Confiscation under FEMA Section 13(2) requires recorded reasons to justify the exercise of discretionary power.

The Appellants, while resident in Canada, opened Non-Resident (Non-Repatriable) Rupee Accounts (NRNR Accounts) in India

In 2001, fearing the financial instability of their cooperative banks, the Appellants withdrew funds as loans against these NRNR Accounts and reinvested the proceeds into new NRNR Accounts with different banks

The Respondent issued Show Cause Notices (SCNs) between 2008 and 2009, alleging that reinvesting loan proceeds into subsequent NRNR accounts (rather than using funds remitted from abroad) violated Section 6(3)(f) of the Foreign Exchange Management Act (FEMA), 1999, and Regulation 5(1)(iv) of the FEMA (Deposit) Regulations, 2000

The Adjudicating Authority (AA) imposed penalties and ordered the confiscation of the account balances on 17.08.2010

The Appellate Tribunal dismissed the Appellants' appeals on 31.05.2012

1. Whether a penalty for contravention of Regulation 5(1)(iv) and Schedule 4 of the FEMA (Deposit) Regulations can be imposed on the account holder, or if the liability rests solely with the "Authorised Dealer"

2. Whether the omission of Regulation 5(1)(iv) by a notification dated 01.03.2002 rendered the subsequently issued SCNs non-maintainable

3. Whether the Adjudicating Authority is required to provide specific reasons for ordering the confiscation of property under Section 13(2) of FEMA in addition to imposing a penalty

The court applied Section 13(1) of FEMA, which prescribes penalties for "any person" who contravenes the Act or its regulations

Section 13(2), which grants the Adjudicating Authority discretionary power to order confiscation "if he thinks fit"

The court relied on Schedule 4 of the FEMA (Deposit) Regulations, 2000, which stipulates that NRNR accounts must be opened using funds remitted from outside India and prohibits the use of loans for "re-lending"

Regarding the effect of legislative omission, the court applied Sections 6 and 6A of the General Clauses Act, 1897, which provide that the repeal or omission of an enactment does not affect previously incurred liabilities or pending investigations unless a different intention appears

The court followed the precedent in Shree Bhagwati Steel Rolling Mills v. Commissioner of Central Excise, which established that "omission" is tantamount to "repeal" for the purposes of the General Clauses Act

The Court rejected the Appellants' first contention, holding that although Regulation 5(1)(iv) addresses the Authorised Dealer, Schedule 4 imposes conditions on the account holder; thus, Section 13(1) of FEMA broadly penalizes "any person" involved in the contravention

On the second issue, the Court held that the 2002 amendment omitting the NRNR scheme did not provide an "obliteration" of past violations

Citing Shree Bhagwati Steel Rolling Mills, the Court distinguished the Appellants’ reliance on Rayala Corporation (P) Ltd., noting that the 2002 amendment actually allowed existing NRNR deposits to continue until maturity, proving the legislature did not intend to absolve prior contraventions

Finally, regarding confiscation, the Court observed that the power under Section 13(2) is quasi-judicial and discretionary. Consequently, the AA must provide reasons to justify why a penalty alone is insufficient and why the extreme step of confiscation is warranted

The Court noted that the AA's order was "non-speaking" on this front and failed to consider that the loans were repaid and no foreign exchange loss occurred

It upheld the imposition of penalties under Section 13(1), finding the Appellants had technically contravened the NRNR scheme by reinvesting loan proceeds.

The Court set aside the order for the confiscation of the amounts lying in the NRNR accounts, ruling that the order was non-speaking and lacked the necessary reasoning required for discretionary quasi-judicial actions.

Given the passage of time since the 2008-2010 proceedings, the Court declined to remand the matter for fresh consideration and directly quashed the confiscation orders.