Karnataka High Court: The Division Bench of Jayant Banerji and T.M. Nadaf, JJ., set aside the writ petition and upheld the judgment and order by the Appellate Tribunal of quashing the cash penalties and confiscation of specified assets of the respondents. The Court held that the respondents were “persons resident in India” under Section 2(v), Foreign Exchange Management Act, 1999 (FEMA).
Background
The dispute originated from a complaint dated 9 March 2015 filed by the appellant-Directorate of Enforcement under Section 16(3) FEMA. The complaint alleged that the respondents had violated various provisions of FEMA and the regulations framed under it. Based on this complaint, the Directorate of Enforcement issued a show-cause notice on 13 March 2015 requiring the respondents to explain why adjudication proceedings should not be initiated against them and why their assets should not be confiscated under Section 13(2) FEMA. The proceedings involved allegations relating to the establishment of a partnership firm, acquisition of immovable property, maintenance of bank accounts, and other financial transactions.
After adjudication, the Directorate of Enforcement passed an order on 28 June 2016 holding that the respondents had contravened FEMA. Exercising powers under Section 13(1) FEMA, various penalties were imposed on the respondents and the authority also ordered confiscation of specified assets. These included balances lying in 2 bank accounts and a parcel of land measuring 3237 square. The respondents were directed to deposit the penalties within 45 days.
The impugned order was challenged by the respondents before the Appellate Tribunal. The Tribunal found that the respondents had remained in India for more than 182 days during the relevant financial year and therefore satisfied the statutory definition of “person resident in India” under Section 2(v) FEMA. It also noted that the respondents had entered India on business visas to established their business activities in India.
It was held that the respondents had applied for permission in Reserve Bank of India (RBI), before the purchase of immovable property. RBI had informed that no prior permission was required if they fulfilled the criteria under Section 2(v) FEMA. The amount for purchase of immovable property came through legal channel and necessary foreign inward remittance certificates (FIRCs), were issued by the Bank. The respondent was assessed for income tax since the Assessment Year 2010—2011 and had been paying income tax till Assessment Year 2017—2018. On these facts, the Tribunal concluded that no violation of FEMA had occurred.
The Directorate of Enforcement filed an appeal challenging the Tribunal’s decision. It argued that the respondents had formed a partnership firm without obtaining prior permission from RBI and had received donations from foreign nationals. The appellants contended that although the respondents had resided in India for more than 182 days, this fact alone was insufficient to classify them as persons resident in India. According to the appellant, Section 2(v)(i)(B) contained exceptions which excluded persons who had come to or stayed in India otherwise than for employment, business, vocation, or an intention to stay for an uncertain period. It was therefore argued that the respondents continued to remain persons resident outside India, making the relevant FEMA Regulations applicable to them.
Decision and Analysis
The Court examined the statutory framework in detail. It also perused Section 2(v) FEMA, which defines “person resident in India”. The Court observed that the provision requires residence in India for more than 182 days during the preceding financial year and also considers the purpose for which a person has come to or stays in India. A person who comes to India for employment, for carrying on business or vocation, or under circumstances indicating an intention to stay in India for an uncertain period falls within the definition of a person resident in India, provided the requirement relating to residence is satisfied. The Court emphasised that the respondents had entered India specifically on business visas and had in fact carried on business activities after their arrival.
An important factual circumstance considered by the Court was that they had stayed in India for more than 182 days during the relevant financial year. They had entered India on 8 August 2008 under a business visa, which was subsequently renewed. The immovable property in question was purchased only on 1 September 2009, more than 1 year after their arrival. During this period, they had continuously carried on business in India. Consequently, the statutory requirements of Section 2(v) stood fully satisfied. The respondent-firm, namely, “Joy of India”, was assessed for income tax since Assessment Year 2010—2011 and had been paying income tax till Assessment Year 2017—2018.
The Court also interpreted Section 2(v) by comparing Parts A and B of the Definition. It observed that the language employed in these provisions shows that the legislature intended to distinguish between persons who leave India and persons who come to India, while recognising that those who come for employment or business and satisfy the residence requirement are to be regarded as persons resident in India. Since the respondents did not fall within any of the statutory exceptions, they satisfied the legal definition.
The Court further noted that before purchasing the property, the respondents had approached RBI seeking clarification. RBI had informed them that prior permission would not be necessary if they qualified as persons resident in India under Section 2(v). Acting upon this clarification, the respondents completed the transaction. The amount for purchase came through legal channel and necessary FIRC certificates were issued by the Bank. The entire amount of ₹16,03,000 was received through lawful banking channels. The Court observed that there was no evidence that any part of the transaction had been carried out through unauthorised means or in violation of foreign exchange regulations.
The Court held that the respondents were persons resident in India and several FEMA Regulations relied upon by the Directorate of Enforcement became inapplicable. These included the Foreign Exchange Management (Investment in Firm or Proprietary Concern in India) Regulations, 2000, the Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2000, the Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2000, and the Foreign Exchange Management (Establishment in India of Branch or Office or Other Place of Business) Regulations, 2000. Since these Regulations govern transactions involving persons resident outside India, they could not be invoked against respondents who were legally resident in India under FEMA.
The Court also observed that the partnership firm had been regularly assessed under the Income-tax Act, 1961 and had been allotted a Permanent Account Number (PAN). The firm had been filing tax returns and paying taxes from Assessment Year 2010—2011 onwards. The Court found no perversity or legal error in the Tribunal’s findings. It emphasised that, the Tribunal had correctly appreciated the facts and had properly applied the statutory provisions. The Court dismissed the appeal and upheld the setting aside of the adjudication order, penalties, and confiscation by the appellant.
[Enforcement Directorate v. Joy of India Partnership Firm, Writ Petition No. 698 of 2018, decided on 9-6-2026]
*Judgment authored by: Justice Jayant Banerji
Advocates who appeared in this case:
For the Appellant: Arvind Kamath, ASG, Unnikrishnan M., Advocate
For the Respondent: Joshua Hudson Samuel, Advocate
