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Beyond Boundaries: Absence of Limitation in FEMA Enforcement

The article analyses the intricate realm of the Foreign Exchange Management Act, 1999 ('FEMA') and its remarkable evolution from the stringent Foreign Exchange Regulation Act, 1973 ('FERA'). Authored with a keen eye on the Directorate of Enforcement's ('ED') role, this article meticulously examines the non-applicability of limitations in FEMA enforcement, especially concerning investigations into aged contraventions. Drawing insights from key judicial precedents, it explores the nuanced landscape where the absence of explicit limitations in FEMA poses challenges, and where the principles of natural justice and reasonable timelines become paramount. This professional discourse navigates the complex legal framework, emphasizing the imperative for the judicious application of investigative powers and the safeguarding of individual rights within the FEMA landscape.

Introduction

FEMA along with its rules, regulations, directions, and other forms of delegated legislation, is the fundamental law governing the inflow and outflow of foreign exchange into and out of India. Before the enactment of FEMA, the FERA was the law inter alia dealing with foreign exchange transactions and imposed strict restrictions on dealings in foreign exchange. The contraventions under FERA imposed criminal liabilities on the offenders. However, with the liberalization of the Indian economy, FERA was replaced by FEMA which is not a criminal statute (except for certain transactions) but rather imposes a civil penalty on its contraventions. In essence, FEMA was a result of the modernisation of the Indian economy, enacted to liberalize and deregulate the Indian market.

The ED is the agency which has been given the power to enforce and administer FEMA i.e., carry out inquiries, and investigations, issue show cause notices and impose penalties for contraventions of such law. In FEMA, s. 37 specifically empowers the Director and its subordinate officers, to exercise power and initiate investigation for any contraventions committed by any person and impose monetary penalties as provided under s. 13 of FEMA. ED authorities have been bestowed with powers similar to those of the Income Tax (‘IT') authorities, e.g., the power to issue summonses or carry out search and seizure operations.

This article seeks to examine the various facets of the non-applicability of limitation in matters under FEMA, including whether ED has powers to investigate very old cases under FEMA i.e., cases where a contravention has taken place, say, more than 10 years ago.

Meaning of Limitation and When can such Plea or Defence be taken under FEMA?

Meaning of Period of Limitation

Limitation refers to the maximum period of time which is allowed to elapse from the occurrence of a certain event before certain actions can be brought to court for remedy. According to s. 2(j) of the Limitation Act, 1963, ‘period of limitation’ means the period of limitation prescribed for any suit, appeal, or application by the Schedule, and ‘prescribed period’ means the period of limitation computed in accordance with the provisions of this Act. However, the concept of limitation does not apply to FEMA.

Defence of Limitation in Old Transactions Investigation Under FEMA

Under FEMA, all forex-related contraventions are in the nature of civil wrongs. The Central Government is empowered by FEMA to impose restrictions on and supervise 3 things: payments made to any person outside India or receipts from them, forex and foreign security deals.

The non-applicability of limitation on FEMA means that the ED can investigate contraventions under FEMA even for transactions undertaken more than 10-15 years back. This is a significant departure from the general principle of limitation, which is designed to ensure that legal actions are pursued within a reasonable time frame.

The plea of limitation under FEMA would typically depend on the nature of the contravention, the evidence available, and the circumstances surrounding the transaction. For example, an application under s. 5 of the Limitation Act read with ss. 19 and 49(5)(a) of FEMA for condonation of delay can be moved.

Judicial Precedents: When no time limit is prescribed, ED to act within a reasonable time and justify the reason for delayed investigation

1)           State of Gujarat v. Patil Raghav Natha and Ors.[i]

In this case, the Supreme Court observed that where no limitation period has been provided in the statute, the authorities are required to initiate the proceedings within a reasonable period. The Court also emphasized that the determination of what constitutes a reasonable time period would be contingent upon the unique facts and circumstances of each case.

2)           Government of India v. Citadel Fine Pharmaceuticals[ii]

In this case, the Supreme Court observed that when no time limit is prescribed for recovery of duty, the same would not be violative of a. 14 of the Constitution and in such scenarios, the Adjudicating Authority is expected to judiciously exercise their conferred powers within a reasonable time. Concerning the determination of a reasonable time, the Court held that whenever a question regarding the inordinate delay in issuance of notice of demand is raised, the assessee is open to contend as to how the delay is bad in law and if the officers are investigating the facts of the case, notice or recovery is to be made within a reasonable time period.

3)           State of Madhya Pradesh v. Bani Singh and Ors.[iii]

In this case, the Supreme Court found that the departmental proceedings initiated in 1987 for the alleged irregularities that took place between 1975­77 could not be permitted to be continued, as it would be unfair and unreasonable. The Supreme Court further held that there is no satisfactory explanation for the inordinate delay of more than a decade and it is unreasonable to think and even consider that the department took 12 years to initiate disciplinary proceedings.

4)           Shirish Harshavadan Shah v. Deputy Director, E.D.[iv]

In this case, the High Court of Bombay quashed and set aside a memorandum and a notice issued under FERA, which resulted in reopening the proceedings after more than 22 years. It was observed by the High Court that the ED cannot be allowed to reopen or reinvestigate or reopen a case after such a long time since it would prove to be a serious prejudice to the petitioner for being answerable to the relevant facts of the case which are impossible for human memory to remember. The Court further stated that since the statute is silent about the limitation period to complete the adjudication proceedings, no objection can be taken against the ED despite the proceedings being revived after 12 years. Further, it is settled in law that every authority should exercise its power to investigate within a reasonable period, which would certainly depend upon the facts and circumstances of each case. As seen in this matter, the ED was unable to explain the delay in reopening the case after 12 years. The Court observed that it was not the petitioner who was responsible for the same and quashed the proceedings, noting that if the ED was allowed to reopen cases without reasonable justification for substantial delays, it would grant the authority an unfettered power to adjudicate cases dating back to 20, 25, or even 30 years.

5)           Innovative Tech Park Ltd. v. Special Director of Enforcement[v]

In this case, the High Court of Delhi held that in quasi-criminal proceedings, the penalty should not be imposed merely because it is lawful to do so. The Adjudicating Authority issued the show cause notice (‘SCN’) on 27.05.2002, which was served to the appellant on 15.02.2006, causing a lapse of 13 years from the date of remittance being done in 1993. The Court observed that if there is a contravention and if a penalty is to be imposed, then the ED should investigate within a reasonable time considering facts. It is trite law that to impose a penal liability, compliance should be sought within a reasonable time and a person cannot be penalised for not retaining the documents for a period of 13 years. Further, since the SCN served was also belated, the defence taken by the appellant was plausible and hence the impugned penalty order passed by the Adjudicating Authority was set aside and the contended appeal was disposed of.

6)           Union of India v. Citi Bank, N.A.[vi]

In this case, the respondent bank was granted a license to be an authorised dealer under ss. 6(4) and 6(5) of FERA during the period from October 1992 and January 1993. The authorities issued the SCN on 25.02.2002 alleging that the respondent contravened the provisions of ss. 8(1), 64(2), 64(4), 64(5) and 73(3) of FERA. The Supreme Court observed in this matter something similar to in Citadel (supra) that in case of absence of provisions, it is an established legal principle that proceedings should commence within a reasonable timeframe, such as 8 years in this instance due to the respondent being a banking company. According to s. 2, 3, and 4 of the Companies (Period of Preservation of Records) Rules, 1985, a banking company is obligated to maintain records for 5 years and 8 years, unless specifically instructed otherwise, through an order mandating a longer retention period. The Supreme Court further held that if the SCN which was issued back in 2002 for the contravention committed in 1992-93 was permitted, it would cause prejudice to the respondents and would be unfair.

7)           CNH Industrial (India) (P) Ltd. v. Union of India[vii]

The Bombay High Court in this case quashed the SCNs which were issued without informing the appellant/noticees. These SCNs were pending adjudication for more than a decade since they were issued but the department neither informed the petitioner about the transfer of the said notices to the call book nor was the petitioner informed about the objections raised by the department. It was further held that it is the duty of the Adjudicating Authority to take the SCN to its logical conclusion within a reasonable period for which the petitioner cannot be made to suffer. The High Court further observed the facts and held that even the hearing of such SCN belatedly is in violation of the principles of natural justice, and it constitutes a gross delay on the part of the department. Hence, the High Court of Bombay quashed the impugned SCNs.

Legal Position

FEMA itself does not explicitly prescribe a time limit for adjudicating contraventions or state that the law of limitation does not apply to matters under FEMA. In simpler terms, it can be understood from the nature of the Act and the various judicial precedents that there is no specific limitation period for contraventions occurring beyond a certain period in the past, such as 5 or 10 years.

This is in contrast with other laws like Income-tax law and GST law which prescribe a time limit beyond which the tax demands cannot be made by the authorities. This is probably because FEMA deals with foreign exchange management and the levy of penalty for contraventions of its provisions may be considered quasi-criminal in nature, and generally limitation does not apply to criminal laws (though being mindful of s. 468 of the Criminal Procedure Code, 1973 (‘CrPC’)).

For completeness, it would be relevant to mention here that post-2015, criminal prosecution can also be initiated in certain contraventions of FEMA (s. 13(1C)) and result in a punishment sentence of up to 5 years. It is to be noted that since this prescribed sentence is more than 3 years, the limitation for taking cognizance of the matter prescribed under s. 468 of the CrPC won’t be applicable. Thus, the criminal liability under FEMA also comes without limitation.

Principles of Natural Justice

The principles of natural justice, reasonable timelines, and addressing substantial delays are integral to fair decision-making in FEMA matters. The Reserve Bank of India, as the regulatory authority, is obligated to uphold these principles to ensure fair and prompt resolution of cases. This includes the right to be heard, impartial decision-making, providing reasoned justifications for actions taken, and avoiding undue delays that may cause hardship or prejudice to the accused persons.

Courts have time and again recognized that substantial delays can constitute a violation of natural justice and may warrant judicial intervention. In such instances, the authorities may be required to expedite the adjudication process to address the delay. These principles collectively form the pillar of fair administrative proceedings in FEMA matters.

Conclusion

As observed, various High Courts and the Supreme Court have addressed matters relating to undue and inordinate delay by the Adjudicating Authorities, where proceedings were initiated after a reasonable time has passed. It is pertinent to note that neither of the Courts has entertained proceedings with a delay where the notices were issued against the noticees after a substantial period of time has passed, nor have they allowed the Adjudicating Authorities to proceed with the investigations where such notices and SCNs were issued and adjudicated years later than when the actual offence was committed.

The absence of a statute of limitations for conducting investigations under FEMA provides the ED with the opportunity to resolve such cases, provided they can offer valid reasons for any delays. If the ED can successfully justify their delay, the Courts might permit the imposition of penalties for violations that occurred more than a decade ago, as long as these investigations are conducted within a reasonable timeframe.

The legal landscape has witnessed instances where the Adjudicating Authorities have issued notices and SCNs belatedly, as observed by the High Court of Bombay in Harshavadan (supra), and how the High Court has tackled the prejudice towards the noticees and assessee by initiating proceedings where a reasonable time for investigating the matter has passed. The Courts have also made the Authorities justify the reasons for such delays due to which the assessee and the noticees should not suffer for the belated SCN issued by the Authorities while investigating the contraventions under FEMA and FERA which were committed decades ago. Furthermore, such undue delays inconvenience the assessees and notices, especially in situations where the person who has contravened the provisions of FEMA and FCRA has passed away. In such conditions, the families are made to bear the consequences of the actions of such an assessee mainly because of the delay caused by the Adjudicating Authorities, where the rest of the family must bear the penalties arising out of such contraventions.

Therefore, in the absence of such a limitation period, the ED will continue to exercise its unrestricted powers of investigating matters, ignoring the period of time that has passed by imposing penalties on such noticees and so on. Penalties are considerable in cases where the Authorities or the Departments are pursuing the investigation under a delayed time period, justify the reasons behind such investigations, and then impose penalties. If the Court is not satisfied with the explanations for the delay provided by the Authorities, such notices should not be deemed maintainable, and appropriate remedies should be extended to the aggrieved parties.


End Notes


[i] State of Gujarat v. Patil Raghava Nath (1969) 2 SCC 187
[ii] Government of India v. Citadel Fine Pharmaceuticals MANU/SC/0189/1989
[iii] State of Madhya Pradesh v. Bani Singh (1990) Supp. SCC 738
[iv] Shirish Harshavadan Shah v. Deputy Director, E.D. 2010 SCC OnLine Bom 2133
[v] Innovative Tech Park Ltd. v. Special Director of Enforcement [2017] 78 taxmann.com 156 (Delhi)
[vi] Union of India v. Citi Bank N.A. 2022 SCC OnLine SC 1073
[vii] CNH Industrial (India) (P) Ltd. v. Union of India 2022 SCC OnLine Bom 645

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


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