TaxTMI 
TaxTMI 
2020 (1) TMI 522
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....t, inter alia, Sterling Biotech ("First FIR"), that Sterling Biotech in connivance with some unknown public servants had engaged in some illegal transactions as gratifications in lieu for settling proceedings before authorities, obtaining tenders for supply of goods and granting loans by Banks and financial institutions; and FIR No. RCBD1/2017/E/0007 dated 25th October 2017 against Sterling Biotech and Others ("Second FIR"). It was also alleged that the Directors of Sterling Biotech and others hatched a criminal conspiracy amongst themselves with dishonest intention to cheat Andhra Bank and other public sector banks. 4. The allegations made in the Complaint revolve around companies, entities, persons belonging to the Sandesara Group of companies ("Sandesara Group"). Insofar as this appellant is concerned, who has acquired outstanding loans payable by below mentioned entities of Sandesara Group, alongwith all rights, titles and interests, securities, guarantees, etc. under the provisions of SARFAESI Act from the various banks/financial institutions, most of them being public sector banks/financial institutions regulated by Reserve Bank of India): Sterling Biotech Limited....
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....ies are to the extent charged in favour of appellant (together hereinafter referred to as "JMFARC Mortgaged Properties"). It is cleared that in view of which appellant has rights as a secured creditor in the said properties. The Complainant alleges that the said JMFARC Mortgaged Properties fall within the scope of "proceeds of crime". The said JMFARC Mortgaged Properties were given as collateral to the respective Banks in lieu of the loans advanced to Sterling Biotech Limited, Sterling SEZ and Infrastructure Ltd., Unique Proteins Pvt. Ltd., PMT Machines Ltd. and subsequently assigned to this appellant. 9. SICOM Limited sanctioned a loan of INR 50,00,00,000/- (Rupees Fifty Crore only) to Unique Proteins vide a duly executed Loan Agreement on 19th May 2010. The said loan was secured by way charge over assets of certain entities of Sandesara Group. Thereafter, the loan account of Unique Proteins was declared as NPA by SICOM Limited on 30th November 2012, due to default in repayment of the said loan amount. Appellant in its ordinary course of business, acquired this outstanding loan from SICOM Limited with all rights, title and interest, along with the underlying security interests,....
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....h 2014 under the provisions of SARFAESI Act, 2002. Properties attached under the PAO and mentioned at Sl. Nos. 6, 7 and 9 in the Complaint are properties on which this Defendant acquired a security interest pursuant to the Assignment Agreement dated 25th March 2014 executed between Federal Bank and appellant. Facts pertaining to the acquisition of loan of PMT Machines 12. Oriental Bank of Commerce, under consortium lending, sanctioned various credit facilities to PMT Machines, which were enhanced/reviewed from time to time. The said facilities were secured by way of charge over the assets of PMT Machines vide Agreement of Hypothecation of Assets dated 15th March 2005, Deed of Hypothecation dated 20th March 2007, and Joint Deed of Hypothecation dated 26th September 2008. Thereafter, the loan account of PMT Machines was declared as NPA by Oriental Bank of Commerce in December 2012, due to default in repayment of the said loan amount. Appellant in pursuance of its aforementioned business activities, acquired this outstanding loan from Oriental Bank of Commerce with all rights, title and interest, along with the underlying security interests, pledges and/or guarantees in respect ....
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.... more than a year after the last of the Sandesara Group loans had been acquired by appellant. The First FIR was registered by the CBI/AC-III/New Delhi on 30th August 2017 under Sections 13(2) r/w 13(1)(d) of the Prevention of Corruption Act, 1988 ("PC Act") and Section 120B of the Indian Penal Code, 1860 ("IPC") against, inter alia, Sterling Biotech. The Second FIR dated 25th October 2017 was registered for offences allegedly committed under Section 13(2) r/w 13(1)(d) of the PC Act and 120B r/w Sections 420, 467, 468 and 471 of the IPC against Sterling Biotech. Pursuant to the registration of the Second FIR, the Complainant registered ECIR/HQ/17/2017 dated 25th October 2017 and took up the matter for investigation on 27th October 2017. 15. In none of the FIRs referred above, name of assignor of loan JMFARC or any of its personnel has been mentioned. Further, the said Second FIR itself shows that there was a criminal conspiracy to cheat the public sector banks, some of whom have assigned the loans to appellant and hence having stepped into the shoes of the victim banks, the appellant is also a victim. Further, without prejudice to above, Complainant in Para 5 of its reply to t....
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.... Reserve Bank of India guidelines. It may also be pertinent to note that all the assignment agreements executed between assignor banks/financial institutions and appellant contain an affirmative covenant that the accounts assigned have not been classified as "fraud accounts" and that fraudulent accounts do not form part of the assignment agreements. After being informed of the proceedings being initiated by the Complainant against Sterling Entities, appellant provided a detailed written response before the Complainant on 18th April 2018, 27th April 2018 and 11th June 2018, setting out the true and factual position leading to the Assignment and the secured charge created in favour of appellant on the JMFARC Mortgaged Properties. Further, it is also noteworthy to mention that JMFARC Mortgaged Properties were duly charged in favour of respective banks/financial institutions for a fair consideration, and the same was under was bonafide loan transaction in the ordinary course of business of banking/lending. There was an authentic disbursement of loans which, amongst other securities, was secured by way of a charge over JMFARC Mortgaged Properties. 18. The details of the JMFARC Mor....
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....012 Loan account of Sterling SEZ was declared as NPA by Dena Bank. 11. 4th July 2012 Charge was created in favour of SICOM Limited vide Memorandum of Entry of even date, as a security for loans granted to Unique Proteins. 12. 30th September 2012 Loan account of Sterling Biotech was declared as NPA by Federal Bank. 13. 30th November 2012 Loan account of Unique Proteins was declared as NPA by SICOM Limited. 14. December 2012 Loan account of PMT Machines was declared as NPA by Oriental Bank of Commerce. 15. 22nd March 2014 Defendant No. 85 acquired the outstanding loan of Unique Proteins from SICOM Limited including all its rights, title and interest vide a registered Assignment Agreement dated 22nd March 2014 and hence obtained a valid and subsisting secured charge over the JMFARC Mortgaged Properties at Serial Nos. 4, 18 and 39 in the PAO and in the Complaint. 16. 25th March 2014 Defendant No. 85 acquired the outstanding loan of Sterling Biotech from Federal Bank including all its rights, title and interest vide a registered Assignment Agreement dated 25th March 2014 and hence obtained a valid and subsisting secured charge ove....
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....ued by the Ld. AA against Defendant No 85 as per the PMLA. 28. 16th July 2018 CIRP under the Code initiated vide order dated 16th July 2018 by Hon'ble NCLT Mumbai against Sterling SEZ and Sterling International Enterprises Limited. 29. 22nd October 2018 CIRP under the Code initiated vide order dated 22nd October 2018 by Hon'ble NCLT Mumbai against PMT Machines. 19. It is now a settled position of law that "reasons to believe" cannot be a mere rubber stamping and the officer who is supposed to write down his reasons to believe has to apply his mind and provide specific reasons why a property is being attached under Section 5 of PMLA. More importantly, "reasons to believe" cannot be a mechanical reproduction of words in the statute. It is submitted that when an authority is judicially reviewing such "reasons to believe", it must be apparent that the officer penning the reasons has applied his mind to the materials available on record and has, on that basis, arrived at his "reasons to believe". The process of thinking of the officer must be discernible and the reasons have to be made explicit. It is only the reasons that can enable the reviewing authority ....
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....nder the Sandesara Group. Appellant only came to be associated with the account and assets of said Sterling Entities prior to filing of any complaint/FIR or proceedings being initiated against the Sandesara Group and therefore, there was no reason for this Defendant to suspect any wrong doing on part of the said Sterling Entities prior to acquiring their loans. 23. The appellant submits that majority of the properties over which this Defendant acquired a security interest had been purchased by the Sandesara Group prior to the year 2008, which is when the ED alleges the offences started (as per the Second FIR). It is submitted that at the very least, the properties which were acquired by the Sandesara Group prior to the year 2008 cannot be said to have been acquired by the proceeds of crime and as such, cannot fall within the purview of PMLA. Further, in any event, this Defendant acquired security interest over the majority of JMFARC Mortgaged Properties, by virtue of assignment under the provisions of SARFAESI Act, much before the registration of any FIR or ECIR. Therefore, the said JMFARC Mortgaged Properties cannot fall within the purview of the PMLA. In view of the aforesaid,....
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....reements. 28. The counsel for the respondent has supported the impugned order. He argued the PAO was passed as per law. The appellant has no option to approach to the Special Court for released of properties or should wait for final order after trial. 29. The present Appellant is concerned, the said attached properties namely bearing Serial Nos. 1,4,6,7,9,10,18,26,35,37,39,40,42,43,45,48 and 52 in the PAO and the Complaint, to the extent and charged in favour of the Appellant (together hereinafter referred to as "JMFARC Mortgaged Properties") and in view of which this, Appellant has rights as a secured creditor in the said properties. 30. Out of the 17 JMFARC Mortgaged Properties, the ED has admittedly not even attempted to provide reasons to believe for 16 properties. 31. Out of 17 JMFARC Mortgaged Properties, the ED has attached 14 properties which have been acquired prior to the date on which the alleged scheduled offences were committed. The said 14 properties out of the 17 JMFARC Mortgaged Properties have been acquired prior to the date on which the alleged scheduled offences were committed is an admitted position of fact between the parties. The Appellant, in Para....
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....rived or obtained as a result of criminal activities. The mortgaged property is not acquired from proceed of crime. 35. It is argued on behalf of the appellant that the present case is squarely covered by the recent judgment of the Hon'ble Delhi High Court in Dy. Director Directorate of Enforcement v. Axis Bank [2019] 104 taxmann.com 49, wherein, it has been observed as under: "163. Having regard to the above scheme of the law in PMLA, it is clear that if a bonafide third party claimant had acquired interest in the property which is being subjected to attachment at a time anterior to the commission of the criminal activity, the product whereof is suspected as proceeds of crime, the acquisition of such interest in such property (otherwise assumably untainted) by such third party cannot conceivably be on account of intent to defeat or frustrate this law. In this view, it can be concluded that the date or period of the commission of criminal activity which is the basis of such action under PMLA can be safely treated as the cut-off. From this, it naturally follows that an interest in the property of an accused, vesting in a third party acting bona fide, for lawful and a....
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....es in appeal right up to the Hon'ble High Court, an order confirming the attachment cannot be said to have attained finality. This Tribunal is only concerned with the validity of the impugned order and provisional attachment order which has been confirmed. 38. Therefore, this Tribunal possesses the requisite jurisdiction in terms with the Act as the court of first appeal, to adjudicate upon the pleas of the Appellant and determine the bonafides and legitimacy of its claims as well as the legality of the Provisional Attachment Order. Upon an argument being raised by the Enforcement Directorate that claims of third parties are to be solely adjudicated by the Special Court before whom trial is pending. 39. The Hon'ble High Court of Delhi in the Axis Bank Decision has held that the claim of a party asserting a bonafide and legitimate claim would be inquired into by the Special Court only if the order confirming the attachment "has attained finality". An order cannot be said to have attained finality until and unless all the remedies under the Act have been exhausted. No doubt, the bank and financial institutions are always at liberty to approach the Special Court (if so d....
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....d parties may take number of years. Their case is squarely covered under para-163 and 165 of the judgement. 42. From the facts of the present, it is evident that legal issues of the Appellant case are similar to the judgement rendered by Hon'ble Delhi High Court as (a) The Appellant is not an accused and is bona fide third party to the transactions complained of by the ED; (b) The Appellant disbursed a loan in accordance with law to the Respondents Accused and created a mortgage over the Secured Property prior to the commission of the Scheduled Offence in respect of the Secured Property; and (c) The Appellant commenced the proceedings under SARFAESI Act against the Secured Property prior to its provisional attachment. (d) The said property was not acquired from the proceed of crime. 43. The appellant is always at liberty to approach the Special Court to initiate the proceeding for disposal of mortgaged property, if so desired, who is agreeable to deposit the excess amount if such situation will arise. Counsel for appellant after taking the instructions from his clients stated that his clients are duty bound to deposit the excess amount with the respondent. 44. It is su....
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....Mortgaged Properties have been attached since they have been acquired from "proceeds of crime" and not because they are of equivalent value and hence this defence is also not available to the Respondent.[ Paragraph 162 of the Judgement.] (d) If a bona fide third party claimant had acquired interest in the property which is subjected to attachment at a time anterior to the commission of the criminal activity, the product whereof is suspected as proceeds of crime, the acquisition of such interest in such property by such third party cannot conceivably be on account of intent to defeat or frustrate this law. In this view, it can be concluded that the date or period of the commission of criminal activity which his the basis of such action under PMLA can be safely treated as the cut-off. An interest in the property of an accused, vesting in a third party acting bona fide, for lawful and adequate consideration, acquired prior to the commission of the prescribed offence evincing illicit pecuniary benefit to the former, cannot be defeated or frustrated by attachment of such property. [Paragraph 163 at Page No. 94 of the Judgment.] 45. It is admitted position between the parties....
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....ntry. The courts in overseas countries are aware about the mortgage law. Rather, if their mortgage properties are disposed off, loan amount would be decreased. No doubt, they should also be dealt with criminal liabilities, but recovery process cannot be stalled in this way. These joneys are always happy if their mortgage properties shall remain attached and should not be disposed of. It is also held that if the mortgage properties are not the proceeds of crime, the said properties cannot be attached in lieu of value thereof as banks are the secure creditors, but ED, no doubt, after investigation, is welcome to attach the properties in lieu of value thereof only in the cases where it was virtually not possible to trace out the properties which were purchased from proceeds of crime, but other than the mortgage properties which were not acquired from proceeds of crime. Borrowers mortgage properties can not secure in safe heaven if they failed to return back the loan amount otherwise public will suffer. 50. No doubt, this tribunal is clear in its mind that if the property was acquired from proceeds of crime and at the time of mortgage, the bank is aware and still the loan is sanctio....