FEMA adjudication must await the final appellate outcome of related Section 37A asset seizure proceedings.

The appellants, directors of M/s. Accord Distilleries & Breweries Pvt. Ltd., were accused of acquiring shares in a Singapore-based entity without Reserve Bank of India (RBI) approval, allegedly violating Section 4 of the Foreign Exchange Management Act (FEMA), 1999

Consequently, the Authorised Officer seized their Indian assets under Section 37A(1)

However, the Competent Authority, under Section 37A(3), refused to confirm the seizure on February 3, 2021, finding no proof of financial contravention

While the Enforcement Directorate’s (ED) appeal against this refusal was pending before the SAFEMA Appellate Tribunal, the Adjudicating Authority issued a Show Cause Notice (SCN) under Section 16(3) based on the same allegations

The appellants challenged the SCN via writ petitions, which were dismissed by a Single Judge and a Division Bench of the Madras High Court

During the pendency of the present appeals, the Adjudicating Authority passed a final order imposing penalties, expressly disregarding the Competent Authority’s findings by relying on observations made by the High Court

1. Whether a writ petition challenging a Show Cause Notice is maintainable under Article 226 of the Constitution when the foundational facts are substantively questioned

2. Whether the findings of a Competent Authority under Section 37A (refusing to confirm seizure) impact subsequent adjudication proceedings under Section 16 of FEMA

3. Whether the Adjudicating Authority can pass a final order that effectively overrules the Competent Authority’s findings while a statutory appeal on those findings is pending

The Court applied Section 37A of FEMA, which provides for the seizure of domestic assets equivalent to foreign assets held in contravention of Section 4

It interpreted Section 37A(4), noting that while it ensures seized assets remain available for adjudication, it does not permit the Adjudicating Authority to ignore a refusal to confirm seizure

The Court also relied on the precedent Union of India v. VICCO Laboratories, which establishes that while writ courts generally do not interfere with SCNs, they may do so in exceptional cases involving a lack of jurisdiction, abuse of process, or patent injustice

The Court reasoned that Section 37A is a preventive measure requiring a "reason to believe" a contravention exists

Since the Competent Authority had recorded a considered finding that no such reason existed, the very foundation of the SCN was compromised

The Court found the High Court’s refusal to entertain the writ petition on maintainability grounds was erroneous, as the lack of "reason to believe" constituted an exceptional circumstance warranting judicial review

Furthermore, the Court critiqued the Adjudicating Authority’s final order for "abdicating the powers of the Appellate Authority" by effectively reversing the Competent Authority’s order while the Department's own appeal was still pending at the Tribunal

The Court held that if the Competent Authority’s finding of "no contravention" is affirmed in appeal, it must necessarily bear upon the outcome of the Section 16 adjudication

The Court revived the proceedings from the stage of the SCN

It directed the Appellate Tribunal to decide the Department's appeal against the Section 37A order within two months

The adjudication of the SCN shall proceed only after the disposal of said appeal, ensuring the Adjudicating Authority does not pre-empt the Tribunal’s decision