Farouk Educational Trust Vs Special Director (Appellate Tribunal under SAFEMA, New Delhi)
Charitable Purpose Does Not Excuse FEMA Loan Breach: Tribunal Reduces Penalty to Rs. 1 Crore
The Appellate Tribunal under SAFEMA, New Delhi, has upheld the finding of a FEMA contravention involving rupee loans received by an educational trust from its non-resident trustees, while reducing the penalty from Rs. 5 crore to Rs. 1 crore. The Tribunal rejected the argument that the charitable purpose of the funding or its non-repatriable character excused non-compliance with the prescribed repayment period.
The Tribunal also held that a trust falls within the inclusive definition of “person” under section 2(u) of FEMA. It further observed that mens rea was not essential for imposing a penalty for breach of the civil obligations under consideration.
Background of the Dispute
Farouk Educational Trust was constituted through a registered trust deed dated August 1, 2003, to promote education and establish educational institutions. It operated eight educational institutions in Puducherry and Tamil Nadu.
Its non-resident trustees provided funds for acquiring land, constructing buildings, purchasing fixed assets and meeting recurring expenditure. The funds were transferred from their accounts to the trust or its institutions and recorded in the books as loans and advances.
The Enforcement Directorate alleged that the trust had received Rs. 37,53,05,596 from five non-resident trustees and failed to comply with the applicable borrowing conditions.
By an order dated March 31, 2022, the Special Director imposed a penalty of Rs. 5 crore for contravention of section 6(3)(e) of FEMA read with Regulations 3 and 4 of the Foreign Exchange Management (Borrowing and Lending in Rupees) Regulations, 2000.
Trust Claimed Funds Were Intended as Donations
The trust argued that the trustees intended to contribute funds for education and public welfare. Describing the amounts as loans in the accounts, it submitted, did not reflect the underlying intention to donate them.
It also contended that a trust was not a separate person covered by FEMA and that trust property vested in its trustees. Consequently, transfers by the trustees could not be regarded as borrowings between distinct persons.
Alternatively, the trust argued that the funds qualified as non-repatriable rupee borrowings under Regulation 4. It maintained that the alleged failure to comply with the three-year loan period was, at most, technical and did not justify the substantial penalty.
Challenge Based on Omission of Section 6(3)
The trust challenged the proceedings on the ground that section 6(3) had been omitted through the Finance Act, 2015.
The Tribunal noted that the relevant omission became effective only on October 15, 2019. In this case, the complaint was filed on June 19, 2018, and the show-cause notice was issued on December 19, 2018.
Since both preceded the effective omission date, the Tribunal distinguished the Karnataka High Court judgment relied upon by the trust, which concerned a complaint and notice issued after that date.
It also rejected the allegation that the complaint and show-cause notice had been issued on the same day without adequate consideration, finding that the record showed otherwise.
Trust Covered by FEMA’s Definition of Person
The Tribunal observed that section 2(u) provides an inclusive definition of “person”, covering every artificial juridical person not falling within the preceding categories.
It distinguished the Supreme Court decision cited by the trust because that judgment concerned the definition under the Consumer Protection Act, 1986, whose wording differed from FEMA.
The Tribunal rejected the contention that the trust and its trustees could be treated as indistinguishable. It also noted that, whatever the asserted charitable intention, the amounts had actually been recorded as borrowings in the accounts of the trust and its institutions.
Non-Repatriation Did Not Remove Repayment Requirement
Under Regulation 4, the permitted non-repatriable rupee borrowing was subject to specified conditions, including that the loan period should not exceed three years.
The Tribunal held that non-repatriation did not prevent repayment. The loans could have been repaid by crediting the lenders’ NRO or NRSR accounts, as provided in the regulation.
A chartered accountant’s certificate produced during the appeal did not establish the absence of the alleged contravention. The Tribunal therefore rejected the argument that the non-repatriable nature of the funding removed the repayment obligation.
Mens Rea and Final Decision
The trust sought relief by relying on its welfare objectives and the Supreme Court’s decision in Hindustan Steel Ltd. Vs State of Orissa.
The Tribunal instead applied the principles discussed in Chairman, SEBI Vs Shriram Mutual Fund, concerning penalties for breach of civil obligations. It observed that section 13 of FEMA did not require proof of wilful, deliberate or intentional conduct for the contravention under consideration.
Accordingly, charitable intention did not negate the established regulatory breach.
However, the Tribunal reduced the penalty from Rs. 5 crore to Rs. 1 crore and partly allowed the appeal. The reduction did not disturb the finding of contravention or amount to acceptance of the claim that the recorded loans were merely donations.
Cases Discussed
- Pratibha Pratisthan & Ors. Vs Manager, Canara Bank & Ors. — Supreme Court (judgment discussed in relation to Consumer Protection Act).
- Hindustan Steel Ltd. Vs State of Orissa — (1969) 2 SCC 627 (SC).
- The Chairman, SEBI Vs Shriram Mutual Fund & Ors. — (2006) 5 SCC 361 (SC).
- Director of Enforcement Vs MCTM Corporation Pvt. Ltd. & Ors. — MANU/SC/0300/1996 (SC).
- Karnataka High Court, W.P. No. 1418/2021 (GM-FE), judgment dated 06.12.2024 — party names not specified in source; TaxGuru publication not verified.
FULL TEXT OF THE ORDER OF APPELLATE TRIBUNAL UNDER SAFEMA
This Order disposes of the Appeal No. FPA-FE-35/CHN/2022 filed by M/s Farouk Educational Trust (FET) against the Order No. SDE/SRO/CEZO-I/05/2022 dated 31.03.2022 (Impugned Order) passed by the Special Director, Directorate of Enforcement, Government of India, Southern Regional Office, Chennai. The Ld. Adjudicating Authority (AA) imposed the penalty of Rs.5,00,00,000/- on M/s Farouk Educational Trust for the contraventions of Section 6 (3) (e) of the Foreign Exchange Management Act, 1999 (FEMA) read with Regulation 3 and 4 of Foreign Exchange Management (Borrowing and Lending in Rupees) Regulations, 2000 to the extent of Rs. 37,53,05,596/- vide the Impugned Order.
2. Ld. Counsel for the Appellant submitted that the Appellant is a public Charitable Trust formed vide registered Trust Deed dated 01.08.2003. The first trustees of the Appellant were Shri Mohammed Farouk, Mrs. Roshan Jumana and Mrs. Ismath Begum. One of the objects of the Trust was to establish and run education institutions and industrial training units in the name of the Trust or any other name under the management and control of the Trust at any suitable place in Puducherry, Tamil Nadu or any other State in India as it thinks fit. The Trust when it was formed proposed to hold and promote education and learning including primary, secondary, higher secondary and college education besides technical, non-technical education and to run and maintain schools, colleges and/or other institutions for the aforesaid purpose. For the purpose of achieving the objects of the Trust, the Appellant Trust could carry out activities including purchase of land or building, establishment and running of educational institutions etc. It was also stated that the benefit under the Trust shall accrue to all persons without any discrimination on the grounds of culture, caste, religion or sex etc. For achieving the objects of the Trust, the Appellant Trust was entitled under the Trust Deed to accept and collect voluntary donations, subscriptions, grants and raise funds for the furtherance of the objects of the Trust. The Trust after registration under Section 12A (a) of the Income Tax Act, 1961 added brothers of Shri B. Mohd. Farouk namely Shir B. Mohd. Sayeed/Said, Shri B. Mohd. Younis and Shri B. Mohd. Ismail as Trustees. The Trustees are all non-resident Indians having lawful business abroad which generates substantial income. The surplus incomes were remitted to corpus of the Trust. The Appellant Trust established and runs eight Educational Institutions in Puducherry and Tamil Nadu.
3. Ld. Counsel for the Appellant submitted that on completion of investigation conducted by the Respondent, the Assistant Director of Enforcement, Chennai filed a Complaint dated 19.01.2018 before the Special Director, Directorate of Enforcement (Adjudicating Authority) under Section 16 (3) of FEMA. The gist of the Complaint is that the Appellant is a person resident in India not being a Company incorporated in India. The Appellant is permitted to borrow in rupees from persons residents outside India provided the period of loan shall not exceed three years. The Appellant had borrowed a sum of Rs. 37,53,05,596/- from 01.04.2006 to 31.03.2018 from persons resident outside India namely the Trustees and the same are outstanding for more than three years as on date and that the Appellant has not returned any part of the loan to the borrowers. On these allegations, the Complaint proceeds to aver that the Appellant had violated the prohibition of Section 6(3)(e) of FEMA read with Regulation 3 and 4 of Foreign Exchange Management (Borrowing and Lending in Rupees) Regulations 2000. Ld. Counsel further submitted that a preliminary reply dated 09.02.2019 was furnished to the Show Cause Notice (SCN). The gist of the reply is that the entire proceedings are misconceived inasmuch as the Appellant cannot be a person within the meaning of Section 2 (u) of FEMA to attract the provisions of FEMA. It was further pointed out that the Trust property at all times vest with the Trustees and the Trust is not an entity distinct from its Trustees. It was pointed out that when an amount is remitted from abroad by the Trustees to their account and thereafter to the Trust, it is an account of the Trustees and cannot be stated to be borrowed money. It was pointed out that it is a case of non-resident Indians bringing money into India in their names. It was further pointed out that Section 6(3) was omitted by Act 20 of 2015 and therefore invocation of the said provisions as also the Regulations made thereunder stood repealed on the date of the SCN without a saving clause and therefore further proceedings cannot be maintained. It was further pointed out that the SCN itself has been issued without application of mind inasmuch as it has been issued by the office of the Adjudicating Authority on the very same day on which the Complaint has been filed and the Adjudicating Authority had no occasion to go through the voluminous documents submitted and come to an independent conclusion that the proceedings in terms of Section 16 of the FEMA are warranted and to be continued. It was submitted at the time of personal hearing that the inflow of money into the Bank accounts of the Appellant were documented and made known to the statutory authorities including Income Tax Authorities and Bankers, hence to the Reserve Bank of India (RBI). Since the intention was to make donations by the Trustees to the Trust, the inflows cannot be regarded as borrowings. Ld. Counsel emphasized that the amounts of money which came into the account of the Appellant Trust were from the NRO accounts maintained by the Trustees in India.
4. Ld. Counsel for the Appellant submitted that the Ld. AA has not done wholistic and complete reading of the provisions of Regulation 3 and 4 of the Foreign Exchange Management (Borrowing and Lending in Rupees) Regulation 2000. If it had done so, it can be found that there is no contravention of Regulation 3 inasmuch as the said provision itself states that save as otherwise provided in the Act, Rules or Regulations made thereunder, no person resident in India shall borrow in Rupees from or lend in Rupees to a person resident outside India except with the permission of the Reserve Bank of India / Authorized Dealer. This is a general provision. Regulation 4 of the same regulation states that a person resident in India not being a Company incorporated in India may borrow in Rupees on a non-repatriation basis from a non-resident Indian or a person of Indian origin resident outside India subject to the conditions enumerated in Clause (i) to Clause (v). This provision is an exception to Regulation 3 and is in the nature of an exemption to the general rule referred supra. Reading of the said provision discloses that the amount of loan shall be received by way of inward remittance from outside India or out of non-resident ordinary account of the lender maintained with an authorized dealer or an authorized bank in India. This condition is satisfied. Likewise, the other conditions are also satisfied. According to the Respondent, the only conditions which has not been satisfied is that the period of loan shall not exceed three years. Admittedly, the amount borrowed shall not be allowed to be repatriated out of India and the treatment per se of the amounts in the books of accounts is not an indicative factor of it being treated as loans which was more for accounting purpose and not the intention of the trustees who had parked their funds for the benefit of the trust. If that is so, the question of repayment of the loan does not arise and the breach if any of Clause (ii) of Regulation 4 can only be termed as technical. Ld. Counsel for the Appellant therefore pleaded to allow the Appeal.
5. Ld. Counsel for the Respondent Directorate submitted that the Loans and Advances Statement for each of the financial years (Institution-wise) revealed that the Trustees of M/s FET viz., S/Shri Mohamed Farouk, Mohamed Said, Mohamed Younus, Mohamed Ismail and Smt. Roshan Jumana, have all provided loans to the educational institutions under M/s FET and the consolidated amount (each institution wise), had been accounted in the Balance Sheet of each year of M/s FET. In as much as the preliminary investigation revealed that all the Trustees appeared to be “persons resident outside India” and their borrowings were regulated under FEMA. In response to the Summons, Shri Mohamed Farouk, Managing Trustee of M/s FET vide letter dated 05.05.2018, authorized Shri R. Raghupathy, Accounts Manager and Shri S. Syed Mohideen, Accountant to appear on behalf of M/s FET and also authorized him to produce books of accounts or other documents and to file written statement in connection with the case and that the documents and the written statement filed by him during the hearing were binding on him and the Trust. The Trust was being funded for all the Capital Expenditure (including purchase of Land and building for the Institution and purchase of other fixed assets) and for the recurring expenditure on day to day activities by S/Shri Mohammed Said, Mohamad Farouk, Mohamad Younus, Mohamad Ismail and Smt. Roshan Jumana. The funds provided by them from day one till date were accounted in the books of accounts as were loans and advances from the respective individuals. The aforementioned individuals provide their funding, by way of transfer from their bank accounts either to the account of the Trust or to the account of their respective institution. All the aforementioned individuals were residing outside India for last 15 years. The Family was engaged in the Business of precious stones in the name and style Farouk Bros.
6. Ld. Counsel for the Respondent Directorate further submitted that on being questioned Shri Raghupathy replied that there were no agreements for the loans accounted in the books of the Trust. No interest had been paid to the individuals. The amount funded by each individual had not been assessed to Income Tax (IT) and they had not been shown as Income. The individuals filed the IT returns in India as NRI declaring their Rental Income and Bank Interest Income. No amount had been returned to the respective Individuals though some amount had been shown as returned in respect of two defunct institutions. Shri Raghupathy further explained that Shri Mohammad Farouk maintained three accounts in India, out of which the Bank of India account was the Non- resident account through which remittances were received from abroad and transfers were made in rupees to the Trust as loans. The SBI and Canara bank account contained transactions relating to domestic transactions. Similarly, Shri Mohammad Said maintained two accounts in India, out of which the Bank of India account was the Nonresident account through which remittances were received from abroad and transfers were made in rupees to the Trust as loans. The SBI bank account contained transactions relating to domestic transactions. Ms. Roshan Jumana, Shri Mohammad Younus, Shri Mohammad Ismail and Smt. Ismath Begum, maintained SB/General accounts only and were yet to be converted into nonresident account, even though, the four individuals were NRIs. Ms. Roshan Jumana and Smt. Ismath Begum till date did not have any foreign inward remittances and their lending to the Trust arise out of their income in India. The bank accounts of Mohammad Younus and Mohammad Ismail would be converted into nonresident accounts shortly. Shri Raghupathy submitted copy of the order under Section 12 AA(b) of the Income Tax Act, 1961 issued by the Commissioner of Income Tax for registration of the trust and also furnished copy of the exemption certificate given by the IT department under section 80(G). Ld. counsel for the Respondent Directorate asserted that M/s FET, had borrowed a total amount of Rs.37,53,05,596/- from its Trustees who were persons resident outside India during the FY 2006-07 to till date and none of the amount borrowed had been returned to the lenders. During the enquiry, Shri Mohamed Said was shown the Statement dated 09.05.2018 and 21.05.2018 given by Shri R. Raghupahy, Accounts Manager of M/s Farouk Educational Trust. Shri Mohamed Said accepted and admitted the facts stated by Raghupathy and as a token of accepting the facts stated by him he affixed his dated signature on the last page of both the statements. Shri Mohamed Said further stated that he was aware that Shri R. Raghupathy had provided all the information relating to the remittances made by him and his brother from their overseas accounts to their Indian accounts and its further transfer as loan to FET and for acquisition of property. All of them had provided funding to the Trust, which was accounted as loans” by the Trust in their books of accounts and the said loans were yet be returned by the Trust till date. Ld. Counsel pointed out that it is matter of record that Shri Mohammed Farouk was interested in setting up good educational institutions at Pondicherry. They were advised to form Charitable Trust, through which they could run educational institutions and thereby improve the quality of education at Pondicherry for the needy. Accordingly, they had set up the Farouk Educational Trust. However, since the Trust did not invite huge deposits or contribution for developing the Trust and setting up the educational institutions and for its day-to-day activities, funds were required. The funds were provided by them by way of remittances from Hong Kong to their individual accounts and then transferred to the Trust based on its requirement on a regular basis. The fund management was looked after by his brother only and that they were advised that foreign contributions could not go directly to a Trust and hence, they provided loan to the Trust.
7. Ld. Counsel for the Respondent submitted that the Ld. AA has disposed of the contention that under Section 2(u) of FEMA, Trust is not shown as a person to attract the provisions of FEMA. Ld. AA, however, made a finding that Section 2(u) of FEMA defines “person” unless the context otherwise requires in the Act. Although the word “trust” is not categorically specified in the said section, it covers every artificial juridical persons, not falling within any of the sub-clauses specified under Section 2(u) of FEMA. Therefore, “Trust” also comes under the ambit of Section 2(u) of FEMA. Hence, Trust can be treated as a person under the provision of FEMA. Ld. AA has also made a finding with regard to the contention of the Appellant that Section 6(3) of FEMA was omitted by Act 20 of 2015 and hence, the Regulation issued thereunder could not apply to the facts of the present case. Ld. AA noted that the Central Government, vide Section 139 (C) of Finance Act 2015, omitted Section 6(3) of FEMA, 1999 but the same was notified by the Central Government only on 15.10.2019 vide Notification Number S.O. 3715(E) dated 15.10.2019. Ld. AA categorically specified that they Show Cause Notice was issued on 19.12.2018 based on the Complaint dated 19.06.2018. Ld. AA observed that the contention of the Appellant that the loans and the advances were intended for welfare measures and merely to account for the same these were described as such in the books of accounts of the Trust was not acceptable, since, various judicial forums have reiterated that in financial matters, if Act mandates something to be done in a particular manner, it has to be done in that manner only. The issue of purpose of the loan or non-awareness of legal requirement etc. cannot be cited as an excuse to escape from the clutches of law. For imposition of penalty, all that is to be seen is whether there has been any contravention of the provisions of the Act i.e. FEMA, Rules, Regulations, notifications, directions or order issued in exercise of the powers under FEMA. Ld. Counsel for the Respondent Directorate cited the following from Paragraph 5.8 of the Impugned Order:
“I find from the voluntary statements of Shri R Raghupathy, Account Manager, M/s Farouk Educational Trust dated 09.05.2018 and 21.05.2018 and voluntary statement of Shri Mohamad Said Bachir Ahamad dated 23.05.2018 wherein, inter-alia it was confirmed that Shri Mohamad Farouk, Ms. Roshan Jumana, Ms. Ishmath Begum, Shri Mohamad Younus, Shri Mohamad Ismail, Shri Mohamad Said were residing outside India for more than 15 years; that M/s Farouk Educational Trust as received amounts in INR from the aforementioned persons resident outside India.
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It is also noticed from the aforesaid voluntary statements that M/s. Farouk Educational Trust did not return/repay the loan to the aforesaid individuals resident outside India within 03 years and also for the amounts borrowed from 2015-16 to 2017-18, no agreement exists which indicate that the tenor of loan/borrowing is less than 03 years and also the Noticee neither during the investigation nor during the Adjudication claimed that the said amounts would be repaid, which is clearly in violation of Regulation 4 of The Foreign Exchange Management (Borrowing and Lending in Rupees) Regulations, 2000. Therefore, the contention of the Noticee in this regard merits rejection.”
Ld. Counsel therefore prayed for dismissing the Appeal.
8. We have considered the rival submissions and the material on record. The facts that the Trust and its Institutions had received Rs. 37,53,05,596/- in Indian Rupees from five NRIs viz Shri B Mohammad Farouk contributing Rs. 11,73,62,471/-; Shri B Mohammad Said contributing Rs.16,96,03,125/-; Shri B Mohammad Yonus contributing Rs.3,89,50,000/-; Shri B Mohammad Ismail contributing Rs.4,73,00,000/-; and Smt. Roshan Jumana contributing Rs. 20,90,000/- are not disputed. However what has been challenged is the contravention of Regulation 4 of the Foreign Exchange Management (Borrowing and Lending in Rupees) Regulations, 2000. The relevant provisions of the said Regulation are as follows:
Foreign Exchange Management (Borrowing and Lending in Rupees) Regulations, 2000
Notification No. FEMA 4 /2000-RB dated 3rd May 2000
RESERVE BANK OF INDIA (EXCHANGE CONTROL DEPARTMENT) CENTRAL OFFICE Mumbai 400 001
In exercise of the powers conferred by clause (e) of sub-section (3) of Section 6, subsection (2) of Section 47 of the Foreign Exchange Management Act, 1999 (42 of 1999), the Reserve Bank of India makes the regulations relating to borrowing and lending in rupees between a person resident in India and a person resident outside India as under, namely:
3. Prohibition on borrowing and lending in Rupees:-
Save as otherwise provided in the Act, rules or regulations made thereunder, no person resident in India shall borrow in rupees from, or lend in rupees to, a person resident outside India. Provided that the Reserve Bank may, for sufficient reasons, permit a person resident in India to borrow in rupees from, or lend in rupees to, a person resident outside India.
Explanation: For the removal of doubt, it is clarified that use of Credit Card in India by a person resident outside India shall not be deemed as borrowing or lending in rupees.
4. Borrowing in Rupees by persons other than companies in India:-
A person resident in India, not being a company incorporated in India, may borrow in rupees on non-repatriation basis from a non- resident Indian or a person of Indian origin resident outside India, subject to the following conditions:
(i) the amount of loan shall be received by way of inward remittance from outside India or out of Non-resident External (NRE)/Non-resident Ordinary (NRO)/Foreign Currency Non-resident (FCNR)/Non-resident Non- repatriable (NRNR)/Non-resident Special Rupee (NRSR) account of the lender maintained with an authorised dealer or an authorised bank in India,
(ii) the period of loan shall not exceed three years;
(iii) the rate of interest on the loan shall not exceed two percentage points over the Bank rate prevailing on the date of availment of loan;
(iv) where the loan is made out of funds held in Non- resident Special Rupee (NRSR) account of the lender, payment of interest and repayment of loan shall be made by credit to that account; and in other cases, payment of interest and repayment of loan shall be made by credit to the lender’s Non-resident Ordinary (NRO) or Non-resident Special Rupee (NRSR) account as desired by the lender; and
(v) the amount borrowed shall not be allowed to be repatriated outside India.
9. We find on perusal of the record that the Complaint No. T- 3/40/CEZO/C/2014 was filed by the Assistant Director, Directorate of Enforcement, Ministry of Finance, Government of India, Chennai under Section 16 (3) of FEMA on 19.06.2018. The Show Cause Notice No. T-4/40/CEZO-I/SRO/2018 was issued on 19.12.2018 by the Special Director, Enforcement Directorate. The argument that the voluminous documents could not have been perused by the issuing authority is without any basis. The Appellant has cited the Judgment dated 06.12.2024 of the Hon’ble High Court of Karnataka in Writ Petition No. 1418 of 2021 (GM-FE) to argue that since Section 6 (3) of FEMA was omitted vide the Finance Act of 2015, the Complaint and the SCN could not have been issued in 2018. The Judgment (supra) categorically stated that in the facts of the case being decided by the Hon’ble High Court, the Complaint was filed on 25.10.2019 and the SCN was issued on 25.02.2020 on the dates when the Finance Act had already been omitted Section 6(3) of FEMA, since the relevant provisions of the Finance Act, 2015 were notify on 15.10.2019. However, the facts of the present case are different, since the Complaint was filed on 19.06.2018 and the SCN was issued on 19.12.2018 which preceded the date of omission of Section 6 (3) of FEMA from the Act.
10. The word ‘person’ has been given inclusive definition under Section 2(u) of FEMA. The definition is as under:
“2. Definitions.—In this Act, unless the context otherwise requires,—
(u) “person” includes—
(i) an individual,
(ii) a Hindu undivided family,
(iii) a company,
(iv) a firm,
(v) an association of persons or a body of individuals, whether incorporated or not,
(vi) every artificial juridical person, not falling within any of the preceding sub-clauses, and
(vii) any agency, office or branch owned or controlled by such person;”
The Appellant has argued that Trust cannot be included in the definition of person on the basis of the Judgment dated 11.09.2002 of the Hon’ble Supreme Court in the matter of Pratibha Pratisthan & Ors. vs. Manager, Canara Bank & Ors. However, we find that the Judgment has been passed in the context of a matter relating to Consumer Protection Act, 1986. This Act under the provisions of Section 2 (1)m defines persons to include the following:
(i) a firm whether registered or not
(ii) a Hindu undivided family
(iii) a co-operative society
(iv) every other association of persons whether registered under the Societies Registration Act, 1860 or not
We therefore find that the definitions of person under FEMA and the Consumer Protection Act, 1986 are different. In fact, Clause (vi) of Section 2(1)(u) of FEMA does not find place in the Act of 1986.
Hence, the definition of person given in the Judgment (supra) cannot be applied in the facts and circumstances of the present case. It is important to notice that Clause (vi) of Section 2(1) (u) of FEMA provides for every artificial juridical person, not falling within any of the preceding sub-clauses to be included as person. The argument has also been advanced that there is no difference between the Trust and its individual Trustees. We cannot agree with the said argument. Both in law as well as in common parlance Trust and Trustees are understood as distinct and separate, even though both may serve the common purpose. Another argument has been made that the transfer of funds was with the intention to donate for promotion of education and other welfare activities. While that may have been the intention of the Trustees, it is matter of record that the amounts transferred were reflected as borrowings in the books of account of the Trust and the Educational Institutions.
11. Ld. Counsel for the Appellant has argued that the provisions of Regulation 4 of the aforementioned Regulations carves out an exception to Regulation 3 about the prohibition for borrowing and lending in Rupees between persons resident in India and those resident outside India. It has been further argued that the Appellant satisfies all the requirements stipulated under Regulation 4 except of having not been able to meet the requirement that the period of loan shall not exceed three years. Ld. Counsel has contended that even if such transfer of funds to the account of the Trust and its Institutions are regarded as loan, these had to be on non-repatriable basis. We find from the said provisions that while the loan was on non-repatriable basis, these loans were not repaid within the period of three years which could have been done without repatriation by repayment of loan through credit to the lender’s Non-resident Ordinary (NRO) or Non-resident Special Rupee (NRSR) account as desired by the lender. There is no dispute as to the non-resident status of the five Trustees, who extended loans in Rupees to the Trust and its Institutions. We find that the Appellant submitted certificate dated 04.07.2026 of Areef & Co., Chartered Accountants, T Nagar, Chennai stating that the five Trustees advanced Rs. 39,32,85,886/-, out of which Rs. 6,38,56,048/- was repaid to the Trust which was fully utilized by the Trust for the advancement of its causes. The Certificate stated to have been issued on the basis of books of accounts maintained and audited by the statutory Chartered Accountant. We find that the said Certificate does not rule out the contravention of Section 6(3)(e) of FEMA read with the provisions of Regulations 3 and 4 of Foreign Exchange Management (Borrowing and Lending in Rupees) Regulations, 2000.
12. Ld. Counsel for the Appellant has also pleaded that the limited contravention of one of the Clauses of Regulation 4 of the aforementioned Regulation coupled with the fact that the funds were generated from the regular lawful business abroad for welfare measures towards education and other public causes in India should result in the contravention being regarded as venial. He further pleaded that the penalty of Rs. 5,00,00,000/- as disproportionate and may be reduced. The Appellants have cited the Judgment of the Hon’ble Supreme Court in the case of Hindustan Steel Ltd. v. State of Orissa [1969 (2) SCC 627].
13. We cannot agree with the contentions of the Appellants. In this regard, the Judgment dated 23.05.2006 of Hon’ble Supreme Court in the matter of The Chairman, SEBI vs. Shriram Mutual Fund & Ors. [(2006) 5 SCC 361] states in paragraph 35:
“In our considered opinion, penalty is attracted as soon as the contravention of the statutory obligation as contemplated by the Act and the Regulation is established and hence the intention of the parties committing such violation becomes wholly irrelevant. A breach of civil obligation which attracts penalty in the nature of fine under the provisions of the Act and the Regulations would immediately attract the levy of penalty irrespective of the fact whether contravention must be made by the defaulter with guilty intention or not. We also further held that unless the language of the statute indicates the need to establish the presence of mens rea, it is wholly unnecessary to ascertain whether such a violation was intentional or not.”
14. The provisions of Section 13(1) and (2) of FEMA are as follows:
“(1) If any person contravenes any provision of this Act, or contravenes any rule, regulation, notification, direction or order issued in exercise of the powers under this Act, or contravenes any condition subject to which an authorisation is issued by the Reserve Bank, he shall, upon adjudication, be liable to a 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.
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(2) Any Adjudicating Authority adjudging any contravention under sub-section (1), may, if he thinks fit in addition to any penalty which he may impose for such contravention direct that any currency, security or any other money or property in respect of which the contravention has taken place shall be confiscated to the Central Government and further direct that the foreign exchange holdings, if any, of the persons committing the contraventions or any part thereof, shall be brought back into India or shall be retained outside India in accordance with the directions made in this behalf.”
We thus find that there is nothing in the Section which can indicate directly or indirectly requirement of mens rea. Words like “willful”, “deliberately”, “intentionally” etc. are missing. The Hon’ble Supreme Court in the Judgment supra have cited the Judgment in Director of Enforcement vs. MCTM Corporation Pvt. Ltd. and Ors. [MANU/SC/0300/1996], wherein even for FERA 1947 it was held that the contravention shall be breach of a civil obligation which would attract penalty irrespective of the fact whether the contravention was made with any guilty intention or not. The Judgment supra cited a number of previous Judgments wherein it was held that mens rea is not an essential element for imposing penalty for breach of civil obligations. His Lordships have clarified that the case of Hindustan Steel Ltd. vs. State of Orissa (supra) pertained to criminal/quasi criminal proceeding as the provisions of the Act under consideration in that case imposed a punishment of imprisonment and fine as well. The present Appeal deals with provisions which are strictly civil obligations and penalty for the contraventions of these provisions are imposable under Section 13(1) of FEMA which provides for penalty only, up to thrice the sum involved in such contravention.
15. In view of the aforementioned discussion and analysis, we reduce the penalty amount on the Appellant to Rs. 1,00,00,000/- and therefore partly allow the Appeal No. FPA-FE-35/CHN/2022 filed by M/s Farouk Educational Trust. Applications pending, if any, are disposed of accordingly.
