2025 (6) TMI 1180 - AT - Money Laundering

Money Laundering - Provisional Attachment Order - proceeds of crime - reliability of statements u/s 50 of PMLA and relied upon documents - HELD THAT - The present appeals are hereby disposed of with liberty as prayed in view of the judgment of Hon ble Supreme Court of India in case of Vijay Madanlal Choudhary others v. Union of India 2022 (7) TMI 1316 - SUPREME COURT (LB) it is held that Once the possession of the property is taken in terms of Sub-section (4) and the finding in favour of the person is rendered by the Special Court thereafter and during the interregnum if the property changes hands and title vest in some third party it would result in civil consequences even to third party. That is certainly avoidable unless it is absolutely necessary in the peculiar facts of a particular case so as to invoke the option available Under Subsection (4) of Section 8. ED is hereby directed to restrain from taking any coercive step till the trial of PMLA case attains finality. However it is made clear that if the attached property is rented out to any third person/ party then appellants will deposit the 11 month s rent to the ED by way of FDR and the remaining one-month rent can be used for maintenance of the property. The accumulated rent will be disposed of by the LD. Special Judge as per law. Appeal disposed off.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Appellate Tribunal under the Prevention of Money Laundering Act, 2002 (PMLA) in these appeals include:

(a) Whether the confirmation of the Provisional Attachment Orders (PAOs) issued by the Enforcement Directorate (ED) attaching movable and immovable properties of the appellants was justified on the basis of the material collected during investigation under PMLA.

(b) Whether the attached properties constitute "proceeds of crime" as defined under PMLA, thus warranting attachment and confirmation thereof by the Adjudicating Authority.

(c) The extent of the Managing Director's and other officials' involvement in the alleged manipulation and falsification of the books of accounts of the First Leasing Company of India Ltd. (FLCIL), which forms the basis for the attachment orders.

(d) The implications of the findings of fraudulent financial practices, including inflated income and assets, window-dressing of accounts, and misappropriation of funds, on the validity of the attachment orders.

(e) The scope and limitations on the Enforcement Directorate's power to take possession of attached properties pending trial, especially in light of the Supreme Court's ruling in Vijay Madanlal Choudhary & others v. Union of India.

(f) Whether any coercive action by the ED should be stayed until the finality of the criminal trial under PMLA.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) & (b): Justification for Confirmation of Provisional Attachment Orders and Nature of Attached Properties as Proceeds of Crime

The legal framework governing the attachment of properties under PMLA is primarily Sections 5 and 26 of the Act. Section 5 empowers the ED to provisionally attach properties suspected to be proceeds of crime, and Section 26 provides for appeals against such orders. The Adjudicating Authority's role is to confirm or revoke the provisional attachment based on the material available.

The Court examined extensive investigative findings, including statements recorded under Section 50 of PMLA, forensic audit reports, and documentary evidence obtained from banks and other agencies. The investigation revealed systematic manipulation and falsification of the books of accounts of FLCIL over many years, involving inflated income, overstated assets, and unsubstantiated ledger entries designed to present a misleading financial position to banks and statutory authorities.

Key admissions by officials, including the Managing Director and Chief Financial Officers, confirmed that these fraudulent practices were employed to obtain financial benefits such as loans, deposits, and dividends despite the company incurring losses. The nexus between the attached properties and the proceeds of crime was established through this evidence, identifying immovable and movable assets valued at approximately Rs. 25.41 crores as tainted proceeds.

The Court noted that FLCIL operated without the prescribed net owned fund required under Section 451A of the RBI Act, making its acceptance of deposits and lending activities unlawful. The fraudulent financial practices were thus not only deceptive but also illegal, further justifying the attachment of properties derived from such activities.

The Court applied the law to the facts, concluding that the material collected was sufficient to satisfy the threshold for confirmation of the PAOs. The Adjudicating Authority's orders confirming the attachment were upheld as valid and supported by evidence.

Issue (c) & (d): Involvement of Managing Director and Officials in Financial Fraud and its Impact on Attachment Validity

The investigation disclosed that the Managing Director, Shri Farouk Irani, despite attempts to distance himself from the fraudulent activities, was centrally involved in the manipulation of accounts. The Court relied on statements indicating his supervisory role and knowledge of the window-dressing practices, as well as his participation in decisions regarding asset growth projections to secure bank loans.

The Court emphasized that the Managing Director's position as the key personnel at the helm of affairs made it implausible for him to be unaware of the systematic falsification of records. The complicity of other officials, including CFOs and chartered accountants, was also established through their voluntary statements and documentary evidence.

The fraudulent practices included passing extraneous and unsubstantiated debit and credit entries without corresponding bank transactions, inflating stock and debtor statements, and misrepresenting financial health to banks and public authorities. The Court found that these acts constituted offences under IPC sections related to cheating, forgery, and criminal breach of trust, as well as offences under PMLA.

The Court's interpretation underscored that the involvement of the Managing Director and officials was a critical factor in affirming the attachment of properties as proceeds of crime, as these assets were acquired through the proceeds of the fraudulent scheme.

Issue (e): Scope of ED's Power to Take Possession of Attached Properties Pending Trial

The Court referred extensively to the Supreme Court's ruling in Vijay Madanlal Choudhary & others v. Union of India, 2022, which clarified the limited circumstances under which the ED may take possession of attached properties. The ruling emphasized that confirmation of a provisional attachment order does not equate to confiscation of property and that possession should be taken only in exceptional cases after a formal confiscation order is passed.

The Court highlighted that Section 5(4) of PMLA protects the enjoyment of immovable property by the person interested until confiscation is ordered, and premature possession could cause irreparable civil consequences, including transfer of title to third parties during the pendency of trial.

Applying this principle, the Court directed that the ED should refrain from taking coercive possession of the attached properties until the criminal trial attains finality, thereby balancing the rights of the appellants against the interests of the State in preserving the proceeds of crime.

Issue (f): Stay on Coercive Action by ED Pending Finality of Trial

In light of the appellants' submission that they would not press the appeals on merit and sought protection from coercive action, the Court granted liberty to the appellants to lead their defence during trial. The Court ordered that the ED restrain from taking any coercive steps until the conclusion of the PMLA trial.

Furthermore, the Court provided a mechanism for management of the attached properties rented to third parties, directing the appellants to deposit eleven months' rent with the ED by way of Fixed Deposit Receipt (FDR), with the remaining one month's rent to be used for property maintenance. The accumulated rent would be subject to disposal by the Special Judge as per law, ensuring proper custodianship and protection of interests pending trial.

The Court's approach reflected a careful consideration of the competing interests of enforcement and protection of property rights during the pendency of criminal proceedings.

3. SIGNIFICANT HOLDINGS

The Court held:

"It is clearly evident that the books of accounts of FLCIL have been manipulated and falsified by making unsubstantial entries in the Books and it was a process for over many years to show inflated income, inflated assets in the books of accounts of FLCIL."

"As the Managing Director of FLCIL he is the key personnel and at the helm of affairs and it does not stand to reason that he is unaware of the entire fudging of the records and without his concurrence and connivance it is not possible to fudge the records, for his sub-ordinate officials."

"No NBFC can carry on business of a Non-Banking Financial Institution without obtaining a certificate of registration and having a prescribed net owned fund... FLCIL cannot function as an NBFC and so it cannot lend or accept deposits."

"Confirmation of the Provisional Attachment Order does not mean that the property stands confiscated; possession should be taken only in exceptional situations and after a formal confiscation order is passed."

"Section 5(4) clearly states that nothing in Section 5 including the order of provisional attachment shall prevent the person interested in the enjoyment of immovable property attached Under Sub-section (1) from such enjoyment."

"ED is hereby directed to restrain from taking any coercive step, till the trial of PMLA case attains finality."

The Court concluded that the Adjudicating Authority's confirmation of the Provisional Attachment Orders was valid and supported by evidence establishing the properties as proceeds of crime under PMLA. However, the Court restrained the ED from taking possession or coercive action pending the final outcome of the criminal trial, thereby protecting the appellants' rights during the pendency of proceedings.