2025 (5) TMI 317 - AT - Money Laundering

Money Laundering - scheduled offences - mainatinability of Provisional Attachment Order - whether the amount was forefeited before the attachment as per forfeiture clause namely Clause 8 thereof - overriding effect given to the provisions of PMLA 2002 over the agreement clause - kite flying - duping the State Bank of India Main Branch Kanpur of Rs. 46.42 crore in connivance with certain officers of the branch by availing credit facilities without having sufficient funds. Whether or not the amount could still be validly attached by the directorate in view of the overriding effect given to the provisions of PMLA 2002 notwithstanding the fact that the amount already stood forfeited by the appellant? HELD THAT - There is little room for any doubt that the provisions of the Act including those relating to attachment of properties under Section 5 would definitely prevail over the agreement signed by the parties in exercise of the general law provisions. This position would prevail even where the party holding the property (the FDs) in question was otherwise neither found to be involved nor complicit in the commission of the scheduled offence in any manner and was not even aware of the tainted nature of the property. The Hon ble Supreme Court in its landmark judgment in Vijay Madanlal Choudhary Ors. v. Union of India Ors. 2022 (7) TMI 1316 - SUPREME COURT (LB) has categorically held that the sweep of Section 5(1) is not limited to the accused named in the scheduled offence. It was further held by the Apex Court in that case that the objective of enacting the Act was the attachment and confiscation of proceeds of crime which is the quintessence so as to combat the evil of money-laundering by reaching the proceeds of crime in whosoever s name they are kept or by whosoever they are held. Therefore so long as there is material to indicate that the source of the money was proceeds of crime as defined by the Act it can be validly attached by the Directorate in exercise of powers under the Act regardless of whether the current holder of the property (the appellant herein) himself stood charged of any offence or not or even knew about its tainted nature. In the present case the material on record clearly indicates that Shri Hinish Ramchandani and other partners of M/s SRS Investment Company having duped the State Bank of India Main Branch Kanpur of Rs. 46.42 crore in connivance with certain officers of the branch by availing credit facilities and also by resorting to the practice of kite-flying without having sufficient funds in the account of the said company. There are valid reasons to believe that the funds passed on by the company to the present appellant as earnest money was out of the said proceeds of crime obtained by duping the bank though this fact may have been unknown to the present appellant while entering into the agreement for the sale of the property. As such the amount clearly answers to the description of proceeds of crime as defined under section 2(1)(u). A contention has been raised by the appellant that a part of the money (Rs. 7 lacs) out of the earnest money was spent by the Appellant out of the amount of Rs. 2.02 crores - it is found that although a contention has been raised there is nothing on record to prove the authenticity of the claim. Moreover once it has been held that the appellant had received an amount of Rs. 2.02 crores out of the proceeds of crime generated by the company even if it was without knowledge of its tainted nature the fact that he had utilized a part of the amount and made good the same by adding his own funds would not make the amount immune from attachment under the Act since the definition of proceeds of crime under the Act expressly includes the value of such property. The next contention is that PMLA does not have retrospective operation. About Rs. 1.51 crores were received by the Appellant in May 2009 and Sections 120-B 420 IPC and Section 13 of the Prevention of Corruption Act 1988 were added into the Schedule of the PMLA 2002 on 01.06.2009 through an amendment. Thus in any event on the date on which the said amount came into the hands of the Appellant there was no offence within the meaning of the PMLA 2002. It is by now well-settled that the issue of retrospectivity or otherwise insofar as the offence of money laundering is concerned has to be examined with reference to the time of commission of the act which constitutes money laundering under Act and not with reference to the time of commission of the act which constituted the scheduled offence. In other words regardless of whether the predicate offence was committed before or after it was added to the Schedule to the PMLA the commission of the offence of money laundering has to be reckoned with reference to the date or dates on which any of the actions which constitute money laundering were committed. This would include concealment/ possession/ acquisition/ use/ projecting or claiming of proceeds of crime to be untainted property. If any of these actions take place after the offence from which the proceeds were derived was added to the Schedule the offence of money laundering would be committed. There is nothing on record to support the claim of the Bank that the amount of earnest money paid by the company was Rs. 4.02 crores and not Rs. 2.02. No doubt a claim to this effect has been made in the letter dated 04.09.2010 written by the Advocate representing Sh. Hinish Ramchandani to the appellant. However the same is just a bland averment in writing without any supporting material. The amount mentioned in the impugned order is Rs. 2.02 crores only which is the subject matter of attachment and therefore the subject matter of this appeal. The issues averred in these contentions are outside the mandate of this Tribunal nor do they arise out of the impugned order. Needless to say the property attached by the directorate was the amount of Rs. 2.02 crores lying in the form of FDRs which has been challenged in this appeal. The immovable property referred to has not been attached and the manner in which the appellant as its owner has dealt with it is not before this Appellate Tribunal. Conclusion - The earnest money paid under the Agreement to Sell stood forfeited prior to attachment. The forfeited amount nonetheless constituted proceeds of crime under the PMLA and was validly attached. The overriding effect of the PMLA prevails over contractual forfeiture and findings of other fora. Appeal dismissed.

Summary

The core legal questions considered in this appeal under section 26 of the Prevention of Money Laundering Act, 2002 ("PMLA") are as follows:

(i) Whether the amount of Rs. 2.02 crores, paid by M/s SRS Developers as earnest money under an Agreement to Sell dated 17.05.2009, stood forfeited in favor of the appellant prior to the Provisional Attachment Order ("PAO") dated 30.03.2013 issued by the Directorate of Enforcement ("ED");

(ii) Whether the forfeited earnest money can be regarded as "proceeds of crime" under the PMLA and thus be subject to attachment despite the forfeiture;

(iii) The legal effect and applicability of the overriding provisions of Section 71 of the PMLA over other laws, including contractual forfeiture clauses and orders of other forums such as the Debts Recovery Tribunal ("DRT") and Debts Recovery Appellate Tribunal ("DRAT");

(iv) Whether the appellant's contention regarding non-retrospective operation of PMLA and the scheduled offences added to the PMLA Schedule after the receipt of money has merit;

(v) The relevance and effect of prior judicial findings and proceedings before DRT, DRAT, and the High Court on the attachment proceedings under PMLA;

(vi) The validity of the appellant's alleged voluntary consent to attachment and the evidentiary value of statements recorded under Section 50 of the PMLA;

(vii) Whether the appellant's claim that part of the attached amount was spent and replenished by his own funds negates the attachment;

(viii) The nature of the amount paid-whether it was earnest money or part payment of sale consideration-and the appellant's entitlement to retain or return the amount.

Issue-wise Detailed Analysis:

1. Forfeiture of Earnest Money Prior to Attachment

The appellant contended that under Clause 8 of the Agreement to Sell dated 17.05.2009, the earnest money of Rs. 2.02 crores stood automatically forfeited upon failure of the Vendee (M/s SRS Developers) to pay the balance sale consideration and execute the sale deed by 17.11.2009. The appellant relied on a letter dated 14.11.2009 offering an extension subject to increased sale consideration, which was not accepted by the Vendee, thus leaving the original agreement and forfeiture clause operative.

The Court examined the Agreement and the letter, noting that there was no evidence that the Vendee consented to the extension or paid the balance consideration by the stipulated dates. The letter itself was not countersigned or acknowledged by the Vendee, and the ED challenged its authenticity and legal enforceability. However, the Court found that the original forfeiture clause remained effective, and the earnest money stood forfeited by operation of contract well before the PAO issued in 2013.

Precedents such as the Hon'ble Supreme Court's judgment in Satish Batra v. Sudhir Rawal were considered, which clarified the principles governing earnest money and forfeiture: that earnest money is a guarantee for due performance, paid at contract formation, and forfeited on purchaser's default unless contract terms provide otherwise. The Court found these principles applicable, supporting the appellant's claim that the earnest money was forfeited as per contract terms.

2. Attachment under PMLA and the Concept of Proceeds of Crime

Despite the forfeiture, the ED contended that the amount represented proceeds of crime, derived from fraudulent activities by M/s SRS Investment Company and its partners, including Hinish Ramchandani, who duped the State Bank of India of Rs. 46.42 crores. The ED argued that the amount paid to the appellant was tainted money and therefore liable to attachment under Section 5 of the PMLA.

The Court noted that Section 71 of the PMLA provides the Act with overriding effect over any inconsistent law. This principle was reinforced by the Karnataka High Court's decision in Dyani Antony Paul v. Union of India, which emphasized the PMLA's overriding nature to combat money laundering effectively.

Further, the Supreme Court's ruling in Vijay Madanlal Choudhary v. Union of India was cited, which held that the scope of attachment under Section 5(1) is not limited to accused persons but extends to any property identified as proceeds of crime, regardless of the holder's knowledge or complicity. The Court applied this principle, holding that even if the appellant was unaware of the tainted nature of the funds, the amount received was proceeds of crime and validly attachable.

The flow of funds was established through investigation and evidence, showing transfer of defrauded money from M/s SRS Investment Company to M/s SRS Developers and then to the appellant as earnest money. The appellant's statement under Section 50 of the PMLA confirmed awareness of the criminal proceedings against Ramchandani and acknowledged the funds' tainted nature.

3. Effect of Forfeiture on Attachment under PMLA

The appellant argued that since the earnest money was forfeited prior to attachment, it ceased to be property of the Vendee and thus could not be proceeds of crime or subject to attachment. The ED countered that forfeiture under general law or contract does not override the PMLA's provisions, which have overriding effect.

The Court agreed with the ED, holding that the PMLA's overriding provisions prevail over contractual forfeiture clauses. The forfeiture did not extinguish the property's character as proceeds of crime. Therefore, the attachment was valid notwithstanding the forfeiture.

4. Relevance of DRT/DRAT and High Court Proceedings

The appellant relied on orders of the DRT, DRAT, and the Allahabad High Court, which had held that the appellant was not liable to return the amount to the bank and that the bank's recovery proceedings did not affect the appellant's rights. The appellant contended that these findings should be respected and considered in the attachment proceedings.

The Court distinguished these proceedings as civil recovery matters under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, which operate in a different legal sphere from the PMLA's criminal and attachment regime. The overriding effect of PMLA under Section 71 means that findings in civil recovery proceedings do not preclude attachment under PMLA. Hence, these findings were not binding or relevant to the attachment order.

5. Retrospective Operation of PMLA and Scheduled Offences

The appellant argued that the offences under Sections 120-B and 420 IPC and Section 13 of the Prevention of Corruption Act were added to the PMLA Schedule only on 01.06.2009, after the receipt of some funds in May 2009. Therefore, the PMLA could not be applied retrospectively to those funds.

The Court rejected this argument, relying on settled law that money laundering is a continuing offence, and the offence is to be considered with reference to the time of the money laundering act (such as concealment or use of proceeds), not the time of the predicate offence. The Karnataka High Court and Supreme Court decisions were cited to this effect, confirming that PMLA applies even if the predicate offence was committed before its inclusion in the Schedule, so long as the laundering acts occurred after inclusion.

6. Voluntary Consent to Attachment and Statements under Section 50

The appellant claimed that he never voluntarily agreed to attachment and that the statement recorded under Section 50(2) & (3) of the PMLA was taken under duress or misrepresented his position. The ED relied on this statement to assert the appellant's knowledge and acceptance of attachment.

The Court found that the statement merely acknowledged the ED's power to attach tainted money and the appellant's undertaking not to transfer funds without intimation. This did not amount to voluntary consent to attachment but was an acknowledgment of legal consequences. The Court held that attachment under PMLA does not require consent if the property is proceeds of crime.

7. Claim of Spending and Replenishing Funds

The appellant contended that Rs. 7 lakhs out of the Rs. 2.02 crores was spent and replenished with his own funds, and thus the FDRs represented his own money, not proceeds of crime.

The Court found no credible evidence to support this claim. Even if true, the definition of proceeds of crime under the PMLA includes the value of such property. Therefore, mixing tainted money with clean money does not exempt the entire amount from attachment.

8. Nature of Amount: Earnest Money or Part Payment

The State Bank of India contended that the amount was not earnest money but part payment of sale consideration and thus liable to be returned to the bank. The appellant maintained it was earnest money forfeited under contract.

The Court observed that the amount of Rs. 2.02 crores was the subject of the Agreement to Sell and was characterized as earnest money with a forfeiture clause. The Bank's claim of Rs. 4.02 crores was unsupported by documentary evidence. The Court held that the amount was earnest money forfeited by the appellant and that the attachment was valid as proceeds of crime.

Treatment of Competing Arguments and Findings

The Court carefully weighed the appellant's contractual and procedural arguments against the statutory mandate and objectives of the PMLA. While recognizing the contractual forfeiture and the appellant's position, the Court emphasized the overriding effect of the PMLA and the need to prevent laundering of proceeds of crime, even if held by third parties unaware of the tainted nature. The Court distinguished prior decisions cited by the appellant on facts and law, finding them inapplicable or distinguishable.

The Court also rejected the appellant's reliance on civil recovery proceedings and retrospective operation arguments, affirming the primacy of PMLA attachment proceedings. The ED's evidence and flow of funds analysis were accepted as establishing the tainted nature of the amount.

Conclusions

The Court concluded that the earnest money of Rs. 2.02 crores stood forfeited by the appellant under the Agreement to Sell prior to attachment. However, the forfeiture did not preclude the amount from being proceeds of crime under the PMLA. The overriding effect of Section 71 of the PMLA ensured that attachment under the Act prevailed over contractual and other legal claims. The amount was rightly attached as proceeds of crime obtained by fraud and laundered through the appellant. The appellant's other contentions, including retrospective operation, prior civil proceedings, and voluntary consent, were rejected. The appeal was dismissed.

Significant Holdings and Core Principles Established:

"The provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force." (Section 71, PMLA)

"The sweep of Section 5(1) is not limited to the accused named in the scheduled offence. The objective of enacting the Act was the attachment and confiscation of proceeds of crime which is the quintessence, so as to combat the evil of money-laundering, by reaching the proceeds of crime in whosoever's name they are kept or by whosoever they are held." (Supreme Court in Vijay Madanlal Choudhary)

"Earnest money is paid or given at the time when the contract is entered into, and, as a pledge for its due performance by the depositor to be forfeited in case of non-performance by the depositor." (Satish Batra v. Sudhir Rawal)

"Money laundering is a continuing offence and the offence is to be reckoned with reference to the date or dates on which any of the actions which constitute 'money laundering' were committed, not the date of the predicate offence." (Karnataka High Court in Dyani Antony Paul)

Final determinations:

- The earnest money paid under the Agreement to Sell stood forfeited prior to attachment.

- The forfeited amount nonetheless constituted proceeds of crime under the PMLA and was validly attached.

- The overriding effect of the PMLA prevails over contractual forfeiture and findings of other fora.

- The appellant's other contentions regarding retrospective operation, voluntary consent, and civil recovery proceedings do not affect the validity of attachment.

- The appeal against the confirmation of attachment of the two FDRs totaling Rs. 2.02 crores is dismissed.