FERA resident status and knowledge of non-resident transferee: proof, intention and evidence determine liability

FERA resident status depends on the statutory test of purpose and intention to remain outside India for an uncertain period. On the facts discussed, the three Shroff daughters were treated as persons resident outside India because they had continued to live abroad and no reliable material showed an intention to return within a definite period. Liability under section 19(1)(b) required proof that the transferor knew the transferee was non-resident; the Tribunal found that such knowledge was not established, and the derivative charge under section 68 could not survive. The discussion contrasts the FERA approach with the later FEMA definition but applies FERA throughout.

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Issues: (i) Whether the three Shroff daughters were persons resident outside India for the purposes of the Foreign Exchange Regulation Act, 1973. (ii) Whether the transferor company and its directors committed contravention under section 19(1)(b) of the Foreign Exchange Regulation Act, 1973 and the connected charge under section 68 of the same Act could be sustained.

Issue (i): Whether the three Shroff daughters were persons resident outside India for the purposes of the Foreign Exchange Regulation Act, 1973.

Analysis: The statutory definition of "person resident in India" in section 2(p) of the Foreign Exchange Regulation Act, 1973 turns on the purpose of going or staying abroad and, in particular, whether the circumstances indicate an intention to stay outside India for an uncertain period. The daughters had gone abroad for studies, but the record showed continued residence abroad, including residence with non-resident spouses in two cases, and no reliable material was produced to establish an intention to return within a definite period. The Tribunal also drew adverse inference from the absence of passports or other supporting evidence. The later definition in section 2(v) of the Foreign Exchange Management Act, 1999 was noticed as showing the shift in legislative approach, but the decision remained governed by FERA.

Conclusion: The three Shroff daughters were held to be persons resident outside India. The finding was against the assessee.

Issue (ii): Whether the transferor company and its directors committed contravention under section 19(1)(b) of the Foreign Exchange Regulation Act, 1973 and the connected charge under section 68 of the same Act could be sustained.

Analysis: Liability under section 19(1)(b) required knowledge that the transferee was a person resident outside India. On the material relied upon, the Tribunal held that the statement attributed to the company's representative did not establish such knowledge before the December 1995 share transfers, and the subsequent material concerning a later transaction was treated as irrelevant. The findings of the adjudicating authority were described as resting on suspicion and conjecture rather than concrete evidence. Since the foundation charge against the company failed, the derivative charge against its directors under section 68 could not survive.

Conclusion: The contravention under section 19(1)(b) was not sustained, and the connected charge under section 68 also failed. The issue was in favour of the assessee.

Final Conclusion: The appeals relating to the daughters were dismissed, while the appeals relating to the company and its directors were allowed, resulting in a mixed outcome with the penalties against the company-side appellants set aside and the penalties against the daughters maintained.

Ratio Decidendi: Under FERA, resident status depends on the statutory test of purpose and intention to stay outside India for an uncertain period, and contravention under section 19(1)(b) requires proof of knowledge of non-resident status; suspicion or conjecture cannot substitute for such proof.

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