Vijay Pal Dalmia, Advocate
Supreme Court of India & High court of Delhi
Mobile: +91 9810081079
Ms. Maryam Quadri
LL.B. 3rd Year (3 Year Course), Faculty of Law, Delhi University, India
Directorate of Enforcement (ED) is a multi-disciplinary organization mandated with the task of enforcing the provisions of two special fiscal laws – Foreign Exchange Management Act, 1999 (FEMA) and Prevention of Money Laundering Act, 2002 (PMLA). The main functions of ED under the respective laws are:-
- Investigate contraventions of the provisions of FEMA which came into force with effect from 1.6.2000. Contraventions of FEMA are dealt with by way of adjudication by designated authorities of ED and penalties up to three times the sum involved can be imposed.
- Investigate offences of money laundering under the provisions of PMLA which came into force with effect from 1.7.2005 and to take actions of attachment and confiscation of property if the same is determined to be proceeds of crime derived from a Scheduled Offence under PMLA, and to prosecute the persons involved in the offence of money laundering. There are 156 offences under 28 statutes which are Scheduled Offences under PMLA.
In this article, we focus on the powers of ED under FEMA.
INVESTIGATION UNDER FEMA:
FEMA (specifically section 37) empowers the Director and Assistant Director of ED to exercise the power of investigation for any contravention that may occur under FEMA. These officers under FEMA have the power to exercise all the rights for investigation which have been conferred on income-tax authorities under the Income Tax Act, 1961 (ITA). What that means therefore, is the provisions under the ITA giving power of summons, search and seizure etc. for the purpose of investigation to the relevant authorities under ITA will apply analogously to the ED under FEMA.
The Delhi High Court has explained the same in the case of Suman Sehgal v Union of Indiai by holding:
"For that matter, Section 37(3) does not refer to any express provision of the Income Tax Act. The only conclusion which can be therefore logically read is that there is no pre-condition that any 'proceeding' ought to be pending against a particular or specified individual nor is the pre- requisite for exercise of such power dependent upon existing judicial proceeding. As long as there are certain matters under the investigation of the concerned authority, it can invoke the power under Section 37(3)."
The Director and Assistant Director have the same powers as are vested in a Court under the Code of Civil Procedure 1908 when trying a suit for the specific following purposes. These are (Section 131(1) of ITA):
- Discovery and inspection;
- Enforcing the attendance of any person, including any officer of a banking company and examining him on oath;
- compelling the production of books of account and other documents; and
- issuing commissions.
Power of summon of Enforcement Directorate under FEMA:
The word ''summons'' is defined in K.J. Aiyar's Judicial Dictionary (10th Ed. 1988) to mean as ''a call of authority to appear before a Judicial Officer'. When the Director or Assistant Director of the ED summons a person under Section 37(3) of FEMA, the person summoned cannot challenge the issuance of summons by the ED in the Court by way of a writ. This has been held in the case of KA. Manshoor Vs. Assistant Director, Enforcement Directorate, Government of Indiaii by the Madras High Court. In this case, the petitioner in essence was seeking for a writ of prohibition against the ED for having issued the summons by the exercise of the powers vested on them under Section 37 of FEMA read with Section 131 of the Income Tax Act.
The Court held that the attempt by the petitioner to stall the summons issued by the ED has to be necessarily rejected. In coming to such conclusion, the Court placed reliance on T.T.V. Dinakaran v. Enforcement Officer, Enforcement Directorateiii [1995 (80) ELT 745 (Mad)] which was given on account of the now repealed Foreign Exchange Regulation Act. The court had held that,
"When there is suspicion with regard to the involvement of the petitioner in any of the transactions which are prohibited under the FERA Act, it is open to the authorities to summon him for enquiry. Since the documents are pertaining to him, it cannot be said that the investigation has no nexus with the documents called for from the petitioner. When an investigation is commenced, it is not possible for the authorities to come to the conclusion with regard to the involvement or the non-involvement of any person until the enquiry is completed. During the enquiry if the authorities get any information with regard to the involvement of any other individual, those individuals can also be summoned by the concerned officer in order to complete the enquiry. When Section 40(4) of the FERA Act specifically mentions that the proceedings taken by the authorities are judicial proceedings, it is not open to the petitioner to challenge the summons issued under the said proceedings as ab initio void. The petitioner cannot claim any right under Article 21 of the Constitution of India and Section 24 of the Evidence Act, as he is not an accused."
It is imperative to remember that the power given to the ED under Section 37 is the same as that of an Income Tax Officer under the ITA in terms of Section 131. The issuance of summons will no way affect the rights of the person, as it is only for the preliminary investigation and for production of documents before the authority for further investigation.
It was held by the Madras High Court in V. Datchinamurthy and Anr. v. Assistant Director of Inspection (Intelligence), I.T. Department and Anriv. that,
"It is thus manifest that there is great latitude allowed to the ITO in the collection of materials and he does not act as a court at that stage. There are no two parties before him, and the procedure in the adversary system of proceedings cannot be applied to him. However, the ITO, before he uses the materials so collected, is bound to give the necessary opportunity to the assessee to test the evidence, to adduce any evidence in rebuttal and to explain the facts that appear against him. Thus, it is clear that the ITO cannot be asked to put on, or be thrust with, the garb of a court, even at the stage of collection of evidence. There can be no reasonable apprehension of the ITO not utilising the favourable materials appearing in such evidence."
In respect of power of summon by the ED, it has also been held in catena of judgments that a person against whom summons have been issued, such person is not to be accompanied by an advocate when he appears before the ED and recording of statement in presence of advocate is not allowed.
Consequences of non-appearance to summon issued:
Where a summon has been issued in respect of an investigation under Section 37 of FEMA, in default of his appearance on the date mentioned in the summon so issued, he would be liable to action under Section 13 of FEMA.
The procedure would begin from filing of a complaint under Section 16(3) of FEMA by the Assistant Director, ED before the Adjudicating Authority in the matter of such investigation. The complaint would indicate that the appellant was under investigation by the Directorate for contraventions of FEMA which were punishable under Section 13 thereof and that in connection with the said investigation, summonses had been issued requiring the presence of the person before the said Assistant Director for tendering evidence and for producing documents as mentioned in the said summonses. On failure to comply with the summonses without any valid reason would amount to non-compliance of a legal process. Therefore, failure to appear before would lead to imposition of penalty under Section 13 of FEMA for having contravened the provisions of Section 37 of FEMA read with Section 131(1) and 272A(1) of the Income-tax Act, 1961. A show cause notice may then be issued to the person who has failed to appear before the ED, by the Adjudicating Authority.
PROSECUTION DURING ADJUDICATION PROCEEDINGS:
Where the Central Government has reason to believe that any foreign exchange, foreign security, or any immovable property, situated outside India, is suspected to have been held in contravention of FEMA, after recording the reasons in writing, the Government by an order, can seize value equivalent of such exchange, security or property which is situated within India (Section 37A of FEMA).
During adjudication proceedings of the above mentioned exchange, security, property, the Adjudicating Authority may recommend initiation of prosecution with respect to the same. The ED, after recording the reasons of satisfaction to proceed with the prosecution, will file a Criminal complaint against the guilty person (Section 13(1B) of FEMA).
The Court will only take cognizance of such offence by complaint by ED in writing. If any person is found guilty having acquired such exchange, security or property in contravention of the FEMA and in excess of the threshold prescribed by the Government, such person shall be punished with imprisonment for a term which may extend to five years and fine as well as penalty imposed up to three times the sum involved in such contravention and confiscation of the value equivalent of the Foreign exchange, foreign security or immovable property, situated in India (Section 13(1C) of FEMA).
Contravention of any provision of FEMA or any rule or regulation etc. would entail penalty up to thrice the sum involved in such contravention where such amount is quantifiable, or up to two lakh rupees where the amount is not quantifiable, and where such contravention is a continuing one, further penalty which may extend to five thousand rupees for every day after the first day during which the contravention continues (Section 13 of FEMA).
In case a person fails to make full payment of penalty imposed within the period of ninety days (90), then in such a situation an officer of ED will be authorized to recover such arrears of penalty. Such officer of the ED will exercise all powers which are conferred on the income-tax authorities in relation to recovery of tax under ITA. Even the procedure prescribed under the Second Schedule of ITA will apply mutates mutandis apply in respect of recovery of arrears of penalty under FEMA (Section 14A of FEMA).
COMPOUNDING OF OFFENSES:
Compounding of offense under FEMA is a mechanism where the guilty person is allowed to give monetary payment for committing contraventions under section 13. Therefore, the contraventions under FEMA are compoundable and civil in nature. For compounding of any offence under FEMA, an application is to be filed to the Reserve Bank of India. However, it is to be noted that where any person deals or transfers any foreign exchange or foreign security to any person not being an authorized person (hawala transactions) and is found guilty of such offence, compounding of the same will be done only by the ED (Compounding of Contraventions under FEMA, 1999).
However, the option of compounding of offence will not be available in the following situations:-
- where the amount is not quantifiable; and
- Where the contravention committed by such person has been done within a period of three years from the date of similar contravention committed by him which was compounded.
It is pertinent to note that where a criminal complaint had been filed by the ED against the accused (as explained previously), compounding of contravention is explicitly allowed in such case also. The only condition being, that the order of compounding is to brought to the notice of the Adjudicating Authority and on such notice, the person in relation to whom the contravention is so compounded shall be discharged.
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