NRI penalized for illegal agricultural land purchase and hotel construction, penalties reduced after surrendering FCNR receipts

The AT upheld FEMA violations against NRI who purchased agricultural land and constructed hotel between 1995-2010, bringing Rs. 2.59 crores through NRE account. Properties were sold for Rs. 15.25 crores with Rs. 2.5 crores remitted to joint account. While violations were confirmed, AT reduced penalties considering appellant surrendered equivalent FCNR receipts showing no foreign exchange loss. Company penalty reduced from Rs. 25 lakhs to Rs. 5 lakhs, individual penalties reduced from Rs. 1 lakh each to Rs. 50,000 each.

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1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal include:

(a) Whether the appellants violated Regulation 4 of the Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2000 read with Regulation 6 of the Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2000 by remitting foreign exchange abroad in respect of sale consideration for immovable property without prior permission of the Reserve Bank of India (RBI).

(b) Whether the remittance of Rs. 2.5 crore equivalent to US$ 559,284 to the joint foreign account of the sellers (Noticee Nos. 4 and 5) in Switzerland was in contravention of FEMA provisions, particularly given the restrictions on repatriation under Regulation 6(b) of the Acquisition and Transfer Regulations.

(c) Whether the appellants acted in bona fide manner and whether the penalties imposed by the Adjudicating Authority were justified or excessive, considering the facts and circumstances.

(d) Whether the amount eligible for repatriation under Regulation 6(b) includes only the purchase cost of land or also the amount spent on construction of buildings on the land.

(e) Whether the appellants' contention that no foreign exchange loss was caused to the country holds merit, considering the surrender of FCNR receipts and partial repatriation of funds.

(f) Whether the directors of the appellant company (Noticee Nos. 2 and 3) are liable for the contraventions committed by the company under Section 42(1) of FEMA, 1999.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) and (b): Violation of Regulation 4 of Permissible Capital Account Transactions Regulations and Regulation 6 of Acquisition and Transfer Regulations by remittance abroad without RBI permission

The relevant legal framework includes Regulation 4 of Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2000, which prohibits drawal of foreign exchange for any capital account transaction except as permitted under the Act, rules or regulations. Acquisition or transfer of immovable property in India by a person resident outside India is a capital account transaction as defined under Section 2(e) of FEMA.

Regulation 6 of the Acquisition and Transfer Regulations mandates that repatriation of sale proceeds of immovable property by a person resident outside India requires prior RBI permission unless the conditions under Regulation 6(b) are satisfied. Regulation 6(b) permits repatriation up to the amount paid for acquisition of the property in foreign exchange received through normal banking channels or out of funds held in Foreign Currency Non-Resident (FCNR) or Non-Resident External (NRE) accounts.

The Tribunal noted that the appellants remitted Rs. 2.5 crore equivalent to US$ 559,284 to the joint foreign account of the sellers without prior RBI permission. The Adjudicating Authority found this to be a contravention of the aforementioned regulations. The appellants contended that the remittance was towards repatriation of amounts brought in by the sellers for acquisition and construction of the hotel property, and that the transaction was conducted through proper banking channels.

The Tribunal observed that the sale deed apportioned the sale consideration among the landowners and for buildings and machinery, but the remittance was made to a joint account of two sellers, one of whom was resident in India at the time. The Adjudicating Authority rejected the appellants' contention that the remittance was solely for the share of the non-resident seller, noting that the amount could have been paid in India to the resident seller. Further, the Tribunal found that the appellants, by making the remittance directly to the foreign account of the sellers, stepped into the shoes of the sellers, which is not permissible under the regulations.

The Respondent's argument that the maximum repatriable amount was only Rs. 6,15,000/- based on the purchase price of the land in foreign exchange was accepted by the Tribunal. The appellants' claim that the amount spent on construction should also be included in the repatriable amount was not accepted, as the regulations restrict repatriation to the amount paid for acquisition of the immovable property in foreign exchange, not including subsequent construction costs.

The Tribunal also noted the mis-declaration of the purpose of the remittance in the Swift Transfer Report, which was stated as "Closure of FCNR B 148.370.18 transfer to close relative," indicating an attempt to circumvent regulatory restrictions.

Issue (c): Bona fide nature of appellants' actions and penalty justification

The appellants argued they acted bona fide, with no mens rea, and that the penalties were excessive given the lack of foreign exchange loss and the technical nature of the contravention. They highlighted that the appellants surrendered FCNR receipts equivalent to the remitted amount, and a substantial portion of the foreign exchange transferred abroad was brought back to India, mitigating any loss to the country.

The Tribunal acknowledged these submissions and took a lenient view in reducing the penalties imposed. It recognized that the appellants had surrendered FCNR receipts and that no foreign exchange loss was caused. However, the Tribunal maintained that the contravention did occur and penalties were warranted, but at a reduced scale.

Issue (d): Whether repatriable amount includes construction costs

The appellants contended that the amount eligible for repatriation under Regulation 6(b) includes not only the purchase price of the land but also the amount spent on construction of buildings on the land, as the entire investment relates to acquisition of immovable property.

The Tribunal referred to the statutory provisions and held that Regulation 6(b)(ii) limits repatriation to the amount paid for acquisition of immovable property in foreign exchange received through normal banking channels or out of funds held in FCNR or NRE accounts. The amount spent on construction does not qualify as acquisition cost under the regulation and therefore cannot be included in the repatriable amount. This interpretation aligns with the regulatory scheme that distinguishes between acquisition cost and subsequent expenditure on the property.

Issue (e): Foreign exchange loss and surrender of FCNR receipts

The appellants argued that since they surrendered equal amount of FCNR receipts and brought back a substantial portion of the foreign exchange transferred abroad, no foreign exchange loss was caused to the country. The Respondent disputed this, emphasizing the illegality of the initial remittance and the regulatory violation irrespective of subsequent actions.

The Tribunal accepted the appellants' submission to the extent that no foreign exchange loss was caused and took this into account in reducing the penalties. The surrender of FCNR receipts and partial repatriation to India were considered mitigating factors.

Issue (f): Liability of directors under Section 42(1) of FEMA

The Respondent submitted that the directors of the appellant company, being actively involved in the company's affairs, are liable for the contraventions committed by the company. The appellants did not provide evidence that the contravention occurred without their knowledge. The Tribunal concurred with the Respondent, noting that the Managing Director facilitated the remittance to the foreign account and thus the directors are liable under Section 42(1) of FEMA, 1999.

3. SIGNIFICANT HOLDINGS

The Tribunal held that remittance of sale consideration abroad by the buyer directly to the foreign account of the sellers without RBI permission constitutes a contravention of Regulation 4 of the Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2000 read with Regulation 6 of the Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2000.

It was emphasized that "the repatriation of the sale proceeds is restricted to the amount paid for acquisition of the immovable property in foreign exchange received through normal banking channels or out of funds held in Foreign Currency Non-Resident Account or Non-Resident External Account," and that construction costs do not form part of the repatriable amount.

The Tribunal observed that "the payment of consideration by the buyer also has to be done within the country itself and the non-resident seller may repatriate the amount so received in sale consideration to the extent of the amount so eligible in terms of the relevant Regulation."

Regarding penalties, the Tribunal stated that "the appellants are entitled for leniency in payment of penalty" given the surrender of FCNR receipts and absence of foreign exchange loss, but maintained that the contravention occurred and penalties are warranted.

On liability, the Tribunal held that "the directors of the company who are actively taking part in the affairs of the company are liable for the contraventions committed by the company under Section 42(1) of FEMA, 1999."

Accordingly, the Tribunal modified the penalties imposed by the Adjudicating Authority, reducing the penalty on the appellant company from Rs. 25 lakhs to Rs. 5 lakhs and on the individual directors from Rs. 1 lakh each to Rs. 50,000 each, while upholding the finding of contravention.

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