2026 (3) TMI 660 - AT - Money Laundering

Proceeds of crime: resale to bona fide purchaser not treated as tainted; mining profits may be attached; provisional attachment upheld.

On whether resale proceeds to a bona fide third party amount to proceeds of crime, the Tribunal applied the principle that resale to an untainted ... Provisional attachment - Proceeds of crime - sale proceeds from shares sold to a bona fide third party - profits derived from extraction of limestone under the Kadapa mining lease - reason to believe for attachment under Section 5 - substitution of provisionally attached property. Proceeds of crime - Whether sale proceeds/returns from shares acquired by the appellant constitute proceeds of crime in the appellant's hands - HELD THAT: - The Tribunal applied its earlier reasoning in Alpha Avenue [2019 (8) TMI 12 - ATPMLA, NEW DELHI] and found that the appellant's purchase of shares was an outgo and there is no material establishing that the consideration paid by the appellant was itself 'derived or obtained' by criminal activity. The fact that an innocent third party purchaser (PARFICIM) bought the shares at a profit and was not charged, and that the sale proceeds represent returns from a bona fide secondary transaction, precludes characterization of those sale proceeds as proceeds of crime in the appellant's hands. Consequently the Tribunal held that neither the original purchase nor the sale consideration received by the third party can be treated as proceeds of crime attributable to the appellant (see paras 22-24). [Paras 22, 23, 24] Sale proceeds/returns from the shares are not proceeds of crime in the appellant's hands. Proceeds of crime - Whether profits derived from extraction of limestone from the Kadapa mines constitute proceeds of crime and the correct quantification thereof - HELD THAT:- The Tribunal held that, on the material before the Adjudicating Authority and having regard to the sequence of events leading to grant and transfer of prospecting and mining permissions, there was sufficient material to prima facie treat profits from mining activity as representing the 'value' of proceeds of crime under Section 2(1)(u) and hence amenable to attachment (para 28). However, the Directorate had revised its computation after deducting verifiable extraction costs; the Tribunal accepted that revision and concluded that the quantifiable proceeds attributable to mining reduce to Rs. 92.52 crore (paras 29). The overall revised traceable proceeds therefore stand reduced accordingly. [Paras 28, 29] Profits from mining were properly treated as 'value' of proceeds of crime on the material, but the quantification is reduced to reflect deduction of extraction costs. Reason to believe for attachment under Section 5 - Whether the respondent had 'reason to believe' to invoke provisional attachment under Section 5 of the PMLA - HELD THAT:- The Tribunal examined the 'reason to believe' recorded by the Deputy Director and held that the statutory threshold requires reasonable grounds and not conclusive proof. The recorded reasons, including investigational findings of intermingling of proceeds, risk of dissipation, and material relied upon by the Directorate, were held sufficient to invoke Section 5(1) (paras 31-32). The contention that delay negated urgency was rejected. [Paras 31, 32] There existed sufficient 'reason to believe' to justify provisional attachment under Section 5. Substitution of provisionally attached property - HELD THAT:- The Tribunal reviewed precedent and statutory scope and concluded that it lacks a specific statutory power under the PMLA and Rules to permit substitution of attached properties (para 35). Noting that certain High Court orders have entertained substitution in writ jurisdiction, the Tribunal held it cannot, as a creature of the statute, independently exercise such equitable relief. Nevertheless, because the Directorate expressly indicated willingness to accept adequate alternate security, the Tribunal clarified that its conclusion does not prevent the ED from releasing properties against suitable security if the ED chooses to do so (para 36). [Paras 35, 36] The Appellate Tribunal has no statutory power to order substitution of attached properties, though the Directorate may, in its discretion, accept adequate alternate security and release properties. Final Conclusion: The appeal is partly allowed: the Tribunal held that the sale proceeds/returns from the share transactions are not proceeds of crime in the appellant's hands, affirmed that mining derived profits may be treated as 'value' of proceeds of crime but accepted the Directorate's revised quantification (reducing the attributable proceeds from extraction to the lowered figure), found that there was sufficient 'reason to believe' for provisional attachment, and concluded the Tribunal cannot order substitution of attached properties though the ED may, if it chooses, release properties against adequate security. Issues: (i) Whether the sale proceeds arising from shares acquired by the appellant (and sold to a bona fide third party) constitute 'proceeds of crime' in the hands of the appellant; (ii) Whether profits derived from extraction of limestone under the Kadapa mining lease constitute proceeds of crime and the correct quantification of such proceeds; (iii) Whether the 'reason to believe' for provisional attachment under Section 5(1) of the Prevention of Money Laundering Act, 2002 was established; (iv) Whether substitution of attached operational properties by alternate security can be permitted.Issue (i): Whether sale proceeds from shares sold to a bona fide third party are proceeds of crime in the hands of the appellant.Analysis: The Tribunal applied the principle that where shares purchased by the appellant were subsequently sold to an untainted third party purchaser (a bona fide foreign investor) for a higher price, the resulting sale proceeds cannot be treated as proceeds of crime in the hands of the appellant absent material showing that the appellant's original outgo was itself tainted or paid from tainted sources. The Tribunal relied on parity with prior appellate reasoning addressing identical factual and legal questions and noted that the respondent itself treated the third party purchaser as innocent.Conclusion: The sale proceeds arising from the shares sold to the bona fide third party do not constitute proceeds of crime in the hands of the appellant. The finding is in favour of the appellant.Issue (ii): Whether profits from extraction of limestone under the Kadapa mining lease constitute proceeds of crime and the correct quantification.Analysis: The Tribunal examined the sequence of events relating to grant and transfer of prospecting licence and mining lease, and the surrounding facts that support a prima facie nexus between the grant/transfer and the alleged quid pro quo. On that basis the Tribunal found sufficient material to treat, for attachment purposes, profits from mining as representing the 'value of such property' within the definition of proceeds of crime. The respondent however revised its quantification after deducting verifiable extraction costs; the Tribunal accepted that revision insofar as the appellant's position on quantification is concerned and separated the share sale component already held not to be proceeds of crime.Conclusion: Profits from limestone extraction can be treated as proceeds of crime for attachment purposes on the material before the authority, but the quantified traceable proceeds from mining are reduced to Rs. 92.52 crore. This conclusion is partly in favour of the appellant on quantum and partly in favour of the respondent on the characterisation of mining profits as involved in money laundering.Issue (iii): Whether the 'reason to believe' required for provisional attachment under Section 5(1) of the Prevention of Money Laundering Act, 2002 existed.Analysis: The Tribunal reviewed the written 'reason to believe' recorded by the enforcement officer and found that it set out material showing alleged commission of scheduled offences, intermingling and dissipation of direct proceeds, and a risk of dissipation of assets. The Tribunal reiterated that 'reason to believe' for provisional attachment requires prima facie material and not conclusive proof.Conclusion: The requirement of 'reason to believe' for invoking Section 5(1) was satisfied. This conclusion is in favour of the respondent as to the lawfulness of provisional attachment.Issue (iv): Whether substitution of attached operational properties by alternate security may be permitted.Analysis: The Tribunal noted the absence of statutory power in the Adjudicating Authority or the Tribunal to order substitution of attached property under the existing PMLA scheme, as reflected in prior appellate orders. The respondent expressed willingness to accept adequate alternate security (bank guarantees, FDRs, non operational assets). The Tribunal observed that while it cannot itself direct substitution, it will not stand in the way if the respondent chooses to release properties against satisfactory alternate security.Conclusion: The Tribunal cannot direct substitution but leaves open the practical possibility that the respondent may release attached properties against adequate alternate security. This conclusion is favorable to the appellant insofar as substitution by consent of the respondent is permitted operationally, but not as a mandatory relief ordered by the Tribunal.Final Conclusion: The appeal is partly allowed: the attachment insofar as it rests on the share sale proceeds is set aside; the attachment insofar as it relates to mining profits is sustained subject to reduction of the quantification to Rs. 92.52 crore; the provisional attachment and the recorded 'reason to believe' are upheld; substitution of attached properties cannot be directed by the Tribunal though the respondent may, if it so chooses, release properties against adequate alternate security.Ratio Decidendi: Where a bona fide third party purchaser (untainted) acquires assets previously held by the accused and the accused's original payment is not shown to be from tainted sources, proceeds realized on resale to such untainted purchaser cannot be treated as proceeds of crime in the hands of the accused; provisional attachment under Section 5(1) requires prima facie material establishing 'reason to believe' and may extend to 'value of such property' where direct proceeds are intermingled, while substitution of attached property by alternate security is not a power vested in the Adjudicating Authority or the Tribunal but may be effected by the enforcement agency by consent.