2025 (10) TMI 1076 - HC - Money Laundering

Provisional attachment under Section 5 PMLA affirmed; coal allocation letter is property, proceeds of crime under Sections 2(1)(v), 2(1)(u), 3

Directorate of Enforcement Versus M/s. Hi-Tech Mercantile India Pvt Ltd & Ors. & Ors. And M/s. Prakash Industries Ltd And Anr & Anr.

The HC allowed the appeal, set aside the Single Judge's order, and upheld the Directorate's provisional attachment under Section 5 PMLA. It held the ... Money Laundering - fraudulent activities resulting in financial gains leading to proceeds of crime - allocation of the Chotia Coal Block in favour of M/s Prakash Industries Limited (PIL) - allocation letter can be construed as ‘property’ or not - misrepresentation in allocation of coal block leads to proceeds of crime making it an offence of money laundering - correctness in attaching the value of coal extracted - correctness in restricting the applicability of PMLA, pre-allocation, in view of the quashing of First FIR and Chargesheet. Maintainability of appeal - HELD THAT:- A perusal of the facts, in conjunction with the applicable statutory framework under the PMLA would show that actual question for consideration ought to have been, ‘whether the allocation letter constitutes ‗property’ within the meaning of Section 2(1)(v) of the PMLA; and if so, whether the said property was subsequently used or dealt with in a manner that enabled PIL to derive any financial gain, thereby generating ‗proceeds of crime’ as provided under Section 2(1)(u) of PMLA’. It is only in such circumstances that Section 3 of the PMLA could have been validly invoked - the LSJ, having incorrectly identified the preliminary legal issue, then proceeded to conclude that the offence of money laundering under Section 3 of the PMLA was not attracted in the present case. This inference, in the opinion of this Court, strikes at the fundamental core of the issue raised before the LSJ, making the findings legally unsustainable. Whether allocation letter construes as 'property' - HELD THAT:- The definition of ‘property’ as provided under Section 2(1)(v) of the PMLA, is inclusive and expansive, broadly including every description of asset provided thereunder, in form of a deed or instrument evidencing title or interest in such assets. To put it simply, the definition of ‘property’ as provided under the PMLA is broad and inclusive in its approach towards what constitutes as property within the contours of the Act. This statutory definition is further supported by the constitutional jurisprudence of India, reiterating the understanding of what constitutes as property in India under Article 300A of the COI, which recognizes property as inclusive of intangible interests and rights created through incorporeal assets. In the present case, the coal block allocation letter, although subsequently cancelled by the Supreme Court in ML Sharma [2014 (9) TMI 992 - SUPREME COURT], is an instrument evidencing a right or interest, namely, a right to obtain mining lease from the Government and extract coal through its utilisation. In accordance with, the definition of ‘property’ provided under both Black’s Law Dictionary and Section 2(1)(v) of the PMLA, such a right, once exercised and converted into economic gain becomes a form of property and the very foundation for what the Directorate has identified as proceeds of crime. Moreover, it is undisputed that the allocation letter was neither dormant nor kept in abeyance rather was utilised by PIL to derive substantial financial gains through coal excavation, leading to form the very foundation for the economic generation stated to be proceeds of crime by the Directorate. It is pertinent to note that, the act of allocation, in itself, may not constitute a complete offence; rather, it is the first step in a chain of subsequent events, carrying a cascading effect. These events begin with the procurement of the allocation, which is then followed by the actual extraction of coal, an act, if done on the basis of an unauthorised allocation, constitutes a separate illegal act - The allocation sets in motion the process through which the State Government is expected to act upon the recommendation made by the Central Government and facilitate the formalities flowing therefrom. This process leads to an initiation of series of administrative actions, which, if found to be tainted by criminality at the origin, ultimately results in usurpation of a public resource, which otherwise would rightfully vest in the State as a natural resource belonging to the general public at large. Whether misrepresentation in allocation of coal block leads to proceeds of crime making it an offence of money laundering? - HELD THAT:- Sections 2(1)(u) and 3 of the PMLA, when put together leads to infer that Section 3 criminalises any process or activity connected with proceeds of crime, which in turn includes property derived or obtained, directly or indirectly, by any person, as a result of criminal activity, relating to a scheduled offence and the value of such property. In the present case, PIL misrepresented facts and figures in the process of obtaining coal block allocations, which typically attracts offences under Sections 420 and 467 of the IPC and Section 13(1)(d) of the PCA. Thereafter, the coal block allocation letter obtained through such criminal activity conferred valuable rights in favour of PIL which enabled the party to secure mining leases from the government and subsequently undertake coal excavation. As a result, it led PIL to obtain financial benefits in the form of profits earned from the extraction and sale of coal or through the usage of the financial benefits to substitute or derive assets, which qualifies as proceeds of crime within the meaning of Section 2(1)(u) of the PMLA. The Supreme Court in Satyendar Kumar Jain v. Directorate of Enforcement [2024 (3) TMI 862 - SUPREME COURT] has clarified that the offence of money laundering is not limited to the final act of integration and remains ongoing as long as the proceeds are being dealt with. Accordingly, the continuing nature of money laundering, sustains the liability arising out of the PMLA for post-enactment activities involving such proceeds. Moreover, the source of funds stated to be spent by PIL remains unexplained, as such in the absence of a clear financial trail showing that the expenditure incurred by PIL was funded through untainted and legitimate means it cannot merely be presumed that the losses absolve the liability under the Act. In substance, the fallacious premise that “a negative plus a negative result in positive” cannot be invoked to defeat the legislative intent and mandate of the PMLA, since the statute focuses on the derivation of use of property obtained through a criminal activity and not on the eventual profit or loss incurred by a party. Whether the Directorate is justified in attaching the value of coal extracted? - HELD THAT:- In the present case, the Directorate’s evaluation of Rs. 951.77 crores corresponding to the coal excavated during the financial years from 2006-07 to 2014-2015, reflects the financial gain derived by PIL pursuant to attaining the coal block allocation through misrepresentation. The quantification reached by the Directorate as also elaborated in the preceding paragraphs is not constrained to the date of allocation, rather continues as long as the benefit from the tainted property subsists. In the aforesaid background, although it is the case of PIL that the quantification by the Directorate is baseless, no credible evidence to rebut the said quantification has been produced, thereby failing to discharge the onus of proof imposed upon it once the procedural presumption arises. Therefore, once the Directorate has made a prima facie case, establishing the predicate offence, its nexus to the proceeds and reason to believe, the burden shifted to PIL to prove that the property is untainted. Accordingly, the Directorate, is justified in attaching the “value” of coal extracted under Section 5 of the PMLA, when the pre-requisites of attachment has been satisfied. Correctness in restricting the applicability of PMLA, pre-allocation, in view of the quashing of First FIR and Chargesheet - HELD THAT:- The finding of the LSJ limiting the jurisdiction of the Directorate strictly to pre-allocation events, i.e. 04.09.2003, falls short of the intention of the PMLA and overlooks the continuing nature of the offence of money laundering recognised under explanation (ii) to Section 3 of the PMLA, which highlights that the said offence persists as long as the proceeds of crime are possessed, used, concealed, or projected as untainted. It is to note that, while the second chargesheet filed by the CBI may have confined itself to events leading upto the allocation, the PMLA is a standalone statute empowering the Directorate to investigate and act upon ancillary events as long as they are connected to the proceeds of crime. The Directorate is not confined to the timeframe or scope set out by the predicate agency. The LSJ ought not to have rendered conclusive findings premised on an outcome that lacks finality. More specifically, owing to the reason that, the quashing of the FIR and chargesheet was allowed at a preliminary stage, without delving into the examination of the facts, evidence and surrounding circumstances. Furthermore, when the LSJ invoked its extraordinary jurisdiction at the stage of issuance of SCN, relying on the principles laid down in Whirlpool Corporation v. Registrar of Trademarks, it rather became necessary to exercise judicial restraint. Thus, the LSJ must not have drawn definitive conclusion on the existence or absence of predicate offence at such a nascent stage - the financial benefits derived by PIL post-allocation, such as coal extraction, commercial exploitation, profit generation, or any asset substitution, form part of the economic chain flowing from the alleged tainted allocation. These are squarely within the scope of the Directorate’s jurisdiction under the PMLA. Therefore, the Directorate is legally justified in extending its actions beyond the pre-allocation phase, and the artificial cut-off date of 04.09.2003 cannot be used to curtail its statutory mandate. Thus, this Court has reached the conclusion that the issuance of the Provisional Attachment Order under Section 5 of the PMLA formulates a foundational executive action, the legality of which was challenged by PIL under Article 226 of the COI. Further, the coal block allocation letter dated 04.09.2003 obtained through misrepresentation constitutes ‘property’ under Section 2(1)(v) of the PMLA, whereas the illegal financial gains facilitated the generation of proceeds of crime under Section 2(1)(u) of the PMLA. Furthermore, PIL’s continued possession and use of these proceeds established the offence under Section 3 of the PMLA. Moreover, the Directorate has satisfied the statutory pre-requisites envisaged under Section 5 of the PMLA justifying the issuance of PAO. The Impugned Judgment passed by the learned Single Judge, which is under challenge herein, is hereby set aside - Appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the Letters Patent intra-court appeal is maintainable against a Single Judge's order that was exercised in the original writ jurisdiction under Article 226 of the Constitution. 2. Whether a provisional attachment order under Section 5(1) of the PMLA, followed by a show cause notice and complaint under Sections 5(5) and 8(1), is amenable to challenge before the High Court under Article 226 when such actions form a chain of consequences from an executive order. 3. Whether a coal block allocation letter constitutes 'property' within the meaning of Section 2(1)(v) of the PMLA. 4. Whether misrepresentations in obtaining a coal block allocation can render subsequent economic benefits (notably coal extracted and revenues) 'proceeds of crime' under Section 2(1)(u) and thereby attract the offence of money-laundering under Section 3 of the PMLA. 5. Whether the Directorate was justified in provisionally attaching the value of coal extracted as the equivalent value of proceeds of crime under Section 5 of the PMLA. 6. Whether the Single Judge erred in treating the date of allocation (04.09.2003) as a cut-off restricting the scope of PMLA action, in view of a prior quashed FIR and chargesheet and the existence of a subsequent FIR/chargesheet. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Maintainability of the intra-court appeal / scope of Article 226 Legal framework: Article 226 vests High Courts with original writ jurisdiction to issue prerogative remedies; Letters Patent procedure governs intra-court appeals from Single Judge to Division Bench. Challenges to executive acts are typically entertained under Article 226. Precedent treatment: The Court relied on principles (cited reasoning) that where an administrative/executive act is the root cause of subsequent adjudicatory steps, the writ remedy under Article 226 is properly invoked. Interpretation and reasoning: The Court found the Single Judge exercised original writ jurisdiction under Article 226 because the challenge targeted a foundational executive act (the provisional attachment) and its consequential steps (SCN, complaint). The prayers in the writ (original and amended) sought quashing of the executive PAO and consequential reliefs, indicating invocation of Article 226 rather than merely supervisory Article 227 review. Ratio vs. Obiter: Ratio - where a series of legal consequences stem from an executive order, the challenge lies within Article 226 and an intra-court appeal is maintainable; Obiter - comments on distinctness of Article 227 and status of adjudicating authority under PMLA. Conclusion: The intra-court appeal is maintainable because the Single Judge adjudicated under Article 226 on executive action and its legal consequences. Issue 2 - Amenability to writ when PAO, SCN and complaint are chained Legal framework: Section 5 PMLA (attachment) creates an executive power to provisionally attach where 'reason to believe' exists; Sections 5(5) and 8 provide the adjudicatory route. Judicial review under Article 226 is available against executive actions that are the foundation of further proceedings. Precedent treatment: The Court applied standard administrative law principles that a writ can challenge an executive root order producing downstream consequences; reliance on established jurisprudence permitting pre-adjudicatory review at the SCN stage where appropriate. Interpretation and reasoning: Because the PAO is the foundational executive act giving rise to SCN and complaint, the challenge to legality and jurisdiction of that PAO properly fell within writ jurisdiction. The Division Bench observed that the single issue could not be shoehorned into Article 227 supervisory review solely because downstream steps were quasi-adjudicatory. Ratio vs. Obiter: Ratio - executive orders that trigger statutory adjudicatory mechanisms can be challenged under Article 226; Obiter - delineation of limits where writ interference would be inappropriate is noted but not exhaustively framed. Conclusion: The High Court may entertain writ challenges to PAOs and resultant SCNs/complaints where those measures arise from an executive act alleged to be without jurisdiction or unlawful. Issue 3 - Whether allocation letter is 'property' under Section 2(1)(v) PMLA Legal framework: Section 2(1)(v) defines 'property' expansively - corporeal or incorporeal, tangible or intangible, including deeds and instruments evidencing title or interest; PMLA's object includes confiscation of property derived from money-laundering. Precedent treatment: The Single Judge had held allocation not to be property; the Division Bench re-examined that approach in light of statutory definition and contemporary understanding of intangible rights as property. Interpretation and reasoning: The Court adopted a broad textual and purposive interpretation: an allocation letter evidencing an exclusive right to obtain a mining lease and enabling commercial advantage constitutes an incorporeal asset within Section 2(1)(v). The fact that subsequent statutory clearances are required does not negate the instrument's character as a valuable right capable of economic exploitation and thus a form of property, particularly where the instrument is alleged to have been procured by criminal means. Ratio vs. Obiter: Ratio - an allocation/allotment letter conferring an exclusive economic right to pursue a mining lease can constitute 'property' under Section 2(1)(v) where it confers a commercial advantage and is instrumental in deriving economic benefits; Obiter - policy remarks on modern commerciality and intangible assets were ancillary. Conclusion: The allocation letter qualifies as 'property' for purposes of PMLA when it evidences an economic right exploited to derive gains. Issue 4 - Whether misrepresentation in allocation leads to proceeds of crime under Section 2(1)(u) and offence under Section 3 Legal framework: Section 2(1)(u) defines 'proceeds of crime' as any property derived/obtained (directly or indirectly) as a result of criminal activity relating to a scheduled offence, including the value of such property. Section 3 criminalises processes/activities connected with proceeds of crime (concealment, possession, acquisition, use, projecting/claiming as untainted), with Explanation (ii) treating such processes as continuing. Precedent treatment: The Court considered Supreme Court authorities (noted in the judgment) holding that money-laundering is a standalone offence dependent on existence of proceeds derived from scheduled offence and that processes can be continuing offences whose relevant date is dealing with proceeds, not necessarily the date of predicate offence. Interpretation and reasoning: The Court reasoned that where an allocation letter is procured by misrepresentation (scheduled offences), the allocation enables extraction and sale of coal - economic benefits from which are derivatively the proceeds of crime. Those proceeds, when possessed, used, or concealed, attract Section 3. The Court rejected the Single Judge's narrower framing ('whether allocation per se is proceeds of crime'), holding instead that the correct question is whether the allocation is property and whether subsequent use produced proceeds of crime connected to scheduled offences; the continuing nature of money-laundering allows inclusion of post-allocation acts tied to the tainted instrument. Ratio vs. Obiter: Ratio - misrepresentation that procures an instrument of economic advantage can lead to proceeds of crime when that instrument is used to derive economic benefit, and dealing with such proceeds attracts Section 3; Obiter - discussion rejecting 'net benefit' defence as inconsistent with statutory aims. Conclusion: Misrepresentations in obtaining an allocation can render subsequent economic gains 'proceeds of crime' under Section 2(1)(u); processes dealing with those gains fall within Section 3. Issue 5 - Validity of provisional attachment of the value of coal under Section 5 Legal framework: Section 5(1) permits provisional attachment where an authorised officer has 'reason to believe' a person possesses proceeds of crime and that non-attachment would frustrate confiscation proceedings; the provisos prescribe triggering conditions (e.g., report under Section 173 CrPC) though other statutory grounds also exist. Precedent treatment: The Court recognised jurisprudence that Directorate must record reasons to believe supported by material and establish nexus between predicate offence, proceeds, and proposed attachment; once prima facie case is made, burden shifts to respondent to show property is untainted. Interpretation and reasoning: The Directorate quantified proceeds as the value of coal excavated during specific years; the Court held that when the prerequisites (nexus to scheduled offence, material providing reason to believe, recorded valuation) are satisfied prima facie, attachment of the 'value' of extracted coal is permissible. Absence of persuasive rebuttal/evidence from the respondent means the Directorate's quantification stands at prima facie stage for attachment purposes. Ratio vs. Obiter: Ratio - provisional attachment of the equivalent value of proceeds (here, coal extracted) is lawful where statutory preconditions and recorded reasons to believe are met and a prima facie nexus to scheduled offence is shown; Obiter - observations on evidentiary burden shifting were explanatory. Conclusion: The provisional attachment of the value of extracted coal was justified on the material and prima facie nexus presented; respondent failed to discharge burden to show the property was untainted. Issue 6 - Relevance of 04.09.2003 cut-off and effect of quashed first FIR Legal framework: The PMLA is a standalone statute; Explanation (ii) to Section 3 recognises continuing nature of money-laundering; Section 5 provisos identify triggers but do not strictly confine temporal scope of attachment to the predicate report's temporal ambit. Precedent treatment: The Court noted authority that money-laundering may be ongoing and is not limited solely by the timeframe of the predicate offence or the charging document; also observed that interim quashing of earlier FIRs may be subject to appeal/superior court review. Interpretation and reasoning: The Court found the Single Judge's restriction to pre-allocation acts (cut-off date) misconceived: the Directorate may act on proceeds generated post-allocation that are causally connected to a tainted allocation, and the second FIR/chargesheet remained subsisting and was not quashed. The first FIR's quashing did not eliminate enquiry into proceeds where a later FIR and ECIR existed; PMLA's scheme permits investigation into continuing processes tied to proceeds irrespective of the earlier FIR's preliminary quashing, particularly while that quashing remains under challenge. Ratio vs. Obiter: Ratio - the temporal scope of PMLA attachment/investigation is not restricted to the exact period covered by a particular predicate charge sheet where continuing processes produce proceeds linked to a tainted instrument; Obiter - directions about judicial restraint at nascent stages were advisory. Conclusion: The Single Judge erred in adopting the allocation date as an absolute cut-off; the Directorate could validly consider post-allocation proceeds connected to the allegedly tainted allocation, particularly where the second FIR and ECIR remained extant. Overall Disposition 1. The Court concluded that the Single Judge's core framing and resulting findings were legally unsustainable in material respects. 2. The allocation letter, when obtained by misrepresentation and used to derive economic gains, qualifies as 'property' and the consequent benefits can constitute 'proceeds of crime' under Sections 2(1)(v) and 2(1)(u) respectively; dealing with such proceeds draws Section 3. 3. The Directorate's provisional attachment under Section 5 of the PMLA was justified on the material and prima facie nexus shown; the impugned quashing of the PAO and consequential proceedings was set aside and the appeals allowed.