Pre-PMLA Offence Properties from Genuine Sources Cannot Be Attached as ‘Proceeds of Crime’: Patna High Court in HDFC Bank Limited Vs Government of India

1. Overview of the Ruling

In HDFC Bank Limited Vs Government of India (Patna High Court), the Patna High Court clarified the scope of the expression “proceeds of crime” under the Prevention of Money Laundering Act, 2002 (PMLA), particularly in relation to:

  • Properties acquired from lawful sources before the alleged commission of the scheduled offence; and
  • The interpretation of the three limbs of the definition of proceeds of crime in Section 2(1)(u).

The Court held that:

  • Immovable properties purchased from legitimate funds prior to the alleged money-laundering activity cannot be provisionally attached under Section 5 of the PMLA merely because the actual tainted assets or funds are no longer traceable;
  • The phrase “value of such property” in the second limb of Section 2(1)(u) does not empower the Enforcement Directorate (ED) to attach any untainted property of equivalent value that has no direct or indirect nexus with the alleged criminal proceeds; and
  • The third limb, relating to property equivalent in value, applies only where the property derived from criminal activity is taken or held outside India.

The Court quashed the provisional attachment order and corresponding show-cause notice in respect of three mortgaged properties and exercised writ jurisdiction despite the availability of the statutory alternative remedy under the PMLA.

2. Factual Matrix and Transaction Background

2.1 Mortgage of immovable properties to HDFC Bank

  • Respondent No.5, Rajesh Kumar Agrawal, Proprietor of M/S. Maa Tara Agency, had obtained an overdraft facility from HDFC Bank Limited.
  • To secure this overdraft, three immovable properties were mortgaged in favour of HDFC Bank. These were purchased through:
    • One registered sale deed dated 13.10.2019, and
    • Two registered sale deeds dated 31.08.2016.
  • Written agreements formalising the security arrangement between HDFC Bank and respondent No.5 were executed on 05.08.2013 and 24.08.2016, as reflected in Annexure-1 and Annexure-2 to the writ petition.

Thus, all three properties were acquired and mortgaged to HDFC Bank well before the alleged money-laundering transactions surfaced.

2.2 Criminal complaints and bank account transactions

Two FIRs were lodged on 13.12.2016 at Gaya Civil Lines Police Station:

  1. Gaya Civil Lines P.S. Case No.339 of 2016 under Sections 419/420/467/468/469/471/120B of the Indian Penal Code:

    • Informant: Shashi Kumar, Proprietor, Shiva Agro Industries.
    • He maintained a bank account with Bank of India, G.B. Road Branch, Gaya, opened on 12.11.2016, bearing A/C No. 447520110000742.
    • His younger brothers, Shailesh Kumar and Rajnish Kumar, also opened separate accounts in the same branch on 07.09.2016.
    • On 07.12.2016, the informant enquired about the status of these accounts and noticed that large cash deposits had been made by impersonators, followed by transfers to other accounts.
    • The statement annexed to the FIR showed significant credit and debit transactions from 12.10.2016 to **18.11.2016`.
    • These events took place around the period of demonetization on 08.11.2016.

  2. Gaya Civil Lines P.S. Case No.340 of 2016 under the same IPC provisions:

    • Informant: Rajesh Kumar.
    • He and his wife Rubi Kumari held accounts in the same Bank of India branch, opened on 07.09.2016.
    • On 07.12.2016, they were informed about substantial cash deposits and credits in their accounts made by unknown persons.
    • The bank statement revealed sizable cash deposits and onward transfers to other accounts between 15.09.2016 and 17.11.2016.

During the investigation of the above FIRs, it was discovered that funds from the FIR-related bank accounts had been transferred to the account of M/S. Maa Tara Agency, owned by respondent No.5.

On that basis, respondent No.5’s role in alleged money-laundering activities was prima facie indicated. Consequently:

  • The Enforcement Directorate registered ECIR No. PTZO/05/2016 on 26.12.2016.
  • The Deputy Director of Enforcement passed a provisional attachment order dated 18.09.2017 under Section 5 of the PMLA, attaching:
    • The three mortgaged immovable properties (listed at para 17.2, Item Nos. 3, 4 and 5 of the attachment order), and
    • Certain bank accounts and other assets of respondent No.5.

These properties correspond to the items mentioned in Annexure-3 to the writ petition and Annexure D to the counter-affidavit.

Before approaching the High Court, HDFC Bank had already filed a written objection on 17.11.2017 before the Deputy Director, Directorate of Enforcement, claiming priority over the mortgaged properties as a secured creditor under Section 31B of the Recovery of Debts and Bankruptcy Act, 1993 and under Section 26-E of the SARFAESI Act, 2002.

The Bank also challenged the show-cause notice in OC No.826 of 2017 dated 18.10.2017 (Annexure-5), which called upon it to appear before the Adjudicating Authority under the PMLA.

The principal legal questions examined were:

  1. Whether properties acquired from lawful sources before commission of the scheduled offence could be treated as “proceeds of crime” and attached under Section 5 of the PMLA.
  2. Whether untainted properties of equivalent value can be attached under the second limb of Section 2(1)(u) simply because the actual tainted property is not traceable or available for attachment.
  3. Whether the PMLA attachment is invalid merely because HDFC Bank is a secured creditor with statutory priority under Section 31B of the Recovery of Debts and Bankruptcy Act and Section 26-E of the SARFAESI Act.