Mumbai University Solved Question Papers
Law Relating to Customs and Foreign Exchange
Previous Year Question Paper with Solution
LLM · Group 2 Business Law
2025-26 Examination
munotes.in
Mumbai
LLM Group 2 Business Law Law Relating to Customs and Foreign Exchange 2025-26 Question Paper with Solutions
Get access to whole semester resourcesSemester Pass
MU LLM student group
Free to join
First published on munotes.in on 12 August 2026.
Published by munotes.in, Mumbai.
Model answers written and edited by the munotes.in editorial desk.
Passages from this volume may be quoted, in print, online or by an AI system, with credit: name munotes.in and link to this volume's page. The volume may not be reproduced as a whole. Full terms at munotes.in/content-license.
munotes.in is an independent study resource for students of the University of Mumbai. It is not affiliated with the University of Mumbai, and is not endorsed by it.
The University does not publish an official answer key for this paper. The answers in this volume are model answers, written to show how a full-mark answer is built. They are a study aid, not an authority on what an examiner marked.
The question paper reproduced here is the paper as set by the University of Mumbai at the 2025-26 examination.
The answers in this volume state the law as it stands today, not as it stood when the paper was set, and four changes alter answers here. The Customs and Central Excise Settlement Commission ceased to accept applications after 31 March 2025 and ceased to operate from 1 April 2025 under the Finance Act 2025, its work passing to an Interim Board for Settlement of three revenue officers with no judicial member, so immunity from prosecution under section 127H is no longer obtainable. FEMA has had no Appellate Tribunal of its own since 26 May 2017, the SAFEMA Tribunal serving under a substituted section 18 with sections 20, 22, 24, 25, 26 and 29 to 31 omitted. Section 6(3) was omitted on 15 October 2019, moving non-debt capital account transactions to the Central Government. And from 1 May 2025 section 18(1B) requires a provisional assessment to be finalised in two years and section 18A allows a voluntary post-clearance revision of an entry.
Contents
The questions below are the paper as the University of Mumbai set it at the 2025-26 examination, in the order it was set.
MarksPage
The Paper as Set
The questions in this volume are the questions asked at the 2025-26 examination, reproduced as the University of Mumbai set them, in the order it set them. Nothing has been reworded, added or left out. Only the answers are ours. See the original question paper.
Duration 3 hours · Total marks 100 · 7 questions answered
Instructions printed on the paper
- N.B: Please read the Instructions carefully. Do not disclose your identity or mark any inscriptions, signages etc. anywhere on the answer sheets. Use Examples / Citations / Case Laws references, wherever required.
How to use this volume
Solve the paper first, under exam conditions and against the clock. Then read the answers here and mark your own. Reading a solution before attempting the question feels productive and teaches very little, because recognising an answer is not the same as being able to write one.
SECTION I
Form 97875. Attempt any four questions, all questions carry 25 marks
any four of seven · 100 Marks
1.Discuss in elaborate details, the nature of Contraventions, Penalties and Compounding as provided under the Foreign Exchange Management Act.[25]
Answer
For full marks, cover: organise this answer around the three classes of contravention and what the Act does with each, because that is how the machinery actually works and it avoids the flat recital that this stem usually attracts; first the classification and what makes a breach a contravention rather than an offence; then class one, reporting failures, which end in compounding; class two, substantive contraventions, which are adjudicated and penalised; class three, undisclosed foreign assets, where compounding is excluded and imprisonment returns; and close on the enforcement provisions and the one section Parliament has never brought into force.
The nature of the breach: a contravention, not an offence
Section 13(1) attaches liability to a person who contravenes any provision of this Act, or any rule, regulation, notification, direction or order issued in exercise of the powers under this Act, or any condition subject to which an authorisation is issued by the Reserve Bank. Four consequences follow from the choice of the word "contravenes".
There is no mens rea requirement. The section attaches to the fact of the contravention and not to any intention to contravene, which is why a delay caused by an accountant's oversight is as much a contravention as a deliberate evasion, and why the difference between them shows up in the quantum rather than in liability.
There is no criminal court and no arrest for the ordinary breach. The Directorate of Enforcement investigates under section 37 with the powers of an income-tax authority under the Income-tax Act, 1961, and FERA's section 35 power of arrest was deliberately not reproduced.
Liability arises "upon adjudication", so it is not self-operating: an Adjudicating Authority under section 16 must find the contravention on a written complaint by an authorised officer, after a hearing.
The standard of proof is the preponderance of probabilities, not proof beyond reasonable doubt.
The substantive obligations whose breach constitutes the contravention are few. Section 3 forbids dealing in or transferring foreign exchange or foreign security to a person who is not an authorised person, making a payment to or for the credit of a person resident outside India, receiving a payment on behalf of such a person otherwise than through an authorised person, and entering into a financial transaction in India as consideration for acquiring an asset outside India, its Explanation to clause (c) deeming a payment received on a non-resident's instructions without a corresponding inward remittance to have been received otherwise than through an authorised person, which is how hawala is caught.
Section 4 forbids a resident from acquiring, holding, owning, possessing or transferring foreign exchange, foreign security or immovable property outside India. Section 6 regulates capital account transactions. Sections 7 and 8 require the export declaration and the realisation and repatriation of proceeds. Section 10(5) and (6) impose duties on and through the authorised person.
Class one: reporting and procedural contraventions, which end in compounding
This is by far the largest class in practice and any elaborate answer must say so. The commonest FEMA proceeding is not an impermissible transaction but a late filing: Form FC-GPR on the allotment of shares to a non-resident, Form FC-TRS on a transfer between a resident and a non-resident, the annual return on foreign liabilities and assets, or an export bill unrealised beyond the period specified under section 8.
For this class the operative provision is section 15, not section 13. Section 15(1) permits any contravention under section 13 to be compounded, on an application made by the person committing it, within one hundred and eighty days from the date of receipt of the application, by the Director of Enforcement or such other officers of the Directorate of Enforcement and officers of the Reserve Bank as may be authorised in this behalf by the Central Government. Section 15(2) provides that once compounded, no proceeding or further proceeding shall be initiated or continued against the person in respect of that contravention.
The governing rules are the Foreign Exchange (Compounding Proceedings) Rules, 2024, notified by the Department of Economic Affairs on 12 September 2024 in supersession of the 2000 Rules, made under section 46 read with section 15. They fix the compounding authorities and their monetary competence, the procedure on an application, and the post-compounding steps; they raise the application fee from five thousand to ten thousand rupees plus goods and services tax; and they permit digital payment of the fee and of the compounding amount.
Four features of compounding should be brought out because they explain why this class never reaches adjudication. It is voluntary and applicant-driven, so no authority can compound of its own motion. It is available before or during adjudication, and in practice an application suspends the adjudication. It extinguishes the contravention itself, not merely the penalty, because section 15(2) speaks of no proceeding being initiated or continued. And because the Reserve Bank publishes its compounding orders, the trade has a body of guidance on what is treated as venial and what is not, which functions as the working law of this field.
The criticism that follows is worth making. Because most contraventions are compounded, the body of reasoned decisions interpreting sections 3, 6, 7 and 8 is thin. A statute whose principal output is a priced administrative order develops very little jurisprudence, and when a genuinely contested question of construction arises there is little authority to decide it.
Class two: substantive contraventions, which are adjudicated and penalised
Where the contravention is substantive, an investment in a prohibited sector, a receipt beyond a sectoral cap, an unrealised export where no reasonable steps were taken, or a dealing outside the authorised-person channel, the matter goes to adjudication and section 13 does the work.
Section 13(1) fixes the penalty and the figures must be exact. A penalty up to thrice the sum involved in such contravention where such amount is quantifiable; up to two lakh rupees where the amount is not quantifiable; and where such contravention is a continuing one, a further penalty which may extend to five thousand rupees for every day after the first day during which it continues.
Two points about the drafting deserve comment. The words are "up to", so the maximum is a ceiling and the Adjudicating Authority must apply his mind to quantum and give reasons, taking account of whether the contravention was technical or substantive, whether any gain accrued, and whether it was voluntarily disclosed. And the two lakh rupee figure applies only where the sum involved is not quantifiable, which in practice is confined to reporting failures with no attributable amount.
Section 13(2) adds confiscation. The Adjudicating Authority may, in addition to any penalty, direct that any currency, security or any other money or property in respect of which the contravention has taken place shall be confiscated to the Central Government, and further direct that the person's foreign exchange holdings be brought back into India or retained outside India in accordance with directions. The Explanation extends "property" to deposits in a bank into which the property was converted, Indian currency into which it was converted, and any other property resulting from that conversion, so a change of form cannot defeat the order.
Section 11(3) is a separate and much smaller penalty against an authorised person, for contravening a direction of the Reserve Bank or failing to file a return: up to ten thousand rupees, with an additional penalty up to two thousand rupees for every day of a continuing contravention. The disparity is deliberate, because the authorised person is a regulated intermediary and not the beneficiary of the transaction.
Section 42 extends liability to those behind an entity. Where the contravener is a company, every person in charge of and responsible to the company for the conduct of its business, and the company, are deemed guilty, subject to a defence that the contravention took place without his knowledge or that he exercised all due diligence; and any director, manager, secretary or other officer with whose consent or connivance, or by whose neglect, it occurred is also liable. The Explanation provides that "company" means any body corporate and includes a firm or other association of individuals, and that "director" in relation to a firm means a partner.
Section 43 ensures the liability survives the contravener. A right, obligation, liability, proceeding or appeal arising in relation to section 13 does not abate on death or insolvency but devolves on the legal representative or the official receiver or official assignee, with a proviso confining the legal representative's liability to the extent of the inheritance or estate.
Class three: undisclosed foreign assets, where the civil character ends
Sections 13(1A) to (1D) and section 37A, all inserted with effect from 9 September 2015, create a separate and much harsher regime, and an elaborate answer must treat it as a class of its own.
Section 13(1A): where a person is found to have acquired foreign exchange, foreign security or immovable property situated outside India of aggregate value exceeding the threshold prescribed under the proviso to sub-section (1) of section 37A, he is liable to a penalty up to three times the sum involved and confiscation of the value equivalent, situated in India.
Section 13(1C): he is, in addition to the penalty imposed under sub-section (1A), punishable with imprisonment for a term which may extend to five years and with fine.
Section 13(1B): the Adjudicating Authority may, after recording the reasons in writing, recommend the initiation of prosecution, and if the Director of Enforcement is satisfied he may, after recording the reasons in writing, direct prosecution by filing a criminal complaint through an officer not below the rank of Assistant Director. Section 13(1D): no court shall take cognizance of an offence under section 13(1C) except on a complaint in writing by an officer not below the rank of Assistant Director referred to in section 13(1B).
Section 37A supplies the machinery. An Authorised Officer prescribed by the Central Government, who has reason to believe recorded in writing that foreign exchange, foreign security or immovable property situated outside India is suspected to be held in contravention of section 4, may by order seize the value equivalent, situated within India; the proviso bars seizure where the aggregate value abroad is less than the prescribed value.
The order and the material must be placed before the Competent Authority, an officer not below the rank of Joint Secretary, within thirty days; the Competent Authority must dispose of the matter within one hundred and eighty days by confirming or setting aside the order, after hearing the Directorate and the aggrieved person, the period of any judicial stay being excluded with a further thirty days allowed after its vacation. Section 37A(5) gives an appeal directly to the Appellate Tribunal.
Two features of this class are decisive. Section 37A(6) provides that nothing contained in section 15 shall apply to this section, so a case of undisclosed foreign assets cannot be compounded at all. And the proviso to section 37A(4) offers a way out that is an incentive rather than a sanction: if at any stage of the proceedings the aggrieved person discloses the asset and brings it back into India, the Competent Authority or the Adjudicating Authority may pass such order as it deems fit, including setting aside the seizure.
Enforcement, and the provision that has never commenced
Section 14 provides civil imprisonment, and it is enforcement of a debt rather than punishment of a wrong. A person who fails to make full payment of the penalty within ninety days from the date on which the notice for payment is served is liable to civil imprisonment; but no order may be made unless the Adjudicating Authority has issued a show cause notice and is satisfied, for reasons recorded in writing, either that the defaulter has, after the issue of the notice, dishonestly transferred, concealed or removed property with the object or effect of obstructing recovery, or that he has, or has had since the notice, the means to pay and refuses or neglects to do so.
A person arrested under a warrant must be brought before the Authority within twenty-four hours; the proviso to section 14(9) allows a period not exceeding fifteen days in custody or on security to satisfy the arrears before a detention order; section 14(11) fixes the term at up to three years where the demand exceeds one crore rupees and up to six months in any other case; section 14(12) provides that release does not discharge the liability but bars a second arrest under the same certificate; and the Explanation to section 14(6) deems the karta to be the defaulter where the defaulter is a Hindu undivided family.
Section 14A has never been brought into force, and pointing that out is worth doing. It would authorise the Adjudicating Authority to empower an officer of Enforcement not below the rank of Assistant Director to recover arrears of penalty with the powers of an income-tax authority and the procedure of the Second Schedule to the Income-tax Act, 1961. The India Code footnote records that it "shall stand inserted (date to be notified) by Act 28 of 2016, section 229", and no commencement notification has ever been issued. A decade after enactment, the alternative to civil imprisonment that Parliament provided does not exist.
The nature of a contravention, judicially fixed
The modern authority on the civil character of a FEMA breach is Vijay Karia v. Prysmian Cavi e Sistemi SRL, (2020) 11 SCC 1, and it is worth working out because it decides the point in a commercial setting rather than in an enforcement one. The facts are worth setting out because they are a foreign exchange case in commercial dress.
An Italian cable manufacturer and its Indian joint venture partners fell out; the London Court of International Arbitration made awards directing the Indian shareholders to sell their shares to the foreign party at a discount to fair market value. Enforcement in India was resisted under section 48 of the Arbitration and Conciliation Act, 1996 on the ground that a sale to a non-resident at a discounted price offends the exchange control law, then the pricing guidelines and now the Non-debt Instruments Rules, and so is contrary to the public policy of India.
The Supreme Court enforced the awards. It held that a contravention of a provision of an enactment is not synonymous with a contravention of the fundamental policy of Indian law, and that a breach of FEMA or of the rules made under it does not reach that threshold. The reason given is the one that matters for this answer: a FEMA contravention is remediable, because permission may be granted after the event and the contravention may be compounded under section 15, so the transaction is not void and the law is not defied by enforcing the award.
Why it bears on this question. It answers the first word of the question with authority. The Supreme Court treated a FEMA breach as remediable, because it may be permitted after the event or compounded under section 15, and made that the reason for a substantive holding. That is a judicial statement of the classification on which this whole answer rests.
The principle that governs the penalty
On quantum and on the exercise of the power to penalise at all, the governing authority is Hindustan Steel Ltd v. State of Orissa, (1969) 2 SCC 627, decided on 4 August 1969. A government undertaking sold bricks, steel and cement, which it had procured for its own construction, to the contractors building its factory, and was assessed to sales tax as a dealer and penalised for failing to register. It was held liable to the tax.
But the penalty was set aside, and the reasoning is general. A penalty is quasi-criminal; the authority is not bound to impose one merely because it is lawful to do so; and a penalty should not be imposed for a technical or venial breach, or where the breach flows from a bona fide belief that the person is not liable. What is required is deliberate defiance of the law, contumacious or dishonest conduct, or a conscious disregard of obligation.
Why it bears on this question. Section 13(1) sets a ceiling and not a tariff, and this decision supplies the principle behind the discretion the word 'up to' confers: a penalty is quasi-criminal, is not to be imposed merely because it is lawful, and is not for a technical or venial breach or one flowing from a bona fide belief.
Conclusion
Conclusion. The nature of a breach under FEMA is civil, and that classification decides everything: no mens rea, no criminal court, no arrest, liability only upon adjudication, and proof on the preponderance of probabilities. The Act then treats three classes of contravention quite differently.
Reporting and procedural failures, which are the great majority, end under section 15, which permits any contravention to be compounded on the applicant's own application within one hundred and eighty days of its receipt, by the Director of Enforcement or authorised officers of the Directorate and the Reserve Bank, under the Foreign Exchange (Compounding Proceedings) Rules, 2024 notified on 12 September 2024; and section 15(2) then bars any proceeding or further proceeding.
Substantive contraventions are adjudicated and penalised under section 13(1) at up to thrice the sum where quantifiable, up to two lakh rupees where not, and five thousand rupees a day if continuing, with confiscation under section 13(2) following the property into whatever it has become, a much smaller supervisory penalty against an authorised person under section 11(3), vicarious liability under section 42 reaching partners as well as directors, and survival of the liability on death or insolvency under section 43.
The third class is where the civil character ends. For foreign exchange, foreign security or immovable property held outside India above the section 37A threshold, sections 13(1A) to (1D) impose a penalty of three times the sum, confiscation of the value equivalent in India and imprisonment up to five years, cognizance requiring a complaint by an officer not below the rank of Assistant Director; section 37A permits seizure of equivalent Indian assets with a Competent Authority of Joint Secretary rank deciding within one hundred and eighty days; and section 37A(6) excludes compounding altogether, subject only to the incentive in the proviso to section 37A(4) that a person who discloses the asset and brings it back may have the seizure set aside.
Enforcement of an unpaid penalty is by civil imprisonment under section 14 after ninety days, capped at three years above one crore rupees and six months below, section 14A having been enacted in 2016 and never notified.
The rest of the answers
The first answer is free. The rest come with the LL.M. Business Law Semester 2 solved papers.
You have read the question paper and its first answer in full. Buy the solved papers once and you can read every answer of every solved paper in this semester.
Notes + Solved papers: ₹798 Already bought it? Sign in
Or solved papers only: ₹499
Or notes only: ₹499
The question paper itself stays free, as does the syllabus and module one of every subject.
Found an error in this volume? Report it and we will check it against the paper.