2026 (1) TMI 861 - HC - FEMA

Waiver of pre-deposit under Section 19(1) FEMA: Tribunal must allow alternative securities when indigence makes cash deposit impossible

When a tribunal finds undue hardship and poor financial condition, treating a statutory 10% ceiling as a mandatory minimum deposit renders the appellate ... Jurisdictional error - Undue hardship - Impossibilium Nulla Obligatio Est - waiver of pre-deposit under the Second Proviso to Section 19(1) - contravention of Sections 7 and 8 - Non-Performing Assets (NPA) - fundamental equilibrium between the State’s prerogative to secure revenue and the citizen’s right to an effective appellate remedy - Whether the Appellate Tribunal, after having factually arrived at a finding of 'undue hardship' and 'poor financial condition,' committed a jurisdictional error by treating the 10% limit in the Third Proviso to Section 19(1) of FEMA as a mandatory minimum deposit, thereby rendering the statutory right of appeal illusory and the order perverse? HELD THAT:- The expression “undue hardship” is not merely “hardship,” but a burden “out of proportion to the nature of the requirement itself”. For an NPA declared entity with no liquid assets, a multi-million-rupee deposit is, prima facie, an undue hardship. As the Hon’ble Supreme Court cautioned in Monotosh Saha vs. Special Director, ED [2008 (8) TMI 9 - SUPREME COURT], the Tribunal must ensure that the remedy of appeal is not rendered “illusory.” If a condition for appeal is impossible to fulfil, the right to appeal is effectively snatched away. By acknowledging “poor financial condition” while simultaneously demanding Rs.2.20 Crore from an NPA-classified entity, the Tribunal “took away with the left hand what it gave with the right.” By treating the 10% ceiling as a mandatory minimum despite a finding of hardship, the Tribunal failed to exercise its jurisdiction meaningfully. We are of the firm opinion that when a Tribunal finds an appellant is indigent, it must explore the “Middle Path.” Safeguarding Revenue does not always necessitate a liquid cash deposit. The Second Proviso allows the Tribunal to impose “such conditions as it may deem fit,” which includes alternative securities like Indemnity Bonds or Corporate Guarantees. These mechanisms secure the interest of the State without choking the Appellant's access to justice. Thus, we find that the substantial question of law is answered in the affirmative, in favor of the appellant. Issues: (i) Whether the Appellate Tribunal, after recording 'undue hardship' and 'poor financial condition', committed a jurisdictional error by treating the 10% limit in the Third Proviso to Section 19(1) of FEMA as a mandatory minimum deposit, thereby rendering the statutory right of appeal illusory.Analysis: The Tribunal's factual finding of indigence engages the Second Proviso to Section 19(1), which permits the Tribunal to dispense with the deposit where it would cause undue hardship and to impose such conditions as it deems fit to safeguard realisation of penalty. The Third Proviso sets a ceiling (maximum) of ten per cent of the penalty and is not a mandatory floor. Where an appellant is found to be indigent or to be in poor financial condition, the Tribunal must meaningfully exercise its discretion and may adopt alternative mechanisms (for example, indemnity bonds or guarantees) rather than insist on an impossible cash pre-deposit. Treating the 10% cap as a compulsory minimum in the face of an undue hardship finding produces an internal contradiction that undermines the statutory appellate remedy.Conclusion: The Tribunal committed a jurisdictional error by treating the 10% limit as a mandatory minimum deposit in spite of a finding of undue hardship; this conclusion is in favour of the appellant.