2025 (4) TMI 113 - HC - FEMA

Compounding of FEMA offences cannot be sought after completing adjudication proceedings, creates legal uncertainty

Sanjay Jhunjhunwala Versus Reserve Bank of India & Ors.

The Calcutta HC dismissed a petition seeking compounding of FEMA offences after adjudication proceedings concluded. The petitioner initially applied for ... Seeking compounding of the offence adjudicated by the adjudicating authority under FEMA and the subsequent demand notice issued by the Assistant Director (PRC), Government of India - HELD THAT:- Compounding cannot be claimed as a matter of right but it is always subject to the legal provisions. From the chronological sequence of events in this case it appears that the subject transactions took place between 31st February, 2011 and 8th February, 2013. Show cause notice was issued by the adjudicating authority being the Special Director (Enforcement Directorate) on 18th November, 2022. Application for compounding was filed by the petitioner on 20th January, 2023 but the same was returned on 8th January, 2024 on the ground that the application lacked clarity and all facts and figures were not mentioned therein. The petitioner was given liberty to file fresh compounding application. In the instant case the offence of the petitioner was a compoundable one. The petitioner, though applied for compounding at the initial stage, but did not proceed with the same after the application of the petitioner was returned for want of proper details. The petitioner, without raising any objection, participated in the adjudication proceeding. The participation of the petitioner implies that the petitioner did not want to compound the offence and, accordingly, proceeded for adjudication of the same. After the adjudication order was passed and the petitioner has been found guilty of the offences, now prayer has been made to permit the petitioner to proceed with the compounding. It appears that the petitioner simply tried to test the waters and see as to whether the adjudication order comes in his favour or not. After the adjudication order went against him and penalty amount has been quantified, the petitioner seeks to proceed with the compounding. Had the petitioner been aggrieved he would have been required to prefer an appeal, and for doing so, the petitioner had to deposit the entire amount of penalty. The petitioner is trying his level best not to pay the penalty that has been imposed and delay the proceeding for an indefinite period on the plea of compounding. The compounding authority does not have the determination or the jurisdiction to cancel/overrule or set at naught the order passed by the adjudicating authority. It is only one order that survives and that is the order of the adjudicating authority. The petitioner took the risk and did not proceed with his application for compounding prior to conclusion of the adjudication proceeding. The petitioner could have pressed the application for compounding any time prior to conclusion of the adjudication. The FED Master Direction number 4/2015-16 permits compounding even when the adjudication proceeding is ongoing. After the adjudication is complete and offence has been established, the contravener would be bound to comply with the direction passed by the adjudicating authority. The Act is in place since 1999 and the relevant Rules, Regulations, Circulars are also existing for quite some time. The petitioner has not been able to show a single instance when the authority permitted compounding after conclusion of the adjudication process. The interpretation of the petitioner, if accepted, will lead to an uncertain situation and reaching finality to the proceeding will be a never-ending process. As the said situation is not contemplated in the Act, there is no time limit prescribed within which an application of compounding can be filed after the order of adjudication has been passed. It will be an open ended process and any person found guilty in the adjudication proceeding, can seek to file an application for compounding any time he chooses. Penal provision of the Act cannot be taken so lightly leaving it in such an indecisive state. By this way the contravener will remain scot-free and the penal provision of the Act cannot be implemented. The Act will be rendered completely toothless. The same will also give out a very wrong message to the society at large. Tendency to circumvent the law will increase. To avoid such a situation, the legislature has consciously not provided the provision to compound an offence after conclusion of the adjudication process. The Court is of the opinion that the application made by the petitioner seeking compounding of the offence on conclusion of the adjudication proceeding cannot be allowed and the authority rightly rejected the application filed by the petitioner. The Court is not inclined to exercise jurisdiction in the matter. ISSUES PRESENTED and CONSIDEREDThe core legal question considered in this case is whether a contravener under the Foreign Exchange Management Act, 1999 (FEMA) can be permitted to avail the benefit of compounding the contravention after an order of adjudication has been passed by the competent authority.ISSUE-WISE DETAILED ANALYSISRelevant Legal Framework and PrecedentsThe legal framework involves several sections of FEMA, including:Section 3(a) prohibits dealing in or transferring foreign exchange or foreign security to unauthorized persons.Section 4 restricts residents of India from acquiring, holding, owning, possessing, or transferring foreign exchange or foreign security.Section 13 provides penalties for contravention of the provisions of the Act.Section 15 grants the power to compound contraventions.Sections 17 and 19 provide for appeals to the Special Director and the appellate Tribunal, respectively.Section 46 allows for rule-making, including the manner of compounding contraventions under Section 15(1).The Foreign Exchange (Compounding Proceedings) Rules, 2000, particularly Rule 4(4), Rule 6, and Rule 11, outline the procedures and limitations for compounding applications.Court's Interpretation and ReasoningThe Court interpreted the provisions of FEMA and the Compounding Proceedings Rules to conclude that compounding is permissible only before the adjudication order is passed. The Court emphasized that the purpose of compounding is to settle issues without undergoing the full adjudication process. Allowing compounding after adjudication would undermine the process and create legal uncertainty.Key Evidence and FindingsThe petitioner was found to have contravened Regulation 3 of the Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000. The adjudicating authority imposed a penalty, which the petitioner accepted without appealing. The petitioner later sought compounding, which was rejected by the Reserve Bank of India (RBI) due to the completion of the adjudication process.Application of Law to FactsThe Court applied the relevant sections and rules to the facts, concluding that the petitioner's request for compounding post-adjudication was not permissible. The Court noted that the petitioner had initially applied for compounding but did not pursue it after the application was returned for lack of details. The petitioner's participation in the adjudication process implied acceptance of that route over compounding.Treatment of Competing ArgumentsThe petitioner argued that since no appeal was filed, compounding should be allowed. However, the Court found this interpretation inconsistent with the legislative intent and the structure of FEMA and its rules. The Court highlighted that compounding is intended to avoid adjudication, not to serve as an alternative post-adjudication remedy.ConclusionsThe Court concluded that allowing compounding after adjudication would lead to legal uncertainty and undermine the adjudication process. The petitioner's application for compounding was rightly rejected by the RBI.SIGNIFICANT HOLDINGSThe Court held that compounding cannot be claimed as a matter of right and is subject to legal provisions. The Court established that compounding is not permissible after the conclusion of adjudication proceedings. The Court emphasized that the legislative intent was to prevent the reopening of issues after adjudication, which would render the process nugatory.Core Principles EstablishedCompounding is a pre-adjudication remedy intended to expedite resolution and avoid lengthy legal proceedings.Post-adjudication compounding would create a situation with two conflicting orders, which is not permissible under jurisprudence principles.The legislative framework does not support compounding after adjudication to maintain finality and enforceability of adjudication orders.Final Determinations on Each IssueThe Court determined that the petitioner's application for compounding after the adjudication process was not maintainable. The writ petition was dismissed, and the interim order vacated, reinforcing the principle that the adjudication process must be respected and concluded as per the legal framework.