Show Cause Notices issued with unreasonable delay are liable to be quashed if records are not preserved.

The appeals challenged orders passed by the Appellate Tribunal for Foreign Exchange, New Delhi, under Section 35 of the Foreign Exchange Management Act, 1999.

The appellants included Citibank N.A., Hongkong and Shanghai Banking Corporation Ltd., The Bank of Tokyo Mitsubishi, UFJ Ltd., State Bank of India NRI Branch, and State Bank of India, Main Branch.

The alleged transactions, which formed the basis for the Show Cause Notices, occurred between 1989 and 1995.

The Show Cause Notices were issued between February and May 2002.

The core issue revolved around the delay in issuing these notices, particularly given that the alleged contraventions related to the Foreign Exchange Regulation Act, 1973 (FERA Act, 1973), which had a sunset period expiring on June 1, 2002.

The respondent contended that inquiries began in 1995.

Whether Show Cause Notices issued for alleged contraventions of the FERA Act, 1973, and the Exchange Control Manual, 1993, are liable to be quashed solely on the ground of delay, especially when transactions date back to 1989-1995 and notices were issued in 2002?

Whether the initiation of inquiries in 1995 negates the appellant's plea of delay, particularly concerning the preservation of records?

A settled proposition of law dictates that while statutory limitation periods must be adhered to, in their absence, proceedings must be initiated within a reasonable period, the length of which depends on case facts.

The Supreme Court in Union of India and Anr. Vs. Citi Bank N.A., (2022) 19 SCC 188, established that Show Cause Notices issued significantly after the alleged transactions, especially near the sunset period of the relevant act, could be quashed on grounds of delay.

This precedent further considered the Banking Companies (Period of Preservation of Records) Rules, 1985, which mandate banks to preserve records for five to eight years unless the Reserve Bank of India directs longer preservation.

The Court applied the principles from Citi Bank (supra) to the present appeals, noting a significant delay between the alleged transactions (1989-1995) and the issuance of Show Cause Notices (2002).

The notices were issued just prior to the FERA Act's sunset period.

The Court found the delay unreasonable, linking it directly to the 1985 Banking Companies Rules, which require preservation of records for 5 to 8 years.

Since no directive from the Reserve Bank of India mandated preservation beyond this period, the appellants would face an unfair and unreasonable burden to produce records for transactions that occurred much earlier.

The respondent's argument that inquiries began in 1995 was rejected because there was no evidence that the appellants were instructed to preserve records for the ongoing inquiry, and there was an additional seven-year delay from 1995 to 2002 in issuing the notices.

This significant gap rendered the proceedings unfair and unreasonable, aligning the facts with the Citi Bank precedent.

The Show Cause Notices and subsequent proceedings were deemed liable to be quashed on the ground of delay alone.

Consequently, the impugned orders passed by the Appellate Tribunal were quashed.

The Bank Guarantees provided by the appellants for the penalty amounts were discharged and are to be released by the Adjudicating Authority forthwith.