2025 (12) TMI 228 - AT - FEMA

Penalty for hawala remittances under Sections 3(d) and 13(1) FEMA upheld, digital evidence and retracted statements accepted

Shri M.V. Swabhanu Proprietor of M/s Mithra Electronics Versus The Joint Director, Directorate of Enforcement, Bangalore

The AT upheld the adjudication order finding the appellant guilty of contravention of Section 3(d) FEMA for effecting hawala remittances abroad through ... Hawala transfer of funds abroad - higher unit price than the unit price of the contemporaneous imports - contravention of Section 3 (d) of the Foreign Exchange Management Act, 1999 (FEMA) - evidence of the values of the contempourneous imports - documents recovered from the digital devices - compliance of the provisions of Section 65 (B) of the Evidence Act 1872 - denial for cross examination - requirement of mens rea - veracity of the statements of the appellant - explaining documents and loose sheets seized - imposition of penalty u/s 13(1) - HELD THAT:- Appellant as well as Shri Setty have retracted from the statements tendered before the Respondent Directorate. However, we find that the retraction of Shri Setty made by letter dated 26.01.2010 was denied as baseless and incorrect by the Respondent Directorate. Moreover, Shri Setty in his further statement dated 18.06.2010 confirmed the details given by him in his earlier statements. We are not convinced that the retraction made by the Appellant can be accepted in view of the details disclosed by him in his statements tendered before the Respondent Directorate, the nature of the statement being explanatory to the documents recovered from his premises and the independent corroboration from the documents recovered from the premises of Shri Setty. In this regard, our observations are supported by the Judgement of the Hon’ble Supreme Court in the case of Vinod Solanki vs. Union of India [2008 (12) TMI 31 - SUPREME COURT] which has laid down the situations where the retracted statement of the Appellant can be relied upon. Appellant has also challenged the inferences drawn from the documents recovered from the digital devices in view of compliance having not been made by the Respondent Directorate to the provisions of Section 35(B) of the Evidence Act. - Since, the documents were recovered from the digital devices in custody of the Appellant, the inference that such documents can be admitted in evidence is inescapable. Opportunity for cross examination - There does not appear to be any prejudice caused to the interest of the Appellant by the denial of cross examination, which in any case may not have been necessary in the present proceedings. Appellant has argued that since no case of under invoicing of the import of goods has been detected by the Customs Department, the underlying basis of the present case under FEMA cannot be sustained. - We find that the source of the data contained in the table has not been disclosed either in the affidavit or in the documents filed by the Appellant and the private publisher. Moreover, the function relating to the value determination for the import of goods even on the basis of the value of contemporaneous import is that of the Customs Department. Such determination cannot be made in the process of present Adjudication of the Appeal. The pleadings have been made in the Appeal, that nothing has been produced by the Respondent as to show that the contraventions of the Customs Act 1962 have occurred. We observe that the proceedings under the Customs Act and those under the FEMA are independent of each other. Even if for argument sake, it is taken that no proceeding under the Customs Act 1962 could be initiated that does not vitiate the detection and the investigation brought out in the proceedings under FEMA. There is nothing in the Section 13(1) of FEMA, which can indicate directly or indirectly requirement of mens rea. Words like “willful”, “deliberately”, “intentionally” etc. are missing. In the case of Hindustan Steel Ltd. Vs. State of Orissa [1969 (8) TMI 31 - SUPREME COURT] pertained to criminal/quasi criminal proceeding as the provisions of the Act under consideration in that case imposed a punishment of imprisonment and fine as well. The present appeal deals with provisions which are strictly civil obligations and penalty for the contraventions of these provisions are imposable under Section 13(1) of FEMA which provides for penalty only, up to thrice the sum involved in such contravention. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether the retracted statements of the appellant and a third party, explaining documents and loose sheets seized, could be relied upon to establish contravention of Section 3(d) of the Foreign Exchange Management Act, 1999. 1.2 Whether documents and emails recovered from digital devices in the appellant's custody were admissible as evidence in FEMA adjudication proceedings notwithstanding non-compliance with Section 65B of the Indian Evidence Act, 1872. 1.3 Whether denial of cross-examination of officers of the Enforcement Directorate vitiated the adjudication proceedings for breach of principles of natural justice. 1.4 Whether absence of proceedings or findings under the Customs Act, 1962 regarding under-invoicing and reliance on contemporaneous import data could negate or vitiate FEMA proceedings for alleged hawala remittances. 1.5 Whether imposition of penalty under Section 13(1) of FEMA required proof of mens rea and whether reliance on Hindustan Steel Ltd. v. State of Orissa was justified. 1.6 Whether the quantum of penalty imposed required reduction in light of the facts and the appellant's economic condition and how the seized sum of Rs. 4,00,000/- was to be dealt with. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Reliance on retracted statements to establish contravention under Section 3(d) FEMA Legal framework 2.1 The Court considered the principles laid down in Vinod Solanki v. Union of India regarding use of retracted confessions, holding that a retracted confession may be relied upon where substantially corroborated by independent and cogent evidence, and also considered K.T.M.S. Mohamed v. Union of India on the voluntariness and evidentiary value of retracted statements. Interpretation and reasoning 2.2 Multiple statements of the appellant and the third party (Shri Ramakrishna Setty) were found to be explanatory of entries in the seized documents and loose sheets; the documents contained detailed accounts of receipts and payments between them. 2.3 The Court found the statements of the appellant and of the third party to be consistent and mutually corroborative, and in consonance with the documentary material recovered from the premises of both. 2.4 The third party's retraction letter was specifically denied by the Directorate as baseless, and in a subsequent statement he reaffirmed the correctness of his earlier inculpatory statements. 2.5 The Court held that the appellant's retraction could not be accepted in view of: (i) the detailed disclosures made in earlier statements; (ii) the explanatory nature of the statements vis-à-vis seized documents from his premises; and (iii) independent corroboration from documents and statements recovered from the third party. 2.6 Applying K.T.M.S. Mohamed, the Court held that mere retraction does not render a statement involuntary; the burden lay on the maker to establish inducement, threat or coercion, which was not discharged; the authority had considered and rejected the retraction in writing. Conclusions 2.7 The retracted statements of the appellant and the third party, being corroborated by seized documents and mutually consistent, were held to be reliable and could be acted upon to establish contravention of Section 3(d) FEMA. Issue 2: Admissibility of electronic records and applicability of the Indian Evidence Act in FEMA proceedings Legal framework 2.8 The Court examined Rule 4(5) of the Foreign Exchange Management (Adjudication Proceedings and Appeals) Rules, 2000, which provides that in taking evidence the Adjudicating Authority shall not be bound to observe the provisions of the Indian Evidence Act, 1872. 2.9 The Court also considered Section 39 of FEMA concerning presumptions as to documents produced, furnished, or seized under FEMA or any other law, including a presumption as to the truth of contents where documents are seized from a person's custody or control. Interpretation and reasoning 2.10 The appellant challenged the evidentiary use of computer printouts, CDs, pen drive and an email on the ground of non-compliance with Section 65B of the Evidence Act. 2.11 The Court found the impugned email and digital documents were recovered from devices under the control of the appellant, from an email ID identified by him as his own and as used for communication with overseas suppliers. 2.12 In view of Rule 4(5), the Adjudicating Authority was held not bound by the Evidence Act, including Section 65B, and could receive and act upon such electronic material. 2.13 Under Section 39 FEMA, documents seized from the appellant's custody attracted a presumption, unless rebutted, as to signature/handwriting, admissibility and, in the case of such seized documents, the truth of their contents. 2.14 The Court held that reliance on the email and other electronic documents by the Adjudicating Authority did not transgress any provision of law. Conclusions 2.15 Documents and emails recovered from digital devices in the appellant's custody were admissible in FEMA adjudication without satisfying Section 65B of the Evidence Act, and the statutory presumptions under Section 39 FEMA applied to them. Issue 3: Denial of cross-examination and principles of natural justice Legal framework 2.16 The Court referred to Telstar Travels Private Limited & Ors. v. Enforcement Directorate, wherein it was held that refusal of cross-examination of persons producing documents does not per se violate principles of natural justice where documents are disclosed, inspection is allowed, and opportunity to rebut is given. Interpretation and reasoning 2.17 The appellant complained that cross-examination of certain officers of the Directorate was denied. 2.18 The Court found that the Adjudicating Authority had afforded the appellant opportunities to respond to the show cause notice, to give explanations, and to be heard in person, and had meticulously recorded and considered the evidence. 2.19 Relying on Telstar Travels, the Court held that as documents were disclosed and an opportunity to rebut and explain them was afforded, denial of cross-examination of officers did not amount to denial of natural justice. 2.20 The Court observed that no concrete prejudice to the appellant's interest was demonstrated; cross-examination of the concerned officers was not necessary in the facts of the case. Conclusions 2.21 The denial of cross-examination of Enforcement Directorate officers did not vitiate the proceedings and was not a ground to set aside the adjudication. Issue 4: Effect of absence of Customs proceedings and reliance on contemporaneous import data on FEMA contravention Legal framework 2.22 The Court analysed FEMA as a self-contained, special legislation on foreign exchange management, referring to Natwar Singh v. Director of Enforcement, which emphasized that contraventions of FEMA are adjudicated independently under its own statutory scheme. Interpretation and reasoning 2.23 The appellant argued that since no proceedings for under-invoicing were initiated by the Customs authorities, the allegation of hawala remittances based on under-valuation of imports could not stand. 2.24 The appellant filed an affidavit enclosing a table of contemporaneous import values, stated to be printed from a CD of a private publisher; the Court noted that the underlying data source was not disclosed either in the affidavit or in the publisher's materials. 2.25 The Court held that determination of import valuation, including by use of contemporaneous import values, is a function of the Customs Department and cannot be undertaken in appellate adjudication under FEMA. 2.26 It was observed that proceedings under the Customs Act, 1962 and under FEMA are independent; absence of Customs action or of proof of Customs contravention does not render FEMA proceedings invalid or unsustainable. Conclusions 2.27 Non-initiation of Customs proceedings and the appellant's reliance on contemporaneous import data from an undisclosed source did not negate or vitiate the FEMA contravention proceedings; FEMA adjudication could proceed independently of any Customs action. Issue 5: Requirement of mens rea for imposition of penalty under Section 13(1) FEMA Legal framework 2.28 The Court reproduced Section 13(1) of FEMA, which provides for monetary penalty upon contravention, up to thrice the sum involved (where quantifiable) or up to a specified amount otherwise, with additional penalty for continuing contravention. 2.29 The Court relied on The Chairman, SEBI v. Shriram Mutual Fund, wherein it was held that once contravention of a statutory civil obligation is established, penalty is attracted irrespective of intention, and mens rea is not required unless the statute so indicates. 2.30 The Court also referred to Director of Enforcement v. MCTM Corporation Pvt. Ltd. & Ors., which held that contravention under FERA, 1947 constituted breach of a civil obligation attracting penalty irrespective of guilty intention. Interpretation and reasoning 2.31 The Court noted that Section 13(1) FEMA contains no words suggesting a requirement of mens rea such as 'wilful', 'deliberately' or 'intentionally'. 2.32 Applying Shriram Mutual Fund and MCTM Corporation, the Court held that contraventions under FEMA are in the nature of breach of civil obligations, and the presence or absence of guilty intent is irrelevant for imposition of monetary penalty. 2.33 The Court distinguished Hindustan Steel Ltd. v. State of Orissa on the ground that it related to criminal/quasi-criminal proceedings involving possible imprisonment and fine, whereas FEMA penalties under Section 13(1) are purely civil in nature. Conclusions 2.34 Proof of mens rea is not an essential ingredient for imposing penalty under Section 13(1) FEMA; once contravention is established, penalty may be levied irrespective of intention, and Hindustan Steel was held inapplicable to FEMA civil penalty proceedings. Issue 6: Quantum of penalty and treatment of seized amount of Rs. 4,00,000/- Interpretation and reasoning 2.35 The appellant pointed to seizure of Rs. 4,00,000/- from his premises and to his weak economic condition as grounds for reduction of penalty. 2.36 The Court noted that in its earlier interlocutory order the seized amount was referred to as still lying with the Department and a pre-deposit of Rs. 6,00,000/- had been directed and complied with. 2.37 On examination of the show cause notice and the impugned adjudication order, the Court found no proposal or specific action regarding confiscation or appropriation of the seized Rs. 4,00,000/-. 2.38 In view of the absence of any adjudicatory finding or proposal concerning the seized cash, the Court directed that the amount of Rs. 4,00,000/- be released to the appellant. 2.39 Having affirmed the finding of contravention under Section 3(d) FEMA, but considering the facts and circumstances and the appellant's financial position, the Court exercised discretion to reduce the penalty under Section 13(1) from Rs. 1,10,00,000/- to Rs. 10,00,000/-. 2.40 It was ordered that the pre-deposit of Rs. 6,00,000/- already made by the appellant be adjusted against the reduced penalty. Conclusions 2.41 The penalty for contravention under Section 3(d) FEMA was sustained in principle but reduced to Rs. 10,00,000/-; the seized sum of Rs. 4,00,000/- was ordered to be released to the appellant; and the appeal was partly allowed to this limited extent.