Contingent remittance to a resident deposit did not breach foreign exchange restrictions or create an enforceable foreign debt.

A remittance placed in deposit with a resident in India, under an agreement that expressly barred payment or use for the foreign company until Reserve Bank permission was obtained, did not amount to a prohibited payment to a person resident outside India under the Foreign Exchange Regulation Act, 1947. The arrangement also did not create an actionable debt or transfer a recoverable right in favour of the foreign company because any liability remained contingent on statutory approval. Section 21 supported reading the statutory restriction into the contract, so an agreement awaiting permission was not unlawful merely for that reason. The transaction therefore did not contravene section 5(1)(a) or section 5(1)(b), and the penalty was unsustainable.

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Issues: Whether the amount paid to a resident in India as a deposit, subject to Reserve Bank permission, attracted contravention of section 5(1)(a) or section 5(1)(b) of the Foreign Exchange Regulation Act, 1947.

Analysis: The arrangement between the parties fixed compensation in Indian currency, required the amount to be kept by the authorised representative in deposit, and expressly prohibited payment or utilisation in favour of the foreign company until Reserve Bank approval was obtained. On that construction, the amount was not a payment to or for the credit of a person resident outside India. Nor was there an acknowledgment of an existing debt so as to create or transfer a right in favour of the foreign company, because the liability remained contingent upon statutory permission. Section 21 of the Act supported this reading by incorporating the statutory prohibition into the contract and recognising that an agreement conditioned on permission does not become unlawful merely because permission is awaited.

Conclusion: The transaction did not contravene section 5(1)(a) or section 5(1)(b); the penalty was unsustainable and the assessee succeeded.

Final Conclusion: The appeal failed and the appellate order setting aside the penalty was affirmed, with refund directed if the amount had been recovered.

Ratio Decidendi: Where a remittance is placed in deposit with a resident in India and the agreement expressly makes payment to the foreign beneficiary contingent on Reserve Bank permission, there is neither a prohibited payment to a person outside India nor an actionable acknowledgment of debt creating a recoverable right in favour of that person.

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