Safiya Malik

The High Court of Judicature at Bombay Division Bench of Justice M.S. Sonak and Justice Jitendra Jain dismissed a group of appeals challenging penalties imposed for violations of the Foreign Exchange Regulation Act, 1973 (FERA). The Court held that Indian citizens residing abroad under circumstances indicating an intention to stay indefinitely are not considered "persons resident in India" under Section 2(p) of FERA. Accordingly, the Court upheld the penalties imposed by the Special Director of Enforcement Directorate and the Appellate Tribunal for the unauthorized purchase of shares in an Indian company without prior RBI approval.

The present matter arises from multiple appeals filed by individuals and a private company challenging a common order dated 30 October 2000 issued by the Special Director of the Enforcement Directorate, and a subsequent order dated 18 November 2005 by the Appellate Tribunal for Foreign Exchange, dismissing their appeals. The penalties had been imposed on account of violations under the Foreign Exchange Regulation Act, 1973.

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The appellants include three sisters—Neha Shroff, Kiran Shroff, and Kanan Shroff—along with their mother Ranjan K. Shroff (in her capacity as legal representative of the deceased Kishor D. Shroff), and Sujay Trading Corporation Pvt. Ltd., a company where Kishor and Ranjan Shroff served as directors. The enforcement proceedings were initiated for alleged unauthorized acquisition of shares of M/s Ditco Securities Pvt. Ltd., a Mumbai-based company, without prior permission from the Reserve Bank of India (RBI).

The penalties imposed included Rs. 41 lakhs on each of the three daughters, Rs. 25.80 lakhs on the late Kishor D. Shroff, and Rs. 8.5 lakhs on Sujay Trading Corporation Pvt. Ltd.

The key question before the Court was whether the Shroff daughters were "persons resident in India" at the time of the transactions. If they were not, their involvement in the financial transactions concerning the shares of M/s Ditco Securities Pvt. Ltd. would attract the provisions of Sections 9, 19, and 29 of FERA, as well as Section 68, relating to acquiring shares without requisite permissions.

In the proceedings before the authorities, the Shroff daughters contended that they were Indian citizens pursuing higher education in the United States and held student or visitor visas. It was asserted that their temporary educational stay abroad did not amount to a change in residential status under Section 2(p) of FERA. They relied on visa categories (B-1/B-2) and the absence of employment abroad to argue that they remained Indian residents for FERA purposes. They also cited their filing of Indian income tax and wealth tax returns.

The authorities, however, concluded otherwise. The Special Director considered statements, travel records, visa details, and other evidence to determine that the daughters had been staying in the USA for several years under circumstances indicating an intention to remain there for an indefinite period. Notably, Neha was found to have married a US-based chartered accountant and stayed in the US since 1986. Kanan, who had gone to the US in 1994 as a student along with her husband, continued to reside there without indication of return. Kiran left for the US in 1992 and similarly remained abroad without documented intention to return.

The case also involved the Kanan Trust, created in 1975, with the three sisters as beneficiaries. The funds for purchasing shares were sourced from the sisters' accounts, with temporary loans from Sujay Trading Corporation Pvt. Ltd., directed by the parents. The ED had conducted searches and recorded statements from various persons associated with the transactions.

The appellants argued that the statutory definitions had been misconstrued and that no FERA contravention occurred. They further contended that there was no actual loss of foreign exchange, and the penalties were excessive and disproportionate.

The Division Bench stated in its judgment: "The core issue involved in all these Appeals is whether the Shroff daughters could be regarded as 'person resident in India' as defined under Section 2(p) of the Foreign Exchange Regulation Act, 1973 (FERA)..."

Referring to the definition under Section 2(p), the Court recorded: "Ordinarily, one of the crucial tests for determining the question of residence is whether the Appellants had an animus manendi, or an intention to stay for an indefinite period at one place. If the person had such an intention, he could be said to reside there."

Citing K.N. Mehta v. Director of Enforcement, the Court stated that staying abroad under circumstances indicating an intention to remain indefinitely disqualifies one from being considered a resident under FERA.

The Court noted that the daughters were all in the United States for significant periods. It recorded: "There is no clear evidence suggesting that they were living in the USA for employment, business, or vocational purposes... However, the question that arises is whether they were residing in the USA for any other purpose, in circumstances that would indicate their intention to stay outside India for an uncertain period."

In examining evidence from statements, travel history, and matrimonial ties, the Court stated: "The material on record establishes that Neha was married to Sanjay, who was an established Chartered Accountant in the USA, and that she was staying with her husband from 1986 onwards... The position concerning Kanan is also not substantially different... Kiran continued to stay in the USA for an uncertain period."

Rejecting the argument of absence of sufficient evidence, the Court clarified: "We are not dealing with the criminal prosecution of the Appellants... Section 71 of the FERA also provides that where any person is prosecuted or proceeded against... the burden of proving that he had the requisite permission shall be on him."

The Court reiterated: "Upon our independent evaluation of the material on record, we see no reason to interfere with these findings of fact... the circumstances surrounding their stay in the USA... indicate an intention to stay outside India for an uncertain period."

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On the argument relying on RBI v. Jacqueline Chandani, the Court stated: "The decision... does not assist the case of the Appellants. The facts in the said case are not even remotely comparable... The decision holds that FERA applies even to those citizens of India who are staying outside India for any purpose in such circumstances as would indicate their intention to stay outside India for an uncertain period."

The Court further recorded: "There is documentary evidence that establishes beyond doubt the contravention of Sections 9, 19 and 29 read with Section 68 of the FERA... Considering the magnitude of the transactions and the circumstances... there is no substance in the argument based on any alleged disproportionality in the penalty amounts."

The High Court held that there was no merit in the appeals and refused to interfere with the orders of the Special Director and the Appellate Tribunal. The Court stated: "For all the above reasons, we find no merit in these Appeals and consequently dismiss the same without any order as to costs."

It further directed: "The interim orders, if any, are hereby vacated."

Advocates Representing the Parties:

For the Appellants: Mr. B. Seshagopalan assisted by Ms. Lorna Carvalho

For the Respondents: Mr. Vinit Jain assisted by Ms. Neeta Masurkar; Mr. Y. R. Mishra

Case Title: Neha Shroff & Others v. Union of India Through Enforcement Directorate

Neutral Citation: 2025:BHC-AS:25376-DB

Case Number: FERA Appeal Nos. 57 to 62 of 2006

Bench: Justice M.S. Sonak and Justice Jitendra Jain