25 Oct 2023 5:54 AM GMT
The Supreme Court recently issued a notice in a case which raises the issues whether a property acquired before the alleged act of scheduled offences under the Prevention of Money Laundering Act(PMLA), 2002 can be called “proceeds of crime” liable to be attached by the Directorate of Enforcement (ED).
Another issue which arises in the case is whether the PMLA would override the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act and the Recovery of Debts due to Banks Ac and Financial Institutions Act.
A bench comprising Justices Abhay S Oka and Pankaj Mithal issued notice on a Special Leave Petition filed by the Ministry of Finance, Government of India challenging a judgment of the Patna High Court which set aside the ED's provisional attachment of certain properties mortgaged with the HDFC Bank.
The bench tagged the present matter with SBI v. Dr. Kewal Kishan Sood(SLP (Crl.) No.6554 of 2019), which is also raising a similar issue. In that case, the Delhi High Court had held- “The empowered enforcement officer has the authority of law in PMLA to attach not only a "tainted property" but also any other asset or property of equivalent value of the offender of money laundering, the latter not bearing any taint but being alternative attachable property (or deemed tainted property) on account of its link or nexus with the offence (or offender) of money-laundering.”
In the present case, a legal dispute had arisen between HDFC Bank Limited and the Enforcement Directorate over three immovable properties that were mortgaged by a respondent to secure an overdraft loan facility. The case involved allegations of money laundering during demonetization in 2016 and the subsequent attachment of these properties by ED.
2 FIRs were lodged on December 13, 2016, when an informant alleged that significant cash deposits were made in bank accounts through fraudulent means, and money was subsequently transferred to other accounts. During the investigation, it was discovered that money from the accounts mentioned in the FIR had been transferred to the bank account of M/S. Maa Tara Agency, which involved respondent No.5.
This led to the suspicion of money laundering, and the Deputy Director of Enforcement took action by provisionally attaching the three mortgaged properties, as well as the bank accounts of respondent No.5, under Section 5 of the Prevention of Money Laundering Act, 2002 (PMLA).
In response, HDFC Bank raised concerns about its claim over the mortgaged properties under Section 31B of the Recovery of Debts and Bankruptcy Act, 1993. The bank filed a written objection on November 17, 2017, contesting the provisional attachment. Thereafter, a writ petition was filed before the Patna HC.
The High Court began by dissecting the three limbs of Section 2(1)(u) of the PMLA, which defines "proceeds of crime."
The Court emphasized that property purchased before the commission of a scheduled offense does not fall within the scope of the first limb of the definition.
The Court also clarified that the second limb of the definition (No. II) is limited to the value of property derived from criminal activity and does not encompass any property owned by the individual involved in money laundering.
The Patna HC had held “In my view, the property derived from legitimate source cannot be attached on the ground that property derived from scheduled offense is not available for attachment. No.II above is confined to the value of property derived or obtained from criminal activity and not any property of the person alleged to be involved in money laundering. Otherwise, the legislature would not have defined the “proceeds of crime”, which was attachable under Section 5 of the PMLA”
The HC relied on the division Bench judgment of Punjab and Haryana High Court in Seema Garg V. Deputy Director, Directorate of Enforcement 2020 SCC Online P & H 738 which held that “Property purchased before the commission of scheduled offense leaving aside the date of enactment of PMLA, does not fall within the ambit of the first limb of definition of ‘proceeds of crime… To understand the true meaning of the second limb of the definition of ‘proceeds of crime’, it must be read in conjunction with Sections 3 and 8 of the PMLA. If all these sections are read together, the phrase ‘value of such property’ does not mean and include any property that has no link direct or indirect with the property derived or obtained from the commission of scheduled offense i.e. the alleged criminal activity. ‘Value of such property’ means property which has been converted into another property or has been obtained on the basis of property derived from the commission of scheduled offence e.g. cash is received as bribe and invested in the purchase of some house.”
Importantly, the Court stressed that the properties in question, which were acquired by respondent No.5, were not obtained using allegedly tainted money or linked to any act of money laundering at the time of acquisition. Therefore, these properties do not fall within the purview of the second limb of the definition as "value of property derived or obtained from criminal activity."
Consequently, the High Court firmly concluded that the properties in question cannot be termed as "proceeds of crime" and therefore, should not have been p.rovisionally attached under Section 5 of the PMLA. The Court found the act of provisional attachment of the properties of respondent No.5 by the enforcement authorities to be arbitrary and in violation of the mandate of Section 5 of the PML Act, 2002.
The High Court also differentiated between the SARFAESI Act and the Bankruptcy Act on one hand and the PMLA on the other. The former grants secured creditors preferential rights in cases of insolvency, giving them priority over other debts and government claims. In contrast, the PMLA focuses on the attachment and confiscation of "proceeds of the crime" acquired through tainted money from money laundering activities. The High Court firmly asserted that these two sets of laws operate in distinct fields and do not overlap or cover the same ground.
Therefore, the HC had set aside the attachment and allowed the writ petition.
Aggrieved by the same, the petitioner approached the Supreme Court.
Case title: Government of India, Ministry of Finance v. HDFC Bank Ltd.
Citation: SLP (Criminal) Diary No(s). 37743/2023
For petitioner- Mr. S.V. Raju, A.S.G. Mr. Mukesh Kumar Maroria, AOR Mr. Shashank Bajpai, Adv. Mr. Zoheb Hussain, Adv. Mr. Annam Venkatesh, Adv
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