In J. Sri Nisha vs. The Special Director, Adjudicating Authority, Directorate of Enforcement & Anr. (2026), Supreme Court’s Division Bench of Justices Vikram Nath and Sandeep Mehta delivered a 26-page long judgement dated April 1, 2026, wherein, it concluded:”....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, even when the order of the Competent Authority was still under challenge in appeal at the instance of the department." The judgement was authored by Justice Mehta.
It added: "39. In wake of the above discussion, we are of the opinion that the impugned order dated 23rd July, 2024 passed by the Division Bench of the High Court and so also the order of the learned Single Judge of the High Court dated 30th November, 2023, rejecting the writ petition preferred by the appellants and as a consequence, the final order dated 26th August, 2024 passed by the Adjudicating Authority imposing penalty and ordering confiscation of the property held by appellants are declared to be arbitrary and contrary to law. The same are hereby set aside. The proceedings are revived from the stage of the SCN."
The Division Bench concluded: "40. As an upshot, we provide that the Appellate Authority shall first decide the appeal preferred by the Department against the order of the Competent Authority under Section 37A(5) of FEMA after hearing the parties and by passing a reasoned order within a period of two months from today. Pursuant to the disposal of the appeal pending before the Appellate Authority, the proceedings arising out of the SCN may be commenced and shall be taken to their logical conclusion without being prejudiced by any of the observations made hereinabove or in the orders passed by the High Court. 41. The appeals are disposed of in these terms."
These appeals arose out of the common judgment and final order dated July 23, 2024 passed by the Division Bench of the Madras High Court. The appellants had approached the Single Judge of the High Court, assailing the order/show cause notice (SCN) dated December 22, 2021 issued by the Adjudicating Authority under the provisions of the Foreign Exchange Management Act (FEMA), 1999, and the consequential corrigendum dated March 13, 2023. The writ petitions instituted by the appellants assailing the said SCN and corrigendum came to be dismissed by the Single Judge vide common final order dated 30th November, 2023. The intra-Court appeals preferred against the said order was also rejected by the impugned judgment dated July 23, 2024. The appellants approached the Supreme Court.
The controversy in the present cases is more appropriately examined within the framework of sub-sections (1) to (3) of Section 37A. A plain reading of Section 37A(1) indicates that the power of seizure was predicated upon the existence of a “reason to believe” that foreign exchange, foreign security or immovable property situated outside India was suspected to have been held in contravention of Section 4. Such satisfaction by the Authorised Officer at the stage of preliminary seizure under Sub-section (1) is only tentative and is expressly subject to scrutiny under Sub-sections (2) and (3), wherein the Competent Authority is required to independently examine whether the reasons recorded justify continuation of the seizure. The exercise undertaken by the Competent Authority was thus not an empty formality, but a substantive evaluation of whether the material on record was sufficient to sustain even a prima facie inference of contravention in relation to foreign exchange. In the present case, upon such evaluation, the Competent Authority declined to confirm the seizure by a well-reasoned order, thereby indicating that the material did not meet even this preliminary threshold. The refusal to confirm the seizure, therefore, reflects a considered finding that the foundational requirement of a “reason to believe” was not satisfied on the material available.
The Supreme Court observed: "....a prima facie satisfaction was recorded by the Competent Authority that there was no evidence of the appellants being involved in foreign security transactions having any value. Consequently, it has to be taken that there did not exist the “reasons to believe” referred to in Sub-section (1) of Section 37A. These findings definitely support the cause of the appellants herein. It is not in dispute that the appeal preferred by the Department against the order dated 3rd February, 2021, is still pending consideration. The Division Bench of the High Court, while deciding the writ appeal, observed that the writ petition against the SCN is not entertainable. We feel that the said observation may not be correct in every situation. This Court has consistently held that although ordinarily a writ petition against an SCN may not be entertained, however, the said proposition is not an inviolable rule. Interference at the stage of SCN is permissible in exceptional circumstances, such as where the notice suffers from patent lack of jurisdiction, reflects non-application of mind, is issued with a pre-determined or premeditated approach, amounts to an abuse of the process of law, or results in a violation of the principles of natural justice. In such situations, the High Court would be justified in exercising its jurisdiction under Article 226 of the Constitution to prevent manifest injustice."
The Court relied to its earlier decision in Union of India vs. VICCO Laboratories (2007) 13 SCC 270 : 2007 SCC OnLine SC 1420. The relevant pragraph reads:"“31. Normally, the writ court should not interfere at the stage of issuance of show-cause notice by the authorities. In such a case, the parties get ample opportunity to put forth their contentions before the authorities concerned and to satisfy the authorities concerned about the absence of case for proceeding against the person against whom the show-cause notices have been issued. Abstinence from interference at the stage of issuance of show-cause notice in order to relegate the parties to the proceedings before the authorities concerned is the normal rule. However, the said rule is not without exceptions. Where a show-cause notice is issued either without jurisdiction or in an abuse of process of law, certainly in that case, the writ court would not hesitate to interfere even
at the stage of issuance of show-cause notice. The interference at the show-cause notice stage should be rare and not in a routine manner. Mere assertion by the writ petitioner that notice was without jurisdiction and/or abuse of process of law would not suffice. It should be prima facie established to be so. Where factual adjudication would be necessary, interference is ruled out.”
Justice Mehta observed: "33. Thus, the rejection of challenge laid by the appellants to the SCN on the ground of non-maintainability was not justified in the peculiar facts of the case at hand."
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