2021 (6) TMI 990 - HC - Money Laundering

Court dismisses Criminal Original Petitions, upholds prosecution in financial irregularities case

The court dismissed the Criminal Original Petitions, upholding the prosecution of MJPL (A3) and Suresh Khatri (A4) in a case involving allegations of ... Money Laundering - illegal diversion of funds - schedule offence - supply of Gold Bullion or there was only paper transaction - Section 33 of the Sale of Goods Act - HELD THAT:- In the case at hand, the picture is totally different. The criminal Court can independently come to a conclusion that the 22 fixed deposits were proceeds of crime and they were projected as untainted money from MJPL (A3) and Suresh Khatri (A4). The other distinguishing feature in this case is that, the total proceeds of crime is ₹ 318.75crores, out of which, the 22 fixed deposits represent only ₹ 143crores and for the balance amount which has gone into the kitty of MJPL (A3), they can be prosecuted as abettors of the offence of money laundering committed by KGPL (A1). Lastly, the order of the Adjudicating Authority in this case, has not attained finality and the same is pending before the Tribunal and therefore, on this ground too, the criminal prosecution cannot be quashed. In a simple private complaint case, the Magistrate may not have any materials dehors the sworn statement of the complainant to take cognizance of the offences alleged in the complaint. In such cases, it will be desirable, if the Magistrate passes an order giving reasons for taking cognizance of the offence and issuing process. In this case, along with the complaint, the Enforcement Directorate has filed 56 documents and also the statements recorded under the PML Act, in support of the allegations in the complaint - The prosecution has to prove the offence, by adducing evidence and this opportunity has to be given to the prosecution in this case too. The prosecution of MJPL (A3) and Suresh Khatri (A4) cannot be said to be unfounded - Petition dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether findings of an Adjudicating Authority under the PML Act that attached properties are not proceeds of crime can, by themselves, oblige a criminal Court to quash parallel criminal prosecution under the PML Act? 2. Whether an order of cognizance by the criminal Court (Special Court) under Section 204 Cr.P.C. can be quashed for lack of application of mind where the complaint was filed by the Enforcement Directorate with documentary material. 3. Whether reliance on a forensic audit report that disclaims use for judicial purpose renders the entire prosecution unsustainable at the stage of quashing. ISSUE-WISE DETAILED ANALYSIS - Issue 1: Effect of Adjudicating Authority's findings under the PML Act on parallel criminal prosecution Legal framework: The PML Act provides for interim attachment by the Enforcement Officer under Section 5, adjudication of such attachment by the Adjudicating Authority under Section 8, and criminal trial/forfeiture powers vested in the Special Court under Sections 8(5)-(8). The Adjudicating Authority's role is limited to confirming or setting aside interim attachment; ultimate confiscation/trial remains with the criminal forum. Precedent Treatment: Authorities addressing whether administrative/adjudicatory findings bind criminal proceedings have held that such findings may, in appropriate circumstances, justify quashing prosecutions (examples include precedents where exoneratory adjudication rendered criminal prosecution purposeless). However, those precedents involved detailed scrutiny of the adjudicatory record, finality/weight of the adjudicatory finding, and circumstances where no useful purpose would be served by a trial. Interpretation and reasoning: The Court emphasises the limited remit of the Adjudicating Authority under the PML Act - it decides only the propriety of interim attachment and lacks power to order final confiscation. The criminal Court, therefore, can independently adjudicate whether assets constitute proceeds of crime. Where (a) the assets under challenge represent only part of the alleged proceeds of crime, (b) there exist contested factual questions as to whether the transactions were paper transactions or genuine trade, and (c) the adjudication has not attained finality (pending on appeal), an adjudicatory order setting aside attachment does not automatically oust criminal prosecution. The Court distinguishes fact patterns where quashing was appropriate because the earlier adjudication conclusively negated the statutory violation, from the present facts where substantial disputed factual matrix remains and where the Adjudicating Authority's order is not final. Ratio vs. Obiter: Ratio - An Adjudicating Authority's order under Section 8 of the PML Act is not ipso facto binding on a criminal Court; the criminal Court may independently examine whether the impugned properties are proceeds of crime, especially when the adjudicatory role is limited and the order is not final. Obiter - Observations comparing the scheme of the PML Act with other enactments (FERA, Customs, Central Excise) serve to illustrate distinction but do not lay down a broader rule beyond the specific statutory architecture. Conclusions: The Court concludes that the Adjudicating Authority's exculpatory finding in the interim attachment proceedings did not mandate quashing of the criminal prosecution under the PML Act given (i) the limited nature of adjudicatory powers under the PML Act, (ii) existence of disputed facts including that only part of alleged proceeds were the subject of attachment, and (iii) pendency of the adjudicatory order on appeal. Criminal prosecution accordingly may proceed. ISSUE-WISE DETAILED ANALYSIS - Issue 2: Validity of cognizance order and requirement of reasons at the stage of taking cognizance under Section 204 Cr.P.C. Legal framework: Section 204 Cr.P.C. requires the Magistrate to form an opinion that 'there is sufficient ground for proceeding' when taking cognizance on a police report or complaint; standards for summoning/cognizance are less exacting than at framing of charge. Precedent Treatment: The Court analyses divergent authorities: precedents holding that the cognizance order must disclose application of mind and reasons (where a person not in charge-sheet was summoned without adequate basis) and other precedents holding failure to record detailed reasons for cognizance does not vitiate taking cognizance where materials are on record. The Court cites decisions affirming that at the cognizance/summons stage detailed evaluation of merits is not required. Interpretation and reasoning: The Court distinguishes cases where a court added an accused who was not in the charge-sheet without reasons from situations where the investigating agency files a complaint/charge-sheet with supporting materials. Where the Enforcement Directorate filed a complaint accompanied by documents and statements (56 documents and recorded statements in this case), the standard for taking cognizance is satisfied and the lack of elaborate reasons in the cognizance order does not invalidate it. The Court notes that in private complaint situations, more care may be required, but here the prosecution produced voluminous material prompting cognizance. Ratio vs. Obiter: Ratio - Failure to record detailed reasons in a cognizance order does not necessarily invalidate cognizance where the court has applied its mind to materials placed before it; the presence of substantial documentary material accompanying a prosecuting agency's complaint lessens the necessity for extensive reasoning in the cognizance order. Obiter - Remarks on comparative applicability to private complaints and ancillary procedural authorities are illustrative. Conclusions: The Court upholds the cognizance order, finding that the Special Court's taking of cognizance was supported by materials filed by the Enforcement Directorate and did not exhibit absence of application of mind warranting quashing. ISSUE-WISE DETAILED ANALYSIS - Issue 3: Legal significance of a forensic audit report that disclaims judicial use Legal framework: Investigation commonly relies on forensic audits; however, forensic reports that disclaim admissibility or use as sole basis for conviction cannot, by themselves, determine final criminal liability. Criminal prosecution requires proof through admissible evidence tested at trial. Precedent Treatment: Courts have recognised that investigative reports, including forensic audits, can trigger further investigation but are not conclusive proof of guilt or necessarily fatal to prosecution when their own disclaimers are considered. Interpretation and reasoning: The Court notes that the forensic audit report initiated investigation; its disclaimer that it cannot be used for judicial purposes does not preclude the prosecution from using admissible evidence discovered in the investigation or from testing the allegations at trial. The Court emphasises that no report can alone convict; the prosecution must adduce evidence and the accused must be afforded the opportunity to defend at trial. Ratio vs. Obiter: Ratio - A forensic audit report that disclaims judicial use does not automatically render the prosecution unsustainable at the stage of quashing where other admissible materials exist and contested factual issues require trial. Obiter - Comments stressing caution in relying solely on such reports for conviction. Conclusions: The Court rejects the contention that the forensic audit's disclaimer necessitates quashing; it holds that prosecution should be given opportunity to lead evidence and that the forensic audit does not vitiate the criminal proceedings at this stage. OVERALL CONCLUSION The Court dismisses the petitions seeking quashing of the criminal prosecution: (a) an Adjudicating Authority's interim-order setting aside attachment under the PML Act does not automatically preclude criminal proceedings given the limited adjudicatory role under the statute, disputed factual matrix and non-finality of the order; (b) the cognizance order was not vitiated for lack of reasons given the materials placed before the Special Court; and (c) the forensic audit report's disclaimer does not, by itself, render prosecution unfounded.