26 June 2025 Foreign Exchange Management Act (FEMA) >> Business & Commercial Law  

In a significant ruling of Neha Shroff & Others v/s Union of India, Through Enforcement Directorate FERA, Government of India, Mumbai, the High Court has dismissed a series of appeals challenging orders from the Special Director, Enforcement Directorate (ED), and the Appellate Tribunal for Foreign Exchange (Tribunal). The appeals, primarily brought by the Shroff family, contested substantial penalties imposed for alleged contraventions of the Foreign Exchange Regulation Act, 1973 (FERA). The core issue at the heart of these appeals was the residential status of the Shroff daughters – specifically, whether they were "persons resident in India" or "persons resident outside India" under FERA.

Background of the Case:

 

 

The appeals stemmed from common orders dated October 30, 2000, by the Special Director, ED, and November 18, 2005, by the Appellate Tribunal, both of which were challenged. The High Court had admitted these appeals in 2006, formulating six key questions of law, predominantly revolving around the interpretation of FERA provisions, particularly Section 9(1)(a), Section 2(p), and Section 2(q), and the applicability of Section 114 of the Evidence Act.

The cases involved:

• Neha Shroff, Kiran Shroff, and Kanan Shroff (the Shroff daughters): Each faced a penalty of Rs. 41 Lakhs.
• Smt. Ranjan K Shroff: As the legal representative of the late Kishor D Shroff, she challenged a penalty of Rs. 25,80,000/- imposed on her deceased husband.
• Sujay Trading Corporation Pvt Ltd: This company challenged a penalty of Rs. 8,50,000/-.

The central allegation was that the Shroff daughters, deemed "persons resident outside India" by the ED and Tribunal, had purchased shares of M/s Ditco Securities Pvt Ltd, an Indian company, without the requisite prior approval from the Reserve Bank of India (RBI), thereby violating FERA.

The Crucial Definition: "Person Resident in India"

The crux of the appeals hinged on the interpretation of Section 2(p) of FERA, which defines "person resident in India." The Shroff daughters maintained they were Indian citizens residing in the USA solely for educational purposes on student or visitor visas, and therefore, should be considered residents of India. Conversely, the ED and Tribunal contended they were "persons resident outside India" as per Section 2(q) of FERA, which defines it as anyone not resident in India.

The Court noted that a key test for determining residence involves an "animus manendi" – an intention to stay indefinitely at a particular place. Section 2(p) specifically excludes Indian citizens who go or stay outside India for employment, business, or "for any other purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period."

Concurrent Findings and Rejection of Appellant's Contentions:

The Special Director, ED, and the Tribunal had concurrently found that the Shroff daughters were not "persons resident in India." The High Court, after its independent evaluation, found no reason to overturn these findings.

Key points considered by the authorities and upheld by the High Court included:

• Length of Stay and Marital Status: Neha Shroff had been residing in the USA since 1986 and was married to an established Chartered Accountant there. Kanan Shroff and her husband also continued to stay in the USA without clear intention of returning. Kiran Shroff similarly remained in the USA for an uncertain period after pursuing studies.
• Lack of Evidence of Intention to Return: Despite claims of being in the USA for education, no substantial material was produced to indicate an intention to return to India or that their stay was for a definite, limited period. Occasional visits to India, as evidenced by passport entries, were not deemed indicative of an intention to return and stay in India.
• Burden of Proof: The appellants argued that the respondents needed to prove beyond reasonable doubt that the Shroff daughters were not residents of India. The Court clarified that this was not a criminal prosecution. Furthermore, it referred to Section 59 of FERA, which presumes a "culpable mental state" in such cases, placing the onus on the accused to rebut this presumption. Similarly, Section 71 of FERA places the burden of proving permission on the person prosecuted or proceeded against for contravening FERA provisions.

Disproportionality of Penalty and Applicability of Evidence Act:

The appellants also argued that the penalties imposed were disproportionate and that presumptions under Section 114 of the Evidence Act were not properly appreciated. The Court, however, found no disproportionality, noting the magnitude of the transactions and the circumstances of their execution. It also stated that the Tribunal's reference to Section 114 of the Evidence Act in evaluating the evidence was not flawed, and the travel records did not rebut the indication of an intention to stay outside India for an uncertain period.

Conclusion:

The High Court affirmed the concurrent findings of fact by the Special Director and the Tribunal. It concluded that the evidence on record sufficiently established circumstances indicating the Shroff daughters' intention to stay in the USA for an uncertain period, thus classifying them as "persons resident outside India" under FERA. Consequently, the financial transactions concerning the sale and purchase of shares without RBI approval constituted a violation of FERA provisions.

With these findings, the questions of law raised regarding Section 9, Section 68, and the interpretation of "person resident in India" were answered against the appellants. The appeals were dismissed, and the interim orders, if any, were vacated. This ruling underscores the importance of clearly establishing residential status under FERA, particularly for Indian citizens with extended stays abroad, to ensure compliance with foreign exchange regulations.

Section 114, Indian Evidence Act - 1872  

Indian Evidence Act, 1872