Compounding of Offences Can’t be Claimed Once Adjudication Order is Passed Under FEMA

Held by

Hon’ble Calcutta High Court 

In the matter of Sanjay Jhunjhunwala Vs. Reserve Bank of India & Ors.

(WPA 2065 of 2025)

The Petitioner contravened FEMA provisions, and the Adjudication Authority passed an adjudication order imposing a penalty of INR 10 Crores. The Petitioner applied for compounding after the passing of the adjudication order. However, the RBI returned the same, contending that compounding applications can’t be processed as an adjudication order has already been passed. The petitioner accordingly filed a writ petition contending that the petitioner has accepted the order of adjudication and hence, has not preferred any appeal from the same. However, he must be allowed to avail the benefit of compounding at this stage. 

Hon’ble High Court held that as per Clause 6 of the compounding process, an application for compounding may be filed with the compounding authority, including those which are under the adjudication process and have not been disposed of. No contravention would be compounded which has been finally adjudicated and disposed of by the adjudicating authority. Further, Compounding cannot be claimed as a matter of right, but it is always subject to the legal provisions. Once the contravener agrees to avail the benefit of compounding, the same implies that the party is agreeable to a settlement and there is no requirement of the issue being taken up for adjudication. The very object of compounding an offence will be frustrated if a prayer for compounding is made after the adjudication process is concluded.

Further, the order which is executable at present is the order of the adjudicating authority. Not more than one order on the same set of facts, between the same parties, can be permitted. If the compounding is permitted at this stage, then there will be two orders. In respect of a contravention, two orders cannot survive at the same time. Compounding authority does not have the jurisdiction to cancel the order passed by the adjudicating authority. It is only one order that survives, and that is the order of the adjudicating authority. 

Also, Such a situation is not contemplated in the Act. It will be an open-ended process, and any person found guilty in the adjudication proceeding can seek to file an application for compounding at any time they choose. Penal provision of the Act cannot be taken so lightly, leaving it in such an indecisive state. To avoid such a situation, the legislature has consciously not provided a provision to compound an offence after the conclusion of the adjudication process.

Therefore, the application made by the petitioner seeking compounding of the offence on conclusion of the adjudication proceeding cannot be allowed, and the authority rightly rejected the application filed by the petitioner.

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1. Brief facts of the case:

• The Petitioner contravened certain provisions of the Foreign Exchange Management Act, 1999 (“FEMA”) and an adjudication order was passed by the Adjudicating Authority imposing a penalty on 27th March, 2024.

• The Petitioner filed an application for compounding under Rule 4 of the Foreign Exchange (Compounding Proceedings) Rules, 2000 on 6th May, 2024.

• RBI returned such application in September 2024, contending compounding application can’t be processed as an adjudication order is already been passed.

• Subsequently, a demand notice was issued to the petitioner on 17th January, 2025, directing the petitioner to pay the outstanding penalty or to submit an order of the appellate authority dispensing the deposit of the imposed penalty.

• The petitioner accepted the order of adjudication and therefore did not file any appeal from the same. 

2. Contention of the Petitioner:

The petitioner contended that:

• The petitioner has accepted the order of adjudication and hence, has not preferred any appeal from the same. 

• However, he must be allowed to avail the benefit of compounding at this stage. 

• As per Rule 11 of the Compounding Rules, compounding is permitted unless an appeal has been filed against the adjudication order. As the petitioner accepted the adjudicating authority's order and did not file an appeal, they should be permitted to seek compounding of the contravention.

3. Contention of the Respondent:

The Respondent contended that:

• Compounding of an offence is permissible before passing the order of adjudication.

• Once the order of adjudication is passed and the adjudication proceeding is concluded, there is no scope for entertaining the prayer for compounding.

• After the passing of the Adjudication order, the contravener may prefer an appeal challenging the same, if aggrieved, or else pay the penalty that has been imposed.

4. Finding & Analysis by Hon’ble High Court:

Hon’ble High Court made the following Findings and analysis:

• The matter to be decided is whether a contravener can be permitted to avail the benefit of compounding the contravention after an order of adjudication has been passed by the competent authority.

• As per Rule 4(4) of Foreign Exchange (Compounding Proceedings) Rules, 2000, every application for compounding any contravention shall be made in the prescribed Form to the RBI along with the prescribed fee.

• As per Rule 6 of the Compounding Proceedings Rules, if any contravention is compounded before the adjudication, then no inquiry shall be held against such person for adjudication of such contravention.

• As per Rule 11 of the Compounding Proceedings, no contravention shall be compounded if an appeal has been filed under Section 17 or 19 of the Act. The Rule specifies the required format for compounding application wherein the name of the adjudicating authority before whom the case is pending is to be disclosed.

• Further, the RBI has issued Master Direction for compounding of contraventions under FEMA vide Master Direction No. 4/2015- 16 dated 1st January, 2016.

• As per Direction 6.4 of Master Directions, any case where adjudication has been done by the Directorate of Enforcement and an appeal has been filed against such adjudication order, then no contravention can be compounded in terms of Rule 11 of the Compounding Rules. 

• The Applicant shall file an undertaking along with the compounding application that they have not filed any appeal. 

• Further, the RBI has also framed the procedure for compounding of contravention in detail, and the same is published in A.P. (DIR Series) Circular 31 dated 1st February, 2005. 

• As per Clause 6 of the compounding process, that application for compounding may be filed with the compounding authority, including those which are under the adjudication process and have not been disposed of. No contravention would be compounded which has been finally adjudicated and disposed of by the adjudicating authority. 

• The idea of compounding an offence is to get the issue settled without the parties going for regular adjudication upon payment of compensation, as applicable. 

• Compounding cannot be claimed as a matter of right, but it is always subject to the legal provisions. Once the offender/contravener agrees to avail the benefit of compounding, the same implies that the party is agreeable to a settlement and there is no requirement of the issue being taken up for adjudication. The very object of compounding an offence will be frustrated if a prayer for compounding is made after the adjudication process is concluded.

• In the given case, the following is a chronological sequence of events:
  
  • Subject transactions took place between 31st February, 2011 and 8th February, 2013;
  • SCN was issued by the adjudicating authority on 18th November, 2022;
  • Application for compounding was filed by the petitioner on 20th January, 2023, but the same was returned.
  • The petitioner was given liberty to file a fresh compounding application.
  • However, the petitioner did not file any further application for compounding the contraventions. 
  • The adjudicating authority passed the final adjudication order on 28th March, 2024, imposing a penalty of INR 10 Crores.
  • The Petitioner filed the application for compounding after the passing of the adjudication order, however, the same got rejected and returned as not maintainable on 11th September, 2024.

• In the given case, the offence of the petitioner was compoundable. The petitioner applied for compounding at the initial stage. However, the petitioner did not proceed with the same after the application was returned for want of proper details. 

• The petitioner participated in the adjudication proceeding, which implied that the petitioner did not want to compound the offence. After the adjudication order was passed and the petitioner was found guilty, the petitioner wanted to apply for compounding.

• It shows that the petitioner simply tried to test the waters and see whether the adjudication order comes in his favour or not. After the adjudication order went against him and the penalty amount has been quantified, the petitioner seeks to proceed with the compounding. 

• Had the petitioner been aggrieved, he would have been required to prefer an appeal, and for doing so, the petitioner had to deposit the entire amount of the penalty. The petitioner is trying his level best not to pay the penalty that has been imposed and delay the proceeding for an indefinite period on the plea of compounding.

• After the offence of the petitioner has been adjudicated and a penalty imposed, the petitioner would be bound to pay the amount of the penalty quantified.

• Permitting the contravener to avail the benefit of compounding at this stage would require the entire issue to be reopened all over again. The same will frustrate the whole adjudication, rendering the adjudication proceeding nugatory, and the entire period consumed in the process of adjudication gets wasted. It is only to avoid the rigmarole of the adjudication process that the provision for compounding has been incorporated in the Act. The moment the contravener foregoes the benefit of compounding the offence, the next step forward is to reach the adjudication proceeding to its finality.

• The order which is executable at present is the order of the adjudicating authority. Not more than one order on the same set of facts, between the same parties, can be permitted to be executed is one of the cardinal principles of jurisprudence. If the prayer of the petitioner for compounding the offence after conclusion of the adjudication process is allowed, then there will be two orders: first, the order of the adjudicating authority and second, the order of the compounding authority. In respect of a contravention, two orders cannot survive at the same time.

• The compounding authority does not have the jurisdiction to cancel/overrule, or set at nought the order passed by the adjudicating authority. It is only one order that survives, and that is the order of the adjudicating authority. 

• The petitioner took the risk and did not proceed with his application for compounding prior to the conclusion of the adjudication proceeding. The petitioner could have pressed the application for compounding at any time before the conclusion of the adjudication. 

• The FED Master Direction number 4/2015-16 permits compounding even when the adjudication proceeding is ongoing. After the adjudication is complete and the offence has been established, the contravener would be bound to comply with the direction passed by the adjudicating authority.

• Since the implementation of the FEMA Act, the petitioner has not been able to show a single instance when the authority permitted compounding after conclusion of the adjudication process. 

• The interpretation of the petitioner, if accepted, will lead to an uncertain situation and reaching a finality to the proceeding will be a never-ending process.

• Such a situation is not contemplated in the Act, there is no time limit prescribed within which an application for compounding can be filed after the order of adjudication has been passed. It will be an open-ended process, and any person found guilty in the adjudication proceeding can seek to apply for compounding at any time they choose. Penal provision of the Act cannot be taken so lightly, leaving it in such an indecisive state. To avoid such a situation, the legislature has consciously not provided a provision to compound an offence after the conclusion of the adjudication process.

• Therefore, the Court is of the opinion that the application made by the petitioner seeking compounding of the offence on conclusion of the adjudication proceeding cannot be allowed, and the authority rightly rejected the application filed by the petitioner.

5. Final Order

The Hon’ble Calcutta High Court held that:

• The application made by the petitioner seeking compounding of the offence on conclusion of the adjudication proceeding cannot be allowed, and the authority rightly rejected the application filed by the petitioner.

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