“Proceeds of Crime” under PMLA: Whether includes Properties acquired before commission of the Scheduled Offence

In a landmark decision, the Appellate Tribunal under SAFEMA¹ (Appellate Tribunal) in Ayush Kejriwal v. Enforcement Directorate² recently ruled that when assets acquired from criminal activity relating to a scheduled offence i.e. misappropriated bank funds are untraceable, then any property of the accused, equivalent to the value of the misappropriated funds, can be attached. This attachment applies regardless of whether the property was acquired using misappropriated funds or was purchased with legally obtained funds even before the registration of the FIR. This judgment underscores that even assets legally acquired before the commission of scheduled offence or FIR registration can be seized if the proceeds of the crime cannot be traced.

This article aims to critically examine this decision of the Appellate Tribunal in light of two relevant Supreme Court judgments and the varying interpretations by different High Courts across the country. By analysing these judicial perspectives, the authors seek to elucidate the legal standing and implications of this ruling within the context of Indian money laundering law.

Meaning of money laundering and the process in brief

The Prevention of Money-Laundering Act, 2002³ (PMLA) essentially seeks to punish a person who indulges in or knowingly assists, is a party to, or is involved in any process or activity connected with the “proceeds of crime”, including its concealment, possession, acquisition, or use, and who is projecting or claiming it as untainted property. The punishment for money laundering is prescribed in Section 4⁴ of the PMLA, which mandates rigorous imprisonment for a term not less than three years but extending to seven or ten years, as the case may be, and a fine. Besides the punishment, the property derived from the “proceeds of crime” is also liable for confiscation.

The determination of the “proceeds of crime” becomes the central issue of the offence of money laundering, and it can be stated that the purpose of the PMLA is to punish the offender for the offence of money laundering and to attach and eventually forfeit the property acquired from the “proceeds of crime”.

The ruling by the Appellate Tribunal

The bone of contention in the judgment of Ayush Kejriwal⁵ is the meaning of the phrase “proceeds of crime”, which, according to the judgment, under certain circumstances, would also include property equivalent in value to the property derived from the criminal activity relating to the scheduled offence, even though acquired before the commission of the offence and through legitimate and known sources of income.

In Ayush Kejriwal⁶, the appellant’s grandfather was the accused under PMLA. An FIR had been registered against him for siphoning off the funds of the bank under Section 120-B⁷, read with Section 420 of the Penal Code, 1860⁸, and Section 13(2)⁹, read with Section 13(1)(d) of the Prevention of Corruption Act, 1988, on 28-3-2017. The enforcement case information report (ECIR) was recorded by the Enforcement Directorate on 3-1-2020, and proceedings were initiated against him. The property acquired from the criminal activity of defrauding the bank was not traceable. There was another property that the grandfather had acquired out of his own funds in 1988, much before the commission of the scheduled offence. The grandfather gifted this property to his grandson in 2020, and the same was seized under Section 17(1)¹⁰ of the PMLA by the Enforcement Directorate from the grandson. The seizure was confirmed by the adjudicating authority. The appellant contended that he was a bona fide owner of the property, the property having come to him from his grandfather, and that no offence of money laundering had been committed by him.

The Appellate Tribunal decided against the appellant by holding that the transfer made by the accused grandfather to his grandson was not bona fide and, although the property was acquired by the grandfather before the commission of the scheduled offence, the same was subject to attachment as it fell within the definition of “proceeds of crime” under Section 2(1)(u)¹¹ of the PMLA.

The term “proceeds of crime” is defined under Section 2(1)(u) of the PMLA and is reproduced as follows:

“Proceeds of crime” means any property derived or obtained directly or indirectly by any person as a result of criminal activity relating to a scheduled offence or the value of any such property or where such property is taken or held outside the country then the property equivalent in value held within the country or abroad;

Explanation.—For the removal of doubts, it is hereby clarified that “proceeds of crime” include property not only derived or obtained from the scheduled offence but also any property which may directly or indirectly be derived or obtained as a result of any criminal activity relatable to the scheduled offence;

According to the Appellate Tribunal, there are three components to the definition of “proceeds of crime”, and each represents the “proceeds of crime” i.e.—

1. property derived or obtained directly or indirectly by any person as a result of criminal activity relating to a scheduled offence; or

2. value of any such property; or

3. where such property is taken or held outside the country, the property equivalent in value held within the country or abroad.

Regarding the first component, there is no quarrel since this considers a property derived directly or indirectly by any person as a result of criminal activity relating to the scheduled offence. Hence, property acquired after the commission of the scheduled offence and out of the proceeds of the scheduled offence will be covered in this clause.

An interpretation has been adopted by the Appellate Tribunal to the second component based on certain decisions to hold that where the property acquired directly as a result of the criminal activity relating to a scheduled offence is not found or does not exist, then the equivalent value of such property shall be held to be the “proceeds of crime”, even if acquired before the commission of the scheduled offence. This interpretation by the Appellate Tribunal is the bone of contention, which will be discussed later in this article.

As far as the third component is concerned, the law is clear that when a person obtains a property as a result of criminal activity relating to a scheduled offence and such property is held outside the country, then the property equivalent in value held within the country or abroad shall be referred to as the “proceeds of crime”.

The view of the authors on the definition of “proceeds of crime” and the meaning of the phrase “value of such property”

The authors believe that the second component of the definition of “proceeds of crime” has not been interpreted correctly by this decision. In our view, the definition of “proceeds of crime” has only two components.

The first component includes property derived out of a criminal activity relating to a scheduled offence, and the phrase “value of such property” simply means that the “proceeds of crime” would include the current value of the property that has been acquired out of the criminal activity relating to the scheduled offence.

The second component is the equivalent value of the property if the property derived out of the criminal activity relating to a scheduled offence is taken or held outside India.

Let us understand the first component by way of an example. Let us say a person has defrauded the bank to the extent of Rs 100 and has bought a property for Rs 100 out of the “proceeds of crime”. The value of the property may increase, and therefore, the phrase “value of any such property” has been included in the definition to include the current fair market value of the property acquired out of the criminal activity relating to the scheduled offence. In other words, the phrase “value of any such property” is not an independent component/clause representing the “proceeds of crime”. It is merely a clarification or extension of the meaning of the property derived from criminal activity relating to the scheduled offence to include its increased market value within its fold with the efflux of time.

The meaning ascribed above is further strengthened when the second component of the definition relating to the situs of the property abroad is carefully studied. The legislature was aware of a situation where a person may commit criminal activity relating to a scheduled offence in India and invest the “proceeds of crime” from that activity in a property outside India. The property would exist outside India but would not be amenable to attachment because of the laws of the land there. Since the person continues to enjoy the property outside India acquired from criminal activity, he ought to be liable to suffer attachment of an equivalent property value in India. If no property were taken or held outside the country derived from criminal activity relating to a scheduled offence, this definition component would not be applicable, and the equivalent value of property in India would not be subject to attachment.

Hence, following the same analogy, if the property derived from criminal activity relating to the scheduled offence is not available, the accused would only be charged criminally under Section 4 of the PMLA, and his property acquired before the commission of the crime cannot be attached.

Reliance of the Appellate Tribunal on the various judgments for their interpretation and decision

The Appellate Tribunal relied on the judgment of the Supreme Court in Vijay Madanlal Choudhary v. Union of India¹². It cited and relied on the following paragraph, which, according to them, supported their view:

68. It was also urged before us that the attachment of property must be equivalent in value to the proceeds of crime only if the proceeds of crime are situated outside India. This argument, in our opinion, is tenuous. For, definition of “proceeds of crime” is wide enough to not only refer to the property derived or obtained as a result of criminal activity relating to a scheduled offence but also to the value of any such property. If the property is taken or held outside the country, even in such a case, the property equivalent in value held within the country or abroad can be proceeded with. The definition of “property” as in Section 2(1)(v) is equally wide enough to encompass the value of the property of proceeds of crime. Such an interpretation would further the legislative intent in the recovery of the proceeds of crime and vesting it in the Central Government for the effective prevention of money laundering.

69. We find force in the stand taken by the Union of India that the objective of enacting the 2002 Act was the attachment and confiscation of proceeds of crime, which is the quintessence, to combat the evil of money laundering. The second proviso, therefore, addresses the broad objective of the 2002 Act to reach the proceeds of crime, in whosoever’s name they are kept or by whosoever they are held. To buttress this argument, reliance has been placed on the dictum in Attorney General for India v. Amratlal Prajivandas¹³ and Raman Tech. and Process Engg. Co. v. Solanki Traders¹⁴.

The Appellate Tribunal also relied on two decisions of the Delhi High Court in Enforcement Directorate v. Axis Bank¹⁵ and Prakash Industries Ltd. v. Enforcement Directorate¹⁶. The Delhi High Court, in Axis Bank¹⁷, held that even though the property may have been acquired by the suspect legitimately, without any connection to the criminal activity or its result, the same property, however, is intended to fall in the net of proceeds of crime because the owner is involved in the proscribed criminality and the tainted assets are not traceable or cannot be reached, or those found are not sufficient to fully account for the pecuniary advantage thereby gained. That is why such untainted properties (held in India or abroad) are to be seized to the extent of the value of the “proceeds of crime”. This view was also upheld by the Delhi High Court in Prakash Industries Ltd.¹⁸

With respect, we also beg to state that the reliance on para 68 of the judgment of the Supreme Court in Vijay Madanlal Choudhary¹⁹ by the Appellate Tribunal for the proposition that the value of property includes any property equivalent in value to the proceeds out of the crime, is misplaced. It is trite that a judgment of the Supreme Court must be read as a whole. The meaning of “proceeds of crime”, as per Section 2(1)(u) of the PMLA, has been dealt with by the Supreme Court in Vijay Madanlal Choudhary²⁰.

There is an exhaustive discussion on the meaning of the “proceeds of crime” and the various components discussed therein. If one reads the view of the Supreme Court holistically, it clearly comes out that para 68 referred to by the Appellate Tribunal and relied upon is the interpretation of the Supreme Court in respect of properties acquired from the criminal activity relating to the scheduled offence and transferred outside India. This is because the preceding discussion by the Supreme Court in Vijay Madanlal Choudhary²¹ conveys the meaning of “proceeds of crime”, which is discussed as follows:

The Supreme Court has stated that “proceeds of crime” needs to be construed strictly. This itself means that the offence of money laundering, being serious in nature, the scope for interpretation of the term “proceeds of crime” based on perception or presumptions has to be eschewed.

It is further stated that properties recovered or attached in connection with criminal activity relating to a scheduled offence under the general law cannot be regarded as “proceeds of crime”.

It is also stated that the vehicle used in the commission of the scheduled offence may be attached as property in the crime case concerned, it may still not be “proceeds of crime” within the meaning of Section 2(1)(u) of the PMLA.

It has further been held that the possession of unaccounted property acquired by legal means does not necessarily mean the “proceeds of crime”. It may be actionable for tax violation and yet, will not be regarded as “proceeds of crime” unless the tax legislation concerned prescribes such violation as an offence and such offence is included in the Schedule of the PMLA.

The Supreme Court have further gone on to state that property indirectly obtained would mean property derived or obtained from the sale proceeds or in lieu of or in exchange of the “property” directly derived or obtained as a result of criminal activity relating to a scheduled offence.

It was further held that the Explanation added in 2019 does not travel beyond the intent of tracking and reaching up to the property derived or obtained directly or indirectly as a result of criminal activity relating to a scheduled offence and the explanation is only a clarification and not to increase the width of the main definition “proceeds of crime”.

It was further stated that every crime property need not be termed as “proceeds of crime” but the converse may be true. It was held that if some other property is purchased or derived from the “proceeds of crime” then even such subsequently acquired property must be regarded as tainted property and actionable under the PMLA.

From the aforesaid propositions dealt in by the Supreme Court, it comes out that giving a very strict interpretation to the definition of “proceeds of crime”, the Supreme Court has held inter alia, that for a property to qualify as “proceeds of crime”, it must have been directly or indirectly acquired out of the criminal activity relating to the scheduled offence, and a property even though undisclosed but not relatable to the scheduled offence cannot be attached.

On the other hand, if we advert to para 68 of Vijay Madanlal Choudhary²², which has been relied upon by the Appellate Tribunal, it may be seen that the opening sentence is a query relating to “proceeds of crime” having been transferred outside India. The paragraph also ends with an adjudication as to what would constitute “proceeds of crime” in respect of the said property transferred outside India. Hence, the entire paragraph deals with the subject of the “proceeds of crime” having been shifted outside India. Therefore, the middle lines in the paragraph are also in the same context and have to be read as such. This paragraph, in our view deals with properties that have been shifted outside India and have been acquired out of the “proceeds of crime”.

Hence, most respectfully submitting, the sole reliance on this paragraph for the ultimate decision as to what constitutes “proceeds of crime” is not quite correct.

The judgment of the Appellate Tribunal is per incuriam the judgment of the Supreme Court in Pavana Dibbur

It is respectfully submitted that the decision by the Appellate Tribunal is passed per incuriam the judgment of the Supreme Court in Pavana Dibbur v. Enforcement Directorate²³ on the identical issue. Similar issue has been decided by the judgments delivered by the Punjab and Haryana High Court in Seema Garg v. Enforcement Directorate²⁴, High Court of Andhra Pradesh in Pappu Singh v. Union of India²⁵ and High Court of Patna in HDFC Bank Ltd. v. Union of India²⁶.

The Appellate Tribunal have relied on the judgment of the Supreme Court in Vijay Madanlal Choudhary²⁷ and the two decisions of the Delhi High Court in Axis Bank²⁸ and Prakash Industries Ltd.²⁹ and did not appear to have considered several decisions, including one of the Supreme Court, in Pavana Dibbur³⁰ directly on the issue even though it exercises a coordinate jurisdiction by its constitution under the Act.

The Supreme Court, in Vijay Madanlal Choudhary³¹, was examining the constitutionality of the various provisions of the PMLA, and this provision, namely, the definition of “proceeds of crime”, was also examined from the perspective of whether it was constitutional or not.

However, subsequently, the Supreme Court, in Pavana Dibbur³², was confronted with an issue directly related to this subject. In the said case, two properties of the accused had been seized, one of which was a property acquired out of known sources before the commission of the scheduled offence. The Supreme Court specifically adjudicated on this issue and also considered its judgment in Vijay Madanlal Choudhary³³ on the subject. It held that such a property, which does not emanate from the criminal activity relating to a scheduled offence, cannot be subject to attachment under PMLA. They were very clear in their interpretation that “proceeds of crime” simply means properties acquired from the criminal activity relating to the scheduled offence. Thus, they released the property from attachment, and it is apposite to reproduce the relevant portion of the judgment on this issue:

31 (c). … The first property cannot be said to have any connection with the proceeds of crime as the acts constituting the scheduled offence took place after its acquisition.³⁴

Needless to add there are three other decisions of the Punjab and Haryana High Court in Seema Garg³⁵, High Court of Andhra Pradesh in Pappu Singh³⁶ and High Court of Patna in HDFC Bank Ltd.³⁷ which are before the judgment of the Supreme Court in Pavana Dibbur³⁸ but enunciated the same view as was finally upheld by the Supreme Court in Pavana Dibbur³⁹. The relevant portions of the said judgments are reproduced below:

(i) Punjab and Haryana High Court in Seema Garg⁴⁰

35. In our considered opinion, to understand true meaning of second limb of definition of “proceeds of crime”, it must be read in conjunction with Sections 3⁴¹ and 8⁴² of the PMLA. If all these sections are read together, phrase “value of such property” does not mean and include any property which has no link direct or indirect with the property derived or obtained from commission of scheduled offence i.e. the alleged criminal activity. “Value of such property” means property which has been converted into another property or has been obtained on the basis of property derived from commission of scheduled offence e.g. cash is received as bribe and invested in purchase of some house.

51. In view of above discussion, we summarise our findings as below:

(i) *        *        *

(ii) Property acquired prior to commission of scheduled offence i.e. criminal activity or introduction of PMLA cannot be attached unless property obtained or acquired from scheduled offence is held or taken outside the country.

(ii) High Court of Andhra Pradesh in Pappu Singh⁴³

28. Viewed from this perspective, the amendments would be unnecessary if the term “or the value of such property” was understood to authorise the attachment of any property, when the actual proceeds of the crime are not available.

29. The Explanation to this provision which was brought in by Act 2 of 2019 also speaks only of properties derived or obtained from the proceeds of a crime and expands the scope of the definition to include properties obtained not only from the scheduled offences but also criminal activity relatable to the scheduled offence. The Explanation did not expand the definition to include any other property of equivalent value where the proceeds of the crime are lost even by the offender.

30. In that view of the matter, the properties purchased before the commission of the offence, cannot fall within the definition of “proceeds of crime” and cannot be attached or confiscated under the Act. Consequently, the attachment and subsequent proceedings before the adjudicating authority for confiscation of the properties in Table I of the impugned order would be without jurisdiction and would have to be struck down.

(iii) High Court of Patna in HDFC Bank Ltd.⁴⁴

21. … Finally, this Court finds that the phrase “value of such property” does not mean and include any property which have no link direct or indirect with the property derived or obtained from commission of scheduled offence i.e. the alleged criminal activity.

The judgment of the Supreme Court in Pavana Dibbur⁴⁵ which is, an exhaustive exposition on the issue running into 17 pages, has not been referred to or relied upon. Needless to say, the decisions of the other High Courts mentioned above have also not been referred to in their decision. It is further stated that the decision in Prakash Industries Ltd.⁴⁶ and Axis Bank⁴⁷ referred to by the Appellate Tribunal were passed much before the judgment in Pavana Dibbur⁴⁸ by the Supreme Court. There was no need to rely on those, particularly when the reliance was placed by the Appellate Tribunal on the judgment of the Supreme Court in Vijay Madanlal Choudhary⁴⁹. In any case, having relied on Axis Bank⁵⁰ and Prakash Industries Ltd.⁵¹, the Appellate Tribunal should have discussed the other view enunciated by the three High Courts referred to above.

Common law principles followed in India

India, like Great Britain and the United States, follows the common law principle, unlike the codified law principle followed by France, Japan, Germany, etc. Under the common law principle, the Parliament passes the statutory law, which is thereafter interpreted by the higher courts, and their interpretation becomes the law of the land since the same has necessarily to be followed by the courts below. If the precedents laid out by the superior court are not followed or omitted from being followed, it would only result in chaos and uncertainty, causing unfolded hardships to the citizenry.

The correct purport of PMLA — The difference between tax and confiscation/forfeiture

As already stated above, the PMLA seeks to punish the accused under Section 4 of the PMLA for a period of 3 years to 7 years or 10 years, as the case may be, and also forfeit the property acquired from the criminal activity related to the scheduled offence.

By forfeiting property acquired from known and legitimate sources, the Appellate Tribunal has treated forfeiture like a tax. Taxes levied by the Government and forfeiture of property for infractions of law are distinct concepts with different purposes and legal bases. Taxes generate revenue for the Government to fund services and infrastructure. Non-payment of tax can lead to penalties, fines, or seizure and sale of properties, whether acquired before the default or later to recover unpaid taxes. This is because non-payment of taxes imposes a liability of a quantified amount on the assessee, which he is to pay out of whatever assets he has. Forfeiture is a punitive measure that intends to penalise individuals or legal entities for violating laws, often related to criminal activity. Hence, the scope of forfeiture targets specific properties involved in or derived from criminal activity such as drug trafficking, money laundering, etc. The idea of forfeiture is to deprive criminals of their ill-gotten gains. Therefore, it is not like a tax demand that can be recovered out of any property in possession of the defaulter. On this count, the interpretation that only those properties that have been acquired from the criminal activity relating to a scheduled offence ought to be seized and forfeited takes precedence and appears to be the correct view.

The binding precedent of the decision of the Appellate Tribunal

What would be the sanctity/precedence value of the decision rendered by the Appellate Tribunal in Ayush Kejriwal⁵². The Appellate Tribunal is headquartered in Delhi and has Pan India jurisdiction. The members of the Appellate Tribunal are based out of Delhi, hold camp offices all across the country, and render their decisions. The decision rendered by the Appellate Tribunal anywhere in India would be binding on all the subjects within the country. The concept of concurrent jurisdiction applies to the Appellate Tribunal squarely. The Appellate Tribunal falls under the jurisdiction of the High Court inasmuch as, its decisions are appealed against before the High Court under Section 42⁵³ of the PMLA. What would be the impact of the decision of the Appellate Tribunal in the jurisdiction of Punjab & Haryana, Andhra Pradesh and Patna High Court who have taken a contrary view. What would be the effect of the decision of the Appellate Tribunal passed without consideration of Pavana Dibbur⁵⁴ who have also considered Vijay Madanlal Choudhary⁵⁵.

The recourse available

In our view, the Appellate Tribunal should suo motu recall their order since it does not consider the judgment of the Supreme Court in Pavana Dibbur⁵⁶, which is binding on all the subordinate authorities as per Article 141⁵⁷ of the Constitution of India.

Alternatively, the appellant may cite the judgment of the Supreme Court in Pavana Dibbur⁵⁸, which has been omitted from being considered and request the Appellate Tribunal to recall their judgment.

The judiciary’s role is to settle disputes between two adversarial parties, and after hearing both, the Judges decide which view is correct. The common law principle would collapse if the precedents laid down by higher authorities were not followed unreservedly. This would create chaos and uncertainty and cause much suffering to litigants, which would otherwise be avoidable.