2025 (9) TMI 130 - AT - Money Laundering

Appeal dismissed; provisional attachment of equivalent-value property upheld after alleged proceeds vanished and payments undisclosed

Ekta Kathotia Versus The Deputy Director, Directorate of Enforcement, Guwahati

Ekta Kathotia Versus The Deputy Director, Directorate of Enforcement, Guwahati - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether a property acquired prior to the sanction/disbursement of the alleged tainted funds or prior to registration of the FIR can be attached under the Prevention of Money Laundering Act, 2002 as 'proceeds of crime' or as property of equivalent value when the actual tainted proceeds are not traceable. 2. Whether the noticee discharged the statutory obligation under Section 8(1) of the Act of 2002 to disclose the source of acquisition of the attached property and the legal consequences of failure to do so. 3. Whether, on the materials of the investigation (cash deposits in a joint account, transfers to the noticee's account, non-production of bank statements/ITRs and failure to appear for questioning), the provisional attachment and its confirmation are justified as attachment of property equivalent in value to proceeds of crime. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Attachment of property acquired prior to commission/sanction: legal framework The Tribunal construes Section 2(1)(u) (definition of 'proceeds of crime') as comprising three distinct limbs: (i) property derived or obtained, directly or indirectly, by a person as a result of criminal activity relating to a scheduled offence; (ii) the value of any such property (i.e. property of equivalent value); and (iii) where property is taken or held outside the country, the property equivalent in value held within the country or abroad. The second limb permits attachment of 'untainted' property as deemed tainted insofar as it is equivalent in value when the actual tainted property is not available. Issue 1 - Precedent treatment (followed/distinguished) The Tribunal follows and relies on the three-limb interpretation as expounded in Vijay Madanlal Choudhary and elaborated by the Delhi High Court (Axis Bank), rejecting narrower readings (e.g., Kerala High Court in Satish Motilal Bidri and other decisions that would make the second limb redundant). The Tribunal cites subsequent High Court decisions (Prakash Industries, Seema Garg) that uphold the Axis Bank approach and treats contrary precedents as either inapposite or overridden by higher/binding statements. Issue 1 - Interpretation and reasoning The Tribunal reasons that construing Section 2(1)(u) to exclude properties acquired prior to the scheduled offence would frustrate the legislative purpose by enabling siphoning/vanishing of tainted proceeds; the second limb was inserted to permit attachment of property of equivalent value where tainted property cannot be traced. The Tribunal emphasizes statutory text ('or the value of any such property'), purposive interpretation, and safeguards articulated in Axis Bank (including tentative assessment of illicit gain and protection of bona fide third-party rights). Issue 1 - Ratio vs. Obiter Ratio: The Tribunal's binding conclusion is that properties acquired prior to the commission of the scheduled offence are amenable to attachment under the second limb of Section 2(1)(u) as property of equivalent value when the proceeds are not traceable, subject to the safeguards and tests laid down in Axis Bank and related authorities. Issue 1 - Conclusion The Tribunal holds that attachment of a property purchased before sanction/disbursement of the alleged tainted loan is not per se impermissible; in cases where proceeds have been siphoned off or are not available, attachment of property of equivalent value is authorized and appropriate if the statutory safeguards are met. Issue 2 - Duty to disclose source under Section 8(1): legal framework Section 8(1) affords the noticee an opportunity to disclose the source of acquisition of property alleged to be proceeds of crime. The onus to provide documents and reasonable explanation compatible with the acquisition rests on the noticee; failure to furnish bank statements, income-tax returns or other proof undermines the explanatory case. Issue 2 - Precedent treatment (followed) The Tribunal applies the statutory scheme and the established practice of requiring the noticee to place relevant financial evidence before the Adjudicating Authority/Tribunal. No special or novel precedent is invoked to alter this obligation. Issue 2 - Interpretation and reasoning On the facts, payments towards consideration were effected by multiple cheques and cash deposits into a joint account of the noticee and her father, followed by transfers to the noticee's account. The noticee admitted employment but failed to produce bank statements or income-tax returns for 2008-09 and 2009-10 to show legitimate sources/savings. Summons to the father and other family members were not complied with for full explanation. The Tribunal finds that, given these omissions and the cash-deposit trail, the noticee did not discharge the statutory burden to explain the source. Issue 2 - Ratio vs. Obiter Ratio: Failure to disclose/document the source under Section 8(1), when evidence points to suspicious cash flows and transfers, supports confirmation of provisional attachment. Obiter: Observations on what specific documents could have been produced (bank statements, IT returns) are illustrative of expected compliance but not novel legal principles. Issue 2 - Conclusion The Tribunal concludes the noticee failed to discharge the statutory obligation to disclose source of acquisition; this failure weighs in favor of confirming attachment. Issue 3 - Sufficiency of investigative material to justify attachment as equivalent value: legal framework Where the actual tainted proceeds are not traceable, attachment of property of equivalent value is permissible, provided there is at least prima facie material indicating illicit gain and a nexus between the accused's criminal activity and the untraced proceeds; tentative assessment of wrongful gain and preservation of third-party bona fide rights are required safeguards. Issue 3 - Precedent treatment (followed/distinguished) The Tribunal relies on the principles in Vijay Madanlal Choudhary and Axis Bank for (i) the permissibility of attaching equivalent-value property and (ii) the need for assessment of wrongful gain. It distinguishes decisions holding otherwise by reference to the higher-bench authority and purposive statutory reading. Issue 3 - Interpretation and reasoning Factually, the investigation revealed a large CC loan misappropriated and cash withdrawals of Rs. 9,81,15,000/-, with funds routed through multiple accounts. The appellant's father was implicated in the conspiracy and made repeated cash deposits into a joint account with the appellant which were then transferred to the appellant's account and used for vendor payments for the flat. Given disappearance/vanishing of proceeds and these cash-movement indicators, the respondents had material to connect the source of the flat's consideration with the accused's funds or to treat the flat as property equivalent in value to proceeds of crime. The appellant's non-production of bank/IT records and non-cooperation strengthened that inference. Issue 3 - Ratio vs. Obiter Ratio: On the presented facts, the investigative material (cash deposits in joint account, transfers, failure to explain source) constituted sufficient prima facie basis to treat the property as amenable to attachment as property of equivalent value and to confirm the provisional attachment. Obiter: Detailed hypotheticals about alternative documentary proofs the appellant might have produced are illustrative recommendations, not binding findings. Issue 3 - Conclusion The Tribunal finds the provisional attachment properly confirmed: the property was attached not necessarily as direct proceeds of crime but effectively as property of equivalent value in light of vanished/untraceable proceeds and the unexplained cash-deposit trail involving the accused's father and transfers to the noticee. Cross-references and final disposition The Tribunal cross-references its reasoning on the three-limb definition of 'proceeds of crime' (Issue 1) with the noticee's statutory duty to disclose (Issue 2) and the factual matrix of unexplained cash flows (Issue 3) to reach the net conclusion that confirmation of attachment was justified. The appeal is dismissed for failure to establish a legally sufficient or factually credible source of funds and for conformity with the interpretative framework and safeguards prescribed in the cited authorities.