2020 (2) TMI 1026 - HC - Money Laundering

Provisional Attachment of property - money laundering - proceeds of crime - reasons to believe - issuance of show‐cause notice under Section 8(1) of the PMLA - It is argued that the reasons to believe under Section 8(1) was a necessary pre‐requisite of the notice and had to be disclosed to the petitioner for the latter to effectively give a reply - HELD THAT - Although Section 5 specifically mentions that the reason for such belief is to be recorded in writing, such requirement is absent in Section 8. Section 8 stipulates that if the AA has reason to believe that any person has committed an offence under Section 3 or is in possession of proceeds of crime, it may serve a notice of not less than thirty days on such person calling upon him to indicate the sources of his income, earning or assets, out of which or by means of which he has acquired the property attached under sub‐section (1) of Section 5 or seized or frozen under Section 17 or Section 18, the evidence on which he relies and other relevant information and particulars, and to show cause why all or any of such properties should not be declared to be the properties involved in moneylaundering and confiscated by the Central Government. The notice under Section 8(1) of the PMLA in the present case, was issued by the AA situated at Delhi - Although a writ petition was initially filed in the High Court at Delhi, a learned Single Judge directed that the matter ought to be filed before the Calcutta High Court, which, in essence, was affirmed by a division bench of the Delhi High Court. As such, the present writ petition has been filed before this court, despite part of the cause of action for the present writ having arisen in Delhi. Since nothing has come before the court to prove that the notice given to the petitioner under Section 8(1) of the PMLA disclosed the reasons to believe as contemplated in such section, which was a prerequisite of the notice and had to be arrived at by the AA independently, the notice itself was illegal, being bad in law - no proceeding could be initiated on the basis of the notice under Section 8(1) issued to the present petitioner, thereby rendering the notice under Section 5(1) infructuous, post facto, since the notice under Section 5(1) ultimately merged in the notice under Section 8(1) as the latter was a continuation of the process initiated by the former. Commencing with the notice under Section 5(1) and culminating in the notice under Section 8(1) and the proceedings about to be started on the basis of the latter, are vitiated for the aforesaid reasons and thus, bad in law - the Provisional Order of Attachment whereby the Adjudicating Authority directed the issuance of show‐cause notice to the petitioner under Section 8(1), PMLA, cannot be sustained. Petition allowed.

Summary

Issues Involved:
1. Validity of the Provisional Order of Attachment (POA) dated December 29, 2017.
2. Legality of the order dated February 9, 2018, directing the issuance of a show-cause notice under Section 8(1) of the PMLA.
3. Requirement and communication of "reasons to believe" under Sections 5 and 8 of the PMLA.
4. Application of natural justice principles and the audi alteram partem rule.

Detailed Analysis:

1. Validity of the Provisional Order of Attachment (POA):
The POA dated December 29, 2017, was issued by respondent no.2 based on "reasons to believe" that the petitioner acquired properties from proceeds of crime derived from alleged money-laundering activities by other entities. The petitioner challenged this order, arguing that the "reasons to believe" were not adequately disclosed, thus impeding their ability to respond effectively.

2. Legality of the Order Dated February 9, 2018:
The order dated February 9, 2018, directed the issuance of a show-cause notice under Section 8(1) of the PMLA. The petitioner contended that the Adjudicating Authority (AA) failed to provide independent "reasons to believe" as required under Section 8(1), thereby vitiating the notice and subsequent proceedings. The court examined whether the AA adopted the reasons from the POA without independent assessment, which would constitute a dereliction of duty.

3. Requirement and Communication of "Reasons to Believe":
The court emphasized that both Sections 5 and 8 of the PMLA require independent "reasons to believe" at different stages. The petitioner argued that these reasons must be disclosed to enable an effective reply. The court referred to the Delhi High Court's judgment in J. Sekar and Ors. vs. Union of India and Ors., which held that the reasons must be noted and communicated to the affected party. Failure to disclose these reasons at the beginning would render the POA illegal.

4. Application of Natural Justice Principles:
The court highlighted the importance of the audi alteram partem rule, which mandates that a person must be given an opportunity to contest the notice and its basis. Without communication of the reasons to believe, the noticee would be unable to present a comprehensive defense. The court concurred with the Delhi High Court's view that the reasons to believe must be communicated to the noticee to ensure a fair hearing.

Conclusion:
The court found that the AA did not independently arrive at reasons to believe and merely adopted the reasons from the POA. This failure to exercise independent judgment and communicate the reasons to the petitioner vitiated the notice under Section 8(1) and subsequent proceedings. Consequently, the court set aside the POA dated December 29, 2017, and the order dated February 9, 2018. However, the authorities were allowed to reinitiate the process, provided they comply with the statutory requirements and communicate the reasons to believe to the noticee.

The writ petition was allowed, and the impugned orders were set aside, with no order as to costs. The court also directed that urgent certified website copies of the order be made available to the parties upon compliance with requisite formalities.