

Conclusion: The alleged FEMA violation was not proved to the requisite standard and the penalties were unsustainable.

Final Conclusion: The appeals succeeded, the orders of adjudication and the appellate tribunal were set aside, and the deposited amounts were directed to be refunded.

Ratio Decidendi: In quasi-penal foreign exchange adjudication, no adverse material can be relied upon without disclosure and opportunity to meet it, and a penalty cannot be sustained unless the alleged contravention is established on a convincing evidentiary basis.

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