Can’t compound offence once adjudication ends, says HC

Kolkata: In a matter relating to violation of Foreign Exchange and Management Act, 1999 (FEMA), Calcutta High Court dismissed a writ petition, observing there is no provision for compounding an offence after conclusion of the adjudication process.

The bench of Justice Amrita Sinha was moved by the petitioner challenging two aspects: Reserve Bank of India’s rejection of his application for compounding an offence adjudicated by the adjudicating authority under the FEMA Act in September 2024, and a demand notice for payment of outstanding penalty.

The subject transactions took place between February 2011 and February 2013. Special Director, Enforcement Directorate (ED) issued a show-cause notice on November, 2022. Petitioner filed a compounding application in January 2023 but it was returned in January 2024, citing lack of clarity in terms of facts and figures. The petitioner was given liberty to file a fresh compounding application but he didn’t as per legal advice.

After initiating proceedings, the adjudicating authority passed a final order on March 28, 2024 imposing Rs 10 crore penalty. After the order was passed, the petitioner again filed a compounding application. He didn’t, however, appeal against the order. His compounding prayer stood rejected and was returned as not maintainable.

Court observed the offence was a compoundable one but participation of the petitioner in the adjudication proceeding implied he didn’t want to compound the offence. Instead, it appeared that he tried to test the waters and see whether the adjudication order came in his favour or not. When it went against him and the penalty amount was quantified, he filed the compounding application.

The court observed that if compounding prayer is allowed after the end of adjudication, there will be two orders; first, the adjudicating authority’s order and second, the compounding authority’s order. In respect of a contravention, two orders cannot survive at the same time.

Court said the penal provision of the Act can’t be taken so lightly, leaving it in such an indecisive state. By this way, the contravener will remain scot-free and the penal provision can’t be implemented. The Act will be rendered completely toothless. To avoid such a situation, the legislature consciously didn’t provide the provision to compound an offence after the conclusion of the adjudication process.