2025 (11) TMI 10 - AT - Money Laundering

Order quashed for failing to provide relied-upon documents including FIRs with show-cause notice, property and accounts restored

Trivandrum Apollo Towers Pvt. Ltd. Versus The Deputy Director Directorate of Enforcement, Cochin

AT held the impugned order unlawful for failure to supply relied-upon documents (RUDs), including FIRs, with the show-cause notice, violating principles ... Money Laundering - freezing appellant’s bank accounts - seizure of cash and movable assets/digital devices belonging to the appellant company - substantial share-holding or other funds invested in the appellant company at time of seizure or not - relevant relied-upon documents (RUDs) which formed reasons to believe, though specifically requested, were never provided to the appellant - principles of natural justice - HELD THAT:- The appellant has cited the judgment of the Hon’ble Delhi High Court in JK Tyre and Industries Ltd. and Ors. Vs. Directorate of Enforcement and Ors. [2021 (10) TMI 1176 - DELHI HIGH COURT] in support of the contention that the respondent directorate ought to have supplied all the RUDs to the appellant along with the Show Cause Notice and failure to do so renders the order unlawful. The submission of the appellant is that RUDs were not supplied to it with the Show Cause Notice as was mandatory, and at least a part of the same were never supplied to the appellant. A specific averment to this effect was made in the appeal memo wherein it was stated that the appellant was not provided with the documents expressly relied-upon in the O.A and the Show Cause Notice in support of the allegations against the appellant. A list of such documents was also provided which includes FIRs filed against Moosa Haji, Deposit Certificates, Balance Sheets and IT Returns etc - At the same time, it is also stated that non-supply of certain “ancillary documents” such as specific FIRs does not vitiate the proceedings as the SCN and the O.A sufficiently disclosed the basis of the respondent’s actions. The reply of the respondent makes it clear firstly, that the RUDs were not supplied to the appellant along with the SCN as required by the law, and, secondly, that at least some of the RUDs were never supplied to the appellant, including the FIRs - perusal of the Reasons to Believe makes it evident that far from being “ancillary” the FIRs were fundamental documents on the basis of which the entire case was initiated by the ED. In the light of issues raised by the appellant, including failure to draw a cogent link between the proceeds of crime derived by the accused and the funds of the appellant company, the meagre shareholding of Moosa Haji in the appellant company, the period of accepting unsecured loans being prior to the period of commission of the alleged predicate offence, repayment of substantial part of unsecured loans even prior to the registration of the FIRs, lack of any right of a shareholder under law in the properties of the company in which he is shareholder, excessively disproportionate seizure etc., are not gone into, having become infructuous as the overarching issue of legality the impugned order has already been decided in favour of the appellant and against the Directorate. The respondents are directed to return the seized properties and records and to de-freeze the bank accounts of the appellant company within six weeks of receipt of a certified copy of this order - appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the Adjudicating Authority complied with the statutory obligation to supply the documents relied upon (RUDs) along with the Show Cause Notice under Section 8(1) of the PMLA read with the Adjudicating Authority (Procedure) Regulations, 2013. 2. Whether non-supply (partial or complete) of RUDs that formed the basis of the 'reasons to believe' vitiates the retention/freezing/seizure proceedings under Section 17 of the PMLA. 3. Whether, given a proved procedural infirmity in issuance of the SCN (non-supply of RUDs), the Appellate Tribunal may remit the matter to the Adjudicating Authority for fresh consideration or is obliged to set aside the impugned order and direct return/defreezing of assets. 4. Ancillary: Whether other contentions raised (lack of nexus between alleged proceeds of crime and frozen assets; small shareholding; prior repayment of loans; disproportionality of seizure) require adjudication once the procedural defect is found. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Obligation to supply RUDs with the Show Cause Notice Legal framework: Section 8(1) of the PMLA and the Adjudicating Authority (Procedure) Regulations require service of the show cause notice accompanied by the documents/materials relied upon by the Authority in forming the 'reason to believe'. Rule/regulatory mandate contemplates transmission of 'material in possession' relied upon. Precedent Treatment: The Court relied upon the principle articulated in the decision (referred to by the parties) which holds that the Adjudicating Authority must serve all documents it has relied upon in forming the reason to believe; withholding or partial supply is impermissible. Interpretation and reasoning: The Tribunal examined the record and correspondence. The respondent conceded that only limited documents (OA, freezing orders, retention orders, panchanamas) were supplied initially and that some RUDs (notably FIRs and core materials referenced in the Reasons to Believe) were never provided or were provided much later and only after specific requests. The Tribunal held that the FIRs and other documents were not 'ancillary' but formed the core basis of the reason to believe. Ratio vs. Obiter: Ratio - non-supply of RUDs that materially underpin the reason to believe violates the statutory/regulatory mandate and constitutes a fatal procedural irregularity vitiating the adjudicatory process. Obiter - characterization of some documents as 'ancillary' by the respondent was rejected as improper. Conclusion: The Adjudicating Authority/ED failed to comply with the mandatory obligation to serve all RUDs along with the SCN; this omission is fatal to the validity of the impugned order. Issue 2 - Effect of non-supply of RUDs on Section 17 actions (freezing/seizure/retention) Legal framework: Section 17(1)/(1A) provide for seizure/freezing where there is a 'reason to believe' that assets are proceeds of crime; Section 8 mandates procedural fairness in adjudication of retention under Section 17(4). Regulations require transparency and service of evidence relied upon. Precedent Treatment: The Tribunal applied the principles from the cited High Court authority emphasizing that evidence relied upon must be placed before the affected party to enable effective adjudication; unilateral withholding or late disclosure undermines fair hearing. Interpretation and reasoning: Because the Reasons to Believe expressly relied on FIRs, statements and financial records, and those documents were not supplied at the time of SCN, the affected party was deprived of meaningful opportunity to rebut or address the material basis for freezing/seizure. The Tribunal found the omission was not merely technical but struck at the core of procedural fairness required before confirming retention. Ratio vs. Obiter: Ratio - non-supply of RUDs which form the basis of the reason to believe invalidates the adjudicatory process under Section 8 and vitiates confirmation of retention/freezing under Section 17(4). Obiter - discussion that certain categories of documents cannot be treated as 'ancillary' if relied upon to form the reason to believe. Conclusion: The retention/freezing order could not be sustained because it was founded on a process that failed to supply the material relied upon, thereby denying the appellant a fair hearing. Issue 3 - Remedy: Remand versus setting aside and return/defreezing Legal framework: The Tribunal's remedial power on appeal and interplay with precedents limiting remand by Appellate Tribunal; absence/presence of specific statutory power to remit; duty to give effective relief where procedural invalidity established. Precedent Treatment: The Tribunal noted and applied a subsequent High Court decision holding that the Appellate Tribunal lacks a specific power of remand to send matters back to the Adjudicating Authority in certain circumstances. That decision constrained the Tribunal's options. Interpretation and reasoning: Given the demonstrated fatal procedural lapse (non-supply of RUDs) and the jurisprudential constraint on remand, the Tribunal concluded it could not remit for fresh adjudication and therefore set aside the impugned order. The Tribunal expressly refrained from entertaining the merits (nexus, shareholding, loans, disproportionality) as those issues became infructuous once the impugned order was invalidated on procedural grounds. Ratio vs. Obiter: Ratio - where the adjudicatory order is vitiated by mandatory procedural non-compliance and remand is precluded by applicable precedent, the proper relief is to set aside the impugned order and direct return/defreezing of assets. Obiter - commentary on inability to remand under the cited decision. Conclusion: The Tribunal set aside the impugned retention/freezing order and directed return of seized properties and defreezing of bank accounts within a fixed period; the Tribunal declined to adjudicate the substantive contentions on merits as they were rendered infructuous. Issue 4 - Necessity to adjudicate substantive contentions once procedural defect is found Legal framework: Principle that where a fundamental procedural infirmity invalidates the decision, appellate authority need not decide merits which become infructuous; however, where remedy requires it, merits may be considered on fresh adjudication. Precedent Treatment: The Tribunal followed established practice of not deciding merits once a fatal procedural flaw is found and remedial orders are practicable. Interpretation and reasoning: The Tribunal explicitly recorded many substantive arguments (lack of nexus, minor shareholding, timing of loans, repayment, shareholder rights, disproportionality) but held that since the impugned order was set aside on procedural grounds, those issues need not be considered and were left open for any fresh proceedings compliant with law. Ratio vs. Obiter: Ratio - where the underlying adjudicatory process is vitiated, subsidiary factual/legal disputes need not be adjudicated in that appeal. Obiter - observations on the substantive contentions remain undecided and thus non-binding. Conclusion: Substantive challenges were rendered infructuous by the Tribunal's finding on procedural non-compliance and therefore were not adjudicated; they remain open for any lawful process thereafter. FINAL CONCLUSIONS 1. The Adjudicating Authority/ED failed to comply with the mandatory requirement to serve all RUDs relied upon in forming the 'reasons to believe' along with the SCN; such failure vitiates the adjudicatory process under Section 8 read with applicable Regulations. 2. The impugned order confirming retention/freezing/seizure under Section 17 was set aside for that fatal procedural defect; remand was not ordered due to binding authority constraining the Tribunal's remedial powers. 3. Consequent directions were issued for return of seized properties and defreezing of bank accounts within a specified period; substantive issues raised on nexus, shareholding, loans and proportionality were left undecided as infructuous.