Consequences of NRIs/OCIs Purchasing Agricultural Land in India: Lessons from Recent Cases
The recent case of Martin Jebarathna Doss Antonisamy (hereinafter referred to as the petitioner) serves as a cautionary tale for Non-Resident Indians (NRIs) and Overseas Citizens of India (OCIs) contemplating the purchase of agricultural property in India. The Delhi High Court upheld a significant penalty imposed by the Reserve Bank of India (RBI) under the Foreign Exchange Management Act (FEMA), 1999, highlighting the strict compliance requirements and severe financial consequences for violations.
Understanding FEMA Regulations
Under FEMA, as per Regulation 3 of the Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2000, NRIs and OCIs are strictly prohibited from purchasing agricultural land, plantation property, or farmhouses in India. While this regulation has been replaced by the Non-Debt Instruments Rules, 2019, the prohibition on such purchases continues to apply under Rule 24. Failure to comply results in legal consequences, including penalties which will go upto 3 time the amount involved in the contravention.
Facts of the Case
In this case, the petitioner, an OCI and U.S. citizen, purchased agricultural land in Tamil Nadu in 2005 for a sum of Rs. 13.68 lakh. However, as per Regulation 3 of the Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2000, NRIs and OCIs are prohibited from purchasing agricultural land, plantation property, or farmhouses in India. Despite this restriction, the petitioner proceeded with the purchase.
Filing of Compounding Application
The petitioner, upon discovering the violation and claiming unawareness of such compliances, applied for compounding under FEMA to regularize the violation. The RBI directed him to transfer the property to an eligible Indian resident, and he subsequently sold it for Rs. 1.62 crore. The petitioner complied with this directive. In determining the compounding fee, the RBI considered factors like the 18-year period of contravention, financial gains from the sale, and the mode of payment, applying the relevant provisions of the Foreign Exchange (Compounding Proceedings) Rules read with Master Direction on Compounding of Contraventions under FEMA.
Calculation of Compounding Fee
The RBI computed the penalty in accordance with the Master Direction on Compounding of Contraventions under FEMA, 1999. The undue gain from the transaction, calculated as the difference between the sale price (Rs. 1.62 crore) and the purchase price (Rs. 13.68 lakh), amounted to Rs. 1.48 crore.
While the initial penalty was calculated at Rs. 1.49 crore, the RBI capped it at Rs. 41.04 lakh. This was in line with FEMA’s provision limiting the compounding amount to a maximum of three times the sum involved in the contravention.
Challenge to the Compounding Order
The petitioner challenged the compounding order before the Delhi High Court, arguing that the agricultural property was purchased in good faith and that the penalty imposed was excessive despite his compliance with the RBI’s direction to sell the property to an Indian resident. He contended that the fine lacked justification and was arbitrary.
High Court’s Decision
The Delhi High Court dismissed the writ petition, affirming that the RBI’s computation of the penalty was lawful and aligned with FEMA regulations. The Court observed that the petitioner had not pointed out any flaws in the calculation methodology applied by the RBI. It concluded that the fine, which did not exceed 300% of the amount of contravention, was fair and reasonable under the circumstances.
Similar Case: Jayant Nanda
A similar instance occurred in the case of Mr. Jayant Nanda, who purchased six pieces of agricultural land in Gujarat between 2003 and 2007 without obtaining RBI permission. The total cost of acquisition was Rs. 9.75 lakh. Upon discovery, the RBI directed him to transfer the property to an eligible Indian resident and apply for compounding of the violation.
The RBI imposed a compounding penalty of Rs. 29.25 lakh, which was three times the cost of acquisition, as per the provisions of FEMA. This case further emphasizes the financial and legal ramifications of non-compliance with FEMA regulations.
Key Takeaways for NRIs and OCIs:
NRIs and OCIs must be aware that they are prohibited from purchasing agricultural land, plantation property, or farmhouses in India. However, they are permitted to acquire such properties only by way of inheritance.
Non-compliance may result in substantial fines, up to 300% of the amount involved in the contravention. Therefore, NRIs and OCIs should exercise due diligence and ensure strict compliance with FEMA before engaging in any property transactions in India.
Conclusion:
The cases of Martin Jebarathna Doss Antonisamy and Jayant Nanda underscore the importance of regulatory compliance for NRIs and OCIs. While India welcomes foreign investments in its real estate sector, agricultural land remains a restricted category. Awareness and adherence to FEMA regulations can prevent costly legal battles and financial losses.
For reference, the detailed compounding orders can be accessed under:
- Martin Jebarathna Doss Antonisamy vs. Reserve Bank of India, [2024] 167 taxmann.com 353 (Delhi High Court)
- Mr. Jayant Nanda Compounding Order, C.A. No. 93/2019, RBI, May 20, 2019.
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