2022 (8) TMI 1583 - DSC - Money Laundering

Money Laundering - proceeds of crime have been generated by the accused persons - Transfer of the equity shares of the A-1 company - Mining/Production of coal which were utilized/sold and thus funds were generated - HELD THAT - Prima facie case for summoning all the accused persons is clearly made out for the offence u/s 3 of PMLA punishable u/s 4 of the said Act. Accordingly in the overall facts and circumstances of the case cognizance of the offence u/s 3 of PMLA punishable u/s 4 of the said Act taken. Accordingly summons be issued to all the accused persons i.e. (A-1) company M/s B.S. Ispat Ltd. (A-2) Mohan Agrawal (A-3) Govinddas Daga and (A-4) Nandkishore Sarda (A-5) Ashish Agrawal and (A-6) Smt. Swarna Daga Mimani to be served through IO for 10.10.2022

Summary

1. ISSUES PRESENTED and CONSIDERED

(a) Whether the accused persons committed the offence of money laundering under Section 3 of the Prevention of Money Laundering Act, 2002 (PMLA), punishable under Section 4 of the Act, by securing allocation of the Marki Mangli-I coal block through false claims and misrepresentations and subsequently generating proceeds of crime through share transfers and coal production?

(b) Whether the share capital raised by the accused company through issuance of equity shares and the subsequent sale of shares to a third party constitute proceeds of crime derived from criminal activity under PMLA?

(c) Whether the coal produced and sold by the accused company from the allocated coal block amounts to proceeds of crime under the definition provided in Section 2(1)(u) of PMLA?

(d) Whether the provisional attachment of assets amounting to significant sums connected to the accused company and individuals is justified under PMLA?

(e) Whether the prosecution complaint filed under Section 45 of PMLA discloses a prima facie case warranting cognizance and issuance of summons to the accused persons?

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Commission of Money Laundering Offence under PMLA

The legal framework centers on the provisions of the Prevention of Money Laundering Act, 2002, particularly Sections 3 and 4. Section 3 defines the offence of money laundering, while Section 4 prescribes punishment. Additionally, Section 2(1)(u) defines "proceeds of crime" as any property derived or obtained directly or indirectly by any person as a result of criminal activity relating to scheduled offences.

The Court considered the allegations that the accused persons secured the allocation of the Marki Mangli-I coal block by submitting applications and documents falsely representing the existence and directorship of the company M/s B.S. Ispat Ltd. (A-1) before its formal incorporation on 01.12.1999. The applications dated 28.06.1999 and 23.07.1999 were submitted by accused persons describing themselves as directors of the company which did not legally exist at that time.

The Court noted the relevance of the Supreme Court's decision in Vijay Madanlal Choudhary & Ors. Vs Union of India & Ors., which clarified the scope of PMLA offences and the approach to cognizance. The prosecution complaint also referenced the ongoing CBI case against the accused for offences under IPC Sections 120-B and 420 relating to the coal block allocation.

On the facts, the Court found that the false claims and misrepresentations regarding the company's existence and directorship were material to securing the coal block allocation, which is a scheduled offence under the PMLA framework. The Court held that the generation of proceeds through share transfers and coal production flows from this initial illegality, thereby constituting money laundering.

The competing argument that the company was incorporated later and thus the applications were valid was rejected due to the clear timeline and documentary evidence showing the company's non-existence at the time of initial applications.

Conclusion: Prima facie case established that accused persons committed money laundering under Section 3 PMLA by securing coal block allocation through false representation.

Issue (b): Share Capital Raised and Sale of Shares as Proceeds of Crime

The Court examined the detailed shareholding pattern and issuance of equity shares by the accused company. Initially, 700 shares existed, held by the Agrawal and Daga groups. Subsequently, large tranches of shares were issued in financial years 2002-03 and 2010-11, raising share capital of Rs. 28 crores and Rs. 32 crores respectively, including premium amounts.

Shareholding was distributed among the Agrawal, Daga, and Sarda groups, with companies jointly controlled by these groups acquiring substantial shares. The total share capital raised was Rs. 60.05 crores via issuance of 1,50,51,000 equity shares.

The Court found that these amounts were directly derived from criminal activity, i.e., the initial false claim for coal block allocation. The subsequent issuance of shares and sale of entire shareholding to M/s Oriental Iron Casting Ltd. for Rs. 116.58 crores were transactions tainted by the proceeds of crime.

The Court relied on audited financial statements showing fixed assets and land valuations consistent with inflated values linked to the coal block allocation. The share purchase agreement and amounts received by the groups further corroborated the flow of illicit funds.

Arguments that the share transactions were legitimate business dealings were countered by the prosecution's evidence linking the capital raised to the initial illegality. The Court thus held that the share capital raised and sale proceeds constitute proceeds of crime under Section 2(1)(u) PMLA.

Conclusion: The issuance of shares and sale of shareholding by the accused company represents proceeds of crime derived from scheduled offences, amounting to money laundering.

Issue (c): Coal Production and Sale as Proceeds of Crime

The Court considered the production of coal from March 2011 to 2014-15, amounting to 1,91,253 MT valued at Rs. 27.15 crores. The coal was produced from the allocated Marki Mangli-I coal block, which was secured through the initial false claims.

Under PMLA, proceeds of crime include property derived from scheduled offences. The Court held that the coal production and sale proceeds are directly linked to the illegal coal block allocation and thus fall within the definition of proceeds of crime.

Competing arguments that coal production was a legitimate commercial activity were rejected as the foundational allocation itself was obtained by misrepresentation, rendering all subsequent gains tainted.

Conclusion: Coal produced and sold by the accused company constitutes proceeds of crime under PMLA.

Issue (d): Provisional Attachment of Assets

The Court reviewed the orders of provisional attachment of assets worth Rs. 78.25 crores and further Rs. 60.05 crores, confirmed under PMLA. The attachments related to properties and assets of the accused company and individuals connected to the proceeds of crime.

Given the prima facie case of money laundering and the quantum of alleged proceeds, the Court found the provisional attachment justified to prevent dissipation of tainted assets.

Conclusion: Provisional attachment of assets under PMLA was appropriate and in accordance with statutory provisions.

Issue (e): Prima Facie Case and Cognizance

The Court examined the prosecution complaint, supplementary complaint, documentary evidence, and statements of witnesses and accused persons. The reliance on the Supreme Court's decision in Vijay Madanlal Choudhary & Ors. was noted, which supports taking cognizance upon prima facie satisfaction.

The Court concluded that the prosecution complaint disclosed sufficient material to take cognizance of offence under Section 3 PMLA punishable under Section 4. The accused persons were accordingly summoned to face trial.

Conclusion: Prima facie case made out; cognizance taken and summons issued to accused persons.

3. SIGNIFICANT HOLDINGS

The Court held:

"Having perused and considered the entire material, I am of the view that prima facie case for summoning all the accused persons is clearly made out for the offence u/s 3 of PMLA punishable u/s 4 of the said Act."

The Court established the core principle that proceeds of crime under PMLA include any property derived directly or indirectly from scheduled offences, including share capital raised and assets acquired through false representations.

The Court affirmed that misrepresentation regarding company incorporation and directorship to secure government coal block allocation constitutes a predicate offence, and all subsequent financial transactions flowing from such allocation are subject to PMLA scrutiny.

Final determinations:

• Accused persons committed offence of money laundering under Section 3 PMLA.
• Proceeds generated through share issuance, share sale, and coal production are proceeds of crime.
• Provisional attachment of assets is justified and confirmed.
• Cognizance of offence is taken; summons issued to accused persons for trial.