Calcutta High Court (Appellete Side)
Sanjay Jhunjhunwala vs Reserve Bank Of India & Ors on 1 August, 2025
Author: Tapabrata Chakraborty
Bench: Tapabrata Chakraborty
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IN THE HIGH COURT OF JUDICATURE AT CALCUTTA
CIVIL APPELLATE JURISDICTION
APPELLATE SIDE
RESERVED ON: 08.07.2025
DELIVERED ON: 01.08.2025
PRESENT:
THE HON'BLE MR. JUSTICE TAPABRATA CHAKRABORTY
AND
THE HON'BLE MR. JUSTICE REETOBROTO KUMAR MITRA
MAT 524 OF 2025
WITH
IA NO. CAN 1 OF 2025
SANJAY JHUNJHUNWALA
- VERSUS -
RESERVE BANK OF INDIA & ORS.
Appearance:
Mr. P. Chidambaram, Sr. Advocate,
Mr. T. Shatnagen, Adv.
Mr. Aditya Kanodia, Adv.
Mrs. Shreya Trivedi, Adv. .... For the Applicant/Petitioner
Mr. Jaideep Gupta, Sr. Advocate,
Ms. Suchishmita Ghosh, Adv. ... For the respondent nos. 1 and 2
Mr. Arijit Chakraborti, Adv.
Mr. Debsoumya Basak, Adv.
Ms. Swati Kumari Singh, Adv. ... For the respondent nos. 3 and 4
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Reetobroto Kumar Mitra, J.:
1. The present appeal challenges an order passed by a learned Single Judge on 1st
April, 2025, dismissing the Writ Petition filed by the appellant herein. The
primary prayer in the Writ Petition was that the writ petitioner be permitted to
renew the compounding application made by him, thereby quashing the
rejection of the compounding application on 11th September, 2024.
2. The facts in a nutshell are:-
a. The petitioner utilised the liberalised remittance scheme between
February 2011 and 8th February 2013 to remit USD5,99,999 equivalent
to (at prevailing exchange rate at the time) Rs. 2.97 crores to the LGT
Bank of Singapore.
b. The purpose of such remittance was to invest in international bonds,
securities and mutual funds through a foreign currency denominated
portfolio investment account.
c. The amount invested by the petitioner was used to earn profit for the
LGT Bank from its own portfolio bank.
d. The bank would give short term advances for optimising gains against the
pledge of investment held in the appellant’s portfolio account.
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e. Such investment resulted in large gains for the petitioner.f. The petitioner, some time in 2015, closed the account with a profit of
approximately USD 66,773 equivalent to Rs. 1.24 crores.
g. The petitioner had offered such gains for tax purposes and had paid the
tax in 2015 itself.
h. The trouble erupted some time in 2020 when the Enforcement
Directorate initiated proceedings on 17th April 2020 by way of complaint
of contravention of provisions of the Foreign Exchange Management Act,
1999 (hereinafter referred to as the Act).
i. Pursuant to the complaint, a show cause notice dated 20th April, 2020 was
issued under Section 16 read with Rule 4 of Foreign Exchange
Management (Adjudication Proceedings and Appeal) Rules, 2000 for
contravention of provisions of Sections 3(a), 3(b) and 4 of the Act read
with Regulation 3 of the Foreign Exchange Management (Borrowing or
Lending in Foreign Exchange) Regulations 2000, as to why an inquiry
should not be initiated against the appellant.
j. The appellant had given a reply to such show cause notice. In respect of
the above, the authorities proceeded to conduct an inquiry. Even as the
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proceedings were pending, the appellant filed a compounding applicationon 20th January, 2023.
k. The said application was returned by the authority vide an email dated 8th
January, 2024 (Page 138) on the ground that there was lack of clarity and
granted liberty to the appellant to approach the concerned authority
(External Commercial Borrowing Division-ECDB) with a fresh
application.
l. The Adjudicating Authority by its order dated 28th March, 2024 passed
an order, holding the appellant guilty of borrowing without the permission
of the RBI in the form of short term advances and thereby in
contravention of Regulation 3 of the Foreign Exchange Management
(Borrowing or Lending in Foreign Exchange) Regulations 2000. The
adjudicating authority imposed a penalty of Rupees 10 Crore on the
appellant herein, under Section 13(1) of the Act read with the
Adjudication Rules.
m. This order was not appealed by the appellant; on the contrary, a second
compounding application was made, admitting in no uncertain terms, the
contravention of borrowing without RBI’s permissions and violations of
provisions of LRS for trading of foreign exchange for an unauthorised
debit of Rs. 30.13 crores.
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n. It is this second compounding application dated May 6, 2024 filed onMay 10, 2024 by the appellant, which was rejected on 11th September
2024 by the authority, inter alia on the ground that the adjudication
process had already been completed and an order had also been passed
on 28th March 2024, on account whereof the compounding application
could not be entertained.
3. It is this rejection which was challenged by the appellant by way of WPA 2065
of 2025. Thus, the conspectus of the dispute in the present appeal, as in the
Writ Petition, is extremely limited and relates only to the issue: whether a
compounding application can be entertained after the order of adjudication had
been passed by the competent authority.
4. Mr. P. Chidambaram, learned senior advocate appearing for the appellant, had
raised a singular issue: whether a compounding application can be filed after
adjudication by the concerned authority. In support of his contention that such a
compounding could be made, learned senior counsel has raised the following
points:-
a. The power of compounding is vested primarily in Section 15 of the Act
read with Rule 7 of the Compounding Proceedings Rules, 2000 read with
Rule 11 thereof.
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b. He has also placed reliance on the provisions of Section 3, 4, 13, 15, 17and 19 of the Act and also referred to the Compounding Rules 2000,
relying on Rules 3, 4 and 5.
c. Learned senior counsel has argued that the charges under Sections 3(a),
3(b), and 4 are separate and distinct, and that Section 15 of the Act
expressly differentiates between violations under these provisions by
assigning two separate authorities for compounding such offences.
Furthermore, Section 19 establishes a distinct appellate authority for
contraventions of the aforesaid provisions. Consequently, prior to
adjudication it is not possible for a person charged with contravention of
multiple provisions of the Act to ascertain which authority is competent to
entertain the compounding of the offences.
d. Any violation of Section 3a, 3b and 4 of the Act, would have separate
appellate authorities as well as separate compounding authorities.
e. Thus, he argued that it was only after the final order of adjudication being
passed, that the appellant became aware of the contravention or violation
with which he had been charged and only then could he identify the
appropriate compounding authority to approach.
f. He also urged, that it is an admitted position that no appeal had been
preferred by the appellant on account whereof the appellant was entitled
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to invoke the provisions of compounding and make an application interms thereof.
g. The learned Senior Counsel has also sought to impress on us that the
time allowed for filing of an appeal under Section 19 of the Act against an
order of adjudication is 45 days and the enforcement of such an order can
take place only upon the expiry of 90 days from the order. Therefore, it is
implied that an application for compounding ought to be made within a
period of 45 days from the date of the adjudication order, without filing an
appeal under Section 19.
h. The appellant contended that it was only after receipt of the order of
adjudication dated 28th March, 2024 that he came to learn that he had
been exonerated of the charges of contravention of Section 3(a) and (b) of
the Act. Thus, it is only then that the appellant could identify which of the
compounding authorities he could approach. Thus, any compounding
application prior thereto would have been an idle formality and could
result in a procedural hazard. Thus, the second application for
compounding on 6th May, 2024 was not only within the time specified but
also necessarily made post the adjudication order as that would bring
clarity regarding the particular compounding authority that the appellant
would have to approach.
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i. Learned senior counsel for the appellant further submitted that theimpugned order had been passed without considering these facts and was
bereft of any reasoning and ought to be set aside.
j. He further argued that the first compounding application was filed on
erroneous legal advice since at that juncture there was no requirement to
file such application as it was yet to be determined as to whether the
appellant had contravened the provisions of Section 3(a) or any other
provision of the Act. It is only upon such determination the appellant
could have filed the compounding application. It would be further explicit
from the provisions of Clause 6.4 of the master circular being FED Master
Direction No. 4 of 2015 – 2016 that the right to compound contravention
under the provisions of the Act is left ajar till the date of issuance of the
order of the Adjudicating Authority or till filing of an appeal against the
order passed by the Adjudicating Authority under the provisions of
FEMA.
5. We have also heard Mr. Jaideep Gupta, learned senior advocate appearing for
the respondent nos. 1 and 2.
a. Mr. Gupta has drawn our attention to Section 15(2) of the Act relating to
the power to compound contravention, which clearly states that where a
contravention has been compounded no proceeding or further
proceeding shall be initiated or continued, as the case may be, against the
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person committing such contravention in respect of the contravention so
compounded. The stress is on the words “initiated” and “continued”.
According to him, these words have to be read in the context of the
sequence and prescribed timeline in the Act. It clearly means that the
compounding can be done prior to or during the pendency of the
proceeding against a person committing such contravention.
b. The whole purpose, according to him, of compounding is to settle the
dispute, without having to wait for an elaborate adjudicatory process. If,
therefore, one waits for the adjudication process to be completed and then
applies for compounding, the whole purpose of the Act to provide for
compounding of offences becomes redundant.
c. He has laid great stress on the fact that compounding cannot be done post
adjudication, as that would destroy the very fabric of the Act itself. Several
sections were also relied upon by Mr. Gupta, particularly Sections 13, 14,
14A, 16, 19(1) and 19(2), all to emphasise that the Act prescribes specified
timelines and that such timelines cannot be relaxed or disregarded as the
very purpose of the Act itself would then be nugatory.
d. Mr. Gupta has relied upon the decisions reported in 2002 (1) SCC 367
and 2008 (4) SCC 175.
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6. Mr. Arijit Chakraborty appearing for the respondent nos. 3 and 4 has primarily
adopted the submissions of Mr. Gupta. In addition thereto, he relied on the
form meant for Compounding Application under Rule 4 and 5 of the Foreign
Exchange (Compounding Proceeding) Rules 2000. This form mandates in serial
no. 4, the disclosure of the name of the adjudicating authority, before whom the
case is pending.
7. We have heard counsel for all the parties at great length and considered their
submissions and the documents on record.
8. Before going into the arguments made by the parties, we deem it fit to explain
what exactly is meant by the term compounding and the purpose thereof.
9. Compounding is necessarily to be preceded by a charge of contravention.
Contravention is a breach of the provisions of the Act or rules and regulations
framed thereunder.
10. Compounding is the process of voluntarily admitting the contravention, pleading
guilty and seeking redressal.
11. It is thus a voluntary process by which an individual or a corporate entity seeks
redressal of contravention, which he admits.
12. Compounding is meant to provide comfort and concession to an errant party
who admits, of his own volition, the guilt of the contravention. The admission of
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guilt also ensures curtailment of the process of inquiry and adjudication by the
specified authority.
13. Thus, compounding rests on an admission of the contravention alleged. This
admission may be simply stated as “I am guilty of the violation of provisions of
the Act as charged”. If this admission is not forthcoming, there is no question of
entertaining any compounding application.
14. Thus, it would stand to reason that such an admission of contravention is made
by the person charged at a stage prior to the adjudication. This is because, on
adjudication once a person is found guilty he does not have to admit his guilt or
contravention as he is already found to be guilty of the contravention.
15. Compounding can be done at two stages. The first, upon a notice of
contravention being received by the person concerned, prior to commencement
of any inquiry, investigation or adjudication by the directorate of enforcement or
by RBI (Rule 4). The second, is post commencement of any enquiry,
investigation or adjudication by the directorate of enforcement, but prior to its
completion. There cannot be any other stage at which the compounding
application can be made.
16. It is in this conspectus that we propose to deal with the matter. The scheme of
the Act makes it clear that a compounding application has to be made before
the proceedings under Section 13 of the Act are concluded by imposition of a
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penalty. This follows from the words “initiated” or “continued” appearing in
Section 15(2) of the Act.
17. Once a person is charged with a contravention, a complaint is required to be
made in writing before the adjudicating authority constituted under Section 16
of the Act by an officer authorised by a general or special order of the Central
Government as envisaged in Section 16(3) of the Act. Upon the person so
appointed, acting as the adjudicating authority, holding the inquiry and finding
the person charged to be guilty of the contravention, a penalty is liable to be
imposed on the said person, as envisaged under Section 13 of the said Act.
18. Once proceedings under Section 13 of the Act are completed, Section 14
comes into play enabling enforcement of the orders passed by the adjudicating
authority. Various enforcement measures have been provided depending on the
nature and quantum of the contravention. However, for every process of
enforcement, the concerned defaulter has to be given a hearing.
19. Section 15 deals with compounding of a contravention by the concerned
person. However, the scheme specifies that once proceedings under Section 13
come to an end, there is no longer a question of compounding, as the entire
amount of penalty as adjudicated will have to be paid.
20. In the present case, the plea advanced by the appellant that since he had been
charged with multiple contraventions, the appellate authority and the
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compounding authority for such offences being different, he would not be in a
position to make a compounding application till he knew the outcome of the
adjudication of such contraventions does not find favour, as he made the first
compounding application on 20th January, 2023, prior to the adjudicatory
authority passing its order.
21. In the mail of 8th January, 2024, the concerned authority had clearly stated that
due to lack of clarity, the application for compounding of the appellant herein
was being returned. The applicant (appellant herein), had been asked to
approach the External Commercial Borrowing Division (ECBD), with a fresh
application.
22. Thus, the plea now taken, that the appellant would not know which authority to
approach prior to adjudication is rather ill founded.
23. The second compounding application affirmed by the appellant on 6th May
2024 and filed on 10th May, 2024 left serial 4 blank. Serial 4 mandates
disclosure of the name of the adjudicating authority before whom the case is
pending. Though several sub paras have been added, beyond the statutory
mandate, seeking to explain why the application for compounding was being
made at such a belated stage.
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24. Such explanation does not in any manner refer to the non-identifiability of the
compounding authority, prior to the adjudication, the ground so vociferously
argued by the appellant before us.
25. Rule 6 of the Compounding Rules, 2000 makes it clear that once a
contravention is compounded before adjudication, no enquiry shall be made for
adjudication of such contravention.
26. Rule 7 brings further clarity to a situation where compounding of a
contravention is made after a complaint under the Act.
27. In fact, Rule 7 in no uncertain term spells out the authority to whom the
compounding application should be made.
28. Rule 11 of the Compounding Rules 2000, states that no contravention will be
compounded if any appeal under Section 17 or 19 has been filed.
29. The converse of Rule 11, cannot be construed as the universal truth without any
applicability of the parameter set forth in the Act.
30. It cannot mean that if an errant party has not preferred an appeal, he is entitled
to compound his contravention without fulfilling the other criteria specified in
the Act. The other criteria being that the compounding application has to be
made while the case is pending before the Adjudicating Authority.
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31. The appellant clearly was a fence sitter and chose to take a chance until
termination of the process by adjudication by the concerned adjudicating
authority.
32. Upon such adjudication on 28th March, 2024, resulting in adverse findings
against him, the appellant chose to initiate a second round of compounding
proceedings only in May 2024, when he had the liberty to do so in January
2024, upon return of the first application on 8th January 2024.
33. The master circular being FED Master Direction No. 4 of 2015 – 2016 specifies
in clause 6.4 that once adjudication has been done by the Directorate of
Enforcement and an appeal preferred therefrom under Section 17 or Section 19
of the the Act, no contravention can be compounded in terms of Rule 11 of the
Foreign Exchange (Compounding Proceedings) Rules, 2000. The second part
of this clause, 6.4 of the master circular, merely fortifies the first part by saying
that the adjudication referred in the undertaking, as stipulated in Annex (III)
along with the compounding application, is that they will not file any appeal
under Section 17 or Section 19 of the Act. This undertaking is from the
applicant that he will not prefer an appeal from the order of adjudication, if such
an order is passed during the pendency of the compounding application. The
purpose of a compounding application, to avoid the time taken for adjudication
and appeal from the order of contravention, will be rendered completely
nugatory if the compounding is done or permitted to be done post adjudication
of the contravention. Undertaking necessarily means that a person makes a
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promise to do or not to do something in the future. Hence, an undertaking that
the appeal has not been or will not be filed by the applicant, as specified in
Annex (III), is the sine qua non for a compounding application. The provisions
of the Act, the Rules and the Master Circular need to be considered together
and not in isolation. A particular clause cannot be taken up and highlighted.
34. The decision relied upon by Mr. Jaideep Gupta, particularly the one of the
Hon’ble Supreme Court in 2008 (4) SCC 175, is clear and unequivocal.
Though it relates to a case under the Customs Act, 1962, the principle thereof is
aptly applicable to the present case, that the compounding mechanism is to
prevent needlessly proliferating litigation and holding up of collection.
35. Though reference was made to the Foreign Exchange (Compounding
Proceedings) Rules, 2024 and particularly to Rule 9 thereof, which makes it
clear in no uncertain terms that contravention shall not be compounded where
the adjudicating authority has already passed an order imposing penalty under
Section 13 of the Act. However, it was agreed by all parties appearing before us
that the same shall not apply to the present case in view of Rule 14 thereof.
36. The Act, to consolidate and amend the law relating to foreign exchange, was
made with an object to facilitate external trade and payments and for promoting
the orderly development and maintenance of the foreign exchange market in
India. In order to enhance the object of the Act, which is defined as a complete
code in itself, it has been provided with strict timelines. Thus, to hold that a
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compounding application, which is made to curtail the process of recovery of
penalties from errant persons, can be done after the adjudication process has
attained finality would, disrupt the fabric of the Act, which stipulates strict
timelines for such recovery.
37. The purpose of the compounding mechanism envisaged under the Act is based
on utility, that is, for efficient collection of penalties due from errant persons.
38. In this particular case, the compounding application has been made at a stage
when the adjudication process has been completed. Thus, the question of
admission of guilt of the contravention complained of, by the errant person, the
sine qua non for a compounding application, is quite redundant, as he had
already been found guilty of the contravention of the provisions of the Act and
the Regulations.
39. In the circumstances aforesaid, the second application for compounding
affirmed on 6th May 2024 and filed on 10th May, 2024 was rightly rejected by
the compounding authority, holding, inter alia, that the adjudication order had
already been passed by the adjudicating authority with respect to the
contravention applied for in the compounding application. Since the order had
already held that there had been contravention of the provisions of the Act and
the Regulations, the question of admission of contravention by the appellant
herein was redundant.
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40. The Learned Single Judge has considered all aspects of the matter and has
rightly dismissed the Writ Petition of the appellant herein. Thus, we uphold the
order of the learned Single Judge as we find no infirmity in the order.
41. In these circumstances, the appeal fails and is hereby dismissed.
42. An urgent photostat certified copy of this judgment, if applied for, shall be
granted to the parties as expeditiously as possible, upon compliance of all
formalities.
(Reetobroto Kumar Mitra, J.) (Tapabrata Chakraborty, J.)
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