2025 (6) TMI 1883 - HC - FEMA

Bombay HC upholds FERA violations for share transactions without RBI approval, confirms daughters' non-resident status

Bombay HC dismissed appeals challenging FERA violations involving share transactions of an Indian company without RBI approval. The court held that the ... Applicability of the provisions of Section 9(i)(a) of the Foreign Exchange Regulation Act, 1973 (FERA) on “person resident in India” going abroad on a student visa as defined u/s 2(p) Or “person resident outside India” as defined u/s 2(q) at the relevant time - financial transactions involved concerning the sale and purchase of shares of an Indian company - without the prior approval of the Reserve Bank of India (RBI) - violation of the provisions of the FERA - imposition of the penalties - 'animus manendi', or an intention to stay for an indefinite period at one place - presumption of a culpable mental state. HELD THAT:- The circumstances indicated the Shroff daughter’s intention to stay outside India for an uncertain period, it was for the Appellants to have produced some proper material based upon which such circumstances could have been explained, and it could have been established that the Shroff daughters had no intention whatsoever to stay outside India for an uncertain period. The circumstances surrounding their stay in the USA, the length of the stay, their marriage to persons settled in the USA, and the lack of details about their return or any proposed return to India indicate an intention to stay outside India for an uncertain period. Section 71 of the FERA also provides that where any person is prosecuted or proceeded against for contravening any of the provisions of FERA or of any rule, direction or order made thereunder which prohibits him from doing an act without permission, the burden of proving that he had the requisite permission shall be on him. The Special Director has evaluated the material on record in great detail and concluded that the Shroff daughters were not persons resident in India at the relevant time. The Tribunal has also independently evaluated the material/evidence on record and confirmed the findings of fact recorded by the Special Director. Upon our independent evaluation of the material on record, we see no reason to interfere with these findings of fact. As noted earlier, the evidence on record sufficiently establishes circumstances as would indicate the intention of the Shroff daughters to stay in the USA for an uncertain period. Whether the provisions of Section 9 read with Section 68 of the FERA would apply to a person resident in India going abroad on a student visa - Now that we have held that the Shroff daughters were not persons resident in India, this question of law will have to be answered against the Appellants. This is precisely what the Special Director and the Tribunal have done. Even without any reference to Section 114 of the Evidence Act, we find no error in the findings of fact reached by the Special Director and the Tribunal. However, the Tribunal cannot be faulted for referring to Section 114 of the Evidence Act in the context of evaluating the evidence on record. The travel records of the Shroff daughters does not rebut the circumstances as would indicate their intention to stay outside India for an uncertain period. There is documentary evidence that establishes beyond doubt the contravention of Sections 9, 19 and 29 read with Section 68 of the FERA. The defences were raised not about there being no contravention but that some of the Appellants before the Tribunal had no knowledge about the Shroff daughters being persons resident outside India. Considering the magnitude of the transactions and the circumstances in which the same were carried out, there is no substance in the argument based on any alleged disproportionality in the penalty amounts. Accordingly, even the first and second questions of law are required to be answered against the Appellants. As this is an Appeal, we have also reevaluated the material on record, even though an Appeal under Section 54 of the FERA lies only with questions of law. Thus, we find no merit in these Appeals and consequently dismiss the same without any order as to costs. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Court in these Appeals against the impugned orders of the Special Director, Enforcement Directorate (ED), and the Appellate Tribunal for Foreign Exchange (Tribunal) were:(1) Whether the provisions of Section 9(i)(a) of the Foreign Exchange Regulation Act, 1973 (FERA) are attracted only when a person resident in India makes a payment to or for the credit of any person outside India, provided such payment is made in accordance with exemptions granted by the Reserve Bank of India (RBI).(2) Whether the penalty imposed was justified, particularly in the absence of any evidence of loss of foreign exchange or contumacious conduct by the Appellants.(3) Whether illustration (g) under Section 114 of the Indian Evidence Act is applicable, especially considering that the complete travel records and visas of the Appellants' daughters were placed before the Tribunal.(4) Whether Sections 9(i)(a), 9(i)(e) read with Section 68 of FERA apply to persons resident in India going abroad on student visas.(5) Whether the term 'person resident in India' should be interpreted as provided in Clause 1.28(ii) A of Chapter I of the Exchange Control Manual, 1993.(6) Whether Section 114 of the Evidence Act should be invoked in construing the definitions under Section 2(p) and 2(q) of FERA.However, the pivotal issue underlying all these questions was whether the Shroff daughters were 'persons resident in India' under Section 2(p) of FERA or 'persons resident outside India' under Section 2(q) of FERA during the relevant period, as the applicability of FERA provisions and consequent penalties hinged on this determination.2. ISSUE-WISE DETAILED ANALYSISIssue 1 & 4 & 5: Interpretation of 'Person Resident in India' under Section 2(p) and applicability of Sections 9(i)(a), 9(i)(e), and 68 of FERA to persons abroad on student visasRelevant legal framework and precedents: Section 2(p) of FERA defines 'person resident in India' as a citizen of India who has been staying in India after 25 March 1947 but excludes those who have gone out or stay outside India for employment, business, or any purpose indicating an intention to stay outside India for an uncertain period. Section 2(q) defines 'person resident outside India' as one not resident in India. The key test is the animus manendi-intention to stay for an uncertain period at a place. The decision in RBI v. Jacqueline Chandani (1996) clarified that FERA applies to citizens staying outside India with such an intention and distinguishes residence from domicile.Court's interpretation and reasoning: The Court emphasized that the critical inquiry is whether the Shroff daughters' stay in the USA was for a purpose and under circumstances indicating an intention to stay outside India for an uncertain period. The Court found that the daughters, although Indian citizens, were residing in the USA during the relevant period, not for employment or business but for education initially, followed by marriage to settled persons in the USA, and no evidence suggested an intention to return and stay in India.Key evidence and findings: The Special Director and Tribunal relied on statements recorded under Section 40 of FERA, admissions by the father regarding the daughters' residence and marital status in the USA, passports and visa records, and the absence of any material indicating their return to India or intention to do so. The daughters were found to have stayed in the USA for an uncertain period.Application of law to facts: Given the daughters' prolonged stay, marriages to persons settled in the USA, and lack of evidence to the contrary, the Court concluded that their residence was outside India for an uncertain period, thus excluding them from the definition of 'person resident in India' under Section 2(p) and including them within 'person resident outside India' under Section 2(q).Treatment of competing arguments: The Appellants argued that their stay was temporary for education and visits, supported by visa types (student/visitor), income tax filings in India, and no intention to settle abroad. The Court rejected these, holding that the circumstances indicated otherwise and that the burden was on the Appellants to rebut the presumption of intention to stay abroad for an uncertain period.Conclusions: The Court upheld the concurrent findings of the Special Director and Tribunal that the Shroff daughters were persons resident outside India under FERA during the relevant period, thus attracting the application of Sections 9(i)(a), 9(i)(e), and 68 of FERA to their transactions.Issue 2: Validity of penalty imposition in absence of loss of foreign exchange or contumacious conductRelevant legal framework: Penalties under FERA may be imposed for contraventions regardless of actual loss of foreign exchange or contumacious conduct. However, proportionality and basis of penalty are relevant considerations.Court's interpretation and reasoning: The Court noted that the Appellants had carried out substantial transactions involving purchase and sale of shares of an Indian company without prior RBI approval, contravening FERA provisions. The Court found no merit in the argument that penalties were unwarranted due to absence of loss or contumacious conduct.Key evidence and findings: The material showed substantial financial transactions without RBI permission. The Appellants' defenses were found to be false or insufficient to negate contravention.Application of law to facts: The Court held that the contravention was established, and the penalties imposed were proportionate to the gravity of the violations.Treatment of competing arguments: The Appellants contended penalties were excessive and lacked basis; the Respondents countered that penalties were proportionate given economic offences involved.Conclusions: The Court affirmed the penalties as justified and proportionate.Issue 3 & 6: Applicability of Section 114 of the Evidence Act and burden of proofRelevant legal framework: Section 114 of the Evidence Act permits courts to presume existence of certain facts based on common course of events and human conduct. Illustration (g) allows drawing adverse inference when a party fails to produce evidence within its knowledge.Court's interpretation and reasoning: The Tribunal invoked Section 114 to draw adverse inferences against the Appellants due to failure to produce evidence rebutting the presumption of intention to stay outside India for an uncertain period. The Court found no error in this approach and noted that the travel records and visas did not rebut the presumption.Key evidence and findings: The Appellants failed to produce evidence negating the intention to stay abroad, despite having access to travel and visa records.Application of law to facts: The Court upheld the use of Section 114 in evaluating evidence and drawing inferences consistent with the material on record.Treatment of competing arguments: The Appellants argued that the burden of proof lay on the Respondents and that Section 114 was inapplicable; the Court rejected this, noting the rebuttable presumptions under FERA and the Appellants' failure to discharge their burden.Conclusions: The Court affirmed the Tribunal's use of Section 114 and the adverse inferences drawn.Issue 1 (continued): Interpretation of Section 9(i)(a) and exemptions by RBIThe Court clarified that since the Shroff daughters were not persons resident in India, the provisions of Section 9(i)(a), which regulate payments by persons resident in India to persons outside India subject to RBI exemptions, applied to their transactions. The absence of RBI approval for share transactions constituted contravention.Additional observations: The Court noted that no arguments were advanced based on Clause 1.28(ii) A of the Exchange Control Manual, 1993, and that statutory definitions under FERA prevail over such provisions.3. SIGNIFICANT HOLDINGS'The core issue involved in all these Appeals is whether the Shroff daughters could be regarded as 'person resident in India' as defined under Section 2(p) of the Foreign Exchange Regulation Act, 1973 (FERA) or whether they were 'person resident outside India' as defined under Section 2(q) of the FERA for the relevant period.''The circumstances surrounding their stay in the USA, the length of the stay, their marriage to persons settled in the USA, and the lack of details about their return or any proposed return to India indicate an intention to stay outside India for an uncertain period.''The Special Director has evaluated the material on record in great detail and concluded that the Shroff daughters were not persons resident in India at the relevant time. The Tribunal has also independently evaluated the material/evidence on record and confirmed the findings of fact recorded by the Special Director. Upon our independent evaluation of the material on record, we see no reason to interfere with these findings of fact.''Section 114 of the Evidence Act permits the drawing of adverse inferences where a party fails to produce evidence within its knowledge to rebut presumptions. The Tribunal rightly invoked this provision in the present case.''There is documentary evidence that establishes beyond doubt the contravention of Sections 9, 19 and 29 read with Section 68 of the FERA. The defences raised were not about there being no contravention but that some of the Appellants before the Tribunal had no knowledge about the Shroff daughters being persons resident outside India. The Appellants carried out the transactions of sale and purchase of shares without obtaining the prior permission of the RBI.''Considering the magnitude of the transactions and the circumstances in which the same were carried out, there is no substance in the argument based on any alleged disproportionality in the penalty amounts.''The Appeals are dismissed for lack of merit.'