Coal Allocation Per Se Does Not Amount To "Proceeds Of Crime" Under PMLA: Delhi High Court

Observing that the allocation of coal cannot be viewed as proceeds of crime per se, the Delhi High Court has observed that only the gains that may be obtained from criminal activity which are concealed or projected to be untainted can form the subject matter of the offence under the Prevention of Money Laundering Act (PMLA).

Justice Yashwant Varma was of the view that it cannot be said that the allocation of coal is property as contemplated under the Act.

"It is pertinent to note that the Act essentially seeks to confiscate properties and assets that may be derived or obtained from criminal activity and which may then be concealed. It is thus evident that it is only gains that may have been obtained by the utilization of the allocation which could have possibly been viewed as proceeds of crime," the Court said.

The Court also observed that the commission of a predicate offense is the precipitate step for initiation of proceedings under the Act and that the offense of money laundering must be tried and established separately.

"It is also pertinent to observe that the predicate offense constitutes the very foundation of a charge of money laundering. The entire edifice of a charge of money laundering is raised on an allegation of a predicate offence having been committed, proceeds of crime generated from such activity and a projection of the tainted property as having been legitimately acquired," the Court added.

The Court also said that the description of the offense of money laundering as a stand-alone offense would not in itself infuse jurisdiction in proceedings that may be initiated under the Act even after a competent court has come to hold that no criminal offense stands committed or in situations where the accused is discharged of the offense or proceedings quashed.

Essentially, the following observations were made:

- The allegation of money laundering is premised and dependent upon the commission of a criminal offence. Unless proceeds are found to have been derived or obtained from criminal activity, the question of money laundering would not arise.

- The Act is concerned with the commission of an offence which may have yielded revenues of profits which are then concealed and their source obfuscated. However, once the charge of commission of a scheduled offence itself comes to be annulled by virtue of a judicial declaration with a competent Court finding that an offence could not be set to have been committed it would be impermissible to assert that a person or entity has indulged in money laundering.

- Since the offence of money laundering is essentially aimed at depriving persons of the fruits and benefits that may have been derived or obtained from criminal activity, the charge is inextricably linked to criminal activity. However, once it is found that a criminal offence does not stand evidenced, the question of any property being derived or obtained therefrom or its confiscation or attachment would not arise at all and in any case, proceedings if initiated under the Act would be wholly without jurisdiction or authority.

- The Court finds that the expression ―proceeds of crime‖ creates an inextricable link between criminal activity and the acquisition of property and assets as a result thereof. If the charge of criminal activity ceases to exist in law, a charge of money laundering would neither sustain nor survive. The Court thus reiterates the conclusions as drawn and recorded in Rajeev Chanana and Gagandeep Singh.

- Consequently it must be held that once it is found by a competent court, authority or tribunal that a predicate offence is either not evidenced or on facts it is held that no offence at all was committed, proceedings under the Act would necessarily have to fall or be brought to a close.

- Turning then to Section 3 of the Act, the Court finds that the said provision would come into play only if proceeds of crime are found to have been generated. As this Court reads Section 3 it finds that the offence of money laundering has an enduring and ineffaceable link to proceeds of crime. Absent the commission of a criminal offence, the foundation of proceedings initiated under the Act would undoubtedly fall and self-destruct.

- The Court further notes that not every criminal activity falls within the ambit of Section 3. While criminal activity may represent or evidence the commission of a predicate offence under the Penal Code, it is only activity relating to the laundering of proceeds of crime which can form the subject matter of proceedings under the Act. Absent the existence of criminal activity which may have resulted in proceeds of crime having been gained or obtained, a charge under Section 3 would not sustained.

- The Court also bears in mind the language of Section 3 of the Act which links the activities and processes of money laundering to proceeds of crime. Section 3 creates an indelible link between property derived or obtained and criminal activity relating to a scheduled offence. It is only when it is found that a person has derived property as a result of criminal activity that the offence of money laundering can be said to have been committed. Absent the element of criminal activity, the provisions of the Act itself would not be attracted.

- On a fundamental plane, Article 20(1) raises a constitutional injunction or bar in respect of penal action against a person for an act which was not an offense at the relevant time. It is to this extent that the provisions of penal statutes are constitutionally barred from operating retrospectively. The guiding expressions of Article 20(1) are "violation of a law in force" and "at the time of the commission of the act charged....". The Constitution thus constructs a negative command against penal action and conviction except for an offense created by a law which was in force at the time of commission of the act.

- However, an equally well settled principle relating to the retroactive application of penal provisions is that merely because a requisite or facet for initiation of action pertains to a period prior to the enforcement of the statute, that would not be sufficient to characterize the statute as being retrospective.

- It must be borne in mind that the Act with which we are concerned, penalises acts of money laundering. It does not create a separate punishment for a crime chronicled or prescribed under the Penal Code. The Act does not penalise the predicate offense. That offense merely constitutes the substratum for a charge of money laundering being raised.

- Accordingly, while the commission of the predicate offense may be described as the sine qua non for an allegation of money laundering being laid against a person, it is an offense created independently owing its genesis to the Act which came to be promulgated on 01 July 2005. While the commission of a predicate offense may be a condition precedent for an allegation of money laundering being laid, it is the activities of money laundering alone which would determine the validity of proceedings initiated under the Act.

- The Court thus concludes that an offense of money laundering that may be committed post 01 July 2005 would still be subject to the rigours of the Act notwithstanding the predicate offense having been committed prior to that date. As noted hereinabove, Section 3 creates an offense for money laundering. Neither that provision nor the Act is concerned with the trial of the predicate offense.

- Thus, any activity or process that may be undertaken by a person post 01 July 2005 in terms of which proceeds of crime are acquired, possessed or used and/or projected as untainted property would still be subject to the provisions of the Act.

- The Court exposits and reiterates the legal position to be that it is the date of the commission of the offense of money laundering and not the date of commission of a scheduled offense which is relevant and determinative. The date of inclusion of a crime as a scheduled offense would also not be determinative and the issue would have to be decided bearing in mind whether an allegation of money laundering stood committed after the Act had come into force.

The Court was dealing with two petitions concerning allocation of the Chotia coal block in favour of Prakash Industries Limited (PIL), one of the petitioners. The aforesaid allocation came to be made in its favour on 04 September 2003. The allocation ultimately came to be cancelled in terms of the judgment of the Supreme Court in Manohar Lal Sharma v. Principal Secretary.

However, and much before that verdict came to be rendered, CBI on 07 April 2010 registered an FIR alleging misrepresentation by PIL in order to obtain the coal allocation as well as diversion of coal extracted from the said block. The Special Judge CBI taking cognizance of the chargesheet, framed charges against PIL and other accused.

The aforesaid chargesheet came to be challenged by PIL before High Court which in terms of its judgment of 05 September 2014 quashed the FIR as well as the consequential chargesheet which was submitted. The said judgment rendered by High Court is pending on the board of the Supreme Court as on date.

A second FIR was then registered by CBI on 02 December 2016. On conclusion of investigation, CBI proceeded to file a chargesheet numbered on 23 January 2020 alleging commission of offence under sec. 120B read with sec. 420 of the Indian Penal Code.

The allegation in the second chargesheet essentially was that PIL submitted false and forged documents in order to obtain the allocation of the coal block in question, misrepresented facts pertaining to proceedings pending before the Board for Industrial and Financial Reconstruction and thus fraudulently and dishonestly obtained the coal allocation.

Upon the competent court taking cognizance on the aforesaid chargesheet, PIL instituted Special Leave to Appeal on which the Supreme Court by an order of 06 May 2022 has stayed further proceedings before the Trial Court.

It was on submission of the second chargesheet that the impugned proceedings were initiated by the respondents.

The impugned show cause notice and the provisional order of attachment were based on allegations that the allocation was utilised to extract minerals, diversion of the same for the purposes of sale and the laundering of the proceeds so earned and derived through the purchase of immoveable properties.

The Court noted that the allegations in the show cause notice were that the said properties constituted proceeds of crime in themselves and were thus tainted property.

"As has been found in the judgment since the chargesheet bids us to restrict scrutiny of events only up to 04 September 2003, the impugned action could have been sustained if it had been found that proceeds of crime had been derived upto that date. That is clearly not the allegation leveled. Insofar as acquisitions made post that date and the coming into force of the Act is concerned, it is faced with the specter of the first chargesheet having already been quashed. The judgment of the Court quashing those proceedings compels and constrains the Court to acknowledge that no criminal activity was indulged in," the Court observed.

The Court thus held that the said impugned proceedings arising out of the order of attachment dated 01 December 2021 as well as the show cause notice dated 13 January 2022 and all related proceedings shall be quashed.

Case Title: PRAKASH INDUSTRIES LTD. & ANR. v. DIRECTORATE OF ENFORECEMENT

Citation:2022 LiveLaw (Del) 676

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