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Judgment
FPA-PMLA-1373/GOA/2016
The appellant has assailed the impugned order dated 30.05.2016 passed by the Adjudicating Authority, PMLA in Original Complaint (OC) No.
537/2016 in Provisional Attachment Order (PAO) No. 03/2015 dated 08.12.2015 arising out of ECIR/04/NGSZO/2013.
The appellant has prayed for following reliefs in this appeal:-
i. Quashing and setting aside of the impugned order dated 30.05.2016 passed by learned Adjudicating Authority in OC No. 537/2016 in PAO No.
03/2015 dated 08.12.2015 [Case File No. ECIR/04/NGSZO/2013] to extent of the properties mortgaged with the appellant, leading to release thereof
from attachment under the Prevention of Money Laundering Act, 2002;
ii. Such other order(s) as the Honâ€ble Appellate Tribunal may deem fit and proper in the facts and circumstances of the case in favour of the
appellant and against the contesting respondents.
FACTS IN BRIEF
The Punjab National Bank (PNB) was arrayed as defendant No. 5 in the OC No. 537/2016. It appears that the bank has been arrayed as a
defendant because two properties mentioned below, secured against loan, have been attached by the Enforcement Directorate vide PAO No. 03/2015
dated 08.12.2015 in OC No. 537/2016. The details of properties attached and involved in the present appeal are as follows:
i. Undivided 24.27% share and interest in Nazul plot No. A-6 (New. 7) of mouza-Lendra together with RCC super structure comprising Unit No. 1
covering super built up area about 261.92 sq. mts. On the ground floor and;
ii. Undivided 21.31% share and interest in Nazul plot no. A-6 (New. 7) of mouza-Lendra together with RCC super structure comprising Unit No. 2
covering super built of about 230.21 sq. mts. On the first floor on the building known as “Devashraya Apartments†bearing corporation House
No. 28, Nazul Sheet No. 18-C situated at 2nd Lane, Balraj Marg, Dhantoli, Nagpur within the limits of Nagpur Municipal Corporation, ward No. 3 & 5
respectively in Tehsil and District Nagpur.
Under the said PAO, the Enforcement Directorate attached 14 immoveable properties in which the aforesaid properties are at S.No.7&8.
The aforesaid properties along with other properties have been attached by the Enforcement Directorate under Section 5(1) of Prevention of
Money Laundering Act (PMLA), 2002 and filed the OC before the Adjudicating Authority under Section 5(5) of PMLA, 2002 for confirmation of the
attachment under Section 8(3) of the said Act on the basis of following facts:
4.1 That, the Central Bureau of Investigation (CBI), New Delhi registered an FIR bearing RC-219-210-2012-E-0013 dated 20.09.2012 against (a)
M/s. Grace Industries Ltd., 9, Imambada, Road, Nagpur-4400018 (b) Shri Mukesh Gupta, then Director of M/s. Grace Industries Ltd. (c) Smt. Seema
Gupta, then Director of M/s. Grace Industries Ltd. (d) unknown public servants and unknown others for the violations of Section 120-B read with
Section 420 of IPC and Section 13(2) read with Section 13(1)(d) of Prevention of Corruption Act, 1988. The said FIR was registered on the basis of
reference form Central Vigilance Commission, for alleged corruption in the matter of allocation of coal blocks to the private company during the period
2006 to 2009. In the said FIR dated 20.09.2012, it was alleged that Lohara East coal block in the State of Maharashtra was allotted to M/s. Grace
Industries Ltd. and M/s. Murli Agro Products Private Limited in violation of extant guidelines. It was further alleged that M/s. Grace Industries
Limited willfully misrepresented its networth and provided misleading information to the concerned authority in the Ministry of Coal in respect of the
production capacity. It was also alleged that post allocation of the coal block, the promoters and shareholders of M/s. Grace Industries Ltd. sold off
their entire holding of equity in November, 2008 to Shri Sanjay Puranlal Agarwal, Director of M/s. Sanvijay Rolling & Engineering Ltd., Nagpur
(hereinafter referred as SREL), at a stated profit of Rs. 20 crores approximately.
4.2 Based on the FIR registered by Central Bureau of Investigation, New Delhi dated 20.09.2012, and Enforcement Case Information Report (ECIR)
bearing No. ECIR/04/NGSZO/2013 dated 26.12.2013 was registered by Nagpur Sub-Zonal Office of Enforcement Directorate to investigate the
matter under the Provisions of Prevention of Money Laundering Act, 2002.
4.3 The CBI filed Charge sheet bearing No. 14/2014 dated 28.10.2014 before the Court of Special Judge (CBI, Patiala House Court, New Delhi)
against M/s. GIL Nagpur, Shri Mukesh Gupta, then Director of M/s. GIL for commission of offence punishable under Section 420 of IPC, 1860. In
the said charge sheet it is, inter alia, alleged that M/s. GIL misrepresented the facts in the application for and also misrepresented the facts in the
present status of end use plant for which were submitted under the signature of Shri Mukesh Gupta.
4.4 It is revealed that Enforcement Directorate investigated the matter under the PMLA, 2002. During the course of investigation a letter dated
25.08.2014, was issued to Punjab National Bank, Sitabuldi Branch, for seeking the details of A/c statement of M/s. Grace Industries Ltd., Shri Mukesh
Gupta & Smt. Seema Gupta, copy of KYS Norms, certified copies of the documents to obtained Loan, collateral securities provided at the time of loan
and other details. The Bank vide letter dated 10.09.2014 provided the copy of sale deed bearing No. 4860/1996, copy of registered mortgage deed
bearing No. 1474 dated 19.03.2010, copy of two valuation reports dated 17.02.2010 in respect of properties of Smt. Seema Gupta or Shri Mukesh
Gupta, copy of one valuation report dated 14.06.2013 in respect of properties of Smt. Seema Gupta or Shri Mukesh Gupta. The Bank vide letter dated
11.09.2014 submitted the details of Bank statements of M/s. Radhika Trading Company, loan A/c bearing No. 0499008700003523 from 22.03.2010 to
17.07.2014 and current A/c bearing no. 4992100038097 from 22.03.2010 to 17.07.2014. The Bank vide letter dated 13.09.2014 submitted KYs
Documents for A/c No. 0499002100038097. The Bank vide letter dated 16.09.2014 submitted certified copy of documents provided by Shri Mukesh
Gupta, Smt. Seema Gupta at the time of obtaining Cash credits limits of Rs. 4,00,00,000/-.
4.5 Letter dated 18.05.2015 was issued to Punjab National Bank, Kingsway Branch, for seeking the details of the A/c No. 0499008700003523,
present valuation of mortgaged property, payment made by the party, if any. The bank vide letter dated 18.05.2015 submitted the copy of valuation
report, account statement details A/c No. 0499008700003523 from 30.10.2013 to 18.07.2014.
There is no specific allegation against the appellant either in the PAO or OC. As already stated the Punjab National Bank was defendant No. 5 and
the bank has submitted its reply to the OC wherein it was stated that ""that the Defendant No. 1 approached the bank seeking certain financial facilities
vide their application dated 18.03.2010. Acting on that a case credit limit of Rs. 3 crores was sanctioned against hypothecation of stock and further
cash credit limit of Rs. 1 crore against hypothecation of book debts was also sanctioned vide sanctioned letter dated 18.03.2010 totaling the limit of Rs.
4,00,000/- was sanctioned to partnership firm of Shri Mukesh Gupta subject to the personal guarantee of Shri Mukesh Gupta, his wife Smt. Seema
Gupta and other partner and against mortgage of fixed assets of Shri Mukesh Gupta and Smt. Seema Gupta which includes the aforesaid immoveable
properties.
It is an admitted fact that a charge has been created on the aforesaid immoveable properties of Shri Mukesh Gupta and Smt. Seema Gupta in
favour of the bank in 2010.
It is the case of the bank that Shri Mukesh Gupta did not adhere and complied with the terms of the agreement executed by them and the loan
account became highly irregular in payments. The said loan account became grossly irregular and Shri Mukesh Gupta did not regularize the account in
spite of various opportunities given to him.
The said loan account of Shri Mukesh Gupta was declared Non Performing Asset (NPA) as per norms of RBI therefore, the bank proceeded
under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI), 2002 and has issued the
notice under Section 13(2) on 09.12.2013. that even then defendants failed to respond the said demand notice and failed to pay the outstanding dues of
the appellant Bank. Consequently being compelled the appellant Bank issued notice u/s 13(4) of the SARFESAI Act and have taken the possession of
the mortgaged properties vide notice dated 18.03.2014.
It is the case of the Bank that the realization of dues under the aforesaid SARFAESI Act, 2002 has been stayed by the Debts Recovery Tribunal
(DRT)-I, Mumbai by granting status quo subject to deposit of Rs. 50 lakhs.
According to the bank, the recovery proceedings was filed before the DRT for recovery of Rs. 4,62,96,909.97/- which is pending before DRT,
Nagpur vide OA No. 78/2015.
It is the case of the bank, inter alia, that the properties in question are not proceeds of crime as defined in Section 2 (1) (u) of the Prevention of
Money Laundering Act (PMLA), 2002, that the subject properties were acquired by Shri Mukesh Gupta and his wife Smt. Seema Gupta much prior to
the alleged commission of scheduled offences thus they cannot be considered to have been derived or obtained, directly or indirectly by afore named
persons as a result of criminal activities, that the subject properties are mortgaged in favour of the bank, having been acquired ante-date the crime, and
already lying attached under SARFAESI Act, 2002, that there is no material to form the reason to believe that the subject properties are out of
proceeds of crime and liable for attachment under Section 5 that the subject properties were not purchased out of proceeds of crime as the same
were ancestral properties acquired by the Guptaâ€s in 2002. The acquisition of properties mortgaged with the bank ante-dated the crime by many
years.
It is also contended by the Bank that the Recovery of Debts due to Banks & Financial Institutions Act, 1993 has since been amended by
Enforcement of Security Interest & Recovery of Debts Laws & Miscellaneous Provisions (Amendment) Act, 2016 (44 of 2016) dated 16.08.2016 by
virtue of newly added sub-Section 4A of Section 19 of the Act, which now bears the nomenclature- The Recovery of Debts & Bankruptcy Act, 1993,
the borrowers/guarantors/mortgagors are, by operation of law subjected to injunction in dealing with their properties, mortgaged or uncharged, except
in ordinary course of business, without the prior approval of the Debts Recovery Tribunal. The legislative policy is, therefore, demonstrative of the fact
that the assets of the borrowers/mortgagors/guarantors become custodial egis on the institution of Original Application for recovery under the above
Act and service of summons upon the defendants. The aforesaid legislative policy is contemporary and certainly much subsequent to the enactment of
Prevention of Money Laundering Act, 2002. Therefore, the properties which are mortgaged in favour of banks and financial institutions and are
subjected to special enactments viz. The Recovery of Debts & Bankruptcy Act, 1993 and Securitization & Reconstruction of Financial Assets &
Enforcement of Security Interest Act, 2002, the provisions of The Prevention of Money Laundering Act, 2002 would not be applicable to the detriment
of such secured creditors. It is also useful to refer to sub-Section 20(A)(B) of Section 19 of Recovery of Debts & Bankruptcy Act, 1993 which
ordains that notwithstanding anything to the contrary contained in any law for the time being in force, the proceeds from sale of secured assets shall
be appropriated first towards the recovery of costs and thereafter towards the debts owed to the banks or financial institutions. Further, Section 31B
of the aforesaid Act postulates that notwithstanding anything contained in any other law for the time being in force, the rights of secured creditors to
realize secured debts due and payable to them by sale of assets over which security interest is created shall have priority and shall be paid in priority
over all other debts and Government due to the Central Government, State Government or Local Authority. The aforesaid provisions which have been
newly inducted in the Act would certainly override the provisions of the Prevention of Money Laundering Act, 2002 in case of inconsistency and
repugnancy between the provisions thereof.
On the other hand, the Enforcement Directorate, vide its reply, inter alia, contended that the property attached in this matter was treated as
proceeds of crime under PMLA as value thereof, that Adjudicating Authority has passed the well-reasoned order, that by virtue of Section 71 of
PMLA, 2002 it has overriding affect over other Acts, that the subject property is one of the fourteen properties attached vide the order dated
08.12.2015. The investigation conducted under the provisions of PMLA, 2002 the total value of proceeds of crime generated through the process of
Money Laundering is found to be Rs. 24,92,49,850/-. It is further seen that the POC of Rs. 24,92,49,850/-was generated as a result of criminal activity
relating to the scheduled offence which was received by Shri Mukesh Gupta and his family members and entities. The POC thus generated was not
utilized for generation of any new assets rather utilized for retirement of old loans taken by the entities of Gupta Group and day to day working of his
various companies viz. M/s. Gupta Domestic Fuel, M/s. Gupta International Industries Ltd., M/s. Radhika Trading Company, M/s. Aditya Trading
Company etc. As such the aforesaid property has been provisionally attached invoking provisions of Section 2(1) (u) of PMLA, 2002, in consideration
of value thereof.
It is further contended by the Ld. Counsel for the Enforcement Directorate that so it was submitted that the said amendment in SARFAESI Act
has no application to the present case.
We have heard the Ld. Counsel for the appellant as well as for the Enforcement Directorate and have gone through the contentions raised in the
appeal memo, written argument and rejoinder filed by the appellant, the reply of the respondent, impugned order, OC, PAO and other relevant
materials available in the record.
It is the admitted fact that the appellant bank i.e. PNB neither an FIR name accused nor charge sheeted nor any of the officials of the bank are
involved either in the scheduled offence or offence committed under the provisions of PMLA.
As stated above we have perused the impugned order from which we could not find any material that the subject properties of this appeal has
been acquired out of proceeds of crime nor it has been established at this stage that the PNB or its officials are anyway conspired with the aforesaid
named persons to secure the sanction of the loan and its mis-utilization.
The Adjudicating Authority while passing the order has dealt with the contention of the PNB in following manner. The relevant portion of the
impugned order is produced below:
“13. It is the case of D-4 and D-5 that the assets mortgaged to them are “secured assetsâ€. The necessary proceedings for recovery of
Rs. 7,33,52,678.33/- have been initiated by D-4 before DRT, Nagpur, which is pending. Similarly, D-5 has contended that they have
initiated necessary proceedings under SARFAESI Act for recovery of Rs. 4,62,96,909.97/-, which is pending before DRT. It need to be
borne in mind that Section 71 of PMLA has an overriding effect. Consequently, the provisions of PMLA shall have effect and prevail over
provisions of any other Act or its provisions. Looking at the scheme of the Act and the provisions made there under, it cannot be held
otherwise but, that once the assets attached are found to be proceeds of crime and found to be involved in Money-Laundering, such assets
attached cannot be permitted to be returned, utilized or adjusted in any manner, save and except in the manner in which the provisions of
the PMLA, made for confiscation of the proceeds of crime, vesting of the same into Central Government and management of such vested
properties, stipulates. Thus though, the assets might have been mortgaged to the banks/institutions, the same being proceeds of crime cannot
be permitted to be adjusted or utilized towards the debts of the bank, except in the manner prescribed under the Act. The contentions,
therefore D-4 and D-5 have no merits. The D-4 and D-5 are undoubtedly entitled to pursue their action in respect of other assets, if any, of
the concerned Defendants.â€
One of the main legal issue raised in the present appeal is regarding the overriding effect of PMLA and SARFAESI over each other. It is the
contention of the appellant bank that in view of the latest development i.e. amendment of SARFAESI Act, 2002 in 2016 coupled with special nature of
the Act, the SARFAESI Act is having overriding effect over PMLA, 2002. It is also the contention of the appellant bank that “it is no longer res
integra that crown debts have no priority over the claim of mortgagee under a contract of loan. The appellant bank has placed reliance on Bombay
Stock Exchange Vs. V.S. Kandalgaonkar & Ors. - (2015) 2 SCC 1 and Dena Bank Vs. Bhikhabhai Prabhudas Parekh & Co. & Ors. - (2000) 5 SCC
On the other hand, it is the contention of the respondent Department that Section 71 of PMLA is also a special Act. It has the provisions under
Section 71 of the Act which provides that “the provisions of this Act shall have effect notwithstanding anything inconsistent therewith
contained in any other law for the time being in force.†It is also contended by the Ld. Counsel for the respondent Department that the
provisions of PMLA will have overriding effect over the provisions of SARFAESI as the amendment of 2016 is only with respect to amendment of
proviso in the SARFAESI Act not the Act itself.
The aforesaid issue of overriding effect and other issues have been covered in the matter of State Bank of India vs. The Joint Director of
Directorate of Enforcement & Ors. in FPA-PMLA-1026/KOL/2015 vide common order dated 14.07.2017 and also in the matter of Smt. Nasreen Taj
vs. The Deputy Director, Directorate of Enforcement & Ors., Bangalore in FPA-PMLA-382/BNG/2012 vide common order dated 18.09.2017. Both
the above appeals were decided by this Appellate Tribunal The relevant portions of the common order in State Bank of India matter (supra) are
reproduced below:
“30. We may point out that the aspect of overriding effect between the two special Act i.e. PMLA, 2002 and SARFAESI Act has been
widely discussed by the Supreme Court in the case of Solidaire India Ltd. V/s. Fair Growth Financial Services Ltd. & Ors. Wherein after
discussion in para 7-11 it was held that later enactment would prevail with a non-obstante clause. Paras 7-11 reads as under:-
“7. Coming to the second question, there is no doubt that the 1985 Act is a special Act. Section 32(1) of the said Act reads as follows:
“32. Effect of the Act on other laws.â€"(1) The provisions of this Act and of any rules or schemes made there under shall have effect
notwithstanding anything inconsistent therewith contained in any other law except the provisions of the Foreign Exchange Regulation Act,
1973 (46 of 973) and the Urban Land (Ceiling and Regulation) Act, 1976 (33 of 1976) for the time being in force or in the Memorandum or
Articles of Association of an industrial company or in any other instrument having effect by virtue of any /law other than this Act.â€
The effect of this provision is that the said Act will have effect notwithstanding anything inconsistent therewith contained in any other law
except to the provisions of the Foreign Exchange Regulation Act, 1973 and the Urban Land (Ceiling and Regulation) Act, 1976. A similar
non obstante provision is contained in Section
13 of the Special Court Act which reads as follows:
“13. Act to have overriding effect.â€"The provisions of this Act shall have effect notwithstanding anything inconsistent therewith
contained in any other law for the time being in force or in any instrument having effect by virtue of any law, other than this Act, or in any
decree or order of any Court, tribunal or other authority.â€
It is clear that both these Acts are special Acts. This Court has laid down in no uncertain terms that in such an event it is the later Act
which must prevail. The decisions cited in the above context are as follows: “Maharashtra Tubes Ltd. v. State Industrial & investment
Corpn. Of Maharashtra Ltd.; Sarwan Singh v. Kasturi Lal; AllahabadBankv.Canara Bank and Ram Narain v. Simla Banking & Industrial
Co. Ltd.
We may notice that the Special Court had in another case dealt with a similar contention. In Bhoruka Steel Ltd. v. Fairgrowth Financial
Services Ltd. it had been contended that recovery proceedings under the Special Court Act should be stayed in view of the provisions of the
1985 Act. Rejecting this connection, the Special Court had come to the conclusion that the Special Court Act being a later enactment would
prevail. The headnote which brings out succinctly the ration of the said decision is as follows:
“Where there are two special statutes which contain non obstante clauses the later statute must prevail. This is because at the time of
enactment of the later statute, the Legislature was aware of the earlier legislation and its non obstante clause. If the Legislature still confers
the later enactment with a non obstante clause it means that the Legislature wanted that enactment to prevail. If the Legislature does not
want the later enactment to prevail then it could and would provide in the later enactment that the provisions of the earlier enactment
continue to apply.
The Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992, provides in Section 13. that its provisions are to
prevail over any other Act. Being a later enactment, it would prevail over the Sick Industrial Companies (Special Provisions) Act, 1985. Had
the Legislature wanted to exclude the provisions of the Sick Companies Act from the ambit of the said Act, the Legislature would have
specifically so provided. The fact that the Legislature did not specifically so provide necessarily means that the Legislature intended that the
provisions of the said Act were to prevail even over the provisions of the Sick Companies Act.
Under Section 3 of the 1992 Act, all properly of notified persons is to stand attached. Under Section 3(4), it is only the Special Court which
can give directions to the Custodian in respect of property of the notified party. Similarly, under Section 11(1), the Special Court can give
directions regarding property of a notified party. Under Section 11(2), the Special Court is to distribute the assets of the notified party in
the manner set out thereunder. Monies payable to the notified parties are assets of the notified party and are, therefore, assets which stand
attached. These are assets which have to be collected by the Special Court for the purposes of distribution under Section 11(2). The
distribution can only take place provided the assets are first collected. The whole aim of these provisions is to ensure that monies which are
siphoned off from hanks and financial institutions into private pockets are returned to the banks and financial institutions. The time and
manner of distribution is to be decided by the Special Court only. Under Section 22 of the 1985 Act, recovery proceedings can only be with
the consent of the Board for Industrial and Financial Reconstruction or the appellate authority under that Act. The Legislature being aware
of the provisions of Section 22 under the 1985 Act still empowered only the Special Court under the 1992 Act of the 1992 Act to give
directions to recover and to distribute the assets of the notified persons in the manner set down under Section 11 (2) of the 1992 Act. This
can only mean that the Legislature wanted the provisions of Section 11(2) of the 1992 Act to prevail over the provisions of any other law
including those of the Sick Industrial Companies (Special Provisions) Act, 1985.
It is a settled rule of interpretation that if one construction leads to a conflict, whereas on another construction, two Acts can he
harmoniously constructed then the latter must be adopted. If an interpretation is given that the Sick Industrial Companies (Special
Provisions) Acy 1985, is to prevail then there would be a clear conflict. However, there would be no conflict if it is held that the 1992 Act is
to prevail. On such an interpretation the objects of both would be fulfilled and there would be no conflict. It is clear that the Legislature
intended that public monies should be recovered first even from sick companies. Provided the sick company was in a position to first pay
back the public money, there would be no difficulty in reconstruction. The Board for Industrial and Financial Reconstruction whilst
considering a scheme for reconstruction has to keep in mind the fact that it is to be paid off or directed by the Special Court. The Special
Court can, if it is convinced, grant time or installments.
There can, therefore, be no stay of any proceedings for recovery against a sick company so far as the Special Court under the 1992 Act is
concerned.
We are in agreement with the aforesaid decision of the case, more so when we find that whenever the legislature wishes to do so it
makes appropriate provisions in the Act in that behalf. Mr Shiraz Rustomjee has drawn our attention to Section 34 of the Recovery of Debts
Due to Banks and Financial Institutions Act, 1993 wherein after giving an overriding effect to the 1993 Act it is specifically provided that
the said Act will be in addition to and not in derogation of a number of other Acts including the 198.5 Act. Similarly under Section 32 of the
1985 Act the applicability of the Foreign Exchange Regulation Act and the Urban Land (Ceiling and Regulation) Act is not excluded. It is
clear that in the instant case there was no intention of the legislature to permit the 1985 Act to apply, notwithstanding the fact that
proceedings in respect of a company may be going on before the BIFR. The 1992 Act is to have an overriding effect notwithstanding any
provision to the contrary in another Act.â€
The similar view was taken by the Bombay High Court in the case of Bhoruka Steel Ltd. Vs. Fairgrowth Financial Services Ltd. The
judgment rendered on 09.02.2016 reported in 1997 (89) company cases 547 (BOM) para 15 of the said judgment read as under:
To be noted that in both the judgments, relied upon by counsel, the Supreme Court has held that generally where there are two special
statues, which contain non-obstante clauses, the later statute must prevail. This is because at the time of enactment of the later statute, the
Legislature was aware of the earlier legislation and its non-obstante clause. If the Legislature still confers the later enactment with a non-
obstante clause it means that the Legislature wanted that enactment to prevail. If the Legislature does not want the later enactment to prevail
then it could and would provide in the later enactment that the provisions of the earlier enactment continue to apply. In the present case, the
said Act is later. The said Act provides that its provisions are to prevail over any other Act. This would include the Sick Companies Act. If
the legislature wanted to provide otherwise, they would have specifically so provided.â€
Recently, the Parliament has amended the twin legislations viz. (i) the SARFAESI Act, 2002 and (ii) the DRT Act, 1993(after amendment
titled as the Recovery of Debts and Bankruptcy Act, 1993) by the Enforcement of Security Interest and Recovery of Debts Laws and
Miscellaneous Provisions (Amendment) Act, 2016 and its provisions have been given effect from 01.09.2016.
The amended provisions give overriding effect over any other law and priority to the secured condition for the time being in force
including the provisions of PMLA in so far as recovery of the loan by the secured creditors is concerned.
The amended provisions are reproduced as under:
(i) Section 26E of the SARFAESI Act, 2002 :
“26E. Priority to secured creditors â€" Notwithstanding anything contained in any other law for the time being in force, after the
registration of security interest, the debts due to any secured creditor shall be paid in priority over all other debts and all revenues, taxes,
cesses and other rates payable to the Central Government or State Government or local authority.
Explanation : For the purposes of this section, it is hereby clarified that on or after the commencement of the Insolvency and Bankruptcy
Code, 2016 (31 of 2016), in cases where insolvency or bankruptcy proceedings are pending in respect of secured assets of the borrower,
priority to secured creditors in payment of debt shall be subject to the provisions of that Code.â€
(ii) Section 31B of the Recovery of Debts and Bankruptcy Act, 1993 :
31B. Priority to secured creditors â€" Notwithstanding anything contained in any other law for the time being in force, the rights of secured
creditors to realise secured debts due and payable to them by sale of assets over which security interest is created, shall have priority and
shall be paid in priority over all other debts and Government dues including revenues, taxes, cesses and other rates due to the Central
Government, State Government or local authority.
Explanation : For the purposes of this section, it is hereby clarified that on or after the commencement of the Insolvency and Bankruptcy
Code, 2016 (31 of 2016), in cases where insolvency or bankruptcy proceedings are pending in respect of secured assets of the borrower,
priority to secured creditors in payment of debt shall be subject to the provisions of that Code.â€
In Section 2 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 after the words ""the date of the application"",
and includes any liability towards debt securities which remains unpaid in full or part after notice of ninety days served upon the borrower
by the debenture trustee or any other authority in whose favour security interest is created for the benefit of holders of debt securities or;
is added which makes the said amendment or the 1993 Act applicable to all the debts which remains unpaid.
Thus, it is very clear from above that the secured creditor, get a priority over the rights of Central or State Government or any other
Local Authority. The amendment has been introduced to facilitate the rights of the secured creditors which are being hampered by way of
attachments of properties, belonging to the financial institutions/secured creditors, done by/in favour of the government institutions.
The Full Bench of the Madras High Court while acknowledging the amount of losses suffered by the Banks and while approving the
latest amended Section 31B of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 held in the case “The Assistant
Commissioner (CT), Anna Salai-III Assessment Circle Vs. The Indian Overseas bank and Ors.†Thatâ€
“There is, thus, no doubt that the rights of a secured creditor to realise secured debts due and payable by sale of assets over which
security interest is created, would have priority over all debts and Government dues including revenues, taxes, cesses and rates due to the
Central Government, State Government or Local Authority. This section introduced in the Central Act is with ''notwithstanding'' clause and
has come into force from 01.09.2016. Further it was also held that the law having now come into force, naturally it would govern the rights
of the parties in respect of even a lis pending.â€
The Assistant Commissioner (CT) Vs. The Indian Overseas Bank, Madras High Court, WP No. 2675 of 2011 (Full Bench)
“2 We are of the view that if there was at all any doubt, the same stands resolved by view of the Enforcement of Security Interest and
Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016, Section 41 of the same seeking to introduce Section 31B in
the Principle Act, Which reads as under:-
“31B. Notwithstanding anything contained in any other law for the time being in force, the rights of secured creditors to realize secured
debts due and payable to them by sale of assets over which security interest is created, shall have priority and shall be paid in priority over
all other debts and Government dues including revenues, taxes, cesses and rates due to the Central Government, State Government or local
authority.
Explanation. â€" for the purposes of this section, it is hereby clarified that on or after the commencement of the Insolvency and Bankruptcy
Code, 2016, in cases where insolvency or bankruptcy proceedings are pending in respect of secured assets of the borrower, priority to
secured creditors in payment of debt shall be subject to the provisions of that Code.â€
“3 There is, thus, no doubt that the rights of a secured creditor to realize secured debts due and payable by sale of assets over which
security interest is created, would have priority over all debts and Government dues including revenues, taxes, cesses and rates due to the
Central Government, State Government or Local Authority. This section introduced in the Central Act is with “notwithstanding†clause
and has come into force from 01.09.2016â€
“4 The law having now come into force, naturally it would govern the rights of the parties in respect of even a lis pending.â€
“5 The aforesaid would, thus, answer question (a) in favour of the financial institution, which is a secured creditor having the benefit of
the mortgaged property.â€
In another Madras High Court judgment in the case of “Dr. V. M. Ganesan vs. The Joint Director, Directorate of Enforcement†has
explained the grievances faced by the financial institutions while holding that
“For instance, if LIC Housing Finance Limited, which has advanced money to the petitioner in the first writ petition and which
consequently has a right over the property, is able to satisfy the Adjudicating Authority that the money advanced by them for the purchase
of the property cannot be taken to be the proceeds of crime, then, the Adjudicating Authority is obliged to record a finding to that effect
and to allow the provisional order of attachment to lapse. Otherwise, a financial institution will be seriously prejudiced. I do not think that
the Directorate of Enforcement or the Adjudicating Authority would expect every financial institution to check up whether the contribution
made by the borrowers towards their share of the sale consideration was lawfully earned or represent the proceeds of crime. Today, if the
Adjudicating Authority confirms the provisional order of attachment and the property vests with the Central Government, LIC Housing
Finance Limited will also have to undergo dialysis, due to the illegal kidney trade that the petitioner in the writ petition is alleged to have
indulged in. This cannot be purport of the Act.â€
In a case contested by one of the branches of the Appellant Bank, the High Court of Madras “State Bank of India Vs. The Assistant
Commissioner, Commercial Tax, Puraswalkam Assistant Circle and Ors.â€, while upholding the Amendment Act, 2016 to Section 26E of the
SARFAESI Act and reaffirming the view of the Full Bench of the same court in The Assistant Commissioner (CT), Anna Salai-III Assessment
Circle (supra) lifted the attachment entry and held that
“In other words, not only should the amendment apply to pending lis, but the declaration that the right of a secured creditor to realise
the secured debts, would have priority over all debts, which would include, Government dues including revenues, taxes, etc., should hold
good qua 2002 Act as well.â€
B. RAMA RAJU V. UOI AND ORS. Reported in (2011) 164 company case 149(AP)(D Bw)ho has dealt with the aspect of bonafide
acquisition of property in para 103. The same read as under:-
“103. Since proceeds of crime is defined to include the value of any property derived or obtained directly or indirectly as a result of
criminal activity relating to a scheduled offence, where a person satisfies the adjudicating authority by relevant material and evidence
having a probative value that his acquisition is bona fide, legitimate and for fair market value paid therefor, the adjudicating authority must
carefully consider the material and evidence on record (including the Reply furnished by a noticee in response to a notice issue under
Section 8(1) and the material or evidence furnished along therewith to establish his earnings, assets or means to justify the bona fides in the
acquisition of the property); and if satisfied as to the bona fide acquisition of the property, relieve such property from provisional
attachment by declining to pass an order of confirmation of the provisional attachment; either in respect of the whole or such part of the
property provisionally attached in respect whereof bona fide acquisition by a person is established, at the stage of the section 8(2)
process…â€
The Supreme Court in (2010)8 Supreme Court Cases 110 (Before G.S. Singhvi and A.K. Ganguly, JJ) in the case of United Bank of
India V/s. Satyawati Tondon and Ors. In paras no. 6, 55 & 56 has held as under:-
To put it differently, the DRT Act has not only brought into existence special procedural mechanism for speedy recovery of dues of banks
and financial institutions, but also made provision for ensuring that defaulting borrowers are not able to invoke the jurisdiction of the civil
courts for frustrating the proceedings initiated by the banks and other financial institutions.
It is a matter of serious concern that despite repeated pronouncement of this Court, the High Courts continue to ignore the availability
of statutory remedies under the DRT Act and the SARFAESI Act and exercise jurisdiction under Article 226 for passing orders which have
serious adverse impact on the right of banks and other financial institutions to recover their dues. We hope and trust that in future the High
Courts will exercise their discretion in such matters with greater caution, care and circumspection.
Insofar as this case is concerned, we are convinced that the High Court was not at all justified in injuncting the appellant from taking
action in furtherance of notice issued under Section 13(4) of the Act. In the result, the appeal is allowed and the impugned order is set
aside. Since the respondent has not appeared to contest the appeal, the costs are made easy.â€
In the subsequent changes in law and amendment in the another Special Act i.e. SARFAESI Act, 2002 the decisions referred by Mr. Matta in
the case of Solidaire (Supra) and Bhoruka Steel (Supra) does not help the case of the respondent no. 1 because the effect of overrding the
PMLA looses its validity once the amendment is made which even has been interpreted subsequently by the Full-Bench of the Chennai High
Court in the case of Assistant Commissioner CT (Supra) and other decision in the nature of the facts in the present matter.
It is also a matter of fact that after passing the impugned order the borrowers have also settled the loan amount with the complainant
â€" i.e. Union of India in order to pay the remaining out-standing amount. The undertaking in this regard is recorded in Court. It is written
agreement and the statement of the parties were recorded. Counsel for the borrowers has also informed us that his client also intent to pay
the remaining out-standing amount to the State Bank of India in order to clear their liabilities once the attached properties are sold and
even otherwise.
Copy of the settlement of the borrowers and the complainant Bank of India was filed before us. As far as the schedule offence is concerned,
we do not wish to make any comment. But we can only observe that in case of settlement, joint petition for quashing of FIR in the High
Court u/s 482 Cr. P.C. could be filed.
It is not denied on behalf of department that these provisional attachment was made, the proceedings of recovery of amount were
pending before the DRT for recovery against the borrowers and for sum of the properties, possession were with the bank. The mortgaged
deeds are also not disputed or/and validity of the same are not challenged on behalf of ED.
It is settled law that generally when the civil dispute between the parties are settled before the court particularly pertaining to the
recovery of out-standing amount, on joint petition, the High Court while exercising its discretion may quash the criminal petition u/s 482 Cr.
P.C. at the joint request of the parties.
Three Judge Bench in Narendra Lal Jain & Ors., (supra) held that during the investigation pertaining to the culpability of the accused
in the crime, the concerned bank had instituted suits for recovery of the amount claimed to be due from the respondents and the said suits
were disposed of in terms of the consent decrees. On the basis of the said consent decrees an application for discharge was filed which was
rejected by the trial court but eventually was allowed by the High Court. The charges in the matter were framed under Section 120-B/420
IPC by the learned trial Judge against the private parties. As far as bank officials are concerned, charges were framed under different
provisions of the Prevention of Corruption of Act, 1988. Being dissatisfied with the said order,, the CBI had preferred an appeal by
obtaining special leave and in that context the court observed that the accused respondent had been charged under Section 120-B/420 IPC
and the civil liability of the respondent to pay the amount had already been settled and further there was no grievance on the part of the
bank. Taking note of the fact that offence under Section 420 of IPC is compoundable and Section 120-B is not compoundable, the Court
eventually opined thus:-
“11. In the present case, having regard to the fact that the liability to make good the monetary loss suffered by the bank had been
mutually settled between the parties and the accused had accepted the liability in this regard, the High Court had thought it fit to invoke its
power under Section 482 Cr.P.C. We do not see how such exercise of power can be faulted or held to be erroneous. Section 482 of the
Code inheres in the High Court the power to make such order as may be considered necessary to, inter alia, prevent the abuse of the
process of law or to serve the ends of justice. While it will be wholly unnecessary to revert or refer to the settled position in law with regard
to the contours of the power available under Section 482 CR.P.C.it must be remembered that continuance of a criminal proceeding which is
likely to become oppressive or may partake the character of a lame prosecution would be good ground to invoke the extraordinary power
under Section 482 Cr. P.C.
In Sanjay Bhandari V/s. CBI, Crl. M.C. M.C. 5798/2014, Delhi High Court, dated 29.06.2015
“69….. By consent the parties have settled all disputes in the recovery suit, the consent decree of DRT stood to be disposed off as duly
satisfied. There is hence no force in the submission of respondents that the complainant bank has not exonerated the petitioners, first being
the Civil Procedure Code, and the second being the OTS Scheme of the Reserve Bank of India, which the petitioners have extensively
referred to in the original petition. The provisions of OTS Scheme prevent the complainant bank from entering into any compromise or
settlement under the said OTS Scheme in the cases of willful default, fraud and malfeasance. The complainant bank in choosing to enter into
such consent terms under the provisions of OTS Scheme has not only exonerated the petitioners, but for all intents and purposes given up
the perusal of the complaint and having no grievance against them in any other proceeding whether civil or criminal on the same set of
issues.â€
“70. There is no doubt that the trial has been proceeding for offences for the last about 20 years ago. The dispute between the petitioner
and complainant Bank 33 years old. A long time has in fact been elapsed since the alleged commission of offences. Still the trial continues.
The present petition is maintainable as the same has been filed also on additional grounds and circumstances. No useful purpose would be
served if such oppressive trial may continue for many more years. Thus, ends of justice are served by quashing such a proceeding, as the
parties cannot be allowed to go through the rigmarole of criminal prosecution for long numbers of years in a matter, it is doubtful in the
mind of the Court in whose favour it would be decided.†“71. In view of above mentioned reasons, this Court is inclined to quash the
proceedings pending against the petitioners, arising out of R.C. No. 4A/94/SIU(X) dated 23rd May, 1994, titled “CBI vs. N. Bhojraj
Shetty & Ors.‘, being C.C. No.65/11, pending in the Court of Spl. Judge (CBI), Tis Hazari Courts, Delhi.â€
The said decision has been upheld by the Hon‘ble Supreme Court.
In the present case, it is undisputed facts that the attached property were purchased much prior to the period when the facility of loan
sanctioned to the borrowers. The banks while rendering the facilities were boanfide parties. It is not the case of the respondent that the
attached properties were purchased after the loan was obtained. The mortgaged of the properties were done as bonafide purposes. None of
the bank is involved in the schedule offence. No PMLA proceedings are pending except the complainant bank was arrayed as Column;-11
at the time of framing charges. Union Bank of India has not granted sanction against its employee to proceed against him in criminal
complaint. There is no criminal complaint under the schedule offence and PMLA is pending against the two banks. In case of failure on the
part of borrowers to comply with the terms of settlement, the contempt proceedings are maintainable in the Court where the settlement was
recorded.
In view of the entire gamut of the dispute, we are of the considered opinion that the conduct of the banks are always bonafide. Both
banks are innocent parties. They were legally entitled to inform the Adjudicating Authority about their innocence and they rightly did so but
their contention was rejected as appeared from the impugned order.
This Tribunal in the case of IPRS in appeal no. FPA-PMLA-1302/MUM/2016 decided on 22.06.2017 had dealt with the similar issue as
to whether the innocent party whose immovable properties are attached by the ED can approach the Adjudicating Authority for release of
the same in para no. 55 to 60 the same read as under:-
“55. Whether innocent party whose properties i.e. movable or immovable are attached can approach the Adjudicating Authority for
release of attached property.
The Scheme of Prevention of Money Laundering Act clearly provides the mechanism whereby the innocent parties can approach the
Adjudicating Authority for the purposes of release of properties which have been attached in terms of the provisions of Section 5 of the Act.
This can be seen by reading Section 8(1) and the proviso to Section 8(2) of the Act whereby Adjudicating Authority has to rule whether all
or any of the properties referred to in the notice are involved in money laundering or not.
“8. Adjudication.- (1) On receipt of a complaint under sub-section (5) of section 5, or applications made under sub-section (4) of section
17 or under subsection (10) of section 18, if the Adjudicating Authority has reason to believe that any person has committed an offence
under section 3 or is in possession of proceeds of crime, he 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 money-
laundering and confiscated by the Central Government: Provided that where a notice under this sub-section specifies any property as being
held by a person on behalf of any other person, a copy of such notice shall also be served upon such other person: Provided further that
where such property is held jointly by more than one person, such notice shall be served to all persons holding such property.
(2) The Adjudicating Authority shall, after- (a) considering the reply, if any, to the notice issued under subsection (1); (b) hearing the
aggrieved person and the Director or any other officer authorised by him in this behalf, and (c)taking into account all relevant materials
placed on record before him, by an order, record a finding whether all or any of the properties referred to in the notice issued under sub-
section (1) are involved in money-laundering: Provided that if the property is claimed by a person, other than a person to whom the notice
had been issued, such person shall also be given an opportunity of being heard to prove that the property is not involved in money-
laundering, section 58 B or sub-section (2 A) of section 60 by the Adjudicating Authority (4) Where the provisional order of attach
There are judicial pronouncements whereby it has been laid down that the innocent parties can approach the Adjudicating Authority for
release of property by showing their bonafides in their dealings with the property. In the case of Sushil Kumar Katiyar (Appellants) Vs UOI
and Ors. (Respondents) MANU/UP/0777/2016 decided on 10.05.2016 by Allahabad High Court, it has been observed by the Ld. Single
Judge after noticing the judgment of Karnataka High Court that the element of knowingly or mens rea have been provided under the Act so
that the aspect of implicating any innocent person can be ruled out. Relevant para 26 of judgment is reproduced below:-
“26. Thus, upon consideration of the law laid down by the Hon'ble Karnataka High Court, it is clear that the amendment incorporated in
the Money Laundering Act was not held unconstitutional and ultra virus, but it was observed by the Karnataka High Court that the property
of a person can be attached without there being any prosecution for the offence of Money Laundering, but so far as the prosecution of a
person for the offence of money laundering is concerned, the proceedings under section 3 of the PML Act can be initiated only in case the
person is held guilty of receiving proceeds of crime as a result of commission of scheduled offence. The Karnataka High Court has also held
that the complainant in such a case is not required to wait for the result of trial being held for the scheduled offence. A complaint can still be
filed against such person, but if ultimately the person is acquitted of the charge for the scheduled offence, his prosecution under section 3 of
the Act for the offence of Money-Laundering would also come to an end. It has also been kept open by the Karnataka High Court that a
person against whom complaint under section 3 of the PML Act has been filed and he is being prosecuted for the offence of money-
laundering, he can show before the court that he is innocent and has not received any proceeds of crime.â€
It is clear that innocent person can approach the Adjudicating Authority of any competent court to demonstrate his innocence that he has
not received any proceeds of crime. The consequence of this is that while considering whether all or any of the properties provided under
notice issued u/S 8(1) are involved in money laundering, the Adjudicating Authority can take into consideration the plea of innocence
raised by any person and also the fact as to whether the property which has been attached has any nexus whatsoever with that of money
laundering or not if the person before the Tribunal/ Adjudicating Authority is able to demonstrate that he neither directly nor indirectly has
attempted to indulge nor with knowledge or ever assisted any process or activity in connection with proceeds or crime and the question of
his involvement does not arise as he is third party, then the Tribunal/ Adjudicating Authority can consider the said plea depending upon
whether there exist bona fide in the said plea or not and proceed to adjudicate the plea of innocence of the said party.
This is due to the reason that Section 8 allows the Adjudicating Authority to only retain the properties which are involved in money
laundering which means as to whether properties attached are involved in money laundering or not is a pre-condition prior to confirming
or attachment by Adjudicating Authority. Therefore, at that time, if the plea is raised that the party whose property is attached is innocent or
is without knowledge of any such transaction with respect to money laundering, then the Tribunal can consider the said plea and proceed to
release the said property out of the properties by holding that the said property is not involved in money laundering.
For the purposes of determining whether the property is involved in money laundering, the Court may consider the ingredients of
Section 3 which define offence of money laundering. The aspect of knowledge or involvement has been discussed by Ld. Single Judge of
Gujarat High Court in the case of Jafar Mohammed Hasanfatta and Ors (Appellants) Vs Deputy Director and Ors. (Respondents)
MANU/GJ/0219/2017 wherein Ld Single Judge has observed as under:-
“37. A holistic reading of this definition of 'proceeds of crime' and the penal provision under Section 3 of PMLA, which uses conjunctive
'and', makes it luminous that any persons concerned in any process or activity connected with such ""proceeds of crime"" relating to a
scheduled offence"" including its concealment, possession, acquisition or use can be guilty of money laundering, only if both of the two
prerequisites are satisfied i.e.-
“(i) Firstly, if he-
(a) directly or indirectly 'attempts' to indulge,
(b) “knowingly†either assists or is a party, or
(c) is “actually involved†in such activity; and
(ii) Secondly, if he also projects or claims it as untainted property;
The first of the two pre-requisite to attract Section 3 of PMLA shall thus satisfy any of the following necessary ingredients-
“A. RE: DIRECT OR INDIRECT ATTEMPT:
In State of Maharashtra v. Mohd.Yakub, MANU/SC/0239/1980 : (1980) 3 SCC 57, the Hon'ble Supreme Court observed that-
“13. Well then, what is an “attempt� ...In sum, a person commits the offence of ""attempt to commit a particular offence"" when (i)
he intends to commit that particular offence and (ii) he, having made preparations and with the intention to commit the offence, does an act
towards its commission; such an act need not be the penultimate act towards the commission of that offence but must be an act during the
course of committing that offence.
Thus, an “attempt to indulge†would necessarily require not only a positive ""intention"" to commit the offence, but also preparation for
the same coupled with doing of an act towards commission of such offence with such intention to commit the offence. Respondent failed to
produce any material or circumstantial evidence whatsoever, oral or documentary, to show any such 'intention' and 'attempt' on the part of
any of the petitioners.
B. RE: KNOWINGLY ASSISTS OR KNOWINGLY IS A PARTY:
In Joti Parshad v. State of Haryana, MANU/SC/0161/1993 : 1993 Supp (2) SCC 497 the Hon'ble Supreme Court has held as follows-
“5. Under the Indian penal law, guilt in respect of almost all the offences is fastened either on the ground of ""intention"" or ""knowledge
or ""reason to believe"". We are now concerned with the expressions “knowledge†and ""reason to believe"". “Knowledge†is an
awareness on the part of the person concerned indicating his state of mind. “Reason to believe†is another facet of the state of mind.
Reason to believe"" is not the same thing as “suspicion†or “doubt†and mere seeing also cannot be equated to believing.
“Reason to believe†is a higher level of state of mind. Likewise “knowledge†will be slightly on a higher plane than “reason to
believeâ€. A person can be supposed to know where there is a direct appeal to his senses and a person is presumed to have a reason to
believe if he has sufficient cause to believe the same.â€
The same test therefore applies in the instant case where there is absolutely no material or circumstantial evidence whatsoever, oral or
documentary, to show that any of the petitioners, 'Knowingly', assisted or was a party to, any offence.
C. Actually involved:
Actually involved would mean actually involved into any process or activity connected with the proceeds of crime and thus scheduled
offence, including its concealment, possession, acquisition or use. There is absolutely no material or circumstantial evidence whatsoever,
oral or documentary, to substantiate any such allegation qua the petitioners,
D. Neither any of the petitioners is arraigned as accused in the 'Scheduled Offences' punishable under Indian Penal Code for direct or
indirect involvement, abetment, conspiracy or common intention, nor is any such case made out even on prima facie basis against any of
them.
The second of the two pre-requisite to attract Section 3 of PMLA would be satisfied only if the person also projects or claims proceeds of
crime as untainted property. For making such claim or to project 'proceeds of crime' as untainted, the knowledge of tainted nature i.e. the
property being 'proceeds of crime' derived or obtained, directly or indirectly, as a result of criminal activity relating to a scheduled offence,
would be utmost necessary, which however is lacking in the instant case.
These are four ingredients which are determinative factors on the basis of which it can be said that whether any person or any property
is involved in money laundering or not. If there is no direct / indirect involvement of any person or property with the proceeds of the crime
nor there is any aspect of knowledge in any person with respect to involvement or assistance nor the said person is party to the said
transaction, then it cannot be said that the said person is connected with any activity or process with the proceeds of the crime. The same
principle should be applied while judging the involvement of any property of any person in money laundering. This is due to the reason that
if the property has no direct involvement in the proceeds of the crime and has passed on hands to the number of purchasers which includes
the bona fide purchaser without notice, the said purchaser who is not having any knowledge about the involvement of the said property
with the proceeds of the crime nor being the participant in the said transaction ever, cannot be penalized for no fault of his. Therefore, it
cannot be the Scheme of the Act whereby bona fide person without having any direct/ indirect involvement in the proceeds of the crime or its
dealings can be made to suffer by mere attachment of the property at the initial stage and later on its confirmation on the basis of mere
suspicion when the element of mens rea or knowledge is missing.
Similar principle has been laid down by Chennai High Court in the case of C. Chellamuthu (Appellants) Vs The Deputy Director,
Prevention of Money Laundering Act, Directorate of Enforcement (Respondent) MANU/TN/4087/2015 decided on 14.10.2015, relevant
portion of which are reproduced below:-
“ 20. The said sections read as follows:--
“23. Presumption in inter-connected transactions Where money-laundering involves two or more inter-connected transactions and one or
more such transactions is or are proved to be involved in money-laundering, then for the purposes of adjudication or confiscation (under
section 8 or for the trial of the money-laundering offence, it shall unless otherwise proved to the satisfaction of the Adjudicating Authority or
the Special Court), be presumed that the remaining transactions form part of such inter-connected transaction.
Burden of proof
In any proceeding relating to proceeds of crime under this Act, (a) in the case of a person charged with the offence of money-laundering
under Section 3, the Authority or Court shall, unless the contrary is proved, presume that such proceeds of crime are involved in money-
laundering; and
(b) in the case of any other person the Authority or Court, may presume that such proceeds of crime are involved in money-laundering.
In the present case, one G. Srinivasan is accused of having played fraud and obtained a loan of Rs. 15,00,00,000/- by producing bogus
and fabricated documents. From and out of the said amount, the property in question was purchased by him in the names of his Benamies.
One Ayyappan was appointed as their Power Agent. One Gunaseelan purchased the property through the Power Agent Ayyappan. The said
Gunaseelan was examined and his statement was recorded Under Section 50 of the Act. He had stated that he purchased the property for
cultivation. He developed the property but geologist gave opinion that property will not yield proper income. In the circumstances, he sold
the property to appellants. The respondent has not produced any document or material to disprove the statement of Gunaseelan. There is
nothing on record to show that the transaction in favour of the said Gunaseelan, is not genuine. It is not the case of respondent that the said
Gunaseelan is a Benami or employee of G. Srinivasan and that Gunaseelan did not pay any amount as sale consideration or the sale
consideration paid by Gunaseelan was not legitimate money. There is no material to show nexus and link of Gunaseelan with G. Srinivasan
and his Benamies. In the absence of any verification or investigation by respondent with regard to genuineness or otherwise of the purchase
by Gunaseelan; whether he was connected with G. Srinivasan or the sale consideration is legitimate or not the property in the hands of
Gunaseelan cannot be termed as proceeds of crime.
Further, the appellants have given statements under Section 50 of the Act. They have categorically stated that they possess agricultural
lands, cultivate GloriosaSuperba seeds and sell the same and derive considerable income. They have named the persons to whom they have
sold the GloriosaSuperba seeds and produced Bank statements. Some of the Appellants have stated that they sold their lands and borrowed
monies to purchase the property in question. There is nothing on record to show that the respondent had verified these statements.
Especially, the respondent has not verified the Bank statement produced by the Appellants to ascertain the genuineness of the same and
whether the money deposited came from genuine purchasers or from the persons involved in fraud and Money Laundering. The respondent
does not allege that Appellants are Benamies of G. Srinivasan or no sale consideration passed to the vendor.
Considering the materials on record and judgments reported in MANU/MH/1011/2010: 2010 (5)Bom CR 625 [supra] and : [2011] 164
Comp Cas 146(AP) [supra], I hold that appellants have rebutted the presumption that the property in question is proceeds of crime. The
respondent failed to prove any nexus or link of Appellants with G. Srinivasanand his benamies. Once a person proves that his purchase is
genuine and the property in his hand is untainted property, the only course open to the respondent is to attach sale proceeds in the hands of
vendor of the appellants and not the property in the hands of genuine legitimate bona fide purchaser without knowledge.
Before the Adjudicating Authority it was admitted by complainant that appellants had no knowledge that properties in the hands of their
vendor was proceeds of crime. It was also not disputed by complainant that the appellants did not have financial capacity to buy properties.
Paragraphs 21, 22, 23 and 24 of order of Adjudicating Authority is extracted herein for better appreciation.
“21. The CBIBS & FC (BLR) has filed a charge sheet in the court of Spl. Judge for CBI cases Coimbatore, against Sh. Arivarasu, Sh. R.
Manoharan, Sh. R. Selvakumar, Sh. G. Srinivasan, Sh. K. Martha Muthu, Sh. V. InduNesan, Sh. K. Vignesh, Sh. A. Sainthil Kumar, Sh. M.
Ram Krishnan, for the offences punishable under Section 120-B read with 420, 467, 471 IPC and section 13(2) read with 13(1)(d) of PC
Act 1988. The offences punishable under section 120-B, 420, 471 are schedule offence under Section 2(1)(y) of the PMLA and therefore on
of the condition for issuing provisional attachment order is satisfied. The other important point to be determined is whether the properties
attached vide Provisional attachment order are involved in money-laundering. The only defense or explanation raised by Defendants,
particularly Def No. 2 to 8 is that the landed properties attached by the complainant are not proceeds of crime. These properties were
purchased by these defendants without having any knowledge, whatsoever, that these properties were derived or obtained through criminal
activities relating to schedule offence. It has been demonstrated by them that they verified the title deeds relating to the properties and after
due verification of every details entered into the sale transactions as such these are bona fide deals entered by them against proper sale
consideration and the money paid to the seller is also well explained.
Against the above arguments vehemently raised by the defendants, the complainant without disputing that the deals are bona fide
heavily relied on the judgment of the Bombay High Court, dated 5.08.2010 in Mr. Radha Mohan Lakhotia Vs. Deputy Director, PMLA,
Directorate of Enforcement, Mumbai in first appeal No. 527/2010. In this case it held by the Bombay High Court that the property bought
without the knowledge that the same is tainted could be subjected to Provisional Attachment Order.
In the instant case the only point to be decided is whether the properties bought by any person against clean money and without any
knowledge that properties have been acquired directly or indirectly through scheduled offence could be subject matter of provisional
attachment order.
It is an admitted position that the Defendants (D-2 to D-8) had no knowledge that the properties in the hands of the vendor was proceeds
of crime. They have also verified the papers relating to these properties before the deal. No point has been raised with regard to the
financial capability of these Defendants to buy these properties. However, the Bombay High Court decision in Radha Mohan Lakhotia has
been pressed into service to make out a plea that the properties could be attached in such circumstances under the PMLA.
Provisional attachment was sought to be continued only based on the judgment of Bombay High Court in Radha Mohan Lakhotia's case.
A reading of paragraphs 21 to 24 clearly reveals that both the Adjudicating Authority as well as Appellate Authority failed to properly
appreciate the facts and findings in Radha Mohan lakhotia's case. In that case, the Department had placed substantial and acceptable facts
to prove that the property in the hands of third party was proceeds of crime. It is pertinent to note that in Mr. Radha Mohan Lokatia's case,
Department had proved the nexus and link between the person possessing the property and person accused of having committed an offence.
All the persons involved in that case were close relatives.
In the present case, the respondent failed to prove that the appellants did not have sufficient financial capacity to buy the property or
that the money paid by them as sale consideration was not legitimate money derived by agricultural activities. No material was produced to
show that the appellants are close relatives of person, who involved in criminal activities and the person, who sent monies to purchase the
property did not possess financial capacity to provide such huge amounts and that they are not genuine purchasers of agricultural products
of appellants. The respondent has not made any such investigation and has not produced any such material. Further, the Appellate
Authority in fact considered the additional documents produced before it, but rejected the same on the ground that Appellants have not given
any valid reasons for not filing the same before the Adjudicating Authority. Having considered the Additional documents, the appellate
authority failed to give any finding on merits after verifying with the concerned Bank.
From the scheme of the Prevention of Money Laundering Act, 2002 and its object, it is clear that the intention of the legislature was not to apply
the Act to the transactions subject matter of the present case.
In the PAO as well as in O.C. it is admitted that the properties herein are mortgaged with the appellant PNB Bank. It is also a fact that the
mortgaged properties are not acquired out of any proceeds of crime. It has come on record that the properties mortgaged were acquired prior to the
alleged commission of crime. The relevant sale deed of the mortgaged properties are of 1996 so the date of acquisition is prior to the date of alleged
commission of crime in the present case.
In the present case the Adjudicating Authority has come to a conclusion at para no. 13 of the impugned order that the assets are found to be
proceeds of crime and found to be involved in money laundering. The aforesaid conclusion has not be elucidated by the Ld. Adjudicating Authority in
his order. It appears that the only thing was in his mind that section 71 of PMLA has an overriding effect. The provisions of PMLA shall have effect
and prevail over provisions of any other Act or its provisions. To this we are not in agreement with the Ld. Adjudicating Authority because of the
amendment of 2016 made in SARFAESI Act. The PNB is the rightful claimants of the said property which are already in its possession under
SARFAESI Act.
The Honâ€ble Supreme Court of India in the case ofA ttorney General of India and Ors. (AIR 1994 SC 2179 )while dealing with the matter under
Conservation of Foreign Exchange and Prevention of Smuggling Activities Act has defined the illegally acquired properties and held that such
properties are earned and acquired properties and held that such properties are earned and acquired in ways illegal and corrupt, at the cost of the
people and the state, hence these properties must justly go back where they belong, the state. In the present case as they money belongs to the PNB it
is public money. The PNB has the right to property under the Constitution of India. The property of the PNB cannot be attached or confiscated if
there is no illegality in the title of the appellant and there is no charge of money laundering against the appellant. The mortgaged of property is the
transfer under the Transfer of Property Act.
In para no. 7 of the impugned order the Ld. Adjudicating Authority has stated that “the PAO and the O.C. enumerates the 14 properties
(which include the mortgaged properties involve in this appeal) standing in the name of Shri Mukesh Gupta & Smt. Seema Gupta either singly or jointly
and in the name of Gupta International Industries, Nagpur. The details concerning the said properties as to its acquisition, its registration, consideration
and details of transfer in their favour are well enumerated in para 22 to 35 of P.A.O..†However, on going through the said PAO it is seen that the
mortgaged properties i.e. at Sr. no. 7 & 8 were purchased vide sale deed on 08.05.1996 for ten lakhs each in the year 1996. We have gone through
entire PAO but we could not find any substantial material in the said PAO evidencing that the properties involved herein are acquired out of proceeds
of crime. Therefore we are not in an agreement with Ld. Adjudicating Authority that the mortgaged properties are acquired out of proceeds of crime
or that it could be attached as a value of proceeds of crime particularly when the properties are mortgaged with the Bank.
That the definition of “proceeds of crime†as per Section 2(u) of the PML Act comprises of the property which is derived or obtained as a
result of criminal activity. In the present case, all the properties have been purchased by the Guptas and have been mortgaged with the PNB much
prior to the date of alleged offence which shows that no proceeds of crime are involved in the acquiring of these properties and hence the same
cannot be attached by the ED because the same would result in hampering the interest of the Appellant Bank.
The Ld. Adjudicating Authority has failed to understand that PNB has heavy stakes in the properties as they have lent its valuable money to the
borrowers. The property is mortgaged with the PNB. If, in future, any borrower fails to repay the loan, the Bank has a legal right to bring the
properties to sale and recover its dues. Valuable right will be lost for Appellant, be order of attachment and eventual confiscation. As a matter of fact,
the borrowers may not be interested in repaying the loan, since they are not going to enjoy the property. Therefore, ultimately, the action of the
ED/Respondent no. 2 would make the Bank a much greater victim than even the respondent nos. 3 & 4. The bank in the present case is just a victim
and not an accused. If the attachment would continue against the mortgage properties of the bank in such manner, the economy of the country would
suffer. The bank in the present case has proceeded with the matter in good faith and is not involved in the offence of money laundering.
Further we are unable to agree with the contention of the Ld. Counsel for the respondent that provision of PMLA will have overriding effect over
the provisions of SARFAESI Act as the amendment of 2016 is only with respect to proviso in the SARFAESI Act not the Act itself because there
would be no existence of a proviso in the absence of main provision in the Act. The proviso as well as main provision in the Act are inter-related. The
proviso is to be read with the main provision. The proviso has got no independent existence. By amending the proviso the law makers of the country
have made their intention clear that the SARFAESI Act has overriding effect in the present fact and circumstances of the case.
The Ld. Adjudicating Authority has failed to consider that the ED has attached the properties without examining the case of the bank. The
evidence on record suggests that the properties were acquired by the borrowers much before the alleged date of crime. No money disbursed by the
Bank from its loan account, has been invested in acquiring these properties. Furthermore, the Appellant Bank had created charge over the property
prior to the date of the crime. The Bank has already filed the suit for recovery and has also taken the action under SARFAESI Act. The Ld.
Adjudicating Authority failed to appreciate that depriving the Appellant Bank from its funds/property, without any allegations or involvement of the
Bank in the alleged fraud would be unjustified.
The properties attached cannot be attached under Section 5 of the PML Act because the properties are not purchased from the alleged proceeds
of crime. As per the provisions of Section 5(1) (c) the primary requirement for the attachment is that the proceeds of crime are likely to be concealed,
transferred or dealt with in any manner. In this case there was absent of such requirement. The said properties are already in the possession of the
Appellant Bank under the SARFAESI Act.
The Honâ€ble Supreme Court of India in the case of Attorney-General of India and others reported in AIR 1994 SC 2179 while dealing with the
matter under Conservation of Foreign Exchange and Prevention of Smuggling Activities Act has defined the illegally acquired properties and has held
that the illegally acquired properties are earned and acquired in ways illegal and corrupt, at the cost of the people and the state, the state is deprived of
legitimate revenue to that extent hence these properties must justly go back where they belong, the state. In the present case as the money belongs to
the Appellant Bank it is liable to be recovered by the Appellant Bank.
The property of the Appellant Bank cannot be attached or confiscated when there is no illegality or unlawfulness in the title of the Appellant Bank
and there is no charge of money laundering against the Bank. The mortgage of property is the transfer under the Transfer of Property Act as there is
no dispute as regards the origin of funds or the title of the properties. As far as the bank is concerned, the bank had to recover its outstanding dues by
taking over the possession of the mortgaged properties in case the Respondent no 3 to 5 are not able to pay back the credit facilities availed by them
and by way of the SARFAESI provisions these properties are being taken in possession by the Appellant Bank so that recovery can be made from the
accounts which have become NPA.
The respondent has no lien over the said properties as the Appellants banks are now the Legal transferee of said properties. Even in the criminal
jurisprudence the stolen property when it is in the hands of unauthorized person that person cannot claim title to the property. The said recipient cannot
retain the property over which he has no legal title and the property should be returned to the lawful owners because the both banks are victims and
even after trial, they are to receive-back the said properties being victim party in normal type of cases u/s 8(8) of the Act. However in the present
cases, the banks are innocent parties. They are not involved in any criminal proceedings. If they are asked to await till the trial is over, the systems in
these type of cases, the economy would collapse.
From the discussion made above, we are of the view that there is no nexus whatsoever between the alleged crime and the Bank who is mortgagee
of the properties in question which were purchased before sanctioning the loan. Thus no case of money-laundering is made out against Bank who has
sanctioned the amount which is untainted and pure money. They have priority to recover the loan amount/debts by sale of assets over which security
interest is created, which remains unpaid. The Ld. Adjudicating Authority has not appreciated the facts and law involved in the matter and the primary
objective of section 8 of PMLA is that the Adjudicating Authority to take a prima facie view on available material and facts produced. The
contentions raised by Mr. Neeraj Atri, Advocate has no substance. The provisional attachment in the present matter is bad and against the law.
In the circumstances available in the present case, the allegation of money laundering prima facie, so far as present appellant & properties
involved in this appeal, found to be unsustainable for the purpose of attachment under the PMLA, 2002.
In view of aforesaid facts and circumstances and for reasons referred above, we set aside the Impugned Order dated 30.05.2016 and the
Provisional Attachment Order dated 08.12.2015. The mortgaged properties attached under the PAO 03/2015, so far as, properties concern in this
appeal are released from attachment forthwith.
No costs.