Properties Upheld as Proceeds of Crime Despite Pre-Offence Purchase; Appellant Fails Section 8(1) PMLA Burden

The AT under SAFEMA upheld the provisional attachment of properties linked to a shell company involved in diversion of bank funds, treating them as "proceeds of crime" or their "value" under the PMLA, even though the properties were acquired before the alleged bank fraud period. The Tribunal rejected the appellant-entity's argument that pre-offence acquisition insulated the properties from attachment, emphasizing that a restrictive interpretation would defeat the Act's object. The AT noted that the appellant failed to discharge the statutory burden under Section 8(1) to prove legitimate sources of acquisition. Finding no infirmity in the Adjudicating Authority's order, the appeal was dismissed and the attachment sustained.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether immovable property standing in the name of a separate company, controlled by the accused director and having no genuine business activity, can be attached as "value of such property" under the Prevention of Money Laundering Act, 2002, in connection with money-laundering involving another company.

1.2 Whether a property acquired prior to the period of commission of the scheduled offence can be attached as "the value of any such property" within the definition of "proceeds of crime" under Section 2(1)(u) of the Prevention of Money Laundering Act, 2002, where the actual proceeds of crime are not available.

1.3 Whether the appellants discharged the statutory burden under Section 8(1) of the Prevention of Money Laundering Act, 2002, to prove the legitimate source of acquisition of the attached property.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Attachment of property held by a separate company controlled by the accused

Interpretation and reasoning

2.1 The Court recorded as an admitted fact that the common individual (Sh. Luv Bhardwaj) was a director in both the borrower company (against whom the scheduled offences and diversion of funds are alleged) and the appellant company in whose name the attached property stands.

2.2 In his statement under Section 50 of the Act, the said individual categorically stated that he was the major shareholder of the appellant company and that the other director had been inducted only to complete quorum and sign documents.

2.3 Investigations revealed that the appellant company had no business activity during the relevant period. On these facts, the Court concurred with the respondent's contention that the appellant company was a "shell company" and that the other director was merely a dummy director installed by the controlling individual.

2.4 The Court noted that the Adjudicating Authority had treated the attached property not as "direct proceeds of crime" but as "value of such property," in view of the diversion of large sums from the borrower company and the flow of funds to related or offshore entities, while the appellant company itself had no legitimate business operations.

Conclusions

2.5 The Court held that, in the circumstances where the appellant company was found to be a shell entity controlled by the accused director of the borrower company, its property was liable to be proceeded against and attached as "value of such property" and the objection that it was a distinct legal entity not implicated in the predicate offence was rejected.

Issue 2 - Attachment of property acquired prior to the commission of the scheduled offence as "value of such property"

Legal framework as discussed

2.6 The Court relied upon prior detailed judgments of the Tribunal and higher courts interpreting Section 2(1)(u) of the Act, particularly as examined in earlier Tribunal decisions and in light of the judgments in Vijay Madanlal Choudhary, Axis Bank, Prakash Industries, and other authorities.

2.7 Section 2(1)(u) defining "proceeds of crime" was noted, as construed in the Tribunal's earlier decisions, to have three distinct limbs separated by the word "or": (i) property derived or obtained directly or indirectly from criminal activity relating to a scheduled offence; (ii) "the value of any such property"; and (iii) in case such property is taken or held outside the country, "property equivalent in value held within the country or abroad."

2.8 The Court adopted the reasoning that the second limb ("the value of any such property") authorises attachment of property of equivalent value when the directly traceable proceeds of crime are not available or have been siphoned off or vanished, and that this power is not confined to cases where the property has been taken outside India.

2.9 The Court endorsed the position that restricting the definition to only properties acquired after commission of crime, or ignoring the second limb, would render the middle part of the definition redundant and frustrate the object of the Act by enabling accused persons to dissipate or conceal the tainted property.

2.10 The Court referred to the detailed analysis in prior Tribunal and High Court decisions which rejected the contrary view taken in certain High Court judgments (including those holding that properties acquired prior to the crime could not be attached), on the ground that such views overlook the full import of Section 2(1)(u) as interpreted in light of paragraph 68 of Vijay Madanlal Choudhary and the concept of "deemed tainted property" explained in Axis Bank and Prakash Industries.

2.11 The Court accepted that, as clarified in these authorities, properties acquired even prior to the commission of the scheduled offence may fall within "the value of any such property" and be attachable of equivalent value when: (i) the person accused of money-laundering had an interest in such property at least till the time of the proscribed criminal activity, and (ii) the directly traceable proceeds of crime are unavailable, having been siphoned off or vanished.

Conclusions

2.12 Applying the above legal position, the Court held that the fact that the subject property was purchased prior to the period of commission of the alleged bank fraud does not by itself immunise it from attachment as "value of such property" under Section 2(1)(u), when the actual proceeds of crime are not available.

2.13 The Court therefore rejected the argument that the temporal precedence of the acquisition of the property, vis-à-vis the scheduled offence, barred its attachment and found no legal infirmity in treating it as "value of such property."

Issue 3 - Burden under Section 8(1) to prove legitimate source of acquisition

Legal framework as discussed

2.14 The Court referred to the express language of Section 8(1) of the Act, under which the onus is entirely upon the noticee to explain the sources of income, earnings or assets out of which the attached property has been acquired, and to produce the evidence relied upon to establish legitimate acquisition.

Interpretation and reasoning

2.15 During the appellate proceedings, the Court specifically requested the appellants to state how they had discharged their burden of proving the legitimate sources for acquisition of the subject property, and what explanation, if any, had been tendered before the Adjudicating Authority on this aspect.

2.16 Despite repeated queries, the appellants were unable to explain the legitimate sources of acquisition of the property or indicate any cogent explanation or supporting evidence furnished before the Adjudicating Authority.

Conclusions

2.17 The Court held that the appellants had failed to discharge the statutory burden under Section 8(1) to prove the lawful source of acquisition of the attached property, both before the Adjudicating Authority and before the Appellate Tribunal.

2.18 In view of (i) the finding that the appellant company was a shell entity controlled by the accused director, (ii) the settled legal position that properties acquired prior to the scheduled offence can be attached as "value of such property" when the proceeds of crime are not available, and (iii) the appellants' failure to discharge the burden under Section 8(1), the Court found no reason to interfere with the confirmation of attachment and dismissed the appeals.

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