The Unspoken Rule of FEMA: A Judgment That Puts Actions First - Is the 182 day rule, a deciding factor for residency?

A recent judgment by the Appellate Tribunal SAFEMA, New Delhi, in the case of Pradeep Mishra v. Special Director, Directorate of Enforcement [2025] 176 Taxmann.com 876 (SAFEMA - New Delhi), has brought the nuances of the Foreign Exchange Management Act (FEMA), 1999, into sharp focus. While a cursory reading of the judgment might suggest that residential status is solely determined by a person’s stay in the preceding financial year, a deeper analysis reveals a more complex and critical conclusion: an individual’s actions are paramount in determining their residential status under FEMA. 

This judgment, therefore, should not be viewed as a rigid reinterpretation of the law, but rather as a powerful reminder of how judicial bodies weigh an individual's conduct when assessing compliance.

The Facts of the Case and the Tribunal’s Ruling

The case involved Pradeep Mishra, an Indian citizen who, after working in Saudi Arabia, returned to India in May 2012 with the declared intention of settling permanently. He and his wife purchased agricultural land in India in August 2012, using funds from his Non-Resident External (NRE) savings account. Under FEMA regulations, a "person resident outside India" is prohibited from acquiring agricultural land.

The Adjudicating Authority imposed a penalty of ₹8 lakhs on Mishra for this contravention. In his appeal, Mishra argued that he should be considered a "person resident in India" as of May 2012 due to his intention to settle permanently. The tribunal, however, rejected this argument. It determined that to ascertain his residential status at the time of the land purchase in August 2012, they must look at the preceding financial year, which was 2011-12. Since Mishra had not stayed in India for more than 182 days during that period, he was classified as a person residing outside India, making his purchase of agricultural land a contravention.

Why the Judgment Should Not Be Taken at Face Value

While the tribunal’s reasoning appears to be a strict application of the 182-day rule, it overlooks the exception provided in Section 2(v)(i)(B) of FEMA. This clause states that a person of Indian origin who comes to India for employment or to carry on a business is considered a resident, regardless of their stay in the preceding year. Mishra's return to India for employment should have qualified him for this exception. The court, however, focused on the timing of his return in relation to the financial year being examined, a point that is a critical flaw in its legal reasoning.

The tribunal’s decision, therefore, seems to be a case of a rigid interpretation of one part of the law at the expense of another. Many professionals and academics have held that the tribunal took a sterner, literal view of the law and made it difficult for returning NRIs to conduct transactions in India. If this judgment were to be taken as a binding precedent that residential status is always determined by the preceding financial year, it would contradict the very purpose of FEMA's "purpose of stay" clause, which is designed to immediately grant resident status to individuals who are genuinely returning to India for long-term settlement.

The True Takeaway: Actions Speak Louder Than Intentions

The real lesson from this case lies not in the flawed application of the preceding year rule, but in the tribunal's consideration of the appellant's actions, which led to a reduction in his penalty. The tribunal observed that Mishra had funded the land purchase with his lawful earnings from abroad and "might not have been aware about the provisions of FEMA". It also acknowledged that he had deposited a pre-deposit of 25% of the penalty amount.

All through acquiring the properties, the Appellant did not re-designate the NRE Account as resident account and continued using his account to conduct transactions in India. It is submitted that the judgement makes an intricate inference that when a person has not re-designated his accounts then, he is still a non-resident Indian who has not cemented his intention to stay in India. Hence, the 182 days rule applies. 

Crucially, while the court upheld the contravention, it reduced the penalty from ₹8 lakhs to ₹2 lakhs, stating that the penalty should be "proportional to the contravention indulged in by the appellant". This decision demonstrates that while a person's good intentions are not a complete defense against a contravention, they are a significant factor in determining the severity of the penalty. The court also cited a Supreme Court judgment that declared that a penalty is attracted as soon as a contravention is established and that a guilty intention (or mens rea) is irrelevant in cases of civil contraventions.

This case is a stark reminder that under FEMA, individuals are held responsible for their actions, regardless of their intent. The appellant's failure to convert his NRE account, which is a contravention of FEMA, further underscores this point. The tribunal's decision to uphold the contravention but reduce the penalty based on a perceived lack of malicious intent highlights the importance of an individual's conduct. Ultimately, the judgment serves as an authority for the principle that while intentions are considered, actions are what matter in the eyes of the law.

If you have questions about how this impacts your immigration status or if you are a returning NRI, feel free to reach out to PnP Consulting Private Limited at info@pnpconsutling.in