2024 (12) TMI 1457 - HC - Money Laundering

Money laundering - scheduled offence - loan borrowed by the companies have facilitated mis-appropriation, manipulation of books of accounts through fictitious accounts and conversion of property of SIL by way of No. (1) Capital advances to potentially related party, (2) Sales and purchase with potentially related properties (3) bilateral transactions with properties related amongst themselves - petitioner mainly contended that the respondent cannot proceed under PMLA in view of the quashment of predicate offence - legal grounds on which FIR pertaining to the scheduled offence was quashed - scheduled offence of section 447 of the Act is still pending against the petitioner - PMLA is a sui-generis legislation - section 3 of PMLA is a standalone provision - ECIR cannot be equated with FIR - deliberations on the principle of automatic quashing of ECIR once FIR stands quashed. Legal grounds on which FIR pertaining to the scheduled offence was quashed - HELD THAT - It is not in dispute that complaint under Sections 44 and 45 of PMLA has been filed. Thereafter, supplementary complaint was also filed invoking Section 447 of the Companies Act, 2013 on 12.06.2024. The FIR was challenged before the High Court of Karnataka. The High Court quashed the FIR on the ground that the investigation pertaining to the same allegation against the petitioner and other accused was entrusted to the Serious Fraud Investigation Office (SFIO), and the SFIO after investigation submitted a report and thereafter filed a chargesheet / complaint before the Special Court and the same is pending before XV Additional City Civil Court, Chennai. Therefore, the Court quashed the FIR No. 11/2019 dated 01.11.2019 on the ground that SFIO alone has jurisdiction to try the said offences. Scheduled offence of section 447 of the Act is still pending against the petitioner - HELD THAT - The proceedings under section 447 of the Companies Act, 2013 is a scheduled offence under PMLA, 2002. It is not disputed that already chargesheet / complaint has been filed under Section 447 of the Companies Act, 2013 on 09.09.2022 and the same is pending before the XV Additional City Civil Court, Chennai. Further, it is submitted that the Petitioner was arrested by SFIO and is under judicial custody from 02.08.2022 - the action of Respondent Department does not stand vitiated as the predicate offence under Section 447 of the Companies Act, 2013 is still pending and not quashed. Therefore the prayer of quashing of the ECIR and all subsequent proceedings appears to be misplaced one. PMLA is a sui-generis legislation - HELD THAT - After investigation of the crime, the Respondent Department has to investigate into whether the offence, as enunciated under Section 3 of PMLA has been committed or not, and the adjudication, prosecution and trial under PMLA is independent of the scheduled offence. The Respondent is the notified Investigative Authority for PMLA only and not for the scheduled offence - In a case where based on the scheduled offence Enforcement Directorate initiated PMLA proceedings, conducted investigation, identified proceeds of crime and filed statutory complaint under Sections 44 and 45, then it is to be construed as Standalone Process within the parameters laid down by the Hon'ble Apex Court in the case of Vijay Madanlal 2022 (7) TMI 1316 - SUPREME COURT (LB) . Section 3 of PMLA is a standalone provision - HELD THAT - The authority under PMLA, is to prosecute a person for offence of money laundering only if it has reason to believe, which is required to be recorded in writing that the person is in possession of Proceeds of Crime . Only if that belief is further supported by tangible and credible evidence indicative of involvement of the person concerned in any process or activity connected with the proceeds of crime, action under the Act can be taken forward for attachment and confiscation of proceeds of crime and until vesting thereof in the Central Government, such process initiated would be a standalone process. Therefore, the live link between the scheduled offence and PMLA proceedings would be relevant for initiation of proceedings under PMLA. The Hon'ble Supreme Court elaborately considered initiation of PMLA proceedings, for which it is a pre-condition that a scheduled offence is to be registered. ECIR cannot be equated with FIR - HELD THAT - ECIR is born from FIR, but once the ECIR is born, the umbilical cord that connects the ECIR with FIR losses its relevance and the ECIR becomes an independent document in itself. Consequently, a new life in the form of ECIR emerges, which can breath on its own without the support of FIR. So, the FIR and ECIR become two different documents and both tend to take shape on its own, independent of each other. Deliberations on the principle of automatic quashing of ECIR once FIR stands quashed - HELD THAT - It shocks the conscience of the Court that in recent cases involving money laundering, a certain pattern has emerged, whereby, the FIR quashed through minor technical glitches or procedural irregularities and with that as a ground they seek for quashing of ECIR also - Any application of principle, even if in its literal form paves way for injustice, then the Court is allowed to take a detour to expound the law in such a way which serves the cause of justice. If the principles of automatic quashment of ECIR is adopted arithmetically, the very purpose and objective of PMLA is defeated. This Court is not venturing into the grounds of quashing an FIR as the principles pertaining to the same has already been laid down elaborately by the Hon ble Supreme Court. But the rationale here is to cull out the level of bearing that a quashed FIR has on an proceedings challenging the ECIR. This Court feels that all cases where FIR is quashed shall not automatically become a ground for quashing an ECIR. Instead a case to case analysis is a pre requisite for deciding on the sustenance of an ECIR - keeping in line with the explanation to Section 44 of the PMLA, 2002, this Court comes to the irresistible conclusion that cases where FIR pertaining to the scheduled offence is quashed it does not automate the exoneration of the accused from the predicate offence. Rather FIR quashes on grounds of mere technicalities or procedural irregularities in the FIR, cannot by itself form a basis to grant an automatic quash of ECIR. Also in the aforementioned instance, there needs to be a case to case examination of the offence registered under the PMLA before the offence is rendered ineffectual. Implications of automatic quashing of ECIR based on FIR quash - HELD THAT - Since the SFIO was already entrusted with the investigation by the Central Government vide order dated 09.04.2019 on the same set of allegations, the present FIR registered by the CBI was quashed by the High Court citing the aforementioned reason. Hence, it is amply clear that the High Court has quashed the FIR only on the ground that another Investigating Agency is seized off the matter. The Court has not dealt with the allegations nor tested the merits of the offences charged in the FIR. The Court restricted itself only to the ground of want of jurisdiction. Hence the FIR was quashed purely on this technical or procedural issue and not on substantive grounds and has not made any findings as to the offences or the prima facie allegations in the FIR. Therefore, the quashing of the FIR shall not warrant an automatic quashing of ECIR. All the more, the predicate offence under Section 447 of the Companies Act, 2013, which is also a scheduled offence under the PMLA still stands good and requires further investigation. Therefore, in view of the above ECIR is not liable to be quashed. Conclusion - i) The Court quashed the FIR No. 11/2019 dated 01.11.2019 on the ground that SFIO alone has jurisdiction to try the said offences. ii) The action of Respondent Department does not stand vitiated as the predicate offence under Section 447 of the Companies Act, 2013 is still pending and not quashed. Therefore the prayer of quashing of the ECIR and all subsequent proceedings appears to be misplaced one. iii) The Respondent is the notified Investigative Authority for PMLA only and not for the scheduled offence. The live link between the scheduled offence and PMLA proceedings would be relevant for initiation of proceedings under PMLA. iv) If the principles of automatic quashment of ECIR is adopted arithmetically, the very purpose and objective of PMLA is defeated. The FIR and ECIR become two different documents and both tend to take shape on its own, independent of each other. v) keeping in line with the explanation to Section 44 of the PMLA, 2002, this Court comes to the irresistible conclusion that cases where FIR pertaining to the scheduled offence is quashed it does not automate the exoneration of the accused from the predicate offence. vi) The quashing of the FIR shall not warrant an automatic quashing of ECIR. All the more, the predicate offence under Section 447 of the Companies Act, 2013, which is also a scheduled offence under the PMLA still stands good and requires further investigation. Therefore, in view of the above ECIR is not liable to be quashed. Thus, the petitioners have not made out any case for quashing of ECIR filed by Enforcement Directorate. However, the Trial Court shall proceed uninfluenced by the observations if any made on factual aspects and decide the issues based on documents and evidence available on record and by following the due process - petition dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

• Whether the quashing of the FIR related to the scheduled offence automatically results in the quashing of the Enforcement Case Information Report (ECIR) under the Prevention of Money Laundering Act, 2002 (PMLA).
• The implications of Section 3 of PMLA being a standalone provision and its application in the absence of a scheduled offence.
• The distinction between an FIR and an ECIR and the legal consequences of their quashing.
• Whether the proceedings under Section 447 of the Companies Act, 2013, which is a scheduled offence under PMLA, still stand valid despite the quashing of the FIR.
• The legal framework and interpretation of PMLA as a sui-generis legislation.

2. ISSUE-WISE DETAILED ANALYSIS

A) LEGAL GROUNDS ON WHICH FIR PERTAINING TO THE SCHEDULED OFFENCE WAS QUASHED:

• Relevant legal framework and precedents: The FIR was quashed by the Karnataka High Court due to jurisdictional issues, as the investigation was already entrusted to the Serious Fraud Investigation Office (SFIO).
• Court's interpretation and reasoning: The court noted that the quashing of the FIR was based on procedural grounds and not on the merits of the case.
• Key evidence and findings: The SFIO had already filed a complaint before the Special Court, which was pending.
• Application of law to facts: The FIR was quashed due to jurisdictional overlap, not because the allegations were unfounded.
• Treatment of competing arguments: The petitioner argued for automatic quashing of ECIR, while the respondent contended that ECIR is independent of FIR.
• Conclusions: The quashing of FIR does not automatically quash the ECIR.

B) SCHEDULED OFFENCE OF SECTION 447 OF THE COMPANIES ACT, 2013 IS STILL PENDING AGAINST THE PETITIONER:

• Relevant legal framework and precedents: Section 447 of the Companies Act is a scheduled offence under PMLA.
• Court's interpretation and reasoning: The court held that the proceedings under Section 447 are still valid and provide a basis for PMLA proceedings.
• Key evidence and findings: The SFIO complaint and the pending chargesheet under Section 447.
• Application of law to facts: The existence of the SFIO complaint means that predicate offences still exist.
• Treatment of competing arguments: The petitioner's argument that the quashing of FIR nullifies the PMLA proceedings was rejected.
• Conclusions: The scheduled offence under Section 447 remains active and supports the continuation of PMLA proceedings.

C) PMLA IS A SUI-GENERIS LEGISLATION:

• Relevant legal framework and precedents: PMLA is designed to address money laundering independently of other offences.
• Court's interpretation and reasoning: The court emphasized that PMLA proceedings are independent and can proceed based on the existence of proceeds of crime.
• Key evidence and findings: The identification of proceeds of crime justifies PMLA proceedings.
• Application of law to facts: The PMLA can proceed independently of the status of the FIR.
• Treatment of competing arguments: The petitioner's reliance on the quashing of FIR was found insufficient to halt PMLA proceedings.
• Conclusions: PMLA's sui-generis nature allows it to function independently of the quashing of a scheduled offence FIR.

D) SECTION 3 OF PMLA IS A STANDALONE PROVISION:

• Relevant legal framework and precedents: Section 3 of PMLA defines money laundering as an independent offence.
• Court's interpretation and reasoning: The court affirmed that Section 3 operates independently once proceeds of crime are identified.
• Key evidence and findings: The existence of proceeds of crime is sufficient for PMLA proceedings.
• Application of law to facts: The standalone nature of Section 3 supports the continuation of proceedings.
• Treatment of competing arguments: The petitioner's argument that quashing the FIR nullifies PMLA proceedings was not upheld.
• Conclusions: Section 3 of PMLA can be applied independently of the status of the FIR.

E) ECIR CANNOT BE EQUATED WITH FIR:

• Relevant legal framework and precedents: ECIR is an internal document distinct from FIR.
• Court's interpretation and reasoning: The court clarified that ECIR is not equivalent to FIR and serves a different purpose.
• Key evidence and findings: The distinction between ECIR and FIR was emphasized.
• Application of law to facts: The ECIR remains valid despite the quashing of the FIR.
• Treatment of competing arguments: The petitioner's argument for automatic quashing of ECIR was rejected.
• Conclusions: ECIR is independent and not automatically quashed with the FIR.

F) DELIBERATIONS ON THE PRINCIPLE OF AUTOMATIC QUASHING OF ECIR ONCE FIR STANDS QUASHED:

• Relevant legal framework and precedents: The court referred to the Vijay Madanlal case for guidance.
• Court's interpretation and reasoning: The court rejected the notion of automatic quashing of ECIR with FIR.
• Key evidence and findings: The court emphasized the need for a substantive examination of the grounds for FIR quashing.
• Application of law to facts: The ECIR remains valid unless the FIR is quashed on substantive grounds.
• Treatment of competing arguments: The petitioner's reliance on procedural quashing was insufficient.
• Conclusions: Automatic quashing of ECIR is not justified without substantive grounds.

G) IMPLICATIONS OF AUTOMATIC QUASHING OF ECIR BASED ON FIR QUASH:

• Relevant legal framework and precedents: The court emphasized the need for a case-by-case analysis.
• Court's interpretation and reasoning: The court concluded that automatic quashing undermines the objectives of PMLA.
• Key evidence and findings: The court found that the FIR was quashed on procedural grounds, not substantive ones.
• Application of law to facts: The existence of proceeds of crime justifies the continuation of ECIR.
• Treatment of competing arguments: The petitioner's argument for automatic quashing was found unjustified.
• Conclusions: The ECIR remains valid as the FIR was quashed on procedural grounds.

3. SIGNIFICANT HOLDINGS

• Preserve verbatim quotes of crucial legal reasoning: "The offence of money-laundering is an independent offence regarding the process or activity connected with the proceeds of crime."
• Core principles established: The PMLA proceedings are independent and can continue based on the existence of proceeds of crime, regardless of the status of the FIR.
• Final determinations on each issue: The court dismissed the writ petitions, affirming that the ECIR cannot be automatically quashed based on the quashing of the FIR.

The judgment emphasizes the independent nature of PMLA proceedings and the need for substantive grounds to quash an ECIR, reinforcing the sui-generis nature of the legislation and its focus on proceeds of crime.