2025 (11) TMI 1029 - AT - Money Laundering

Appeals dismissed; provisional attachment under money-laundering law upheld via three-limb proceeds-of-crime test, allowing relatives' asset attachment

AT dismissed the appeals and upheld the provisional attachment order under the money-laundering legislation, finding no basis to interfere. The tribunal ... Money Laundering - Provisional Attachment Order - proceeds of crime - Attachment of property of the director and relatives without analyzing as to whether they are recipients of the proceeds of crime directly or indirectly. - allegation of irregularities and misappropriation in sanctioning various loans between the year 2015 and 2017 - extension of loans with over valuation - HELD THAT:- It is unable to accept the arguments of the Ld. Counsel for the appellants to cause interference in the impugned order because “proceeds of crime” has three limbs clarified by the Apex Court in the case of Vijay Madanlal Choudhary Vs. Union of India [2022 (7) TMI 1316 - SUPREME COURT (LB)] and elaborately dealt by the High Court of Delhi in the case of Directorate of Enforcement Vs. Axis Bank & Ors. [2019 (4) TMI 250 - DELHI HIGH COURT] and Prakash Industries Ltd. Vs. Directorate of Enforcement [2022 (7) TMI 877 - DELHI HIGH COURT]. The judgment of the High Court of Punjab and Haryana in the case of Seema Garg Vs. Deputy Director, Directorate of Enforcement, [2020 (3) TMI 460 - PUNJAB & HARYANA HIGH COURT] was also considered the said issue. The order quoted above covers the issues raised by the appellants to question the attachment of the properties acquired prior to commission of crime. It is for the value equivalent to the proceeds by using the second limb of the definition due to non-availability of “proceeds of crime” in the hands of the appellant having been vanished or siphoned off. It is unable to cause interference in the impugned order and accordingly appeals fail and are dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether confirmation of a Provisional Attachment Order under the Prevention of Money Laundering Act, 2002 (PMLA) was justified where the Enforcement Directorate alleged proceeds of crime arising from sanction and disbursal of overvalued loans. 2. Whether properties held by relatives or third parties can be provisionally attached as 'proceeds of crime' or as property of equivalent value under Section 2(1)(u) of the PMLA, including where such properties were acquired prior to the commission of the scheduled offence. 3. What is the correct statutory interpretation of 'proceeds of crime' under Section 2(1)(u) of the PMLA - specifically the scope and interplay of its three limbs (property derived/obtained directly or indirectly; the value of any such property; and property equivalent in value held within the country or abroad) - and what safeguards apply to third-party interests. 4. Whether a provisional attachment may be confirmed where the investigating agency contends that tainted assets are not traceable or have been siphoned off, and what evidentiary showing is required at the provisional stage (including assessment of equivalence in value and disclosure of source by alleged third-party owners). 5. The legal effect of pending criminal trial on confirmation of provisional attachment orders under the PMLA. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of confirmation of Provisional Attachment Order under PMLA Legal framework: Confirmation of provisional attachment under Section 26 of the PMLA follows recording of ECIR and preliminary investigation; the concept of 'proceeds of crime' in Section 2(1)(u) governs what may be attached. Precedent treatment: The Tribunal applied binding guidance from a three-Judge bench on the definition of 'proceeds of crime' and followed the analytical framework set out by the Delhi High Court (Axis Bank) and subsequent High Court decisions that interpret the three limbs; conflicting views from other High Courts were considered and distinguished where inconsistent with the Apex Court authority. Interpretation and reasoning: The Tribunal evaluated the ECIR, the investigations, and the particulars of 33 loan transactions to conclude that certain identified properties were directly traceable as proceeds of crime while others were attached as equivalent value where tainted assets were alleged to be unavailable. The Tribunal required, and found lacking, satisfactory disclosure of source of funds from persons in whose names properties were registered post-offence. Ratio vs. Obiter: The holding that confirmation was permissible on the record before the Tribunal is ratio; ancillary observations about application of statutory limbs and evidentiary requirements are treated as explanatory ratio applicable to similar cases. Conclusion: On the facts and evidence presented, confirmation of the provisional attachment was upheld in respect of properties found to be direct proceeds and those attached as equivalent value where proceeds were not traceable. Issue 2 - Attachment of properties held by relatives/third parties and properties acquired prior to the offence Legal framework: Section 2(1)(u) contemplates three categories: (i) property derived/obtained (directly or indirectly) by criminal activity, (ii) the value of any such property, and (iii) property equivalent in value held within the country or abroad; procedural safeguards for third parties are recognised in case law. Precedent treatment: The Tribunal followed the Axis Bank interpretation and the three-Judge apex dictum emphasising para 68 (on the breadth of the second limb), and relied on subsequent High Court authority (Prakash Industries) that declined to follow Seema Garg where it conflicted with the Apex Court's approach. Decisions treating the second limb narrowly (to limit it to property outside India or only post-offence acquisitions) were distinguished. Interpretation and reasoning: The Tribunal held that the second limb (value of any such property) cannot be rendered redundant; it permits attachment of untainted property (including that in third-party names or acquired prior to the offence) as property equivalent in value when the tainted property cannot be traced or has been siphoned off. However, such attachment requires a tentative assessment of wrongful gain and scrutiny of the claimed bona fide source - the absence of credible bank statements, tax returns or other proof of lawful source by relatives/third parties supported attachment. Ratio vs. Obiter: The proposition that properties owned by relatives or acquired prior to the offence may be attached as equivalent value where tainted property is untraceable, subject to safeguards and evidentiary requirement, is ratio and central to the decision. Observations distinguishing contrary High Court views are ratio insofar as they enforce the Apex Court interpretation. Conclusion: Attachment of properties in the names of relatives/third parties and of pre-offence acquisitions was sustained as lawful where (a) the agency showed tainted assets were not available/vanished, (b) a tentative equivalence in value to illicit gains was assessed, and (c) third parties failed to satisfactorily disclose lawful source; bona fide third-party rights remain protected where adequately demonstrated. Issue 3 - Proper construction of 'proceeds of crime' and applicability of limbs Legal framework: Section 2(1)(u) must be read as comprising three distinct but complementary limbs separated by 'or', each operative in different factual contingencies; interpretive canons and legislative purpose (prevention and recovery of laundered proceeds) inform construction. Precedent treatment: The Tribunal adhered to the three-bench apex ruling clarifying the three limbs and to Delhi High Court exegesis (Axis Bank) that elaborated safeguards and concept of 'deemed tainted property'. Conflicting High Court lines (that would restrict the second limb severely) were considered inconsistent with apex guidance and therefore not followed. Interpretation and reasoning: The Tribunal reasoned that (i) the first limb covers property obtained directly/indirectly from the scheduled offence (tainted property); (ii) the second limb allows for attachment of the value of such property when the tainted property is not available (enabling attachment of untainted property as equivalent value); and (iii) the third limb addresses cross-border scenarios. Treating the second limb as dependent on the first would nullify legislative intent and render the provision ineffectual in cases of layering, siphoning and dissipation of tainted assets. Ratio vs. Obiter: The interpretive holding that the definition contains three operative limbs and that the second limb authorises attachment of property equivalent in value (subject to safeguards) is ratio. Conclusion: The three-limb interpretation of 'proceeds of crime' is affirmed; the second limb is a necessary legislative tool to secure equivalent value where tainted assets cannot be located, and its application must be accompanied by assessment of illicit gain and protection of bona fide third-party rights. Issue 4 - Evidentiary standard, assessment of equivalence and protection of third-party interests Legal framework: While provisional attachment operates at an interlocutory stage, confirmation requires prima facie satisfaction: (a) some assessment (even tentative) of wrongful gain/value of proceeds, (b) nexus or circumstantial indicia linking property to proceeds or justification for equivalence, and (c) consideration of any third-party claims and supporting disclosures. Precedent treatment: Reliance on Axis Bank and subsequent High Court pronouncements that mandate tentative valuation of illicit gains and prescribe safeguards for bona fide third parties (e.g., proof of consideration, bank statements, tax returns) before attachment of deemed-tainted properties. Interpretation and reasoning: The Tribunal applied these standards to the record: where properties were shown to be acquired after the offence or registered in relatives' names post-offence with inadequate source disclosure, attachment for equivalent value was justified; where properties were directly traceable to proceeds, they were treated as direct proceeds. The Tribunal rejected contentions that pre-offence acquisitions are categorically immune, reiterating that third-party bona fide rights remain protected if satisfactorily established. Ratio vs. Obiter: The prescription of evidentiary expectations at the confirmation stage (tentative valuation of illicit gain; requirement for third parties to substantiate lawful source) constitutes ratio guidance for future cases. Conclusion: Confirmation is permissible on a prima facie record that shows non-availability of tainted assets, a reasoned equivalence assessment, and failure by third parties to prove lawful source; bona fide third-party rights acquired for valid consideration remain a recognized defence to be examined on the full evidence. Issue 5 - Effect of pending trial on provisional attachment Legal framework and reasoning: Confirmation of provisional attachment is interlocutory and remains subject to the final outcome of the criminal trial where allegations of scheduled offences will be adjudicated; the attachment secures assets during prosecution and does not determine guilt. Conclusion: The provisional attachment as confirmed will subsist subject to eventual trial outcome; confirmation at the interlocutory stage does not preclude later relief if the trial establishes lawful acquisition or otherwise does not sustain the claims of proceeds of crime. FINAL CONCLUSION On the material before it the Tribunal upheld confirmation of the provisional attachment in respect of (a) properties found to be direct proceeds of crime and (b) certain properties in the hands of relatives/third parties or acquired prior to the offence that were attached as equivalent value where tainted assets were alleged to be unavailable and where third parties failed to satisfactorily disclose lawful source. The Tribunal applied and followed the three-limb construction of 'proceeds of crime', endorsed the Axis Bank/Delhi High Court approach and the apex bench exposition, and declined to follow inconsistent High Court precedents to the extent they conflict with apex authority. The provisional attachments were confirmed but remain subject to the ultimate result of the pending criminal trial.