Existence Of "Proceeds Of Crime" Is Pre-Condition For Money-Laundering: J&K High Court Quashes PMLA Complaints In Alleged ₹250 Cr Scam

Quashing complaints filed under the PMLA in an alleged 250 crore scam Justice Javed Iqbal Wani observed,

“Having regard to the aforesaid position obtaining in the matter, inasmuch as the admitted facts noticed in the preceding paras, the alleged offence manifestly has not resulted in any “proceed of crime” in favour of the petitioners herein. A-fortiori, it cannot be said that the petitioners have indulged in any activity connected with the “proceeds of crime” for unless there are “proceeds of crime”, there cannot be any activity about the “proceeds of crime”.

The dispute arose from a ₹250 crore loan sanctioned by the J&K State Co-operative Bank to the River Jehlum Co-operative House Building Society for developing a satellite township in Shivpora, Srinagar. Allegations were made that the society was fictitious and that the loan was obtained fraudulently, bypassing standard procedures such as proper documentation, KYC norms, and tangible security.

The Anti-Corruption Bureau (ACB) registered an FIR in 2020, alleging offences under the J&K Prevention of Corruption Act and the Indian Penal Code. Subsequently, the Enforcement Directorate (ED) initiated proceedings under the PMLA, attaching properties and accusing the petitioners of money laundering.

The petitioners, who served as Chairman and Secretary, respectively, of the River Jehlum Co-operative House Building Society alongside the Chairman of the Jammu and Kashmir State Co-operative Bank, which sanctioned a loan of ₹250 crores to the society for the project challenged the proceedings, contending that no "proceeds of crime" were involved as the loan amount was directly credited to landowners' accounts as payment for the land. They argued that the funds never came under their possession, negating any scope for money laundering under the PMLA.

Observations Of The Court:

Making detailed observations on the scope of the PMLA and the elements required to constitute money laundering Justice SWani noted that the central question was whether the alleged offences led to the creation of "proceeds of crime" and whether the petitioners were involved in any activity connected to such proceeds. It observed that the existence of proceeds of crime is an indispensable prerequisite for invoking the PMLA.

The court added that under the PMLA, for an offence of money laundering to arise, a scheduled offence must result in proceeds of crime. Only when an individual is found to have engaged in activities such as possession, concealment, or projection of such proceeds as untainted property can the provisions of the PMLA be invoked, it underlined.

The Court referred to the Supreme Court's decision in Vijay Madanlal Choudhary v. Union of India to emphasise that absent proceeds of crime, authorities under the PMLA lack jurisdiction to initiate prosecution.

Analysing the record, the court found no evidence that the petitioners possessed or controlled the funds in question as the loan amount of ₹250 crores, sanctioned by the J&K State Co-operative Bank, was directly transferred to the accounts of 18 landowners as payment for their property.

“…there was no occasion for the petitioners herein to indulge in any activity associated with the so called “proceeds of crime” as the money that has been released out of the sanctioned loan, which is described as the “proceeds of crime” in the complaint, had admittedly been transferred/credited directly into the accounts of the land owners and the petitioners herein had never been in possession or control of the said money, which is alleged to have been laundered”, the court remarked.

Furthermore, the Court referred to the Supreme Court's order, which allowed the landowners to withdraw the attached funds, affirming that the transaction between the society and the landowners was legitimate. The Court highlighted that if the funds in the landowners' accounts had been proceeds of crime, the Supreme Court would not have permitted their release.

Justice Wani added,

“..treating the said money in the accounts of the land owners for the purpose of making out a case of money-laundering against the petitioners herein under said circumstances cannot but said to be not only abuse of process of law, but as well an attempt to overreach the orders of the Apex Court, in that, the transaction between the land owners and the Society essentially has been treated as a genuine transaction by the Apex Court while ordering release of money in question in favour of the land owners”

The Court observed that mortgaging property with the Bank to secure a loan, even if obtained fraudulently without adhering to banking rules and regulations, could not, by any interpretation, be classified as money laundering. It reasoned that the petitioners' actions in allegedly securing the loan through false documents for the development of a satellite township, at best, constituted forgery or bank fraud rather than an offence under the Prevention of Money-Laundering Act.

“..securing the loan that is said to have been obtained fraudulently without following Banking rules and regulations cannot by any stretch of imagination be termed as money-laundering and that the act of the petitioners herein of having fraudulently secured loan for development and establishment of satellite township by submitting false documents, at the most makes out a case for forgery or Bank fraud”, the court concluded while quashing the complaints.

Case Title: Hilal Ahmad Mir Vs Directorate Of Enforcement

Citation: 2025 LiveLaw (JKL) 4

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