Justice Subhash Vidyarthi, Allahabad High Court 

The Allahabad High Court has held that the phrase "or the value of such property" under Section 2(u) of the Prevention of Money Laundering Act (PMLA) cannot be stretched to target untainted, independent assets purchased long before the commission of an alleged scheduled offence, rendering the attachment completely illegal.

The Court quashed the criminal proceedings, and a summoning order was issued against Tulsiani Constructions and Developers Ltd. and its directors under the Prevention of Money Laundering Act (PMLA).

It held that the Enforcement Directorate (ED) acted entirely without jurisdiction in attaching an immovable property acquired by the applicants nearly a decade prior to the registration of the predicate offence. 

The Bench of Justice Subhash Vidyarthi held, "The phrase ‘or the value of such property’ used in Section 2(u) of the PMLA does not include the value of the Flat which had been acquired in the year 2012, long before the Punjab National Bank lodged the FIR in the year 2022 alleging commission of the scheduled offence and which has not been acquired from the proceeds of crime. The Enforcement Directorate had no authority to attach the Flat that had been acquired in the year 2012, much before the commission of the alleged scheduled offences and which had not been acquired from any proceeds of crime and the attachment of the Flat purchased in the year 2012 is absolutely illegal and without jurisdiction."

Senior Advocate Vaibhav Kalia appeared for the Applicant, while AGA Ganesh Dutt Bhatt appeared for the Respondents.

Brief Facts

The applicant company was engaged in the business of real estate development and construction. On a complaint filed by the Punjab National Bank, a first information report (FIR) was registered against the applicant company and its directors, alleging commission of offences under Sections 409 and 420 of the Indian Penal Code.

The gravamen of the allegation in the predicate offence was that the applicants had induced the bank to sanction housing loans to four buyers for purchasing residential flats in their project. However, the project was not completed within the stipulated timeline, physical possession was not delivered, and the original registered sale deeds were not deposited with the bank, thereby causing a substantial financial loss to the public exchequer.

In furtherance of the said predicate offence, the Directorate of Enforcement initiated an investigation, registered an Enforcement Case Information Report (ECIR), and subsequently filed a criminal complaint under Sections 3 and 4 of the Prevention of Money Laundering Act (PMLA).

During the pendency of the investigation, the respondent authorities issued provisional attachment orders attaching various immovable properties belonging to the applicants, which were subsequently confirmed.

The Special Judge, Anti-Corruption, CBI, took cognizance of the offence under the PMLA and issued summons to the applicants. Aggrieved by the said cognizance and summoning order, as well as the entire ongoing criminal proceedings, the applicants moved the High Court by way of an application under Section 482 of the Code of Criminal Procedure, seeking the quashing of the proceedings.

Contentions of the Applicants

The Applicants argued that the entire dispute between the developer, the bank, and the prospective buyers was purely of a civil and commercial nature arising out of a contractual delay in the execution of the project, which had wrongly been given a colour of criminality.

It was further contended that the necessary ingredients to constitute an offence under Section 420 of the Indian Penal Code were conspicuously absent, as the delay in the delivery of the flats occurred due to bona fide reasons, including extensive litigation, financial liabilities, and the adverse disruptions caused by the global pandemic.

The applicants also challenged the attachment of their properties, asserting that certain attached immovable properties had been acquired through registered deeds nearly a decade prior to the registration of the predicate FIR. Relying on settled judicial precedents, they argued that property acquired long before the commission of the alleged scheduled offence could never be connected with or termed as "proceeds of crime."

Finally, it was argued that the Enforcement Directorate had acted with mala fide intentions by illegally merging an unconnected subsequent FIR lodged by an intervener into the present investigation, thereby exceeding its statutory jurisdiction.

Contentions of the Respondents

Per contra, the Directorate of Enforcement robustly defended the impugned order and submitted that the investigation clearly revealed a calculated financial fraud where public money was systematically embezzled.

It was contended that the funds obtained from the bank and the flat buyers were intentionally siphoned off and diverted to meet other liabilities and to invest in sister concerns instead of utilizing them for the designated housing project, which directly attracted the definition of "proceeds of crime" under Section 2(u) of the PMLA.

The respondent authority argued that entering into a one-time settlement with the bank did not absolve the applicants of their criminal liability under the special statute, especially since the predicate criminal cases were still alive, active, and had not been quashed by any competent court of law.

Observations of the Court

The Court observed that recording clear, cogent, and succinct reasons is the very lifeblood of judicial decision-making and forms an indispensable component of the principles of natural justice. It was held that an order passed by a judicial or quasi-judicial authority without assigning proper reasons for discarding the objections of the affected party suffers from the vice of unreasonableness and non-application of mind, rendering it unsustainable in law.

It was noted that the requirement to observe the principles of natural justice and provide a transparent decision-making process is even higher in criminal proceedings, where the fundamental right to personal liberty is directly at stake. The Court found that the trial court committed a manifest error by taking cognizance and issuing summons mechanically without dealing with the specific written objections raised by the applicants.

It was observed that out of the four loan accounts flagged by the lender bank, one was entirely regular, two stood completely settled with the issuance of 'No Dues Certificates', and the fourth was subject to a mutually agreed One-Time Settlement (OTS) with the first installment already paid.

The Court held that the amicable resolution of these monetary claims conclusively demonstrated that the underlying transactions were commercial in nature and lacked criminal intent, running counter to the foundational objectives of the Prevention of Money Laundering Act (PMLA).

The Court found that the criminal proceedings were maliciously instituted with an oblique and ulterior motive to coerce the developers into redressing civil grievances without the buyers taking recourse to proper civil remedies. It was reiterated that statutory criminal machinery cannot be used as a recovery agent or a tool for the realization of disputed civil dues.

"The fact that the complainants have entered into settlements resolving their monetary disputes makes it manifest that the disputes in fact were essentially of civil nature and the criminal law is merely being weaponised by the complainants in their favour to make it easier for them to achieve their ends...In view of the foregoing discussion, I am of the considered view that the proceedings under PMLA is maliciously instituted with an ulterior motive for wreaking vengeance on the applicants and thereby coercing them to redress the grievances of the Flat buyers to transfer in their favour the flats and/or refund their money, without their resorting to the remedies available under the laws and the same are liable to be quashed", the Court observed.

The Court held that the phrase "or the value of such property" appearing in Section 2(u) of the PMLA cannot be stretched to include an independent asset acquired by the accused nearly a decade prior to the commission of the alleged scheduled offence. Property purchased long before the date of the alleged crime, with no nexus to any tainted funds, cannot be legally termed as "proceeds of crime," making its provisional or final attachment wholly illegal and lacking jurisdiction.

It was further observed that the respondent authority had artificially inflated and falsely projected the quantum of the proceeds of crime. The Enforcement Directorate committed a grave illegality by including sums that had already been settled with the primary lender bank, as well as amounts linked to several other cases that had already been formally quashed by competent courts.

Concluding that no prima facie case was made out to sustain a trial under Sections 3 and 4 of the PMLA, and that a remand to the trial court would merely prolong an unsustainable prosecution, the High Court allowed the application, set aside the  summoning order, and quashed the entire criminal proceedings against the applicants.

Cause Title: Tulsiani Construction and Dev. Ltd. v. State of U.P. and Anr. [Neutral Citation: 2026:AHC-LKO:43154]

Appearances:

Applicant: Senior Advocate Vaibhav Kalia and Advocate Abhinav Mishra Advocate

Respondents: AGA Ganesh Dutt Bhatt, Advocates Rohit Tripathi, Anuuj Tandon, Sanjeev Agarwal.

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