2025 (5) TMI 2105 - AT - Money Laundering

Money Laundering - scheduled offences - main allegation against the companies related to loan default/diversion due to which the accounts of the concerns turned NPA and the banks suffered huge wrongful losses - Sections 120-B read with 420 of the erstwhile IPC and Sections 13(1)(d) the P.C. Act 1998 - HELD THAT - It evident that PMLA 2002 lays down elaborate provisions with regard to the properties and documents seized under the Act. Further the said provisions are couched in mandatory language as indicated by repeated use of the word shall . As such it is not left to the authorities acting under the provisions of the Act to choose a different course of action as per their desire. They may no doubt decide not to retain the property which has been seized and return the same to the person from whom such property was seized. This is evident from the use of the word may in section 20(1). However if they decide that the property needs to be retained the same would have to be in accordance with the other provisions of the Act. Whether the provisions of Section 17(2) of the Act read with Rule 8 of the Prevention of Money-laundering (Forms Search and Seizure or Freezing the Manner of Forwarding the Reasons Material to the Adjudicating Authority Impounding and Custody of Records and the Period of Retention) Rules 2005 have been complied with? - HELD THAT - In the present case the fact of non-compliance with the aforesaid provisions of law with regard to forwarding of copy of the reasons so recorded along with material in his possession is evident from the very Appeal Memo filed by the Appellant Directorate. The failure on the part of the Directorate in forwarding the reasons and materials is an admitted fact. The submission of the Appellant Directorate however it that the failure to forward copy of reasons to believe recorded along with the relevant material/order of retention to the Ld. AA as required u/s 17(2) of PMLA 2002 was that the postal authorities had stopped accepting any posts on account of Covid-19 pandemic. The Respondents have strongly contested this claim. They have referred not only to Covid-19 lockdown and subsequent unlock guidelines issued from time to time by the Government of India but also to a specific RTI query they had filed and the reply received thereto from the Post Office Ahmedabad that they were operational and working during the month October/November 2020. There is nothing on record in the present case to indicate that the respondent Directorate having seized the properties under section 17(1) took the other mandatory steps as laid down in the Act including forwarding of reasons and material to the AA immediately after the search recording the reason to believe that the property/ record is required to be retained for the purposes of adjudication as provided under section 20(1)/21(1) forwarding a copy of Retention Order along with the material in possession to the AA etc. Under the circumstances the Ld. AA has rightly rejected the OA filed by the appellant Directorate and refused to grant permission for further retention of the seized property and records. The retention of the seized properties and records in the present case therefore lacked legal sanctity. Conclusion - The Adjudicating Authority s order affirmed rejecting the application for retention of seized properties and directing their release with no order as to costs. Appeal dismissed.

Summary

The core legal questions considered in the judgment pertain to the procedural and substantive validity of the retention of seized properties and records under the Prevention of Money Laundering Act, 2002 (PMLA). Specifically, the issues include:

1. Whether the mandatory procedural requirements under Sections 17(2), 20, and 21 of the PMLA, 2002, and the corresponding Rules 8 and 3 of the Prevention of Money Laundering (Forms, Search and Seizure or Freezing and the Manner of Forwarding the Reasons and Material to the Adjudicating Authority, Impounding and Custody of Records and the Period of Retention) Rules, 2005 were complied with by the Enforcement Directorate (ED) in respect of the seizure and retention of properties and documents.

2. Whether the failure to forward the reasons recorded along with the material to the Adjudicating Authority (AA) constituted a fatal procedural lapse invalidating the retention of seized properties.

3. Whether the retention of seized cash and documents without passing retention orders under Sections 20 and 21 of the PMLA was legally sustainable.

4. Whether the seized cash and documents constituted "proceeds of crime" under Section 2(1)(u) of the PMLA, 2002, and whether the ED had established a nexus between the seized properties and the scheduled offences.

5. Whether the ED's reliance on the COVID-19 pandemic as a reason for non-compliance with procedural requirements was justified.

6. Whether the applications filed by the ED under Section 17(4) of the PMLA for retention of seized properties were maintainable in the absence of prior retention orders under Sections 20 and 21.

7. Whether the seized properties and documents should be released to the respondents given the procedural lapses and lack of evidence linking them to the scheduled offences.

Issue-wise Detailed Analysis

Issue 1 & 2: Compliance with procedural requirements under Sections 17(2), 20, and 21 of PMLA and Rules 8 and 3 of the 2005 Rules

The legal framework mandates that immediately after search and seizure under Section 17(1), the authorized officer must forward a copy of the reasons recorded along with the material in possession to the Adjudicating Authority in a sealed envelope (Section 17(2)). Further, retention of seized property beyond the seizure requires passing of retention orders under Sections 20 and 21, which must also be forwarded to the AA along with relevant material as per the prescribed procedure (Section 20(2) and 21(1)). Rule 8 of the 2005 Rules prescribes detailed procedural safeguards for forwarding reasons and material, including preparation of an index, sealing of envelopes, marking as confidential, and maintenance of registers.

The Court noted that the ED admitted non-compliance with these mandatory procedural requirements. The ED contended that the failure to forward the reasons and material was due to the postal authorities not accepting posts during the COVID-19 pandemic. The respondents countered this by producing evidence from RTI queries and postal records showing that the post office was operational during the relevant period, supported by government lockdown and unlock guidelines. The Court emphasized the settled legal principle that where a statute prescribes a particular manner of doing a thing, it must be done in that manner alone, citing the Supreme Court decision in OPTO Circuit India Ltd. v. Axis Bank & Ors.

The Court further referred to the Supreme Court's observations in Vijay Madanlal Choudhary & Ors. v. Union of India & Ors. underscoring the constitutional validity of Section 17 and the in-built safeguards requiring strict adherence to forwarding reasons and material to the AA to ensure fairness and accountability.

Given the admitted failure to comply with the procedural mandates and the lack of credible justification for such failure, the Court held that the ED's action of retaining the seized properties without following the prescribed procedure was invalid.

Issue 3: Validity of retention of seized property without passing retention orders under Sections 20 and 21

The Court analyzed the statutory scheme, noting that retention of seized property for up to 180 days requires an order under Section 20(1) (for properties) and Section 21(1) (for documents), which must be forwarded to the AA. Without such retention orders, the property must be returned after seizure. The ED conceded that no retention orders were passed and no material was forwarded to the AA as mandated. The AA had rightly rejected the OA filed by the ED under Section 17(4) on this ground.

The Court held that the failure to pass retention orders and forward them to the AA was a fatal procedural lapse, rendering the retention of seized properties and documents legally unsustainable.

Issue 4: Whether seized cash and documents constitute proceeds of crime and nexus with scheduled offences

The respondents argued that the seized cash was cash-on-hand, duly recorded in audited books and declared in Income Tax Returns, and that the documents seized were not incriminating or related to the scheduled offences. The ED failed to produce any evidence linking the seized cash or documents to the criminal activities of the Ardor group companies or their directors as defined under Section 2(1)(u) of the PMLA.

The Court referred to the Supreme Court's observations in Vijay Madanlal Choudhary & Ors., emphasizing that only property derived directly or indirectly as a result of criminal activity relating to scheduled offences can be regarded as proceeds of crime. Mere possession of unaccounted property or cash shown in books and tax returns does not automatically qualify as proceeds of crime.

Given the absence of any nexus established by the ED, the Court found no merit in the claim that the seized cash and documents constituted proceeds of crime.

Issue 5: Justification of non-compliance due to COVID-19 pandemic

The ED contended that postal restrictions due to the pandemic prevented forwarding of reasons and material to the AA. The respondents disproved this by showing that postal services were operational and that official communications were exchanged through India Post during the relevant period. The Court examined government orders and found that post offices were exempted from closure and were functioning during the period of the search and subsequent proceedings.

The Court rejected the ED's pandemic-related justification as an afterthought and held that it did not excuse the statutory non-compliance.

Issue 6: Maintainability of OA under Section 17(4) in absence of retention orders under Sections 20 and 21

The ED argued that filing an OA under Section 17(4) before the AA for retention of seized property was permissible even without prior retention orders under Sections 20 and 21. The respondents and the AA took the contrary view, holding that Section 17(4) applications are not independent of Sections 20 and 21 and that retention orders must precede such applications.

The Court agreed with the respondents and the AA, observing that the statutory scheme envisages a sequential process: seizure under Section 17(1), retention order under Sections 20/21, and then application under Section 17(4) for further retention. The absence of retention orders rendered the Section 17(4) application premature and invalid.

Issue 7: Direction for release of seized properties and documents

Given the procedural lapses, absence of retention orders, lack of nexus between seized properties and scheduled offences, and expiry of the statutory retention period (180 days), the Court held that the retention of seized properties and documents was without legal sanction. The AA's order rejecting the OA and directing release was upheld.

The Court also noted that the investigation had been completed and prosecution complaint filed wherein none of the respondents were named as accused, further weakening the ED's claim for retention. The maximum permissible period for attachment during investigation under Section 8(3) of the PMLA had expired.

Additional Observations

The Court observed that the ED's attempt to link the respondents to the criminal activities of the Ardor group companies was unsubstantiated. The respondents had explained the source and nature of the seized cash and documents, which were found to be legitimate and unrelated to the scheduled offences. The Court found the ED's reliance on the Supreme Court decision in OPTO Circuit India Ltd. misplaced in the factual context of this case, but accepted the principle of strict compliance with statutory procedure emphasized therein.

Significant Holdings

"The provisions of the PMLA, 2002, are couched in mandatory language, as indicated by repeated use of the word 'shall'. As such, it is not left to the authorities acting under the provisions of the Act to choose a different course of action as per their desire."

"Where a statute provides for a thing to be done in a particular manner, then it has to be done in that manner alone and in no other manner."

"The failure on the part of the Directorate in forwarding the reasons and materials is an admitted fact... The submission of the Appellant Directorate, however, that the failure to forward copy of reasons to believe recorded along with the relevant material/order of retention to the Ld. AA as required u/s 17(2) of PMLA, 2002 was that the postal authorities had stopped accepting any posts on account of Covid-19 pandemic, is not supported by the evidence."

"The retention of the seized properties and records in the present case, therefore, lacked legal sanctity."

"The Ld. AA has rightly rejected the OA filed by the appellant Directorate and refused to grant permission for further retention of the seized property and records."

"Only such property which is derived or obtained, directly or indirectly, as a result of criminal activity relating to a scheduled offence can be regarded as proceeds of crime."

The Court dismissed the appeal, affirming the Adjudicating Authority's order rejecting the application for retention of seized properties and directing their release, with no order as to costs.