AI Drafter 
TaxTMI 
TaxTMI 
2020 (12) TMI 1385
X X X X Extracts X X X X
X X X X Extracts X X X X
.... complaint dated 23.03.2018 from Shri G.D. Chandrashekhar, General Manager, (MC-1), Mid Corporate Regional Office-I, State Bank of India, Chennai Region against M/s. Nathella Sampath Jewelry Private Limited, Chennai & Ors. for offences under Section 120B read with Section 409, 420, 467, 468 & 471 of Indian Penal Code, 1860 and Section 13(2) read with Section 13(1)(d) of the Prevention of Corruption Act, 1988 in the said FIR. i. M/s. Nathella Sampath Jewelry Private Limited. (M/s. NSJPL) (D-1) ii. Shri N. Ranganath Gupta, Promoter cum Managing Director (D-2). iii. Shri N. Prasanna Kumar, Director (D-3). iv. Shri N. Prapanna Kumar, Director (D-4). v. Shri Sohun C.J. Partner of M/s. Jeeravla & Co., Chartered Accountant, Kilpauk Chennai & Statutory Auditor of D-1 and unknown Public Servants and unknown others. b. It is revealed that during the period 2009 to 2017 M/s. NSJPL was enjoying financial assistance in the form of working capital credit limits with IOB, ICICI, HDFC & Citi Bank to the tune of Rs.71 crores which was taken over by SBI during 2009 by sanctioning Rs.100 crores to M/s. NSJPL and that the exposure of SBI was reduce....
X X X X Extracts X X X X
X X X X Extracts X X X X
....falsification of records, diversion of funds etc., which resulted in loss to the banks to the tune of Rs.379.75 crores (outstanding as on 28.02.2018) plus accrued interest on 01.03.2018 to the above banks. f. Since there was misrepresentation/falsification of the book of account/financial statements of the company, the aforesaid banks suffered loss to the tune of Rs.379.75 crores as on 28.02.2018. g. That the account of M/s. NSJPL classified as NPA and recovery process initiated under SARFAESI. h. Since Sections 120-B, 420, 467 and 471 of IPC, 1860 and Section 13(2) read with 13(1)(d) of Prevention of Corruption Act, 1988 are scheduled offences under PMLA so the Enforcement Directorate registered ECIR on dated 09.04.2018. i. That there is allegation of round tripping in the investment in the shares of M/s. NSJPL by the Promoters and that utilization of crime proceeds viz., NSJPL loan funds for settlement of loans in the name of trust in which the directors and promoters are trustees, for settlement of personal home loans of Promoters/Directors. j. That during the course of the investigation by Enforcement Directorate into the allegations....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r HFHL_231020000003580 Rs. 9,00,00,000/- Rs.8,80,09,276/- Dt. 31.03.2016 HFHL_231020000003592 Rs. 9,25,00,000/- Rs.9,19,43,766/- Dt. 30.03.2016 ii. That in order to secure the aforesaid loan facility a security interest by way of equitable mortgage by deposit of Title Deeds of secured assets was created by the borrowers in favour of the Appellant by depositing title deeds and executing a Memorandum of Deposit of Title Deeds dated 28.04.2016. iii. That in terms of the Loan Agreement the Borrowers undertook not to part with possession of or create third party rights in the property or any part of it (whether by way of sale, exchange, lease, mortgage, agreement or option or otherwise. Adjunct to this, it was undertaken by the borrowers that they would not avail of or obtain any further loan or facility on the security of the property without the prior written consent of Appellant. Since Appellant Financial Institution is a secured creditor, the charge on the said mortgaged property was duly recorded in the favour of Objector Financial Institution before the relevant/appropriate Authority(ies). iv. That the borrowers after availing the....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of Rs.18,25,00,000/- (Rupees Eighteen Crore Twenty-Five Lakh Only) to the borrowers vide Loan Agreements dated 30.03.2016/31.03.2016 against the mortgaged properties. Further, as apparent from paragraph 3 of the impugned order at page no. 35 of appeal that a criminal case was registered vide RC 08/E/2018-BS & FC/BLR on 24.03.2018 by CBI, BS and FC, Bangalore against various persons including borrowers of the appellant. Further, as recorded in the impugned order at page no. 42 of appeal that ECIR for investigation under PMLA was registered on 09.04.2018. These facts unambiguously establish that the appellant had acquired interest in the mortgaged properties almost two years prior to alleged scheduled offences. Thus, as held by the Hon'ble Delhi High Court in Deputy Director Directorate of Enforcement Delhi and Ors. vs. Axis Bank, MANU/DE/1120/2019, interest of the appellant herein cannot be defeated or frustrated by attachment of such properties to such extent by the enforcement authority in exercise of its power under Section 8 of PMLA. ii. That admittedly there are no allegations of commissions of scheduled offences against the Appellant or any of the officials of the Ap....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Director Directorate of Enforcement, Delhi & Ors. vs. Axis Bank and Ors., MANU/DE/1120/2019 are reproduced herein 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 adequate consideration, acquired prior to the commission of the proscribed offence evincing illicit pecuniary benefit to the former, cannot be defeated or frustrated by attachment of such property to such extent by the enforcement authority in exercise of its power ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....registration of security interest the dues of a secured creditors gets a priority, over all other debts and all revenues, taxes, cesses and other rates payable to the Central Government or State Government or local authority. iii. That the Hon'ble Division Bench of the Punjab and Haryana High Court in Seema Garg & Ors. v. The Deputy Director, Directorate of Enforcement reported in MANU/PH/0204/2020 has considered the judgment of the Hon'ble Delhi High Court in Deputy Director Directorate of Enforcement Delhi and Ors. vs. Axis Bank and Ors. MANU/DE/1120/2019 and has upheld the same in entirety except on a small issue where the Hon'ble Delhi High Court has declared/treated words "value of such property" and "property equivalent in value held within country" at par. iv. That the respondent in its reply at page no. 3 para 6(c) has wrongly stated that PMLA, 2002 is a criminal law as it provides for confiscation of proceeds of crime or value thereof and entails punishment and since therefore, the criminal proceedings will override civil proceedings. In this regard, reliance is again placed upon the judgment of Hon'ble Delhi High Court in Deputy Director Directorate of E....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., and it is only the material which has direct nexus or link with the formation of the belief, can give jurisdiction to attach the property. It is submitted that the respondent has failed to show any such material in his possession which can lay out the reason that the Appellant is in possession of proceeds of crime and such proceeds are likely to be concealed, transferred, or dealt with any manner which would result in frustration of proceeding under PMLA. Reliance in this regard is placed upon the judgment of the Hon'ble Division Bench of the Punjab and Haryana High Court in Seema Garg & Ors. v. The Deputy Director, Directorate of Enforcement reported in MANU/PH/0204/2020 (para 17). iii. That this Hon'ble Tribunal in JM Financial Asset Reconstruction Company v. The Deputy Director, Directorate of Enforcement, Delhi & Ors. reported in MANU/ML/0094/2019 has also held that in absence of valid reasons the attachment notice and order are liable to be set aside. In the instant case the reason to believe as recorded by the Respondent fails to establish that the mortgaged properties qua Appellant was either proceeds of crime or was its by-product and same was likely to be transf....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on 3 finds no application in the present case as neither there is any involvement of "proceeds of crime" nor there is any involvement of Appellant warranting the application of Section 3. Reliance placed on the Judgment of Gujarat High Court in case of Jafar Mohammmed Hasanfatta and Ors. vs. Deputy Director and Ors. MANU/GJ/0219/2017. 3.3. During the course of argument, the learned counsel for the appellant submitted that this Tribunal is bound by the judgment of the Hon'ble Delhi High Court, rather than the judgment passed by other High Courts as this Tribunal is situated and functioning within the territorial jurisdiction of the Hon'ble Delhi High Court. He has relied on the following judgment: a) J. Sekar v. Union of India & Ors. 2018 SCC OnLine Del 6523 Paras 38-41. b) Sita Ram Khemka v. K. K. Banerji & Ors. MANU/UP/0038/1958 Para 8 c) Astik Dyestuff (P) Limited v. Commissioner of Central Excise & Customs, MANU/GJ/1062/2013 Para 4 d) Income Tax Officer, Ward-8(4), Ahmedabad v. Upkar Retail Private Limited, 2018 SCC Online ITAT 12911Paras 3-5 3.4. Therefore, in light of the submissions made above, it is submitted by the learned counsel f....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Union Bank of India Working Capital 14.72 50.00 Total 100.00 340.00 4.1c. And that the lending banks have reportedly stated that they have noticed the sign of sickness in M/s. NSJPL when they delayed the servicing of interest for April 2017 for all the Banks in the Consortium and that the Inspection of the Show Rooms indicated that there was no activity and low level of stocks at the Show rooms. State Bank of India ordered for a "Stock & Receivables Audit" for the period ending 31.03.2017 and the same was conducted against M/s. NSJPL by M/s. Jayachandran & Co., Chartered Accountants. M/s. NSJPL did not co-operate for physical verification of the stocks by the Auditors and after sustained efforts by the Bank, M/s. NSJPL agreed for verification of stocks by the above said auditors and the process of audit was delayed and completed only on 30.09.2017 and during the course of the Audit, the nominated Auditors noticed sudden depletion of Stock, Stock and Work in Progress. The Auditors noticed a huge drop in the value of stocks between 31.03.2017 & 19.07.2017. The value of Stock as on 19.07.2017 was Rs.18.17 Crores, whereas the Stock shown in the Stock ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... and book debts for the purpose of availing credit facilities from the lenders with a clear criminal/malafide intent to cheat and defraud the lenders. M/s. NSJPL fraudulently siphoned off the funds from the system without having informed the lenders. The observations of the Forensic Audit Report also confirm the diversion/siphoning of the funds. State Bank of India had alleged that the non co-operation of M/s. NSJPL and its officials in allowing the Bank nominated Stock auditors to inspect the stock and non furnishing of the relevant documents to the Forensic Auditor shows the malafide intention of the Company and its promoters in concealing the fraud committed by them; that the actions of M/s. NSJPL and its promoters in submitting false information in the financial statements submitted to the lenders and the disposal of the stocks/inventory which were hypothecated to the lenders without the knowledge of the lenders and not crediting the proceeds to the liability with the lenders and siphoning of funds from the system amounts to falsification of accounts, Criminal Breach of Trust and Cheating with an intention to cause wrongful loss to the Banks and wrongful gain to themselves and ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... examined under PMLA, 2002 and their statements recorded. 4.4. That the investigation under PMLA, 2002 led to the identification of "proceeds of crime", the properties involved in the money laundering etc. The investigation also led to the round tripping in the investment of the Shares of M/s. NSJPL by its promoters, utilization of crime proceeds for acquisition of immovable property in the name of M/s. NSJPL and in the name of individuals related to M/s. NSJPL, utilization of the crime proceeds in the activities of Trusts held by the promoters of M/s. NSJPL including settlement of loans in the name such Trusts, utilization of the crime proceeds for settlement of personal home loans of the Directors and for settlement of existing loans, re-organization of ownership of properties and accommodative transactions, multiple layering of the crime proceeds, funding to the guarantor to enable her acquire a property in her name etc. From the investigation under PMLA, 2002 it was thus noticed that M/s. NSJPL, the Appellant herein and its Promoters/Directors viz., S/Shri Ranganatha Gupta, Prapanna Kumar & Prasanna Kumar, Directors of M/s. NSJPL and also accused in the FIR of CBI, have comm....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ffence investigated by CBI, BS&FC, Bengaluru is also involved in a case of cheating the General Public in collecting Deposits from them and the Economic Offences Wing of the Chennai Police have also registered an FIR against the promoters of M/s. NSJPL vide Crime No.11/2017 for offences under Section 409, 420 of IPC read with the TNPID Act. Two Directors were also reportedly arrested by the TN Police. The information provided by the EOW of TN Police to the Respondent authorities reveal that so far, 3241 Complaints have been received by them for the defaulted amount of Rs.42.99 Crores. It is further submitted that after the attachment of the property in the instant case, several depositors have also approached the Respondent authority seeking to cause investigation against the Appellant and also seeking refund. Thus, the investigation under PMLA, 2002 has been further extended to cover the above mentioned Scheduled Offence also. In other words, it is humbly submitted that M/s. NSJPL and its promoters has not only caused wrongful loss to the Consortium of Banks by indulging in criminal offences, but also cheated the General Public by collecting Deposits and failing to repay them. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....an bank, on perusal of the Bank statements, it is noticed that funds were transferred from the Bank account of M/s. NSJPL to the individual account of the buyers (viz., Prapanna Kumar, Prasanna Kumar and M/s. NSC & Co. as the case may be) and from the said account and from the said transferred funds, DD's were taken in the name of the seller. The following further illustrates the money trail in the acquisition of the properties. i. That in respect of the immovable property registered vide Document No.2316/2013 dated 19.07.2013, DD's to the tune of Rs.5,46,58,000/- were issued in the name of the sellers and the following DD's were issued by Indian Bank on 18.07.2013 & 19.07.2013 and the funds for the said DD's were debited from the Indian bank account number 417057932 of Shri Prasanna Kumar. DD No.598645 dated 18.07.2013 Indian Bank, South Usman Road, T.Nagar 5399852 DD No.598646 Dated 18.07.2013 Indian Bank, South Usman Road, T.Nagar 5011011 DD No.598647 Dated 18.07.2013 Indian Bank, South Usman Road, T.Nagar 24581754 DD No.598706 Dated 19.07.2013 Indian Bank, South Usman Road, T.Nagar 19665383 54658000 ii....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mber 858891046 of M/s. NSC & Co. DD No.598655 dated 18.07.2013 Indian Bank, South Usman Road, T.Nagar 86571148 DD No.598654 Dated 18.07.2013 Indian Bank, South Usman Road, T.Nagar 44689889 DD No.598705 Dated 19.07.2013 Indian Bank, South Usman Road, T.Nagar 15751963 147013000 v. That on perusal of the Statement of Account of A/c No.858891046 of M/s. NSC & Co. with Indian Bank it is noticed that on 18.07.2013 a total amount of Rs.22.05 Crores were transferred from the account of M/s. NSJPL with State Bank of India and from the said funds, DD's were taken in favor of the sellers. Thus, it is clearly evident that the funds from the loan account of M/s. NSJPL were utilized for acquisition of immovable property through Document No.2318/2013 dated 19.07.2013. vi. That the above diagrams clearly indicate the money trail that the funds from the loan account have been utilized for acquisition of the immovable properties at Mylapore in July 2013. 4.10. A further re-organisation in the ownership of the above mentioned properties were made through accommodative financial transactions in the year 2014 and is detailed below: ....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., each of the above cheque was presented for payments on different dates and funds were organised among various accounts including that of M/s. NSC & Co., Shri Prapanna Kumar and Prasanna Kumar, to ensure sufficient funds existed in the respective account for clearances. 4.11.(i). From the above it is clearly evident that the above mentioned properties at Luz Church Road, Mylapore have been acquired out of fraudulent loan amount and thus are proceeds of crime and properties involved in money laundering and rightfully attached vide PAO No.11/2018. (ii). That during March 2016, the appellant on the basis of applications filed by Defendants 1 to 6 herein, sanctioned two home loans amounting totalling Rs.18.25 Crores and the properties mentioned at Sl.Nos.4, 5, 6 & 7 of Para 43 to Schedule I of OC No.1015/2018 were offered as security by the borrowers. During the investigation, it was further noticed that in addition to the utilization of the proceeds of crime for acquisition of the property, the proceeds of crime were further utilized for settlement of the above said two loans. The results of the investigation have been detailed in Para 33.1 to 33.4 and reproduced below. D....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ng proceedings under SARFAESI Act. (v). That Shri Nathella Prapanna Kumar also availed a Housing Loan from Aditya Birla Home Finance Limited to the tune of Rs.9.25 Crores. Inasmuch as he had earlier availed a Housing loan from ICICI Bank, out of the total disbursement of Rs.9,19,43,766/- an amount of Rs.81943766/- was used for settlement of the ICICI Home loan account bearing number LBCHE00002372366. On perusal of the information provided by M/s. Adiya Birla Capital Limited, it is noticed that for the said Home Loan, Shri Nathella Prasanna Kumar had given an ECS Mandate for payment of the EMI in favour of his Indian Bank account number 417057807. During the period from 15.04.2016 to 04.07.2017 he had in all paid EMI totalling Rs.96,14,288/- as detailed below. Out of the said instalments, two instalments were paid out of the RBL Account of Shri Prasanna Kumar, viz., A/c No. 303016682225. Date of payment Amt paid Bank Account 15.04.2016 327776 Indian Bank 16.05.2016 769183 Indian Bank 21.06.2016 769183 Indian Bank 22.06.2016 4339 Indian Bank 15.07.2016 769183 Indian Bank 15.08.2016 769183 Indian Bank 15.09.201....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sels for both the parties. 5.1. That the appellant did not dispute of taking loans by its borrowers from the consortium of the banks led by State Bank of India. There is also no dispute by the appellant that Rs.379.75 crores is the outstanding balance against its borrowers as on 28.02.2018 owed to consortium of banks. It is also not denied that the questioned properties have been purchased in the year 2013 and 2014. 5.2.(i). That the main contention of the appellant is that after due diligence it has sanctioned home loans to the borrowers and a sum of Rs.9 crores through loan account no. HFHL_231020000003580 and Rs.9.25 crores through loan account no. HFHL_231020000003592 out of which Rs.8,80,09,276/- and Rs.9,19,43,766/- were disbursed on dated 31.03.2016 and 30.03.2016 respectively. 5.2.(ii). That the loan became NPA on 01.02.2018 and thereafter demand notice under Section 13(2) of SARFAESI Act, 2002 were initiated and after sixty days symbolic possession of following two properties were taken:- i. Land measuring 5611 Sq.Feet in S.No.123 & 124 thereon bearing Door No.110 and situated at Luz Church Road, Mylapore, Chennai 600 004 & belonging to Nathella Prasanna ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....for the appellant that the appellant is a bona fide third party and has acquired interest in the properties in question at a time anterior to commission of alleged schedule offences. During the course of hearing, it is submitted by the learned counsel for the appellant that the appellant sanctioned the loan in the month of March, 2016 whereas the loan granted by other banks became NPA in the year 2017 so there was no occasion for the appellant to know that the borrowers are defaulter and that the appellant had granted loan bonafidely and that the appellant is a bona fide third party who sanctioned the loan against the security of the aforesaid properties. This submission of the appellant has been negated by the fact that the borrowers of the appellant took different type of loans from Consortium of Banks during the period 2009 to 2017 and has prima facie acquired the question properties in the year 2013 and 2014 by utilizing the loan taken from Consortium of Banks and those loans were taken by falsifying the stocks etc., and diverted the funds for the purpose other than the purpose for which the loans were taken. Thereby, it is prima facie clear, for the purpose of attachment, t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e respondent has referred para 161 of the judgment of Hon'ble Delhi High Court in the matter of Axis Bank's case (supra) and submitted that in the present case, the observation of the Hon'ble Court is directly applicable. The contents of para 161 are reproduced below: "161. The law conceives of possibility of third party interest in property of a person accused of money-laundering being created legitimately or, conversely, with ulterior motive "to frustrate" or "to defeat" the objective of law against moneylaundering. In case of tainted asset - that is to say a property acquired or obtained as a result of criminal activity - the interest acquired by a third party from person accused of moneylaundering, even if bona fide, for lawful and adequate consideration, cannot result in the same being released from attachment, or escaping confiscation, since the law intends it to "vest absolutely in the Central Government free from all encumbrances", the right of such third party being restricted to sue the wrong-doer for damages, the encumbrance, if created with the objective of defeating the law, being treated as void (Section 9)." In view of the above, even if the appellant is ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ollows- "To sum of on the issue, the objective of the legislation in the PMLA be distinct from the purposes of the three other enactments viz., RDBA, SARFAESI Act and Insolvency Code, the later cannot prevail over the former. There is no inconsistency. The purpose, the text and context are different. This Court thus rejects the argument of prevalence of the said laws over PMLA." The aforesaid finding of Hon'ble High Court goes against the submission of the appellant. The Hon'ble Court has clearly held that the RDBA, SARFAESI Act and Insolvency Code can't prevail over PMLA. Rather, his lordship has observed that all these laws must co-exist with harmony. The learned counsel for the appellant has also relied on the judgment of Hon'ble Punjab & Haryana High Court in Seema Garg & Ors. Vs. The Deputy Director, Directorate of Enforcement on this legal issue. This judgment is perused, the question of priority or overriding effect of other laws over PMLA and vice versa appears to be not an issue before the Hon'ble High Court and there appears to be no findings on that except on the question of status of attachment of properties as value equivalent to proceeds of crime. In th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....onal order of attachment is subject to confirmation by the adjudicating authority. The order of the adjudicating authority, in turn, is amenable to appeal to the appellate tribunal. The said forum (i.e. the appellate tribunal) may pass such orders as it thinks fit "confirming, modifying or setting aside the order appealed against" [Section 26(4)]. Undoubtedly, an aggrieved party is entitled in law to invoke the said jurisdiction of the appellate tribunal to bring a challenge to the orders of attachment (as confirmed) but, the law in PMLA, at the same time, also confers jurisdiction on the special court to entertain such claim for purposes of restoration of the property during the trial of the case [Section 8]. The jurisdiction to entertain objections to attachment conferred on the appellate tribunal on one hand and, on the special court, on the other, thus, may be coordinate, to an extent. 168. An argument, however, was raised, by the appellants that the respondents herein should have approached the special court, instead of the appellate tribunal, for consideration of their respective claims. 169. In view of above-noted legislative scheme, it must be clarified th....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... concealed, transferred or dealt with in any manner which would result in frustration of proceeding under PMLA. The learned counsel has relied on the judgments passed by Division Bench Hon'ble High Court of Punjab & Haryana in Seema Garg & Ors. Vs. The Deputy Director, Directorate of Enforcement (supra) and JM Financial Asset Reconstruction Company v. The Deputy Director, Directorate of Enforcement, Delhi & Ors. (supra). In the present case, neither party has filed the copy of the provisional attachment order or the copy of the O.C. But on perusal of para 3 to 26 of the impugned order, the details have been mentioned about how the proceeds of crime have been used to acquire the properties and para no. 27 to 29 of the impugned order are the conclusions arrived at by the complainant on reason to believe. Therefore, it appears that there is compliance with regards to the reason to believe. In the light of above discussions, I do not find any merit in these legal submissions of the appellant. 5. 3.(vi). The last legal submission made by the appellant is that Section 3 of the PML Act, 2002 is not applicable in the present matter. This legal submission is considered. The appe....