FEMA Adjudicating Authority Cannot Overrule Competent Authority's Refusal To Confirm Asset Seizure: Supreme Court

"In effect, the Adjudicating Authority has undone the order of the Competent Authority even while the appeal against the said order is pending. Such a course of action, in the opinion of this Court, tantamounts to abdicating the powers of the Appellate Authority." The Supreme Court, in a significant ruling dated April 1, 2026, held that an Adjudicating Authority under the Foreign Exchange Management Act (FEMA) cannot bypass or overrule a Competent Authority's refusal to confirm asset seizures while an appeal on the issue remains pending.

A bench comprising Justice Vikram Nath and Justice Sandeep Mehta observed that the refusal to confirm a seizure under Section 37A of FEMA is a "substantive evaluation" of evidence, and findings recorded therein necessarily have a direct bearing on parallel adjudication proceedings.

The dispute arose when the Enforcement Directorate alleged that the directors of M/s. Accord Distilleries & Breweries Pvt. Ltd. acquired shares in a Singapore-based entity without Reserve Bank of India approval, prompting the seizure of their assets under Section 37A(1) of FEMA. The Competent Authority refused to confirm this seizure under Section 37A(3), citing a complete lack of evidence that the foreign shares were ever paid for. Despite the Department's appeal against this refusal pending before the Appellate Tribunal, the Adjudicating Authority issued a show-cause notice and ultimately passed a final adjudication order confiscating the properties, which was subsequently upheld by the Madras High Court.

The primary question before the court was whether the Adjudicating Authority under Section 16 of FEMA can independently proceed and overrule findings made by the Competent Authority refusing asset seizure under Section 37A. The court was also called upon to determine whether a writ petition is maintainable against a show-cause notice when foundational facts of the alleged violation are struck down by a coordinate statutory authority.

Interplay Between Seizure And Adjudication

The Supreme Court thoroughly examined the scheme of Section 37A of FEMA, which deals with the seizure of assets held outside India in contravention of Section 4. The bench noted that the initial seizure by an Authorised Officer is merely a tentative, preventive measure based on a "reason to believe" that a violation has occurred. The court clarified that this preliminary satisfaction is expressly subject to independent scrutiny by the Competent Authority under Sub-sections (2) and (3) of Section 37A.

Refusal To Confirm Seizure Is A Substantive Finding

The court strongly rejected the Madras High Court's view that an interim seizure has no implication on the final adjudication proceedings. The bench emphasized that the Competent Authority's evaluation is not a mere procedural step. The court noted that a refusal to confirm the seizure reflects a considered finding that the foundational requirement to suspect a foreign exchange contravention is simply not satisfied on the available material.

"The exercise undertaken by the Competent Authority is thus not an empty formality, but a substantive evaluation of whether the material on record is sufficient to sustain even a prima facie inference of contravention in relation to foreign exchange."

Adjudicating Authority Cannot Usurp Appellate Powers

Addressing the core grievance, the bench criticized the Adjudicating Authority for passing a final order under Section 16 that effectively contradicted the Competent Authority's refusal to seize the assets. The court noted that the Enforcement Directorate's appeal against the Competent Authority's order was still pending before the Appellate Tribunal. By passing an adverse adjudication order that ignored the Competent Authority's findings, the Adjudicating Authority acted arbitrarily and contrary to law.

Writ Petitions Maintainable In Exceptional Circumstances

The Supreme Court also faulted the Madras High Court for dismissing the appellants' writ petitions on the ground of non-maintainability. Relying on the precedent set in Union of India v. VICCO Laboratories, the bench reiterated that the general rule against entertaining writ petitions at the show-cause notice stage is not an inviolable principle. The court held that interference under Article 226 of the Constitution of India is entirely permissible where the notice suffers from a patent lack of jurisdiction or reflects a pre-determined approach.

High Court Observations Caused Prejudice T

he top court observed that the Division Bench of the High Court had impliedly effaced the findings recorded by the Competent Authority, thereby prejudicing the appellants. The bench noted that the Adjudicating Authority had heavily relied on these erroneous High Court observations to impose penalties and order confiscation. Consequently, the Supreme Court declared the actions of the Adjudicating Authority as arbitrary and set aside the final adjudication order.

The Supreme Court set aside the judgments of the Madras High Court and quashed the final adjudication order dated August 26, 2024. The bench directed the Appellate Authority to first decide the Department's pending appeal under Section 37A(5) of FEMA within two months, after which the adjudication proceedings arising out of the show-cause notice may be taken to their logical conclusion.

Date of Decision: 01 April 2026