2025 (10) TMI 797 - AT - FEMA

Appeal dismissed where directorate failed to prove unlawful foreign bank account under FEMA due to unauthenticated evidence

UoI (D.L.A.) ED Versus Shri Alok Bhartia & Anr

AT dismissed the appeal and upheld the adjudicating authority's order dropping proceedings. The directorate failed to prove, on the preponderance of ... Maintenance of a foreign bank account and deposits therein without Reserve Bank of India permission - contravention of Section 4 of the said Act read with Regulation 3 of The Foreign Exchange Management (Foreign Currency Accounts by a Person Resident in India) Regulations, 2000 - test of preponderance of probabilities - failed to furnish the relevant details regarding the bank account - search and seizure operation - Evidentiary value of statements recorded under Section 132(4) - coercion and duress - payment towards additional income tax plus interest but contested the matter in court - HELD THAT:- It is evident that although the appellant in his original statement recorded on 25.08.2011 during the course of the search and seizure operation admitted that the document in question contained details of bank account in his name and in the name of his wife and that the bank account was not reflected in his books or his wife’s books, his position changed merely 4 days after the said search wherein he stated he does not remember anything about the bank account transaction. Further, on 05.09.2011, he completely retracted his statement of 25.08.2011. The appellant directorate has based its entire case against the respondents on the evidence gathered by the I-T authorities during the proceedings under the I-T Act. No corroborating evidence or independent evidence whatsoever has been gathered in the case by the directorate. As per records, the only investigation conducted by the directorate appears to be to record a statement of the appellant under section 37 of the FEMA, 1999 wherein the appellant did not say anything incriminating. Although under section 38 of FEMA, 1999 the officers of the directorate exercise the “like powers” as are conferred on the I-T authorities under the I-T Act, it does not follow that the directorate, for the purposes of investigation under FEMA, can blindly rely on the statements recorded by the I-T authorities in the course of I-T proceedings, that too, without any supporting or corroborating evidence. They would have to exercise their “like powers” independently under FEMA, 1999. Coming to the document in question, there is little doubt that it is foreign in origin. In the present case, the document is evidently neither signed by any bank official nor by the appellants herein nor has it been authenticated as required by the law. It is merely a photocopy of a document whose origin was not at once clear from a bare perusal. During the hearing held on 08.04.2025, specific clarifications were sought from the respondent directorate on the nature of the document and its authenticity as it was not clear as to what was the nature of the document and what was the purpose of its issue; whether it was signed or authenticated by anyone competent to do so; where is the original of the document; how it was obtained. Subsequently, the matter was listed on 15.05.2025 on which day Ld. counsel for the appellant sought an adjournment stating that there had been a fire in the Mumbai office of the directorate to which the case pertains. At his request the matter was adjourned to 16.07.2025. On the said date, none was present on behalf of the appellant directorate and the matter was once again adjourned to 05.08.2025 so as to provide another opportunity to the appellant directorate to provide the necessary clarifications. On 05.08.2025, Ld. Counsel for the directorate finally submitted that in view of the fire which occurred in the Mumbai Zonal Office of the Directorate, the concerned file relating to the case is not traceable. In view of the situation, an appropriate view may be taken by the Appellant Tribunal in the matter. Allegations against the respondents cannot be considered to have been proved on the test of preponderance of probabilities. Accordingly, the case of the appellant directorate against the order of the learned adjudicating authority which dropped the proceedings against the respondents herein, fails and is hereby dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether the maintenance of a foreign bank account and deposits therein without Reserve Bank of India permission constitutes contravention of Section 4 of FEMA, 1999 read with Regulation 3 of the Foreign Currency Account Regulations, 2000, such as to sustain adjudication proceedings. 2. Whether a statement recorded under Section 132(4) of the Income Tax Act, 1961 (recorded during search), which is subsequently retracted, is admissible and of sufficient evidentiary value to establish a contravention under FEMA when relied upon by an investigating agency. 3. Whether a bank statement or account transcript of foreign origin (allegedly from an overseas bank) is admissible and entitled to statutory presumptions under Section 39 of FEMA absent formal authentication and proof of origin. 4. Whether the Directorate/Investigating Agency under FEMA may rely solely on material gathered by Income Tax authorities (including statements and foreign documents obtained by them) without independent corroboration or exercise of its own powers under FEMA. 5. Whether, on the totality of record and on the preponderance of probabilities, the Adjudicating Authority was justified in dropping the proceedings. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Existence of contravention of Section 4 FEMA read with Regulation 3 Legal framework: Section 4 broadly proscribes acquisition, holding or possession of foreign exchange by a person resident in India except as provided by the Act; Regulation 3 prohibits opening/holding a foreign currency account except as permitted by RBI. Interpretation and reasoning: The core legal question is fact-sensitive - whether the respondents in fact held/maintained the overseas account and deposits. The Court observed that the Directorate's case rested on an alleged foreign bank account balance and the respondents' initial admissions during IT search proceedings, later retracted. The presence of deposits in an overseas account could constitute contravention if proved with admissible and authenticated evidence linking the account to the respondent and absence of RBI permission. Ratio vs. Obiter: Ratio - contravention under Section 4/Regulation 3 requires proof of holding/maintenance of foreign exchange/account by the resident; without reliable admissible evidence establishing that link, contravention is not made out on preponderance of probabilities. (See cross-reference to Issues 2-4.) Conclusion: On the record, the Court found the existence of contravention not proved to the requisite standard and therefore proceedings could rightly be dropped. Issue 2 - Evidentiary value of Section 132(4) IT Act statements and effect of retraction Legal framework: Section 132(4) permits examination on oath of persons found in possession/control of documents during search; such statements may be used in related proceedings but are subject to principles of admissibility and relevance. Precedent treatment: The Tribunal relied on judicial authorities that require a nexus between a statement recorded under Section 132(4) and incriminating material discovered during the search for the statement to be relied upon for substantive findings. Authorities were applied to hold that isolated admissions not corroborated by seized material lack legal sanctity. Interpretation and reasoning: The Court noted the temporal sequence - admission during search, an offer to compute and tax undisclosed income, followed within days by retraction and later denials. Crucially, the bank statement alleged to have been confronted at search was not seized from the premises and its origin remained unexplained. CBDT instructions caution against treating confessions/forced admissions recorded in searches as conclusive absent corroborative evidence. The Court held that a retracted statement, unconnected to seized incriminating documents, cannot by itself sustain FEMA adjudication. Ratio vs. Obiter: Ratio - a statement under Section 132(4) is not conclusive; it must be related to incriminating material found during search to have probative value; a later retraction and absence of corroborative seizure diminishes admissibility/weight. Obiter - discussion of policy instructions cautioning coercive confessions (informative but supportive). Conclusion: The initial admissions could not be treated as reliable evidence for FEMA contravention given retraction, absence of nexus to seized material, and lack of corroboration; reliance solely on those statements was impermissible. Issue 3 - Admissibility and presumptions under Section 39 of FEMA for foreign documents Legal framework: Section 39 prescribes presumptions as to documents produced/seized under the Act or received from outside India, but conditions such as prescribed authentication and manner are prerequisites for those presumptions to apply. Interpretation and reasoning: The impugned bank statement was foreign in origin but neither authenticated in the prescribed manner nor shown to be an original signed/attested document. The Court emphasized that Section 39's presumptions require that documents received from abroad be duly authenticated as prescribed; mere photocopies or unauthenticated printouts do not attract statutory presumptions and cannot be admitted as inherently reliable evidence. Ratio vs. Obiter: Ratio - foreign-origin documents relied upon under FEMA must satisfy authentication requirements before Section 39 presumptions or admissibility can be invoked. Obiter - practical observation that provenance/origin must be established by the investigating agency. Conclusion: The bank statement in the record was unauthenticated and of unclear origin; it did not qualify for presumptions under Section 39 and could not be used as reliable evidence to prove the alleged account holding. Issue 4 - Reliance by Directorate on Income Tax investigation and need for independent corroboration Legal framework: Officers under FEMA may exercise 'like powers' as conferred on Income Tax authorities, but exercise of such powers for FEMA investigation requires independent action by the Directorate rather than blind reliance on IT records. Interpretation and reasoning: The Court held that while FEMA investigators can use powers analogous to IT authorities, the Directorate could not simply adopt the IT Department's case material wholesale. The Directorate's investigation comprised essentially recording statements under FEMA which were non-incriminating; it did not independently authenticate or corroborate the foreign bank document or obtain independent bank records. The Court reasoned that without independent exercise of investigatory powers to secure admissible evidence, the Directorate's reliance on IT material is inadequate to establish contravention. Ratio vs. Obiter: Ratio - investigating agency under FEMA must independently exercise its powers and secure admissible evidence; mere adoption of another agency's uncorroborated materials is insufficient to sustain an adjudication. Obiter - expectation that agencies will coordinate but verify provenance and authenticity when relying on foreign-origin evidence. Conclusion: The Directorate's sole reliance on IT investigation materials, without independent corroboration or authentication, was legally insufficient to prove contravention. Issue 5 - Standard of proof and appropriateness of dropping proceedings Legal framework: Adjudicatory proceedings under FEMA are governed by the civil standard of proof (preponderance of probabilities) for establishing contraventions (unless statutory provision prescribes otherwise for specific penal consequences). Interpretation and reasoning: The Court applied the preponderance test to the totality of record - unauthenticated foreign document, retracted admissions, absence of seized corroborative material, dismissal of criminal complaints for lack of evidence, and the Directorate's failure to produce file/authentication (aggravated by loss of file due to fire). On balance, the Court concluded that the appellants/applicants had not shown the contravention on the balance of probabilities. Ratio vs. Obiter: Ratio - where the adjudicator cannot be satisfied on preponderance of probabilities because of inadequate or unauthenticated evidence and lack of corroboration, dropping proceedings is justified. Obiter - observations on procedural adjournments and missing files (not central to law but relevant factually). Conclusion: The Tribunal upheld the Adjudicating Authority's dropping of proceedings; the appeal by the Directorate failed for lack of proved contravention on the preponderance of probabilities and for insufficiency of admissible evidence.