Sanjay Jhunjhunwala Vs Reserve Bank of India & Ors (Calcutta High Court)
Conclusion: Application made by person found guilty under the Foreign Exchange Management Act, 1999 (FEMA) seeking compounding of the offence on conclusion of the adjudication proceeding could not be allowed as accepting a compounding application after the adjudication order would create the possibility of conflicting orders and undermine the authority of Adjudicating Officer.
Held: Assessee filed a writ petition challenging the Reserve Bank of India’s decision to return his compounding application. The application was filed after an adjudication order had already been passed against him under FEMA. A penalty of Rs. 10 crore had been imposed by adjudicating authority, and a demand notice for payment was later issued by the Assistant Director, Directorate of Enforcement. Assessee did not challenge the adjudication order through an appeal and instead chose to seek compounding. Assessee argued that since the adjudication order was accepted and no appeal was filed, assessee should be allowed to settle the matter through compounding. He referred to Rule 11 of the Foreign Exchange (Compounding Proceedings) Rules, 2000 to support the claim that compounding was not barred in such circumstances. They argued that the compounding process aimed to reduce litigation and should be available even after adjudication if no appeal was pending. RBI’s counsel and the Directorate of Enforcement pointed out that compounding was only allowed before adjudication concludes. Once the adjudicating authority had passed a final order, the remedy available to the contravener was either to pay the penalty or to file an appeal. They explained that as per the applicable circulars and master directions, compounding was not permitted after the conclusion of adjudication. It was held that the purpose of compounding was to settle matters voluntarily before the formal adjudication concludes. Allowing compounding after adjudication would defeat this objective and weaken the enforcement mechanism under FEMA. The court pointed out that assessee had earlier applied for compounding in January 2023, but that application was returned for want of details. Instead of correcting and re-filing it at that time, assessee proceeded with adjudication which resulted in a final penalty order. The Court explained that accepting a compounding application after the adjudication order would create the possibility of conflicting orders and undermine the authority of Adjudicating Officer. The court observed that Rule 11 of the Compounding Rules referred to appeals and did not suggest that compounding was available indefinitely after adjudication had ended. The court held that the Reserve Bank of India was correct in rejecting assessee’s compounding application. The writ petition was dismissed.
