2026 (3) TMI 922 - AT - FEMA

Civil penalty liability without mens rea affirmed, with proportionality reduction and pre-deposit adjustment in sanction.

The note addresses civil penalty liability for foreign exchange contraventions, confirming that proof of guilty intention is not required where statutory ... Liability of company under Section 42(1) of FEMA - pre-deposit - absence of mens rea for civil penalty under FEMA - transactions by statements under Section 37 - statutory requirement - proportionality in imposition of penalty - Whether the penalty imposed upon the Appellant Shri Sanjay Pai is sustainable or not.​​​​​​ Liability under Section 42(1) of FEMA - HELD THAT:- The penalty on the Appellant is in terms of Section 42(1) of FEMA for the contraventions made by the Company. We find that the Appellant was the CFO of the Company during the relevant period. It is also noted that the Appellant was an active participant in the transactions which were in contravention of the aforementioned provisions of the Act, Regulations thereunder and the Guidelines. The Appellant has also tendered statements under Section 37 of the Act admitting his active role in the said transactions. There is nothing in the Section which can indicate directly or indirectly requirement of mens rea. Words like “willful”, “deliberately”, “intentionally” etc. are missing. The Judgment (supra) in the matter of SEBI cited the Judgment in Director of Enforcement vs. MCTM Corporation Pvt. Ltd. and Ors. [1996 (1) TMI 351 - SUPREME COURT] wherein even for FERA 1947 it was held that the contravention shall be breach of a civil obligation which would attract penalty irrespective of the fact whether the contravention was made with any guilty intention or not. The Judgment (supra) in the matter of SEBI, also cited a number of previous Judgments wherein it was held that mens rea is not an essential element for imposing penalty for breach of civil obligations. The Judgment (supra) has clarified that 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. Final Conclusion: The appeal is partly allowed: the Tribunal affirmed the appellant's personal liability under Section 42(1) of FEMA but held that mens rea is not a requisite for such civil penalties and reduced the penalty payable by the appellant, directing adjustment of the pre-deposit against the reduced amount. Issues: (i) Whether the penalty of Rs.10,00,000 and Rs.10,000 imposed on the Appellant under Section 42 of the Foreign Exchange Management Act, 1999 for contraventions by the company is sustainable.Analysis: The Appellant was the chief financial officer during the relevant period and admitted active participation in the transactions by statements under Section 37 of the Act. The penalty was imposed under Section 42(1) of the Foreign Exchange Management Act, 1999 for contraventions established against the company. The applicable legal framework includes Section 13(1) of the Foreign Exchange Management Act, 1999 which provides for civil penalties where mens rea is not a statutory requirement. The Tribunal applied the principle that once contravention of a statutory civil obligation is established, intention is irrelevant for imposition of penalty, relying on established precedent that civil penalties under regulatory statutes do not require proof of guilty intention. Having found the Appellant's active role and the establishment of contraventions, the Tribunal nevertheless exercised discretion to reduce the penalty to achieve proportionality and adjusted the pre-deposit against the reduced amount.Conclusion: The penalty imposed on the Appellant is partially set aside by reducing the amount to Rs.1,01,000 and the pre-deposit made shall be adjusted against the reduced penalty; the appeal is partly allowed in favour of the Appellant.