FEMA Penalties Deleted for Traders Exchanging NRI Currency With Authorised Money Changer

Deepak Kalia Vs Joint Director (Appellate Tribunal under SAFEMA, New Delhi)

Background of the Dispute

The appeals concerned penalties imposed on two small traders who exchanged foreign currency with M/s. Shukla Forex Pvt. Ltd., an authorised money changer.

During a search at the money changer’s premises on 3 December 2013, the Enforcement Directorate recovered loose sheets recording transactions involving the appellants. Statements were subsequently recorded, and the adjudicating authority imposed penalties under section 3(a) of the Foreign Exchange Management Act, 1999.

Deepak Kalia was penalised ₹50,000, while Gopal Bhushan was penalised ₹5,000. The Department proceeded on the basis that they did not hold RBI licences for dealing in foreign exchange.

The Tribunal held that the provision had been incorrectly applied in the circumstances and allowed both appeals, deleting the penalties.

Foreign Currency Received From Visiting NRI Customers

Gopal Bhushan explained that he operated a small cloth shop, M/s. Jagdambay Silk Store, in a Punjab village situated in an area with a substantial NRI population.

Visiting NRI customers sometimes paid in foreign currency when they lacked sufficient Indian rupees. In the first week of December 2013, customers purchasing clothes had paid €500, equivalent to ₹42,125, towards the shortfall. He thereafter approached Shukla Forex to encash that currency.

Deepak Kalia similarly explained that he operated a small jewellery shop, M/s. Kalia Jewellers. Customers occasionally paid in foreign currency when short of Indian currency. He submitted that he had surrendered foreign currency equivalent to ₹60,000 to Shukla Forex for exchange.

Their case was therefore that they had received currency in ordinary commercial transactions and approached an authorised money changer to convert it.

Section 3(a) Addresses Dealings With an Unauthorised Person

The Tribunal examined the wording of section 3(a). Subject to the statutory exceptions and RBI permissions, it prohibits dealing in or transferring foreign exchange or foreign security to a person who is not authorised.

The Department had emphasised that the appellants themselves were not authorised foreign-exchange dealers.

However, the Tribunal distinguished the status of the appellants from that of the person with whom they transacted. The provision addresses dealings with an unauthorised person; the mere absence of an RBI licence in the hands of the customer did not establish the alleged contravention.

Here, the appellants had approached an authorised money changer. Consequently, their own lack of a licence could not, by itself, justify penalties under section 3(a).

Permissible Retention of Foreign Currency Was Relevant

The appellants relied on Regulation 3(iii)(b) of the Foreign Exchange Management (Possession and Retention of Foreign Currency) Regulations, 2000.

As reproduced in the order, the provision permits a person resident in India to retain foreign currency notes, banknotes and foreign-currency travellers’ cheques up to US$2,000 or its equivalent in aggregate, subject to specified conditions concerning their acquisition.

One permitted source is foreign exchange acquired from a non-resident visiting India, as an honorarium, gift, payment for services or in settlement of a lawful obligation.

The Tribunal considered this provision in light of the appellants’ explanation that the currency had been received from visiting NRI customers towards payment for purchases.

The case therefore involved both the permitted source of acquisition and the aggregate retention limit, rather than an unrestricted entitlement to hold any foreign currency below US$2,000.

Amounts Established Were Within the Retention Limit

For Gopal Bhushan, the Tribunal considered the €500 equivalent to ₹42,125. Using the December 2013 exchange rate referred to in the order, it calculated an approximate US-dollar equivalent of US$681.63, below the prescribed limit.

For Deepak Kalia, the Department alleged transactions totalling ₹3,94,186, comprising ₹60,000 and a further ₹3,34,186.

The Tribunal found that it could not reliably determine the larger alleged amount from the record. It noted that there was no material showing that Deepak Kalia had been confronted with the seized records concerning the previous transactions.

The amount accepted for consideration was therefore ₹60,000, which he had admitted in one statement. Its approximate equivalent of US$970.87 was also below the prescribed retention limit.

Final Decision

The Tribunal held that the section 3(a) charge was not applicable to the appellants in this matter and dropped it.

Both appellants were exonerated from the penalties, and the adjudication order was modified accordingly. Thus, the ₹50,000 and ₹5,000 penalties were set aside.

Author’s Comments
A customer surrendering foreign currency to an authorised money changer is not automatically conducting an unauthorised foreign-exchange business. The provision invoked must match the transaction actually established.

The US$2,000 limit must nevertheless be read with its conditions. It is an aggregate retention allowance for specified categories of acquisition, not a blanket exemption for foreign currency from any source.

The decision also highlights an evidentiary safeguard: a larger transaction amount cannot simply be assumed from seized records without adequately connecting those records to the person concerned.

For traders receiving occasional foreign-currency payments from visiting non-residents, records of the underlying sale and the encashment transaction provide useful support. The order grants relief on its particular facts and should not be read as authorising unrestricted acceptance or trading of foreign currency.

FULL TEXT OF THE ORDER OF APPELLATE TRIBUNAL UNDER SAFEMA

Present appeals are filed by the Appellants u/s 19 of the Foreign Exchange Management Act, 1999 and under the Foreign Exchange Management (Adjudication Proceedings and Appeal) Rules, 2000, against the Adjudication Order dated 21.09.2015 passed by the Joint Director, Directorate of Enforcement, in Show Cause Notice No. T-4/06/JL/2014 dated 31.12.2014, whereby penalties were imposed on the Appellants and main Co-noticees as under:

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2. As per allegations, in pursuance to recovery of documents summons was issued to Shri Deepak Kalia S/o Shri Mangat Ram Kalia, R/o Khalwara Gate, Phagwara, and also to Shri Gopal Bhushan @ Pala S/o Shri Baldev Ram, R/o VPO Bassikalan, Distt. Hoshiarpur.

The statement of Shri Deepak Kalia S/o Shri Mangat Ram Kalia, R/o Khalwara gate, Phagwara was recorded on 15.12.2014 u/s 37 of Foreign Exchange Management Act, 1999 r/w Section 131 of Income Tax Act, 1961, wherein, while explaining Page No. 46 of loose sheets, recovered & seized during search on 03.12.2013, from the business premises of Shri Mohinder Pal Shukla, shown to him, Shri Deepak Kalia, inter alia stated that during first week of December, 2013, he had sold foreign currencies equivalent to Rs. 3,94,186/- to Shri Mahinder Pal Shukla of Shukla Forex Pvt. Ltd. Purani Dana Mandi, Phagwara for which Shri Shukla did not issue any receipt to him. He further stated that he was not holding any license for dealing in Foreign Exchange issued from RBI.

Similarly, the statement of Shri Gopal Bhushan @ Pala S/o Shri Baldev Ram, R/o VPO Bassikalan, Distt. Hoshiarpur was recorded on 15.12.2014 u/s 37 of Foreign Exchange Management Act, 1999 r/w Section 131 of Income Tax Act, 1961, wherein while explaining Page No. 45 of loose sheets, recovered & seized during search on 03.12.2013, from the business premises of Shri Mohinder Pal Shukla, shown to him, Shri Gopal Bhushan @ Pala, inter alia stated that during first week of December, 2013, he had sold foreign currencies equivalent to Rs. 42,125/- to Shri Mahinder Pal Shukla of Shukla Forex Pvt. Ltd. Purani Dana Mandi, Phagwara for which Shri Shukla did not issue any receipt to him. He further stated that he was not holding any license for dealing in Foreign Exchange issued from RBI.

Perusal of documents recovered & seized on 03-12-2013 during search of business premises of Shri Mohinder Pal Shukla, M/s Shukla Forex Pvt, Ltd. and as per the statement of Shri Mohinder Pal Shukla recorded on 03.12.2013 during search and on 25.11.2014, 01.12.2014, 02.12.2014 & 29.12.2014 recorded in the office of ED, u/s 37 of FEMA, 1999 r/w Section 131 of Income Tax Act, 1961, it revealed that the Foreign Exchange purchased and sold by the present appellants to the said FFMC during 03.12.2013, and hence, made the contravention under Section 3(a) of FEMA, 1999.

Accordingly, the Ld. AA imposed the penalties of Rs. 50,000/- on the appellant Deepak Kalia and Rs. 5,000/- on the appellant Gopal Bhushan@ Pala for contravention of Section 3(a) of FEMA, 1999.

Aggrieved from the same, the appellants have preferred the present appeals.

3. The Ld. counsel on behalf of the appellant Sh. Gopal Bhushan stated that he is small cloth merchant and having shop in the name of M/s. Jagdambay Silk Store in village Chabbewal, Punjab, Since, it is an NRI Belt and sometime NRI purchase clothes and in case of short fall of Indian Rupees, they pay in foreign currency. Similarly, in the first week of December 2013 customers came and purchased clothes and due to short payment, they paid 500 EURO equivalent to Rs. 42,125 and the appellant had then gone for encashment to M/s Shukla Forex Pvt. Ltd. and was thus made co-noticee. The said amount was seized by the ED.

4. The Ld. counsel on behalf of the appellant Sh. Deepak Kalia stated that he has small jewelry shop in the name of M/s. Kalia jewelers in village Pachta, Punjab. Being an NRI Belt, the customers some time due to short of money pay in foreign currency and in first week of December 2013, the appellant had gone to M/s Shukla Forex Pvt. Ltd. for exchange and surrendered foreign currency equivalent to Rs. 60,000/- and was thus made a co-noticee.

5. Further, the counsel contended on behalf of both the appellants that as per Rule 3(iii)(b) of the Foreign Exchange Management (possession & retention of Foreign Currency) Regulation, 2000, a person resident in India is allowed to retain foreign currency Travelers Cheques not exceeding USD 2000 or is equivalent in aggregate, provided that such foreign exchange is in the form of currency note bank notes and travelers cheque acquired by him from any person not resident in India and who is on a visit in India as honorarium or gift or services rendered or in settlement of any lawful obligation. Prayer is accordingly made to allow the present appeals.

6. The Ld. Counsel for the Respondent ED argued and heard and the same will be discussed in our analysis and findings below.

7. As per impugned order, the allegation against appellant 1 Deepak Kalia & no.2 Gopal Bhushan @ Pala is qua the contravention of Section 3(a) of FEMA is to the extent of Rs. 3,94,186/- (60,000 + 3,34,186/-) and Rs. 42,125/- respectively. Section 3(a) of the FEMA is reproduced below:

“3. Dealing in foreign exchange, etc.—Save as otherwise provided in this Act, rules or regulations made thereunder, or with the general or special permission of the Reserve Bank, no person shall—

(a) deal in or transfer any foreign exchange or foreign security to any person not being an authorised person;

The Ld. Counsel for the respondent department submitted that the appellants have stated that they are not authorized person to deal in foreign currencies in any manner. Therefore, the charge of the contravention section 3(a) of FEMA, 1999 as brought out in the complaint against the appellant was framed against the appellants.

From the perusal of the above-mentioned Section, it is evident that it talks about the contravention made by a person who is dealing with unauthorized persons. In the present case at hand, the appellants are stated to be unauthorized person to deal in the foreign currency and thus, Section 3(a) of FEMA was imposed on them. However, as per Rule 3(iii)(b), of the Foreign Exchange Management (possession & retention of Foreign Currency) Regulation, 2000, a person resident in India is allowed to keep the foreign currency not exceeding USD 2000. The Rule 3 of Foreign Exchange Management (possession & retention of Foreign Currency) Regulation, 2000, is reproduced below:

“3. Limits for possession and retention of foreign currency or foreign coins :-

For the purpose of clause (a) and clause (e) of Section 9 of the Act, the Reserve Bank specifies the following limits for possession or retention of foreign currency or foreign coins, namely :-

i) possession without limit of foreign currency and coins by an authorised person within the scope of his authority;

ii) possession without limit of foreign coins by any person;

iii) retention by a person resident in India of foreign currency notes, bank notes and foreign currency travelers’ cheques not exceeding US$ 2000 or its equivalent in aggregate, provided that such foreign exchange in the form of currency notes, bank notes and travelers cheques;

a) was acquired by him while on a visit to any place outside India by way of payment for services not arising from any business in or anything done in India; or

b) was acquired by him, from any person not resident in India and who is on a visit to India, as honorarium or gift or for services rendered or in settlement of any lawful obligation; or

c) was acquired by him by way of honorarium or gift while on a visit to any place outside India; or

d) represents unspent amount of foreign exchange acquired by him from an authorised person for travel abroad.”

As regards the appellant Gopal Bhushan @ Pala had EURO 500 equivalent to Rs. 42,125/- and in the year 2013, Ending Rate of rupee against USD (December 2013) was settled around ₹61.80 per USD, thus, he had approx. 681.634 USD for the value of 42,125 Rupees (Euro 500), which is much less than the sanctioned amount of foreign currency (USD 2000) allowed to kept by Indian resident. Thus, the appellant Gopal Bhushan @ Pala is liable to be exonerated of the penalty amount.

As regards the appellant Deepak Kalia, we cannot decipher the quantum of amount he can be charged with, except for the foreign currency equivalent to Rs. 60,000/-, which he has admitted in one of his statements and this amount equates to USD 970.87 (as per December 2013 rates) which is also less than the sanctioned amount of foreign currency allowed (USD 2000) to be kept by the Indian resident. There is nothing on record that present appellant was confronted with the record seized from the premises of the M/s Shukla Forex Pvt. Ltd. qua the previous transactions. Hence, they are entitled to be exonerated for this charge.

8. In lieu of the discussion above, we are thus of the view that the charge of Section 3(a) is not applicable against the appellants in this matter and is dropped thereby. Accordingly, the appellants are exonerated from any penalties. The impugned order is modified and consequences to follow accordingly.

Appeals Allowed.

Pronounced on 08th Day of October, 2026.