2020 (3) TMI 460 - HC - Money Laundering

Fraudulent availment of VAT refund - Validity of Provisional Attachment Order - Money Laundering - proceeds of crime - Adjudicating Authority confirmed the attachment for a period of 90 days during the pendency of investigation or pendency of the proceeding before a court under PMLA - case of appellant is that at the time of expiry of 90 days from the date of confirmation order investigation was pending; property in question was purchased much prior to not only commission of alleged offence but also introduction of PMLA; and there is non-compliance of the requirement of recording of reasons prior to provisional attachment of property. HELD THAT - Two sets of proceedings are initiated under PMLA after recording of ECIR. In first set of proceedings, initiated by Enforcement Department, property i.e. proceeds of crime are provisionally attached and in second set of proceedings criminal complaint is filed before Special Court which has power to convict the accused and confiscate attached properties. The conceded facts emerging from record are that two Appellants had purchased their property in 1991 and one Appellant in 2011. The alleged offence of fraudulent availment of VAT refund was committed in February-March 2013 and PMLA came into force w.e.f. 1.7.2005. As per FIR of scheduled offence, ECIR and different orders passed by Respondents, M/s Jaldhara Exports, a proprietorship concern of Raman Garg fraudulently obtained VAT refund from VAT authorities without actual export of goods. The properties in question are lying mortgaged with bank since 2009. As per impugned order, the Respondent is empowered to attach any property, thus property even though purchased in 1991 could be attached. Concededly, the Appellants are neither arrayed as accused in scheduled offence nor criminal complaint filed before Special Court under PMLA. The Respondent has already filed criminal complaint under PMLA against Raman Garg and others before Special Court, however admittedly investigation is still pending. The Respondent has not filed any criminal complaint under Section 3 of PMLA against Appellants and a period of even 365 days from the date of confirmation order passed by Ld. Adjudicating Authority has already expired. Whether provisional attachment of property is sustainable after the expiry of 90 or 365 days from the date of order passed by adjudicating authority? - HELD THAT - The Respondent in its reply before Tribunal as well during the course of arguments before this Court conceded that investigation is still pending and although complaint stands filed against only Raman Kumar and Others but not present Appellants. As investigation even against Raman Kumar and Others is still pending, Adjudicating Authority ordered to continue attachment for 90 days during the pendency of investigation. The Appellants were neither arrayed as accused in police case (FIR relating to scheduled offence) nor in the complaint filed before Special Court, thus the Appellants are entitled to benefit of time period cap prescribed by Section 8 (3)(a) of PMLA. The 90 days period prescribed under Section 8(3)(a) has been enlarged to 365 days w.e.f. 01.08.2019. In the present case even 365 days period has expired but investigation is still pending, thus Appellants are entitled to benefit of 90/365 days cap and provisional attachment order stands ceased to exist by operation of law. Whether property acquired prior to enactment of PMLA i.e. prior to 1.7.2005 can be provisionally attached under Section 5 of the PMLA? - Whether phrase value of such property occurring in definition of proceeds of property includes any property of any person irrespective of source of property? - HELD THAT - As per Section 8(6) of the PMLA, where the Special Court finds that offence of money laundering has not taken place or property is not involved in money laundering, it shall release such property. If contention of Respondent is upheld, there would be no need of recording findings by Special Court with respect to property attached being proceeds of crime, no sooner it is held that offence of money laundering has been committed, then the Special Court would be bound to confiscate every attached property because every property in the hand of a person, who had obtained or derived property from scheduled offence, would be proceeds of crime - A person who is not connected with commission of scheduled offence as well property derived from said offence but had dealt with any other property of a person, who had committed scheduled offence, would fall within the ambit of Section 3 of the PMLA, which cannot be countenanced in law. There would be total chaos and uncertainty. The authorities would get unguided and unbridled powers and may implicate any person even though he has no direct or indirect connection with scheduled offence and property derived from thereon but has dealt with any other property (not involved in scheduled offence) of the person who has derived or obtained property from scheduled offence. It would amount to violation of Article 20 and 21 of Constitution of India. There may be a case where a person accused of commission of scheduled offence, on account of destruction or disposal of property, is having no property. Non-availability of property derived from scheduled offence does not immune an accused from offence of money laundering committed under Section 3 of the PMLA. As per scheme of the Act, there is criminal liability of an accused apart from civil liability of attachment of property, thus object of the Act is not defeated merely on the ground that property derived from crime is not available for attachment. The property derived from legitimate source cannot be attached on the ground that property derived from scheduled offence is not available. There are so many scheduled offences where property may or may not be involved because every scheduled offence is not committed for the sake of property e.g. offence relating to wild animals, waging war against Government of India, murder, attempt to murder, offences under Arms Act. There is a long list of offences under different enactments where property is normally not involved still these are scheduled offences and punishable under Section 3 4 of PMLA - Thus, the phrase value of such property does not mean and include any property which has no link direct or indirect with the property derived or obtained from commission of scheduled offence i.e. the alleged criminal activity. Whether officer attaching property is required to record reason that property is likely to be concealed, transferred or dealt with in any manner which may frustrate proceedings relating to confiscation? - HELD THAT - Section 5(1) specifically requires that Director or any other officer authorized by him shall record reasons in writing on the basis of material in his possession that he has reason to believe that proceeds of crime are likely to be concealed, transferred or dealt with. Like PMLA, there are a number of enactments viz Income Tax Act, 1961, Customs Act, 1962, Central Goods and Services Tax Act, 2017 where there is requirement of recording of reasons prior to taking particular action like arrest, search, seizure of goods/records, attachment of bank accounts etc. - an authority required to record reasons prior to initiating any action is duty bound to record reasons in writing which cannot be mere formality but should be germane and relevant to the subjective opinion formed by authority. Reasons recorded are subject to judicial review and court may look into material which made basis of reasons recorded. In the present case, concededly property was purchased in 1991 and mortgaged with bank in 2009. The alleged offence was committed in 2013 whereas attachment order was passed in December 2017. There is nothing on record to show that Appellants after 2009 or 2013 attempted to dispose of property in question which prompted the Respondent to pass attachment order. The Respondent has simply taken wording of Section 5(1) of the PMLA and reiteration of these words would not constitute recording of reasons that if property is not attached, it may result in frustrating any proceedings of confiscation - the Respondent has passed attachment order without recording the reasons on the basis of material in his possession that property in question was likely to be concealed, transferred or dealt with in any manner which would frustrate confiscation proceedings. Appeal allowed.

Summary

Issues Involved:

1. Sustainability of provisional attachment after the expiry of 90 or 365 days.
2. Provisional attachment of property acquired prior to the enactment of PMLA.
3. Interpretation of the phrase "value of such property" in the definition of "proceeds of crime."
4. Requirement for recording reasons for provisional attachment of property.

Detailed Analysis:

1. Sustainability of Provisional Attachment After the Expiry of 90 or 365 Days:

The court examined whether the provisional attachment of property is sustainable after the expiry of 90 or 365 days from the date of the order passed by the adjudicating authority. It was noted that as per clause (a) of Sub-Section (3) of Section 8 of the PMLA, the provisional attachment shall continue during investigation for a period not exceeding 90 days, which was later amended to 365 days. The court found that the appellants were entitled to the benefit of the time cap prescribed by Section 8(3)(a) of PMLA. Since the investigation was still pending and the appellants were not arrayed as accused in the criminal complaint, the provisional attachment order ceased to exist by operation of law after the expiry of the prescribed period.

2. Provisional Attachment of Property Acquired Prior to the Enactment of PMLA:

The court addressed whether property acquired before the enactment of PMLA could be provisionally attached. It was determined that property purchased prior to the commission of the scheduled offense does not fall within the first limb of the definition of "proceeds of crime," but it may fall under the third limb if the property derived from the scheduled offense is taken or held outside India. The court emphasized that the phrases "value of such property" and "property equivalent in value held within the country or abroad" are not synonymous and must be given distinct meanings. Thus, property acquired before the enactment of PMLA cannot be attached unless it is equivalent in value to property held or taken outside the country.

3. Interpretation of the Phrase "Value of Such Property":

The court analyzed the phrase "value of such property" within the definition of "proceeds of crime" under Section 2(1)(u) of PMLA. It was concluded that "value of such property" refers to property that has been converted into another form or obtained based on property derived from the commission of a scheduled offense. The court rejected the interpretation that any property, irrespective of its source, could be attached as "proceeds of crime." This interpretation aligns with the legislative intent and ensures that only property directly or indirectly linked to the criminal activity is subject to attachment.

4. Requirement for Recording Reasons for Provisional Attachment:

The court examined whether the officer attaching the property is required to record specific reasons that the property is likely to be concealed, transferred, or dealt with in a manner that may frustrate proceedings relating to confiscation. It was emphasized that the authority must record reasons based on material in possession, and mere reproduction of the wording of Section 5 of PMLA is insufficient. The court found that in the present case, the respondent failed to provide specific reasons for the attachment, which indicated a lack of application of mind and rendered the attachment order invalid.

Conclusion:

The appeals were allowed, and the impugned order dated 09.08.2019 passed by the Tribunal was set aside. The court summarized its findings as follows:

1. Filing of a complaint against others is not sufficient to deprive any person of the benefit of the 365-day time cap if the investigation is pending.
2. Property acquired before the commission of the scheduled offense or the introduction of PMLA cannot be attached unless the property derived from the scheduled offense is held or taken outside the country.
3. The Director or authorized officer must record specific reasons for the attachment, and mere reproduction of the statutory wording is not sufficient.

The court directed that a copy of the order be placed on the files of connected appeals.