PMLA attachment of auction-purchased property upheld by SAFEMA Appellate Tribunal

Background of the appeal

The Appellate Tribunal under SAFEMA, New Delhi, was called upon to decide an appeal filed by Alive Hospitality & Foods Pvt. Ltd. challenging an order dated 10.07.2012 passed by the Adjudicating Authority under the Prevention of Money Laundering Act, 2002 (PMLA, 2002). The Adjudicating Authority had confirmed a Provisional Attachment Order (PAO) No. 02/2012 dated 15.03.2012, which covered, inter alia, a residential property known as “Jay Bungalow”, Ishavashyam Society, Vastrapur, Ahmedabad.

The attachment was made on the basis that the consideration used to acquire Jay Bungalow in a bank auction was allegedly sourced from proceeds of crime generated by M/s Vishal Exports Overseas Ltd. (VEOL) and its key managerial persons, particularly Pradeep Mehta and Deepak Mehta, through fraudulent credit facilities obtained from public sector banks.

Alive Hospitality & Foods Pvt. Ltd. argued that it was a bona fide purchaser in a public auction under the SARFAESI framework and that there was no legal or factual basis to treat the bungalow as “proceeds of crime” or to sustain the attachment. The Tribunal ultimately rejected these contentions and dismissed the appeal.

Core facts leading to PMLA proceedings

CBI charge sheet and scheduled offences

  • The Bank Security and Fraud Cell of CBI, Mumbai filed a charge sheet against M/s Vishal Exports Overseas Ltd. (VEOL), its Chairman Subhashchandra C. Mehta, Managing Director Pradeep S. Mehta, Joint Managing Director Deepak S. Mehta, and certain Punjab National Bank officials.
  • The allegations pertained to cheating and defrauding multiple banks, notably Punjab National Bank, International Banking Branch, Ahmedabad, to the tune of Rs. 106 crores, by misuse of various credit facilities and by use of forged and fabricated documents.
  • The charge sheet (No. 13 dated 26.11.2009, in FIR No. RC 1(E)2008/CBI/BS&FC/Mumbai dated 31.01.2008) invoked offences under:
    • Section 120B read with Sections 420, 467, 471, 477A of the Indian Penal Code, and
    • Section 13(2) read with Section 13(1)(d) of the Prevention of Corruption Act, 1988.
  • These predicate offences are scheduled offences under PMLA and form the basis for PMLA proceedings.

SARFAESI enforcement and auction sale

  • On default and fraud by VEOL, banks enforced security under the SARFAESI Act and took over certain mortgaged immovable properties, including Jay Bungalow and another property referred to as Vishal House.
  • These properties were offered for sale in a public auction by a consortium of banks led by State Bank of India.
  • In the auction:
    • M/s JMD Media Pvt. Ltd. acquired one property (Vishal House).
    • Alive Hospitality & Foods Pvt. Ltd., the appellant, purchased Jay Bungalow for Rs. 2.15 crores.

The Enforcement Directorate (ED) alleged that these purchaser companies were not genuine third-party buyers but front entities controlled by Pradeep Mehta and that the auction purchases were funded from laundered money.

ED investigation under PMLA and money trail findings

Incorporation of new entities and control

The Directorate of Enforcement registered an ECIR and carried out an independent investigation under PMLA. The findings recorded in the Provisional Attachment Order and the complaint included:

  • Two new companies – M/s JMD Media Pvt. Ltd. and M/s Alive Hospitality & Foods Pvt. Ltd. – were incorporated in June 2008.
  • These companies were found to have been formed on the instructions of Pradeep Mehta, with no genuine business activity.
  • Their primary function, according to ED, was to receive funds and use them to buy the SARFAESI-auctioned properties previously mortgaged by VEOL.
  • The directors of these and other connected entities were largely known associates, friends, or relatives of Pradeep Mehta, many of whom admitted having little real role in management.

Intermediary entities and fund flows

The complaint identified intermediary companies through which funds allegedly moved before landing in the appellant’s hands, including:

  • M/s Global Nutrition Products Pvt. Ltd., and
  • M/s Vikalp Rasayan Pvt. Ltd.

The ED documented, in detail, a sequence of transactions:

  • Funds flowed from VEOL or its related concerns to Global Nutrition and Vikalp Rasayan.
  • From these intermediary entities, funds were transferred to M/s JMD Media Pvt. Ltd. and M/s Alive Hospitality & Foods Pvt. Ltd. on a series of dates and in specific amounts (set out in the complaint from pages XVI to XXII).
  • The fund movements were typically back-to-back: money came into an intermediary and on the same or next day was passed on to JMD Media or Alive Hospitality.
  • All such transfers predominantly used accounts maintained in Kalupur Commercial Co-operative Bank Ltd., Swastik Char Rasta Branch, Ahmedabad.

Share application money and loans

  • Alive Hospitality & Foods Pvt. Ltd. received Rs. 40 lakhs described as share application money from five individuals – Rakhi Gupta, Anil Gupta, Ayush Patel, Swalika Patel and Lila Patel.
  • Statements recorded under Section 50 of PMLA indicated that these amounts were arranged by Pradeep Mehta and Deepak Mehta, and that the directors (such as Rakesh Bhatt) did not know the real contributors or their details.
  • ED concluded that both the so-called loans and share application money were in substance funds belonging to Pradeep and Deepak Mehta, recycled through various layers.

Statements of key individuals

Statements of several persons were recorded, including: