2026 (2) TMI 1345 - AT - FEMA

Section 6(4) FEMA protects only legitimately substantiated foreign funds; breach of foreign exchange rules found, penalty reduced.

Section 6(4) of the Foreign Exchange Management Act permits a resident to hold, transfer or invest foreign currency acquired while non-resident only if ... Contravention of Section 3(a) of the Foreign Exchange Management Act, 1999 read with Section 4 - holding, transfer or investment of foreign currency acquired while non resident - Legitimacy and source of foreign funds as determinative for statutory protection - Discretion to reduce penalty in exercise of appellate power - HELD THAT:- We observe that Sub-Section 4 of Section 6 of FEMA does allow persons resident in India to transfer funds in foreign currency provided such funds were acquired, held or owned by such person, when he was resident outside India. The statutory provisions cannot be read as to mean that illegitimate funds or unexplained funds could be covered within the said provisions. The explanation of the Appellant that the funds were acquired from his friend is not corroborated by the other facts on record. These facts include description of the said funds, as proceeds from sale of bonds and the mode of its acquisition in cash and in parts. There is no claim made by the Appellant on record, as to the source of funds being from his salary abroad. We therefore concur with the Impugned Order as to the contravention of Section 3(a) and Section 4 of FEMA. For the ends of justice shall be met on reduction of penalty to Rs. 1.5 Lakhs on the Appellant for the contravention of Section 3(a) and Section 4 of FEMA. The amount of pre-deposit of the penalty, if made, shall be adjusted against the reduced penalty. Issues: (i) Whether a person resident in India can hold, transfer or invest foreign currency acquired while resident outside India under Section 6(4) of the Foreign Exchange Management Act, 1999 and whether that provision applies to the transactions in question; (ii) Whether contravention of Section 3(a) read with Section 4 of the Foreign Exchange Management Act, 1999 is established on the facts and what penalty is appropriate.Issue (i): Whether Section 6(4) of the Foreign Exchange Management Act, 1999 permitted the Appellant, a person resident in India, to hold and transfer US$1.28 lakhs acquired while he was a non-resident.Analysis: Section 6(4) allows a person resident in India to hold, own, transfer or invest foreign currency acquired when resident outside India or inherited from such a person. The provision does not protect funds that are illegitimate or unexplained. The material showed the funds were described in transfer messages as proceeds of sale of bonds, were received in cash and in parts, and the explanation that the funds belonged to a third party was found uncorroborated and an afterthought on the record.Conclusion: Section 6(4) of the Foreign Exchange Management Act, 1999 does not cover the Appellant's transactions on the found facts; the provision is not applicable to protect the transfers in question.Issue (ii): Whether contravention of Section 3(a) read with Section 4 of the Foreign Exchange Management Act, 1999 is established and what penalty should be imposed.Analysis: The adjudicating authority's findings that the funds did not originate from the Appellant's salary abroad, that receipts were in cash and in parts, that supporting documents and third-party statements were afterthoughts, and that transfers were routed through the Appellant's non-resident account were accepted. Those factual findings sustain contravention of Section 3(a) read with Section 4. Considering the facts and circumstances and the Appellant's partial pre-deposit, the Tribunal exercised discretion to reduce the monetary penalty.Conclusion: Contravention of Section 3(a) read with Section 4 of the Foreign Exchange Management Act, 1999 is established against the Appellant; however, the penalty is reduced to Rs. 1.5 lakhs and any pre-deposit shall be adjusted against the reduced penalty.Final Conclusion: The appeal is partly allowed by upholding the finding of contravention but reducing the penalty to Rs. 1.5 lakhs; the reduced penalty reflects mitigation while affirming the substantive breach of FEMA provisions.Ratio Decidendi: Section 6(4) of the Foreign Exchange Management Act, 1999 permits holding or transfer of foreign currency acquired while resident outside India only where the funds are legitimately acquired and duly substantiated; unexplained or illegitimate funds are not protected by that provision.