The High Court of Delhi has partially allowed appeals filed by three individuals against orders of the Appellate Tribunal for Foreign Exchange, ruling that while penalties for contravening the Foreign Exchange Management Act, 1999 (FEMA) were justified, the subsequent confiscation of their bank funds was “non-speaking and without any reason.”
The Division Bench, comprising Justice Navin Chawla and Justice Ravinder Dudeja, held that adjudicating authorities must exercise their quasi-judicial discretion under Section 13(2) of FEMA by providing specific reasons for choosing confiscation in addition to a monetary penalty.
Background of the Case
The appellants—Sunita Mehta, Subash Mehta, and Sanjay Mehta—were residents of Canada who had opened ‘Non-Resident (Non-Repatriable) Rupee Accounts’ (NRNR Accounts) in India. In 2001, due to the financial instability of the cooperative banks where their funds were held, the appellants took loans against these NRNR Accounts. They subsequently used the loan proceeds to open new NRNR Accounts in different banks.
The Enforcement Directorate issued Show Cause Notices between 2008 and 2009, alleging that opening new NRNR accounts with funds raised through loans within India—rather than through foreign remittances—contravened Section 6(3)(f) of FEMA, read with Regulation 5(1)(iv) and Schedule 4 of the Foreign Exchange Management (Deposit) Regulations, 2000.
In 2010, the Adjudicating Authority imposed penalties and ordered the confiscation of the amounts lying in the accounts. This was upheld by the Appellate Tribunal in 2012.
Arguments of the Parties
The appellants, represented by Mr. R.K. Handoo, argued that Regulation 5(1)(iv) casts a duty only on the ‘Authorised Dealer’ (the bank) and not the account holder. They further contended that the regulation was omitted via a notification on March 1, 2002, making the show cause notices issued thereafter non-maintainable. Reliance was placed on the Supreme Court judgment in Rayala Corporation (P) Ltd. & Anr. v. Director of Enforcement (1969). Finally, they argued that the confiscation order was silent on reasoning and should be set aside.
The Respondent, represented by Standing Counsel Mr. Arkaj Kumar, argued that Schedule 4 of the Regulations explicitly prohibits the use of loans for “re-lending” or opening new accounts, as NRNR accounts must be funded by remittances from outside India. Citing Shree Bhagwati Steel Rolling Mills v. Commissioner of Central Excise & Anr. (2016), the respondent argued that the “omission” of a regulation does not absolve prior violations. Regarding confiscation, the respondent claimed it was at the absolute discretion of the authority.
Court’s Analysis and Observations
The Court rejected the appellants’ argument that only banks could be penalized. Referencing Section 13(1) of FEMA, the Court noted:
“The obligation cast is, therefore, both on the Authorised Dealer as also on such person who owns the account. A violation of the same in terms of Section 13(1) of FEMA would therefore attract a penalty for both…”
On the issue of the omitted regulation, the Court distinguished the Rayala Corporation case, holding that the “omission” in this context was a form of repeal that preserved the liability for past violations. The Bench observed:
“The existing NRNR accounts could, in fact, continue till their date of maturity… the intent of the Reserve Bank of India appears to be to provide full convertibility… Therefore, the judgment in Rayala Corporation (P) Ltd. can have no application to the facts of the present case.”
However, the Court found the confiscation of the funds legally unsustainable under Section 13(2). The Bench emphasized that the Adjudicating Authority must explain why a penalty alone is insufficient:
“The Adjudicating Authority is exercising a quasi-judicial function and therefore, is bound to give reasons for the exercise of the discretion vested in it under Section 13(2) of FEMA. The Adjudicating Authority has, therefore, to conclude, by giving reasons for the same, as to why, in the given facts, imposition of a penalty alone will not suffice…”
The Court noted that the Adjudicating Authority’s own record showed the loan had been repaid through the maturity of the accounts and “there was no loss of foreign exchange.”
Decision
The High Court upheld the imposition of penalties but set aside the confiscation orders. Declining to remand the matter back to the authority due to the passage of nearly 18 years since the proceedings began, the Court concluded:
“We find that there is no warrant for confiscating the amounts lying to the credit of the appellant(s) in their NRNR accounts, especially where the loan transactions stood settled on the maturity of the NRNR Accounts.”
The appeals were partially allowed, and the parties were ordered to bear their own costs.
Case Details
- Case Title: Sunita Mehta & Ors. v. Special Director Enforcement Directorate
- Case Number: MISC. APPEAL (FEMA) 2/2025 (and connected matters)
- Coram: Justice Navin Chawla and Justice Ravinder Dudeja
- Date: April 8, 2026
