Introduction
In Pradip Burman v. Special Director, Director of Enforcement, Delhi[i], the Appellate Tribunal SAFEMA, New Delhi (‘Tribunal’) dealt with the equivalent seizure of property under s. 37A(1) of the Foreign Exchange Management Act, 1999 (‘FEMA’) for contravention of s. 4 of the FEMA and deposit of amounts outside India. In this case, the Special Director, Directorate of Enforcement (‘Respondent’) seized certain bonds belonging to Pradip Burman (‘Appellant’) as property equivalent to that held outside India in contravention of s. 4 of the FEMA.
Brief Facts
The Respondent received secret information that the Income Tax authorities (‘ITA’) had filed a criminal prosecution complaint against the Appellant, alleging that he had kept black money in foreign banks. Consequently, the Respondent filed a prosecution complaint before the Metropolitan Magistrate (Spl. Acts).
Investigations revealed that the Appellant had acquired USD 32,12,000 outside India. He kept the amount with foreign banks and did not repatriate it to India. Further inquiries by the Respondent revealed that he was a resident of Dubai from 1999 to 2001. Thereafter, he became a permanent resident of India and had an account with a foreign bank, which was later closed.
The Appellant had declared the amount to the ITA and offered to pay income tax to buy peace.
The Appellant averred that the source of such funds in the foreign account was his remuneration for advisory services provided during his stay in Dubai.
The Respondent concluded that the Appellant acquired and deposited USD 32,12,000 in foreign exchange with foreign banks and did not repatriate the amount to India, in contravention of s. 4 of the FEMA.
Therefore, the equivalent value of property was liable to be seized in terms of s. 37A(1) of the FEMA whereby total tax-free government bonds valued at Rs 22.72 crores held by the Appellant were seized.
Consequently, a petition was filed before the adjudicating authority for confirmation, which was subsequently confirmed.
Held
Before delving into the factual and legal matrix of the case, the Tribunal dwelled into the scope of relevant provisions and held as follows:-
Under s. 4 of the FEMA, there is no bar on acquiring, holding, owning, possessing, or transferring any foreign exchange, foreign security, or any immovable property outside India, except as provided by the FEMA and the regulations or with the permission of the Reserve Bank of India (RBI).
Under s. 37A(1) of the FEMA, an authorized officer can seize equivalent property in India where he has reason to believe that any foreign exchange, foreign security or immovable property outside India is held in contravention of s. 4.
Under s. 37A(2) of the FEMA, the seizure order shall be placed before the competent authority within 3 days of seizure. Further, the competent authority shall dispose of the petitioner within 180 days of seizure, whereby it will either confirm or set aside the order of seizure passed under s. 37A(1).
As per s. 37A (4) of the FEMA, where the competent authority confirms the order of seizure, the seizure of equivalent assets will continue until the adjudication proceedings are concluded unless the aggrieved person discloses the fact of such foreign exchange and brings back the same to India and the competent authority passes an appropriate order setting aside the seizure order.
Under s. 37A(5) of the FEMA, an appeal lies to the Tribunal against the order of the competent authority.
Scope of Appeal under s. 37A(5) of the FEMA
On the issue of the scope of s. 37A(5), the Tribunal noted that it was undisputed that the action against the Appellant was initiated on the basis of the prosecution complaint filed by the ITA, in which the Appellant was subsequently discharged by the ACMM, finding no evidence of the requisite standard to proceed with the framing of charges.
On this issue of taking such discharge order on record, it was urged that under s. 37A(5), the Tribunal must confine itself strictly to the issues that the competent authority has dealt with and cannot get into the issues which have not been dealt with by such authority or the developments subsequent to the order of such authority, including the order of the ACMM[ii] in the present case.
The Tribunal, in this regard, held that the provision did not state that the Tribunal must pass its order based on outdated facts, which would remain frozen in time as they were analyzed when the competent authority passed its order. Hence, the discharge order was taken on record.
Effect of order of discharge on the current proceedings
The second contention before the Tribunal was that the entire proceedings were initiated on the basis of the prosecution complaint by the ITA in which the Appellant stood discharged. Further, it was contended that the discharge order notes that the ITA failed to identify any specific bank account(s), let alone link the account to the Appellant.
In this regard, the Tribunal held that the prosecution complaint pertained only to two specific years (assessment years ('AYs') 2006-07 and 2007-08). However, the present case did not pertain to these two financial years; therefore, the ACMM finding had little relevance in the present case.
Further, the Tribunal noted that in a prosecution, the prerequisite for framing charges is that the evidence produced must establish the guilt of the accused ‘beyond a reasonable doubt.’ Under s. 37A, there is no requirement for such proof, but there is merely reason to believe that foreign exchange is held in contravention of s. 4.
Therefore, the legislature has set a low threshold under s. 37A. Hence, there is no merit in the averment that action has been taken under s. 37A no longer stands because the appellant was discharged in the prosecution case.
Sharing of information acquired under the Double Taxation Avoidance Agreement (‘DTAA’)
The Appellant contended that information shared under the India-France DTAA could not have been shared with any authority or court other than those dealing with income tax proceedings.
The Tribunal held that as per the language of s. 37A, the Respondent could initiate action upon receiving information regardless of its source. Further, even if any merit could be attributed to the Appellant's argument pertaining to violation of the DTAA, it was not within the Tribunal's purview to address that issue.
Transfer of bonds to the Respondent
Regarding the issue that transferring bonds to the Respondent amounted to confiscation and was outside the scope of s. 37A, it was argued that the said provision did not authorize confiscation, only seizure.
Upon factual analysis and submission from the Respondent, the Tribunal held that the Respondent had only seized the bonds, and confiscation would occur only after the adjudication proceedings concluded.
Nature of Application of S. 37A of the FEMA
The application argued that s. 37A has a prospective application and cannot apply to undisclosed foreign income that existed before the amendment came into effect.
Upon factual analysis, the Tribunal observed that the Appellant's authorized representative, in a letter to the DG of Investigations, Income Tax Department[iii], admitted that the Appellant continued to operate the account even after becoming a tax resident in India. However, the account was closed a long time ago.
No details were provided regarding when the account was closed and the subsequent transfer of receipts to another account. If the account was closed and proceeds were repatriated to India, the Appellant could always apply to the competent authority to set the order aside.
In the absence of evidence from the Appellant regarding the date the account was closed and the offer for taxation related to that account, as late as in the AYs 2006-07 and 2007-08, even when he was a non-resident Indian (NRI) until 2001, the action under s. 37A was justified.
Furthermore, since the closure date of the account or even the fact of its closure was not proven, the question of retrospective application did not arise.
The question of retrospectiveness does not arise in cases where the action is initiated on the grounds that property was held in contravention of the amended Act after it came into force.
Thus, the appeal was dismissed.
Our Analysis
The Tribunal delineated several issues pertaining to the applicability and operation of s. 37A of the FEMA. Regarding the scope of appeal before the Tribunal, it was held that the Tribunal is empowered to consider additional material on record concerning subsequent developments. Critically, the Tribunal held that in the absence of specific details on the closure of foreign accounts, source of funds and repatriation of funds to India, it would be deemed that the said funds are being held in contravention of s. 4. Consequently, s.37A cannot be considered to have retrospective application in such cases.
Further, the Tribunal noted that the burden of proof in prosecution cases is significantly higher than the ‘reason to believe’ criterion under s. 37A. Therefore, a discharge in a prosecution case with a greater burden of proof does not entitle relief in proceedings under s. 37A.
End Notes
[i]Â [2024] 165 taxmann.com 726.
[ii]Â Aviation Chief Machinist's Mate.
[iii]Â Directorate General of Income Tax Investigation.
Authored by Huzaifa Salim, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.
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