Regulatory Appeals (SEBI SAT, ITAT)

8.6.1 Introduction: Regulatory Appeals in Cryptocurrency Context

Cryptocurrency businesses and investors may face regulatory actions from multiple authorities including SEBI (if tokens are classified as securities), Income Tax Department (VDA taxation under Section 115BBH), FIU-IND (AML compliance), and RBI (payment system issues). Understanding how to challenge adverse regulatory decisions through appropriate appellate mechanisms is essential for cryptocurrency practitioners.

This part examines the regulatory appellate framework relevant to cryptocurrency, focusing on the Securities Appellate Tribunal (SAT) for securities-related matters, Income Tax Appellate Tribunal (ITAT) for VDA taxation disputes, and writ jurisdiction for other regulatory challenges.

Regulatory Actions Affecting Cryptocurrency

When SEBI Jurisdiction Applies to Crypto

SEBI's jurisdiction over cryptocurrency remains evolving. Currently, SEBI may assert jurisdiction when:

• Token as Security: If a token meets the definition of "securities" under Securities Contracts (Regulation) Act, 1956 - particularly if it represents investment contract, debt, or equity rights
• Regulated Entity Involvement: If SEBI-registered intermediaries (mutual funds, portfolio managers, stockbrokers) deal in cryptocurrency
• Market Manipulation: Potential jurisdiction over manipulation of prices if crypto assets are eventually brought under securities framework
• Future Regulation: Expected cryptocurrency legislation may expand SEBI's mandate

Importance of Timely Appeals

Regulatory orders have immediate effect unless stayed. Key considerations:

• Strict limitation periods - missing deadline may preclude appeal
• No automatic stay - separate application required
• Regulatory orders can cause immediate business disruption
• Reputation damage from publicized regulatory action

8.6.2 Securities Appellate Tribunal (SAT)

The Securities Appellate Tribunal (SAT) is the specialized appellate body for appeals against orders of SEBI, IRDAI, and PFRDA. If SEBI takes action against cryptocurrency-related securities or regulated entities involved in crypto, SAT is the appropriate appellate forum.

Constitutional Basis and Jurisdiction

SAT was established under Section 15K of the SEBI Act, 1992. Its jurisdiction includes:

"Any person aggrieved by an order of the Board... may prefer an appeal to the Securities Appellate Tribunal having jurisdiction in the matter." Section 15T, SEBI Act, 1992

Appealable Orders

• Orders imposing monetary penalty under SEBI Act
• Orders of debarment from accessing securities market
• Directions under Section 11 or 11B of SEBI Act
• Orders under various SEBI regulations (listing, takeover, insider trading, etc.)
• Orders refusing registration or cancelling registration

Limitation Period

Section 15T(2) provides a limitation period of 45 days from the date of receiving the order. The Tribunal may condone delay up to an additional 45 days if sufficient cause is shown. Total maximum: 90 days.

Appeal Procedure

Step 1: Filing Appeal

File Form A (prescribed under SAT Rules) with:

• Certified copy of impugned order
• Memo of appeal with grounds
• Copies of relevant documents relied upon
• Affidavit verifying facts
• Vakalatnama if represented by advocate
• Appeal fees (prescribed rates)

Step 2: Stay Application

If seeking stay of impugned order, file separate stay application with grounds for interim relief.

Step 3: Response by SEBI

SEBI files reply/counter-affidavit within stipulated time.

Step 4: Hearing

Oral hearing before SAT bench. Typically single member for penalties up to Rs. 5 crores; two members for higher.

Step 5: Order

SAT passes reasoned order - may confirm, modify, or set aside SEBI order.

Powers of SAT

SAT has wide powers under Section 15U:

• Confirm, modify, or set aside the order appealed against
• Remand matter to SEBI for fresh consideration
• Pass any order as circumstances require
• Full power to review facts and law

Appeal from SAT to Supreme Court

Section 15Z provides appeal to Supreme Court on "any question of law arising out of" SAT order. This is a second appeal limited to questions of law - SAT's factual findings are generally final.

8.6.3 Income Tax Appellate Tribunal (ITAT)

The Income Tax Appellate Tribunal (ITAT) is the final fact-finding authority for income tax disputes. With VDA taxation under Section 115BBH and TDS under Section 194S, cryptocurrency tax disputes are increasingly likely. ITAT will be the primary forum for challenging adverse assessments and penalties related to cryptocurrency taxation.

ITAT Jurisdiction

ITAT hears appeals against orders of Commissioner (Appeals) or Principal Commissioner (Appeals) under Section 253 of the Income Tax Act, 1961.

Appealable Matters for Crypto

• Assessment orders determining VDA income and tax liability
• Orders treating VDA gains as business income vs capital gains
• Penalty orders for non-disclosure or misreporting
• TDS defaults under Section 194S
• Addition of unexplained VDA investments under Section 69
• Disallowance of expenditure claims on VDA transactions

Appeal Process

First Appeal: Commissioner (Appeals)

Before ITAT, assessee must exhaust first appeal to CIT(A):

• Appeal filed within 30 days of assessment order (Section 246A)
• Heard by Commissioner (Appeals)
• Full factual and legal review

Second Appeal: ITAT

Appeal to ITAT from CIT(A) order:

Common Cryptocurrency Tax Issues Before ITAT

1. Classification of VDA Income

Section 115BBH applies flat 30% rate regardless of characterization. However, disputes may arise about:

• Whether activity constitutes "transfer" under Section 2(47)
• What constitutes "cost of acquisition" (Section 115BBH(2)(a))
• Year of chargeability (point of transfer)

2. Cost of Acquisition Disputes

Section 115BBH(2)(a) allows deduction only for cost of acquisition. Issues include:

• Proof of cost for old acquisitions
• FIFO vs specific identification for cost allocation
• Treatment of transaction fees
• Mining costs as cost of acquisition

3. Unexplained Investments (Section 69)

If assessee cannot explain source of VDA investment, additions under Section 69 may be made. ITAT reviews:

• Whether investment source adequately explained
• Creditworthiness and genuineness of source
• Documentary evidence of acquisition

Appeal from ITAT

Appeal from ITAT lies to High Court under Section 260A only on "substantial question of law." Factual findings of ITAT are final. High Court reviews legal interpretation, not fact appreciation.

8.6.4 SEBI Settlement Proceedings (Regulations 2018)

The SEBI (Settlement Proceedings) Regulations, 2018 provide a mechanism for settling proceedings without admission of guilt. For cryptocurrency-related enforcement actions by SEBI, settlement may offer a pragmatic resolution avoiding prolonged litigation and market uncertainty.

Settlement Framework

Key features of SEBI Settlement Regulations, 2018:

"Any person against whom any proceeding has been initiated or may be initiated for the alleged default... may, notwithstanding anything contained in any other law for the time being in force, file an application for settlement of the proceeding." Regulation 3, SEBI (Settlement Proceedings) Regulations, 2018

Types of Proceedings Eligible for Settlement

• Quasi-judicial proceedings (penalty proceedings under various acts/regulations)
• Administrative proceedings (directions, debarment)
• Not available for criminal prosecutions

Settlement Terms

Settlement typically involves:

1. Settlement Amount: Disgorgement of wrongful gains/losses avoided plus additional amount
2. Non-Monetary Terms: Undertaking not to repeat violations, enhanced compliance measures
3. No Admission: Settlement without admission or denial of findings
4. Confidentiality: Settlement order published but detailed negotiations confidential

Settlement Procedure

Determination of Settlement Amount

Regulation 8 provides factors for determining settlement terms:

• Gravity and nature of charges
• Wrongful gains or losses avoided
• History of regulatory actions against applicant
• Degree of cooperation extended
• Impact on securities market
• Any mitigating or aggravating circumstances

Strategic Considerations for Crypto Cases

Confidentiality Provisions

Regulation 23 provides that settlement proceedings are confidential. However:

• Settlement order is published on SEBI website
• Order contains summary of allegations and settlement terms
• Negotiations and internal discussions remain confidential

8.6.5 Stay Applications and Interim Relief

Regulatory orders typically take immediate effect, potentially causing irreparable harm to business operations. Obtaining stay of adverse orders pending appeal is often critical. This section examines stay application strategies before SAT and ITAT.

Stay Before SAT

Rule 5 of SAT (Procedure) Rules, 2000 provides for stay applications:

Requirements for Stay

• Prima Facie Case: Arguable grounds for success on appeal
• Balance of Convenience: Greater harm from refusing stay than granting it
• Irreparable Injury: Harm that cannot be compensated in money if order executed
• No Delay: Prompt filing of stay application

Conditions for Stay

SAT typically grants stay subject to conditions:

• Deposit of portion of penalty amount (typically 10-25%)
• Bank guarantee for balance
• Undertaking not to dispose of assets
• Time-bound disposal of appeal

Stay Before ITAT

Section 254(2A) of Income Tax Act provides for stay by ITAT:

"The Appellate Tribunal may, after giving both parties an opportunity of being heard, pass such orders thereon as it thinks fit and may order to stay the recovery of the amount in dispute." Section 254(2A), Income Tax Act, 1961

Six-Month Time Limit

Important: Stay granted by ITAT is valid only for 180 days unless extended. Extension requires special circumstances.

Stay Application Contents

• Copy of CIT(A) order being appealed
• Copy of appeal memo filed
• Grounds for stay (prima facie case, balance of convenience, irreparable injury)
• Undertaking regarding cooperation in early disposal
• Details of assessee's financial position

High Court Stay (Writ Jurisdiction)

If SAT/ITAT refuses stay, High Court may grant interim relief under Article 226:

• Writ petition challenging regulatory order
• Interim stay application pending writ disposal
• Usually requires exhausting statutory appellate remedy first
• Exception: where statutory remedy is not efficacious or order patently without jurisdiction

8.6.6 Writ Jurisdiction for Regulatory Challenges

Where no statutory appellate remedy exists, or where fundamental rights are affected, or where regulatory action is patently without jurisdiction, writ petitions under Articles 226 and 32 of the Constitution provide remedy. For certain cryptocurrency regulatory actions, writ jurisdiction may be the primary recourse.

When Writ Jurisdiction Applies

Situations for Direct Writ

• RBI Directions: No statutory appeal provided; writ is remedy
• Jurisdictional Challenge: Regulator acting without authority (e.g., SEBI acting on assets not falling under "securities")
• Fundamental Rights: Violation of Article 19(1)(g) (right to trade) or Article 21 (arbitrary action)
• Procedural Violation: Complete lack of natural justice
• Policy Challenge: Challenging regulatory policy as ultra vires

IAMAI v. RBI: The Precedent

Grounds for Writ in Crypto Context

1. Ultra Vires/Jurisdictional Excess

Challenge if regulator exceeds statutory mandate:

• SEBI acting on assets not qualifying as "securities"
• RBI regulating cryptocurrency without statutory authority
• ED action without predicate offence

2. Violation of Fundamental Rights

• Article 14 - Arbitrary or discriminatory regulatory action
• Article 19(1)(g) - Unreasonable restriction on trade
• Article 21 - Deprivation without fair procedure

3. Procedural Impropriety

• Action without show cause notice
• Denial of hearing opportunity
• Failure to consider representations

8.6.7 Strategic Approaches to Regulatory Appeals

Effective regulatory appeal strategy requires careful analysis of the order being challenged, selection of appropriate forum and grounds, evidence gathering, and coordination of legal and public relations approaches. This section provides a strategic framework for cryptocurrency regulatory appeals.

Pre-Appeal Assessment

1. Analyze the Order: Identify precise findings, legal basis invoked, and penalty/direction imposed
2. Identify Weaknesses: Factual errors, legal misinterpretations, procedural defects
3. Assess Strength of Defense: Evaluate evidence available to counter findings
4. Consider Settlement: Evaluate whether settlement offers better outcome than litigation
5. Litigation Cost-Benefit: Compare appeal cost and duration against penalty/direction impact

Forum Selection Considerations

Building the Appeal Record

Documentary Evidence

• Complete response to show cause notice with enclosures
• Records of hearings (notes, transcripts if available)
• Contemporaneous documents supporting defense
• Expert opinions (technical, legal, forensic)
• Comparative treatment of similar cases

Legal Arguments

• Challenge to regulator's jurisdiction over crypto
• Interpretation of applicable provisions
• Procedural defects in original proceedings
• Proportionality of penalty/direction
• Precedents in favor

Parallel Actions

Consider coordination with:

• Criminal Proceedings: If parallel criminal case, coordinate defense
• Other Regulators: If multiple regulators involved, ensure consistent positions
• Industry Associations: Collective representation for policy challenges
• Public Relations: Manage reputational impact of regulatory action