A Ceiling Is Not a Formula: Delhi HC reduces Rs. 25 Lakh Penalty to Rs. 3 Lakhs Under FERA

Does staying within a statue’s maximum penalty automatically make that penalty valid? The Delhi High Court answered no in M/s Intersales & Anr. v Union of India & Anr.¹ setting aside a Rs. 25 Lakh penalty posed under the Foreign Exchange Regulations Act (FERA)² and replacing it with Rs. 3 Lakhs. A division bench of Justice Naveen Chawla and Ravinder Dudeja held that an authority exercising discretion under section 50 of FERA³ must give at least some reason for the penalty amount it chooses, and that the amount must be proportionate to the contravention actually established, staying under the statutory ceiling is not, by itself, enough. For practitioners handling FERA and FEMA penalty appeals, the order is a useful illustration of how a penalty can survive a finding of contravention on the merits and still fail for want of reasoned quantification.

Intersales was originally a partnership between Rajiv Chachra and his mother, Pushpa Chachra exporting garments, dissolved in 1998 when Rajiv Chachra took over the business as sole proprietor. The Enforcement Directorate’s investigation found that shipments worth US$62,256.50, spread across six Guaranteed Remittance Forms, had not been realised within the prescribed time, and issued a show cause notice in 2002. The Adjudicating Authority’s 2004 order found contravention across five of the six forms and imposed a Rs 25 lakh penalty on Intersales, with separate Rs 2.5 lakh penalties on Rajiv Chachra and Pushpa Chachra individually. On appeal, the Appellate Tribunal for Foreign Exchange accepted that the RBI had written off one form, and that two others had already been the subject of an earlier 2001 adjudication order against Rajiv Chachra personally, which had imposed a penalty of Rs 1 lakh for a contravention of US$17,460. This left only three forms, together worth US$44,796.50, as the surviving contravention. The Tribunal set aside the separate individual penalties since the firm had by then become Rajiv Chachra’s proprietary concern, but retained the full Rs 25 lakh penalty on Intersales itself, and it was this retention the appellants challenged before the Delhi High Court.

Court’s Reasoning

Before the High Court, the appellants did not dispute the underlying finding of the contravention for the three surviving forms. Their challenge was confined to the quantum of the penalty, that Rs. 25 lakhs was disproportionate once measured against the earlier order’s yardstick of Rs. 1 Lakh for a comparable, smaller contravention, and the Tribunal had given no reason for retaining the same figure despite the contravention itself having shrunk. The Enforcement Directorate argued that judicial review does not permit a court to second guess quantum so long as the penalty stay within Section 50’s ceiling of the five times the contravention amount, and that the interference is warranted only where a penalty is arbitrary it shocks the conscience of the court.   

The Court sided with the appellants. It read section 50 as vesting discretion in the Adjudicating Authority to impose a penalty “not exceeding five times the amount or value involved”, and held that such discretion, whatever vested in a statutory authority, must be exercised reasonably, which I turn requires reasons and proportionality to the contravention. Drawing on the Supreme Court’s articulation of the proportionality doctrine in Coimbatore District Central Cooperative Bank v Coimbatore District Central Cooperative Bank Employees Association,⁴ and on the Bombay High Court’s application of that doctrine to a FEMA penalty in Special Director, Directorate of Enforcement v Jaipur IPL Cricket Pvt. Ltd. The Court held that “merely because the imposed penalty falls within the maximum limit prescribed under Section 50 of the FERA, does not, by itself, validate it. The learned Adjudicating Authority/Appellate Authority is required to determine the penalty in a reasonable manner and give at least some reasons for the exercise of the discretion in imposing such penalty and for determination of the quantum thereof.”

Examining the Tribunal’s own reasoning, the Court found it addressed only why the separate individual penalties on Rajiv Chachra and Pushpa Chachra could not be sustained once the firm became a sole proprietorship, and said nothing at all about why Rs 25 lakh remained the right figure once the contravention itself had been reduced by US$14,797.35 through the exclusion of two forms and a further form had been written off by the RBI. The Tribunal’s own order, the Court noted, had said only that the penalty was not “harsh or excessive” without engaging with the changed factual position at all. On that basis, the Court held the penalty “cannot be sustained and is liable to be set aside.”

Fixing the Quantum Instead of Remanding

Having found the penalty unsustainable, the Court considered whether to send the matter back to the Tribunal for fresh determination of quantum, which would ordinarily be the natural consequence of finding an absence of reasons. It declined to do so, noting that the original adjudication order dated back to 2004 and the Tribunal’s order to 2009, with more than fifteen years having passed and the underlying transactions predating even that. Rather than prolong the proceedings further, the Court used the 2001 order’s own yardstick, Rs 1 lakh for a contravention of US$17,460, and applied it proportionately to the surviving contravention of US$44,796.50, arriving at a penalty of Rs 3 lakh. The appeal was partially allowed on this basis, with no order as to costs.

The order draws a distinction that matters well beyond FERA appeals: a statutory ceiling on penalty defines the outer limit of an authority’s power, not a benchmark that any figure below it can simply default to. An authority that revises its own findings on contravention, as the Tribunal did here by excluding two forms and accepting a write-off, cannot leave the penalty figure untouched without explaining why the reduced contravention still justifies the same quantum. The Court’s decision to determine the penalty itself, rather than remand, is also notable as a practical response to prolonged litigation: where an adjudicatory order and its appeal already span the better part of two decades, a court may prefer to bring finality using an available, comparable yardstick from the record itself rather than send the parties back for a fresh round of quantification.

Citations

1. M/s Intersales & Anr. v Union of India & Anr., MISC. APPEAL (FEMA) 40/2025 ↩︎
2. Foreign Exchange Regulation Act, 1973 ↩︎
3. Foreign Exchange Regulation Act, 1973, s. 50 ↩︎
4. Coimbatore District Central Cooperative Bank v. Coimbatore District Central Cooperative Bank Employees Association, (2007) 4 SCC 669. ↩︎

Expositor(s): Adv. Pratistha Dahiya