[AT SAFEMA, NEW DELHI] Tribunal Upholds FEMA Liability of Former Partners Despite Retirement Before Adjudication

Introduction

In Mehul R. Shah v. Joint Director, Directorate of Enforcement[i], filed by Mehul R. Shah and Ashwin H. Shah (‘Appellants’), former partners of M/s Rosecut Diamonds (‘firm’), the present appeal challenges the Order dated 20.08.2010 (‘Impugned Order’) passed by the Special Director, Enforcement Directorate, New Delhi, the Adjudicating Authority (‘AA’). The Appellate Tribunal SAFEMA, New Delhi (‘Tribunal’) upheld the penalty order passed by the  AA against the Appellants for contravening the provisions of the Foreign Exchange Management Act, 1999 (‘FEMA’), specifically ss. 7 and 8, along with regs. 8, 9, and 13 of the Foreign Exchange Management (Export of Goods and Services) Regulations, 2000 (‘Regulations’).

Brief Facts

• The present appeals are directed against the Impugned Order of the AA whereby a penalty of Rs. 50,00,000 each was imposed upon the Appellants for contravention of ss. 7 and 8 of the FEMA read with regs. 8, 9 and 13 of the Regulations.

• The Appellants were partners in a firm engaged in the export of cut and polished diamonds. Adjudication proceedings were initiated against them due to non-realization of export proceeds within the statutory period as mandated under FEMA and the applicable Regulations. The core contention raised by the Appellants was that they had retired from the partnership firm with effect from 01.09.2000, in furtherance of the Family Arrangement cum Compromise Deed dated 31.08.2000. Hence, they could not have been held liable for the contraventions.

• While it was undisputed that export proceeds amounting to USD 10,42,485.32 (Rs. 4.52 Crores) relating to 19 GRs remained unrealized beyond the permissible six-month period, 7 out of the 19 GRs involving USD 3,93,094.63 had evidently crossed the statutory realization timeline well before the Appellants had retired on 01.09.2000.

Findings

• The Tribunal noted that the Appellants were actively involved in the business of the firm during the period when the 7 GRs were generated and overdue. Under FEMA and the applicable Regulations, the statutory obligation to realise and repatriate export proceeds arises from the date of export, not upon retirement or expiry of the six-month period. Thus, the Appellants’ retirement did not absolve them from liability under FEMA.

• It was further observed that the Appellants had failed to furnish any documentary proof that reasonable steps had been taken to recover the export dues, including the alleged litigation initiated in Hong Kong. Mere assertions of financial hardship or informal efforts, such as phone calls and faxes, do not satisfy the legal threshold of ‘reasonable steps’ under FEMA.

• Accordingly, the Tribunal upheld the Impugned Order while observing that the liability could not cease post-retirement since the statutory obligations had already crystallised before the Appellants exited the firm. Thus, the finding that the Appellants had contravened ss. 7 and 8 of the FEMA, read with regs. 8, 9, and 13 of the Regulations, and further read with s. 42(1) of the FEMA with respect to the 7 GRs totalling USD 3,93,094.63, was upheld. However, considering the involvement of the Appellants, along with certain other factors, the Tribunal reduced the penalty imposed on each of the Appellants.

Our Analysis

The Tribunal adopted a measured approach, carefully considering the Appellants’ obligations under FEMA in light of the available evidence. By affirming their liability for violations that occurred before their resignation and reducing the penalty, the Tribunal emphasized the significance of adhering to foreign exchange regulations and the necessity of supporting claims with proper documentation.

This case provides important interpretive guidance on the understanding of the scope of responsibility under FEMA, especially for individuals who exit a business under similar circumstances. The core issue is the Appellants’ failure as partners to ensure the timely realization and repatriation of export proceeds for certain bills that remained unsettled beyond the statutory six-month period. Despite the Appellants’ claim that their resignation preceded the expiration of the statutory period, the Tribunal held them liable. The AA imposed a penalty for non-compliance with FEMA regulations. This ruling addresses the legal implications of the Appellants’ failure to repatriate export proceeds, the continuing responsibilities of partners post-resignation, and the penalties for such violations under FEMA. After a detailed review, the Appellate Tribunal partially upheld the appeal, reducing the penalty, but still held the appellants accountable for the failure to realize the export proceeds.

End Note

[i] [2025] 172 taxmann.com 533 (SAFEMA - New Delhi) dated 27.02.2025.

Authored by Aishwarya Pawar, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.