Allowed

FPA-PMLA-1853/JP/2017 of Regional Office, Syndicate Bank, Jaipur Jaipur v/s The Joint Director Directorate of Enforcement, Jaipur

ATFP21 May 2019FPA-PMLA-1853/JP/2017

Case brief

AI extract

What is this about?

The Tribunal allowed Syndicate Bank's appeal, quashing the confirmation of provisional attachment of 23 mortgaged properties and bank funds. The court held the Bank was a bona fide third-party creditor with prior善意 interest, and the Adjudicating Authority failed to apply its mind or record reasons to believe before confirming attachment.

What did the court decide?

The impugned order confirming attachment of 23 properties and sum of Rs. 8,23,77,774/- was set aside and quashed.

FPA-PMLA-1853/JP/2017 of Regional Office, Syndicate Bank, Jaipur… — Narcotics (NDPS) | ATFP (2019)

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APPELLATE TRIBUNAL FOR SAFEMA, FEMA, PMLA, NDPS, PBPTACT AT NEW DELHI

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Date of Decision: 21.05.2019

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MP-PMLA-3630/JP/2017 (stay) FPA-PMLA-1853/JP/2017 Regional Office, … Appellant/Applicant Syndicate Bank, Jaipur Jaipur Versus The Joint Director Directorate of Enforcement, Jaipur … Respondent

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Advocates/Authorized Representatives who appeared

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For the appellant	: Shri Adarsh Dial, Sr. Advocate Shri Piyush Sanghi, Advocate Ms. Ananya, Advocate
For the respondent	: Mr. Neeraj Atri, Advocate
CORAM JUSTICE MANMOHAN SINGH	: CHAIRMAN
JUDGEMENT

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FPA-PMLA-1853/JP/2017

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The present appeal has been filed by the Appellant - Syndicate Bank against impugned order dated 01.06.2017 in OC 679/2017, whereby the Adjudicating Authority confirmed the provisional attachment of the securities of the Syndicate Bank of 23 immovable properties, detailed of the same are at Page 14 para 7 onwards upto Page 33 in the grounds of appeal.

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FPA-PMLA-1853/JP/2019

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Page 1 of 38

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The brief facts are that a huge fraud was found to have been perpetrated in three branches of the Appellant Bank i.e. Appellant No.2 to 4 by certain officials of the Bank and private parties and borrowers of the Bank in conspiracy with each other. As a result, the appellant Bank has been a victim of the fraud which on investigation was found to have caused a wrongful loss of approximately Rs. 1056 Crores in the said three branches of the Bank. When the fraud was discovered by the Bank, it registered a FIR dated 07.03.2016 under Sections 120B read with 409, 420 467, 468 and 471 IPC and Sections 13 (2) read with 13(1) (c) and (d) of the Prevention of Corruption Act 1988 against S.K. Goel, General Manager, Sanjeev Kumar, DGM, Sh. Desh Raj Meena, CM, Sh. Adarsh Manchanda, AGM etc. and various other customers/persons and including unknown persons involved in the said fraudulent transactions. The period of fraud was found to be 2011 to February 2016 at the said three Branches of the Appellant. Pursuant to the FIR, the CBI took over the investigation and filed a Charge Sheet dated 13.06.2016 in the Court of the Special Judge, Jaipur against various persons.

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Since some of the offences registered by CBI are scheduled offences under PMLA, ED Officials at Jaipur initiated investigation for the offence of Money Laundering by registering an ECIR dated 11.07.2016 under the PMLA and further investigations were carried out. In pursuance to those investigations the Deputy Director made a provisional attachment of certain assets alleged to be proceeds of money laundering and forwarded a compliant in respect thereof to the adjudicating authority. The appellants received a notice of the same under the PMLA and filed a reply objecting to

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FPA-PMLA-1853/JP/2019

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Page 2 of 38

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attachment of certain assets which included properties mortgaged by the borrowers to the appellant bank and certain monies aggregating Rs. 8,23,77,774/- in 44 Bank accounts in the aforesaid three branches of the appellant bank. The Adjudicating Authority, however, after hearing the appellant but without considering the submission of the appellant has confirmed the attachment of the said properties/assets. The present appeal is directed against the confirmation of the said attachment as it purports to treat the securities of the Bank and the funds of the Bank as proceeds of money laundering.

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The brief list of dates and events for understanding the issues

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involved is given below:

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07.03.2016	FIR of criminal conspiracy was registered by CBI, BS&FC,
	New Delhi under the Prevention of Money Laundering Act on the complaint of Sh. C. Sridharan, DGM, Syndicate Bank against the bank officials of Syndicate Bank‟s three branches namely (1) Bapu Bazaar, Udaipur (2) Malviya Nagar, Jaipur &
	(3) M.I. Road, Jaipur and Bharat Bomb, Shankar
	Khandelwal, Piyush Jain, Vineet Jain and other
	customers/companies proprietorships/persons involved in
	the fraudulent transactions, other unknown public servants and unknown public servants and unknown private persons
	alleging that the bank officials have conspired with Bharat
	Bomb and others in the matter of (i) discounting of forged
	cheques, (ii) discounting of forged inland bills and (iii)
	availing of overdraft facility against non-existent LIC policies
	from the Syndicate Bank non-existent LIC policies from the

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FPA-PMLA-1853/JP/2019

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Page 3 of 38

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	Syndicate Bank (iv) Housing loans by depositing fake land records/sanction loans in a project which has already been
	financed by other financial institutions, (v) Purchase of commercial properties at WTP – diversion/siphoning of banks fund where neither the business activity was carried out nor
	the sale deed was executed (vi) other term loans – by depositing fake land records/siphoning of bank fund in excess of their power and in violation of the procedures, resulting in a loss of 1055.79 crores to the Syndicate Bank. (Rs. 1000.6324 Crores in original FIR).
14.06.2016	CBI, BS & FC, New Delhi filed charge sheet before the designated CBI Court, Jaipur against Bharat Bomb, Shankar Khandelwal, Vipul Kaushik, Santosh kumar Gupta the then Branch Manager, Syndicate bank, Udaipur (Rtd.) and Usha Gupta w/o Santosh Kumar Gupta under sections 120(B), 409, 420, 467, 468 and 471, 472 & 474 of the Indian penal Code and Sections 13(2) read with Section 13(1)(c) & (d) of the Prevention of Corruption Act, 1988.
11.07.2016	Since the offences registered by CBI were scheduled offences
	under PMLA, ED officials initiated investigation for the offence of money laundering by registering an ECIR under the PMLA and further investigation was carried out.
27.12.2016	Provisional Attachment Order (PAO No. 04/2016) was passed
	by Deputy Director, Enforcement Directorate, Jaipur
	attaching about 100 properties consisting of 50 immovable
	properties and 50 movable properties in the form of cash deposits in bank accounts totally valued at Rs.

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FPA-PMLA-1853/JP/2019

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Page 4 of 38

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	1179840304/-for a period of 180 days.
23.01.2017	Complaint was filed by the Deputy Director, Enforcement Directorate, Jaipur before Adjudicating Authority under Section 5(5) of the Prevention of Money Laundering Act, 2002 against Bharat Bomb and 46 others. Complaint was registered as O.C. 679/2017.
27.01.2017	Show cause notices were issue to all the parties calling upon all the defendants to show cause why all or any of the
	properties should not be declared to be the properties involved in money laundering and be confiscated by the Central Government and why the attachment order should not be confirmed. Copy of the Show Cause Notice dated 27.01.2017 is annexed herewith as ANNEXURE A-2.
24.03.2017	Reply was filed on behalf of the Syndicate Bank (Defendant No. 40, 42, to 44) Appellants herein. Copy of the reply is annexed herewith as ANNEXURE A-3.
18.05.2017	Oral Arguments of all the parties were heard in a short period of 2 hours and orders were reserved.
23.05.2017	With the permission of the Adjudicating Authority, Syndicate bank filed their written arguments. Copy of the Written Arguments is annexed herewith as ANNEXURE A-4
01.06.2017	Impugned order was passed confirming the attachment order (PAO No. 04/2016) dated 27.12.2016 passed by Deputy Director, ED, Jaipur.
05.06.2017	Impugned Order dated 01.06.2017 was received by the

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Page 5 of 38

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	appellant.
09.06.2017	Letter was sent by Respondent NO. 1 to appellant directing to
	hand over the possession of amount of Rs. 8,23,77,774/- lying in the 44 bank accounts under attachment. Copy of the Letter dated 9.6.2017 is annexed herewith as ANNEXURE A-5.
09.06.2017	Another letter was sent by respondent no. 1 to the appellant
	main branch Udaipur for remittance of Rs. 2,01,61,228/- in
	the account of M/s. Radiant Digitek Network Pvt. Ltd.
	/respondent no. 39 herein.

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The Appellant has nothing to do and has no connection with the allegation of crime committed by the defendant-1 - Bharat Bomb and other persons concerned involved for the offences of money-laundering. The Appellant is not holdings any funds of any of the defendant/respondent. The mortgage properties are admittedly not derived from criminal activities or proceed of crime. The scope of the PMLA is to punish the accused person and not to punish the innocent person who is not involved in the crime within the meaning of Section 2 (1)(u) read with Section 3 of the Act. The appellant is not charge-sheeted nor any prosecution complaint has been filed against the appellant. The appellant has also no objection if the borrowers properties, which were acquired from proceed of crime, be dealt by the respondent in any manner.

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There is no nexus whatsoever, between the alleged crime and the appellant, who is mortgagee of the properties and is a victim of the fraud and is innocent party. The definition of proceed of crime as per Section (u) of the Act comprises of the property which is derived or obtained as a FPA-PMLA-1853/JP/2019 Page 6 of 38

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result of criminal activities. The mortgaged properties are not acquired from proceed of crime.

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The scheme of the Act is such that it cannot apply to a transaction of the nature as in the present case against the appellant. Money of appellant is a public money and its right under SARFAESI cannot be taken away by the attachment order. In case the attachment continues against the mortgage property, in all matters the economy of the country would suffer.

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The claim of the bank was pertaining to 44 overdraft accounts with the appellant Bank having a total credit balance of Rs. 8,23,77,774/maintained by various persons/firms/borrowers in three appellant‟s branches. The details of these accounts are mentioned in Para 8 Page 33 to Page 44 of the grounds of appeal.

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Regarding the 23 immovable properties, it is not in dispute that the said properties are mortgaged securities of the bank against which various loans were advanced to the respondents/borrowers.

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The procedure in which the said 23 properties were mortgaged to the appellant has been seriatim described under each of the property at page 15 onwards of grounds of appeal. For example, properties at Srl. No. 1 and 2 were agreed to be purchased by respondent no.2 and after the agreement to sale in his favour was executed he approach the Bank on the basis of the agreement and requested for a loan for purchasing the same against mortgage. The appellant advanced the loan, and the sale deed was executed in favour of Respondent no. 2 after he purchased FPA-PMLA-1853/JP/2019 Page 7 of 38

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the same from the proceeds of loan and thereafter the sale deed and other documents were deposited with the Bank creating a mortgage by deposit of title deeds under S. 58(f) of the TPA.

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11 When the borrowers failed to make payment of the loan amount, the appellant Bank took steps under the SARFAESI Act and took symbolic possession of the first two properties on 08.06.2016.

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The mortgage documents in respect of Property no. 1 and Property No. 2 have been filed at Sr. No. 1 and 2 in the documents at Page 1 - 56 and Page 57-109 . The details of the OA number and stage of proceedings for recovery are also stated as follows:-

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SR NO	PROPERTY DETAILS	PAGE NO. Volume-1 Document
1	Office No. 433, Fourth Floor, Block-A, Tower A-2, Zone General, WTP, Jaipur [Super built-up area 759.18 sq. ft.]- Sh. Bharat Bomb/Respondent No. 2 (OA No. 50/18 has been filed before DRT, Jaipur. NDOH: 15.11.2018) (SARFAESI -DM order under process)
	Agreement to Sale	1-23
	Affidavit	24-28
	ASD7	29-30
	ASD8	31-34
	Sale Deed	35-56
2	Office No. 206, Second Floor, Block-A, Tower A-2, Zone General, WTP, Jaipur [Super built-up area 2547.57 sq. ft.]- Sh. Bharat Bomb/Respondent - 2 (OA No. 50/18 has been filed before DRT, Jaipur. NDOH: 15.11.2018)

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Page 8 of 38

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(SARFAESI -DM order underprocess)
Agreement to Sale	57-78
Affidavit	79-83
ASD7	84-85
ASD8	86-89
Sale Deed	90-109

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As mentioned, the details of all the 23 mortgages, documents executed and deposited are already provided and necessary documents are filed in four volumes. The index gives the details of each of the 23 properties and the present status of the proceedings pending in the DRT/DM.

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It is argued on behalf of the appellant that the present case is squarely covered by the recent judgment of the Hon‟ble Delhi High Court in Directorate of Enforcement vs. Axis Bank & Ors. reported in 2019 SCC Delhi 7854 dated 2.4.2019 , wherein, it has been observed as under:

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“ 163. Having regard to the above scheme of the law in PMLA, it is clear that if a bonafide third party claimant had acquired interest in the property which is being subjected to attachment at a time anterior to the commission of the criminal activity, the product whereof is suspected as proceeds of crime, the acquisition of such interest in such property (otherwise assumably untainted) by such third party cannot conceivably be on account of intent to defeat or frustrate this law. In this view, it can be concluded that the date or period of the commission of criminal activity which is the basis of such action under PMLA can be safely treated as the cut-off. From this, it naturally follows that an interest in the property of an accused, vesting in a third party acting bona fide, for lawful and adequate consideration, acquired prior to the commission of the proscribed offence evincing illicit pecuniary benefit to the former, cannot be defeated or frustrated by attachment of such property to such extent by enforcement authority in exercise of its power under Section 8 PMLA.

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165. Situation may also arise, as seems to be the factual matrix of some of the cases at hand, wherein a secured creditor, it being a bonafide third party claimant vis-a-vis the alternative FPA-PMLA-1853/JP/2019

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attachable property (or deemed tainted property) has initiated action in accordance with law for enforcement of such interest prior to the order of attachment under PMLA , the initiation of the latter action unwittingly having the effect of frustrating the former. Since both actions are in accord with law, in order to co-exist and be in harmony with each other, following the preceding prescription, it would be appropriate that the PMLA attachment, though remaining valid and operative, takes a back-seat allowing the secured creditor bonafide third party claimant to enforce its claim by disposal of the subject property, the remainder of its value, if any, thereafter to be made available for purposes of PMLA. ”

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The Hon‟ble High Court of Delhi has held that the interest of a third party in the property of an accused, acquired prior to the commission of the proscribed offence cannot be defeated or frustrated by attachment of such property U/s 8 of the Act. The Hon‟ble High Court further recognized the right of such third party to proceed with enforcement of its interest in accordance with law such that while the order of attachment under the Act would not be rendered irrelevant, yet it would take a backseat such that the State action would be restricted to such part of the value of the property as exceeds the claim of the third party, if any .

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From the facts of the present, it is evident that legal issues of the Appellant case are similar to the judgement rendered by Hon‟ble Delhi High Court as (a) The Appellant is not an accused and is bona fide third party to the transactions complained of by the ED; (b) The Appellant disbursed a loan in accordance with law to the Respondents Accused and created a mortgage over the Secured Property prior to the commission of the Scheduled Offence in respect of the Secured Property;

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Page 10 of 38

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and (c) The Appellant commenced the proceedings under SARFAESI Act against the Secured Property prior to its provisional attachment. (d) The said property was not acquired from the proceed of crime.

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The main findings of the Hon‟ble High Court of Delhi are as

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follows:-

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i) Date of Commission of offence of Money Laundering under PMLA is the “cut off” date and if the Bank has mortgage / charge over the properties prior to the commission of offence under PMLA then it is a Bonafide Claimant and its Statutory rights can‟t be defeated under Section 8 of PMLA ,2002.

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ii) Priority of Bonafide Claimants / Secured Creditors will have their dues realized first from the sale of such attached immovable assets and if any balance is left out then the balance amount shall go to the ED on the premise the said properties will continue to remain attached with the ED under PMLA on the ground of value thereof .

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iii) Prior mortgage charge of secured creditors must be registered qua the mortgaged immovable properties only then Bank‟s statutory rights under Section 13 of the SARFAESI, Act are protected and protected.

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iv) SARFAESI, Action initiated prior to the commission of offence of Money Laundering under PMLA would remain valid and interest of secured creditors will remain protected .

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Page 11 of 38

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The Appellant has already initiated recovery proceedings under the SARFAESI and RDDBFI Act and insolvency proceedings under the I&B Code for enforcement of its interest. S. 13 SARFAESI allows secured creditors to enforce security.

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In terms with the statutory safeguards incorporated in the Act, any party aggrieved by the confirmation of the Provisional Attachment Order by the Adjudicating Authority may challenge such confirmation in an appeal to this Hon‟ble Tribunal U/s 26 of the Act and then before the Hon‟ble High Court U/s 42 of the Act against the order of this Tribunal. Accordingly, under the legislative and statutory scheme of the Act, unless a party has exhausted its remedies in appeal right up to the Hon‟ble High Court, an order confirming the attachment cannot be said to have attained finality. This Tribunal is only concerned with the validity of the impugned order and provisional attachment order which has been confirmed.

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Therefore, this Tribunal possesses the requisite jurisdiction in terms with the Act as the court of first appeal, to adjudicate upon the pleas of the Appellant and determine the bonafides and legitimacy of its claims as well as the legality of the Provisional Attachment Order. Upon an argument being raised by the Enforcement Directorate that claims of third parties are to be solely adjudicated by the Special Court before whom trial is pending, the Hon‟ble High Court of Delhi in the Axis Bank Decision has held that the claim of a party asserting a bonafide and legitimate claim would be inquired into by the Special Court only if the order confirming the attachment “has attained finality”. An order cannot be said to have attained finality until and unless all the remedies under FPA-PMLA-1853/JP/2019 Page 12 of 38

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the Act have been exhausted. No doubt, the bank and financial institutions are always at liberty to approach the Special Court (if so desired) in order to invoke the amended provision of sub section 8 of Section 8, however, it is wrong to suggest that the bank and financial institutions are not entitled to challenged the order of attachment because this tribunal is only exclusively having jurisdiction to examine the validity of attachment and to decide the same under section 26 of the Act as to whether attachment was valid or not. The bank and financial institution are entitled to take the remedy before the Special Court after the decision of appeal or during the pendency of appeals.

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The Adjudicating Authority has confirmed the attachment of the above 23 properties by the impugned order beginning from Page 61. The impugned order runs into 149 pages and out of the 149, more than 140 pages of the impugned order is a reproduction of the FIR/Charge-sheet or the replies submitted by the various defendants. The reasoning has been given only in 4-5 pages wherein without referring to the relevant facts the Adjudicating Authority has stated that in his opinion conditions set out in S. 5 and 8 of the PMLA have been satisfied and the attachment is justified and thus confirmed. When the appeal was listed on 4^th March, 2019, Hon‟ble Member was on leave. Counsel for the appellant has pressed for hearing. Both parties have addressed the arguments. The order was reserved. As per settled law, the Chairman is empowered to hear the appeal as a single Bench.

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In the heading of discussion about the mortgage, the reply of Syndicate Bank is reproduced. However, the case of the appellant bank and the plea raised have not been discussed in accordance with law. FPA-PMLA-1853/JP/2019 Page 13 of 38

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Page 13 of 38

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Perusal of the impugned order and provisional attachment order would show that both suffer from complete non application of mind. The Adjudicating Authority has not understood that the appellant Bank has acted bona fide and is actually the victim of a fraud and have been deprived of its legitimate funds by virtue of the fraud. The money advanced by the Bank was a part of the lendable funds bank and by no stretch of imagination the said funds can be stated to be the proceeds of a crime. The funds of the banks are not proceed of crime, which is not denied during hearing of an appeal nor any reason to believe produced to show that mortgaged properties were acquired from the proceed of crime. It was merely stated that the few banks employees were mixed up with the borrowers at the time of obtaining loan, therefore, the bank is not entitled to recover the loan amount as it is become case property and the fraud has been played upon Bank. No doubt, the fraud against the accused parties must be investigated and guilty must be brought on book.

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The Impugned order erroneously recorded in its finding in para 12 of the impugned order, which read as under:-

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“12. On a thorough perusal of the PAO, Complaint, relied upon documents, the investigation conducted by the ED and the statements recorded u/s 50 of the PMLA and on careful consideration of the arguments advanced on behalf of the Complainant and Defendants undersigned comes to the prima facie conclusion that the Defendants have committed the Scheduled Offence, generated proceeds of crime and laundered them. No doubt the properties attached are proceeds of crime or value thereof and are involved in money laundering. Undersigned therefore orders confirmation of the above Provisional Attachment Order. This order shall continue during the pendency of the proceedings relating to any offence under this Act before court or under the corresponding law of any other country, before the competent court of criminal jurisdiction outside

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India as the case may be and become final after an order of confiscation is passed under sub-section (5) to sub-section (7) of Section 8 or Section 58B or sub-section 2A or Section 60.”

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It is matter of fact and as per material available on record that the mortgaged property was not acquired from the proceed of crime. The main issue involved in the matter is that at the first instant as to whether those properties were validity attached or not. The stage of Section 8(8) will come later if the provisional attachment is validity passed. If the initial order of attachment is bad if the said properties are acquired from proceed of crime and banks by virtue of agreement is entitled to recover the amount in legal manner, the question of confirmation order towards the value, thereof does not arise.

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This tribunal does not agrees with the argument of the respondent on this issue as the bank and financial institution cannot be asked to be a mute spectator to the confirmation of attachment of mortgaged properties at this stage without availing statutory remedy under this Act and await the conclusion of trial U/s 3, 4 of the Act to agitate and pursue its rightful legal claim over such mortgaged properties. Till the trial is over (which may take number of years). It would be futile to deny the Appellant his claim over the mortgaged properties at the stage of confirmation of the PAO itself. If the mortgaged properties are not acquired from the proceed of crime. The legislative intent for relief at this stage can be borne out from the fact that under the proviso to sub clause 1 and 2 of section 8 of the Act, prior to the confirmation of the PAO, the Adjudicating Authority is required to adjudicate over the claim of an innocent party who seeks claim over the attached property, apart from

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the person to whom notice had been issued. Therefore, the Adjudicating Authority by the Impugned Judgment has erred in failing to recognise the legitimate claim of the Appellant at the stage of confirmation of the PAO itself. Actually the borrowers always happy if their mortgaged properties stand attached so that they may not pay the loan amount and their property shall remain in safe heaven.

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The object of PMLA would show that the scheme of the PMLA is not intended to penalize a victim of the fraud, who filed an FIR against the fraudster and commences the legal process for prosecuting and bringing to book the culprits, as otherwise the Act itself would be arbitrary and unconstitutional. S. 8 (1) deals with confirmation of provisional attachment and requires that if on a complaint under S. 5 (5) (as in the instant case) if the Adjudicating Authority has reason to believe that any person has committed an offence under S. 3 or is in possession of proceeds of crime it may serve a notice of not less than 30 days on such person calling upon him to indicate the sources of income, earning or assets out of which, by means of which he acquired property attached under S. 5(1). S. 3 defines the offence of money laundering to mean that whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or activity connected with the proceeds of crime including its concealment, possession, acquisition or use and projecting or claiming it as untainted property shall be guilty of offence of money laundering. Reading S. 8(1) and 3 together two jurisdictional conditions are necessary before any attachment under S. 8(1) can be confirmed i.e. (i) Adjudicating Authority must have reason to believe that any person has committed an offence under S. 3; (ii) such person is in possession of proceeds of crime. In such FPA-PMLA-1853/JP/2019 Page 16 of 38

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a case a notice has to be served on that person asking him for his source of income by which he has acquired property attached under S. 5(1).

¶80

In the present case a notice dated 27.01.2017 was served on the appellants Syndicate Bank calling upon them to indicate the source of income, earning or assets by which they acquired the attached properties. It is apparent in the present case that the Adjudicating Authority has not applied its mind while issuing the notice under Section 8(1) of the Act. It is undisputed fact that the bank is a victim party and the fraud has been played upon the bank who is not the accused. The contents mentioned in notice would show as the has is an accused.

¶81

The attached properties are the immovable properties mortgaged to the appellant Bank which were acquired from the loan amounts granted by the Appellant Bank. It is also apparent that the source of funds wherefrom mortgagee‟s rights in the attached properties are acquired by the Bank was uncalled for the lendable funds in the books of the Syndicate Bank which is a Government of India company. The funds in this case are not proceeds of crime in any event and are legitimate and legal funds. The source of income of appellant Syndicate Bank can also not be questioned.

¶82

Proceeding further, there can be no reason to believe in the mind of the Adjudicating Authority to believe that Syndicate Bank has committed an offence under S. 3 or is in possession of proceeds of crime for which the mortgage security of the Syndicate Bank could be attached and ultimately vest in the Government of India. The Adjudicating Authority has not applied its mind at all to the facts of this case before confirming FPA-PMLA-1853/JP/2019 Page 17 of 38

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the attachment of 23 immovable properties detailed above which had been duly mortgaged to the Syndicate Bank.

¶84

None of the two essential conditions as mentioned above for invoking the provisions of S. 8(1) of the PMLA were present in the present case. The attachment of mortgaged securities of the Bank do not at all fit into the scheme of the PMLA and the Adjudicating Authority has merely paid lip service to the provisions of the Act and has mechanically attached the said mortgaged security of the Bank leading to completely untenable consequences and treating the lendable monies of the appellant Bank as if the same were proceeds of crime.

¶85

On behalf of the bank that the impugned order does not disclose any reasoning. There is no application of mind whatsoever and it is assumed that the properties in question are the proceeds of the crime. There is no reasoning to show as to how the attached properties are the proceeds of crime. There is no reference to the statutory provisions, much less any reasoning to show as to how the facts as stated (assuming them to be true) fall within the terms of the statute, how the mischief sought to be remedied by it is prevented. It is submitted the order is liable to be set aside on this ground alone as the Adjudicating Authority has not analysed the facts at all. The order suffers from a fundamental error. There is no understanding by the Adjudicating Authority of the contents of the statute, much less its application to the facts of the case.

¶86

In reply to the arguments addressed by Mr. Atri, it may be correct that the manager of the Bank and the borrowers entered into a conspiracy to cheat the bank in the sense that the Bank is induced to FPA-PMLA-1853/JP/2019 Page 18 of 38

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advance a loan to the borrowers which was in violation of procedure of the Bank and in excess of delegated powers of the charged manager.

¶88

It is also a matter of record that the Bank is not a part of the conspiracy. The monies advanced are from the funds of the bank. The source of funds of the bank is not illegal and it is not tainted money. The contract of loan is between the Bank and the borrowers/guarantors and not between the manager and the borrower/guarantors. The money advanced is not the money of the manager.

¶89

Thus, the contract of loan is a legal contract which is enforceable in law. There is no connection between contract of loan between the bank and borrower and the conspiracy. The fact that the bank was induced into entering into a contract of loan with the borrower, which otherwise it may or may not have entered into, by the manager and borrower conspiring in the matter cannot impact the validity of the loan contract.

¶90

If the argument of respondent is accepted, can it be said that the loan proceeds and investment made from the loan proceeds are the “proceeds of crime” under S. 2(u) of the Act? Is the property in question derived by the borrower as a result of any criminal activity? Is the contract of loan between bank and borrower a criminal activity? The criminal activity was only in the manner in which the Bank was induced to grant the loan. The grant of loan itself by the Bank cannot be termed criminal activity in respect of a scheduled offence. In the present case it is implicit that the borrower may have given some consideration to the charged manager for facilitating the loan. Such consideration would be the proceeds of the crime. It is submitted that the facts of this case do FPA-PMLA-1853/JP/2019 Page 19 of 38

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not come within the mischief of S. 2(u) of the Act and therefore, the entire proceedings against the properties in question are without jurisdiction.

¶92

The Adjudicating Authority has not applied its mind to the requirements of Ss. 5 and 8 of the Act. Under S. 5(1) for provisional attachment the Director must have reason to believe, which reason he has to record in writing, on basis of material that (a) any person is in possession of any proceeds of crime and (b) proceeds of crime are likely to be concealed, transferred or dealt with in any manner which may result in frustrating any proceedings relating to confiscation of such proceeds of crime.

¶93

Thereafter, at the stage of confirmation, of the provisional attachment, on receipt of any complaint etc. if the Adjudicating Authority has reason to believe that any person has committed any offence under S. 3, or is in possession of proceeds of crime, he may serve a notice of not less than thirty days on such person calling upon him to indicate the sources of his income, earning or assets, out of which or by means of which he has acquired the property attached under S. 5(1), the evidence on which he relies and other relevant information and particulars, and to show cause why all or any of such properties should not be declared to be the properties involved in money-laundering and confiscated by the Central Government.

¶94

As per fact of the present case, the Adjudicating Authority has not complied with the statutory provisions contained in S. 8. It was on record of the Adjudicating Authority that all the properties in question were FPA-PMLA-1853/JP/2019 Page 20 of 38

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mortgage by the borrowers with the Syndicate Bank. In response to the show cause notice dated 27.01.2017, the appellant had filed a detailed reply dated 24.03.2017. The records of the Bank had also been taken by the Authorities. The full loan statements and the mortgaged documents were in the possession of the Adjudicating Authority. All details regarding the advances made were clearly borne out from the same. Some of the properties were under the symbolic possession of the appellant Bank pursuant to notices of symbolic possession given under the provisions of the SARFAESI Act which facts have been detailed herein above and may be read as part hereof. The perusal of the impugned order would show that the Adjudicating Authority has not considered the reply of the Appellant Bank at all.

¶96

For determining what property can be confiscated under the Act, S. s 2(u), 3, 5(1) and 8 have to be read together. S. 2(u) defines proceeds of crime to mean any property derived or obtained by any person as a result of “criminal activity relating to a scheduled offence or the value of any such property”. It means that there must be a connection between the property in question and the criminal activity relating to a scheduled offence. S.3 defines the offence of money laundering.

¶97

Perusal of S.3 indicates that only a person who is knowingly a party to any activity or is involved in such activity connected with proceeds of crime and projects or claims it as untainted property can be guilty of the offence. S.5(1) shows that before any property can be provisionally attached there must be material prima facie to show any person is in possession of any proceeds of crime which are likely to be concealed, transferred or dealt with in a manner which may frustrate the

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confiscation proceedings thereof. The primary requirement for invoking S.5(1) is that there must be material to show that some proceeds of crime are in possession of any person. The requirement is that material must indicate that any property of whatever description in possession of any known person is “proceeds of crime” as defined in S. 2 (u). Finally adjudication proceedings are under S.8. Perusal of S.8 (1) shows that if any person has committed an offence under S. 3 or is in possession of proceeds of crime he may be served notice to indicate the sources of his income etc. out of which or by means of which he has acquired the attached property . This obviously means that if in response to the notice, the person in possession discloses legitimate means for having acquired the property in question, the property cannot deemed to be involved in money laundering. Therefore, the attachment thereof cannot be confirmed.

¶101

It is submitted on behalf of the Bank that it was also explained to the Adjudicating Authority during the oral hearing as to what is the implication of mortgaging a property. However, the Adjudicating Authority has not at all referred to the submissions made during the oral hearing much less considered it. It is rightly submitted that the legal implication of a mortgage must be understood. When a property is mortgaged, the only right which is left in the mortgagor is that of the equity of redemption. Otherwise the entire corpus of the property passes to the mortgagee i.e. the appellant Bank in this case. The mortgagee has a right to take over the possession of the property and to realise it whereas the mortgagor who is left only with the equity of redemption has only the right to make full payment of the dues of the mortgagee and then redeem the property. Otherwise the mortgager is not left with any FPA-PMLA-1853/JP/2019 Page 22 of 38

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vested right. In other words the mortgaged assets are essentially assets of the appellant Bank and not of the mortgager.

¶103

The Adjudicating Authority completely failed to appreciate this aspect of the matter. As a matter of fact the Adjudicating Authority has not discussed the effect of mortgage etc. at all. The funds of the Bank being legitimate funds the mortgaged asset can by no stretch of imagination be considered to be tainted property or proceeds of crime. Therefore, the attachment of 23 mortgaged properties was bad and illegal and contrary to law and under the scheme of the Act. The combined reading of all the above provisions shows that the possession of a person of any provisionally attached property if supported by legitimate means cannot be the subject matter of confiscation proceedings. Thus if any property which might have been involved in money laundering, passes to another person who takes it bonafide without notice of any illegality for consideration it cannot be the subject matter of confiscation in the hands of that person. In such a case only the value or consideration received by the transferor involved in money laundering from such innocent third person can be treated as the proceeds of crime within the last part of S.2(u). It is submitted that if the Act is not interpreted in such a manner, it will lead to absurd results.

¶104

„Proceeds of crime‟ has to be implicitly read in a logical manner. Certain amount of money may be proceeds of crime with one person but good money qua another person. Suppose a robber loots a bank vault and is caught with the loot. In such a case the loot has to be restored to the bank. This should be so as the money in the Bank vault is not

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tainted or illicit money. To confiscate it under the Act and to vest it in Central Government would be absurd.

¶108

Take another instance. In above example, the robber buys a house with the loot. He thereafter sells the house to another person X, who obtains the purchase money from a Bank by way of loan and starts living in it. At this stage, the robber is caught and reveals the truth. Will the house in the hands of „X‟ be proceeds of crime? Will it be attached and its possession be taken over by the ED?, if so, this would be absurd.

¶109

The Banks were not charge sheeted and the Bank‟s conduct was bona fide. The secured creditor has a priority of the rights of Central/State Government /any other local authority. An innocent party can apply for setting aside the attachment and the scheme of the PMLA and its object make it clear that intention of the legislation was not to apply the act to a transaction of a nature like the attachment of property mortgaged to the Bank against a loan if the mortgaged properties are not acquired from proceed of crime as Banks money is public money and property of the Bank i.e. mortgage interest of the Bank in the property cannot be attached or confiscated if there is no charge of money laundering against the Bank. Object of the PMLA has main relation to crimes connected with illicit in narcotic drugs, connected activities etc. There is no money laundering in the instant case as far as the Bank is concerned.

¶110

There is no nexus whatsoever, between the alleged crime and a Bank who is mortgagee of the properties. The Bank is a victim of the

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fraud and is innocent party. Appellant Bank has nothing to do and has no connection with the allegation of crime committed by the defendants /respondent no.2 Bharat Bomb etc. Appellant bank itself is not holdings any funds of any of the defendant/respondent and Bank itself as to recover a huge amount from them for which it has filed various proceedings. The mortgage properties are not derived from criminal activities or proceed of crime and the scope of the PMLA is to be punishing the accused person and not to punish the innocent person who is not involved in the crime within the meaning of S. 2 (v ). The mortgages of the property were done for bona fide purpose and no PMLA proceedings are pending against the Bank and there is no criminal complaint of any scheduled offence against the Bank.

¶114

44 overdraft accounts with the appellant Bank having a total credit balance of Rs. 8,23,77,774/maintained by various persons/firms/borrowers in three branches being Appellant no. 2 to 4.

¶115

The Adjudicating Authority has attached a some of Rs. 8,23,77,774/- lying in 44 accounts with the appellant Bank as proceeds of crime belonging to fictitious persons and firms owned by Bharat Bomb respondent no.2 by misusing KYC documents. The finding in the impugned order is perverse. The details of these accounts and the money lying in credit in each of the account and the account holder etc. are stated in Para 8 Page 33-41 of the appeal . Copies of each of the 44 bank accounts are filed as Annexure A-7 (Colly) to the appeal which is at Page 39 to 659 Volume-III & IV of the appeal.

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The amounts lying in each of the 44 accounts are part of the amounts advanced by the Bank to the account holders against discounting of alleged government cheques which were found to be forged. As soon as the fraud was discovered by the Bank, these 44 accounts were frozen by the Bank. As a result part of the loans advanced by the Bank in each of the accounts remained deposited in the account. Thus these amounts are the lendable funds of the appellant Bank and are not proceeds of crime belonging to the account holders as mistakenly assumed by the ED and confirmed by the Adjudicating Authority.

¶119

The Adjudicating Authority has misunderstood the facts and has illegally attached Rs. 8,23,77,774/- in cash in the books of the appellant Bank as proceeds of crime. The Adjudicating Authority ought to have appreciated that these funds are funds lying in the books of the appellant Bank in the accounts of 44 persons/firms/proprietors. The appellant has filed the account statement of all these accounts with the present appeal and the same were also on record of the Adjudicating Authority. On the basis of attachment of these amounts by Adjudicating Authority the Assistant Director, ED, Jaipur has written a letter dated 09.06.2017 to the appellant whereby it has called upon the appellant to transfer this amount by RTGS to the account of the ED. A copy of this letter has already been filed above with this appeal. In regard to these funds the appellants submit that these 44 accounts were overdraft accounts against discounting of purported Government cheques submitted by the account holders to the Bank. It is submitted that the account holder submitted such Government cheques and sought advances against the same. The amount eligible against the respective cheques were credited to the respective accounts holders account. In due course, it was found that the cheques submitted by the account holder FPA-PMLA-1853/JP/2019 Page 26 of 38

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against which the appellant bank advanced monies into the accounts in question were forged and the same bounced. The respective account holders managed to withdraw and utilized various amounts from their respective accounts. However, when the fraud was discovered there were certain amounts which were advanced by the appellant Bank that were still lying in the credit in these 44 accounts. It is submitted that the source of these funds are the lendable funds of the appellant Bank and are legitimate funds. Such amounts still lying in the 44 accounts in question are not tainted money or illegitimate money or proceeds of crime in any manner whatsoever. It is submitted accordingly that the Adjudicating Authority could not have any reason to believe that these funds are proceeds of money laundering or that these funds were being projected by the appellant Bank as untainted property even though the same were not untainted property. It is submitted that the provisions of S. 3(5) and (8) of the PMLA to attach these funds in the hands of the appellant Bank cannot be invoked by any starch of imagination. The confirmation of attachment of these monies amounting to Rs. 8,23,77,774/- as per statement annexed is totally illegal without jurisdiction and liable to be set aside. These funds are the legitimate funds of the appellant bank and the appellant is entitled to appropriate the same for its own Banking business.

¶121

It is submitted that under Section 8(1), upon receipt of a Complaint U/s 5(5) of the Act, if this Hon'ble Authority has reason to believe that any person has committed an offence under section 3 or is in possession of proceeds of crime, he may serve a notice of not less than thirty days on such person calling upon him to indicate the sources of

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his income, earning or assets, out of which or by means of which he has acquired the property attached U/s 5(1) of the Act.

¶125

As per law, the Appellant is permitted to continue the proceedings under the SARFAESI Act and sell the Secured Property for recovery of its outstanding dues, in case the final decree for recover the amount is passed in favour of the appellant.

¶126

The Supreme Court in (2010)8 Supreme Court Cases 110 (Before G.S. Singhvi and A.K. Ganguly, JJ) in the case of United Bank of India V/s. Satyawati Tondon and Ors. In paras no. 6, 55 & 56 has held as under:-

¶127

6. To put it differently, the DRT Act has not only brought into existence special procedural mechanism for speedy recovery of dues of banks and financial institutions, but also made provision for ensuring that defaulting borrowers are not able to invoke the jurisdiction of the civil courts for frustrating the proceedings initiated by the banks and other financial institutions.

¶128

55. It is a matter of serious concern that despite repeated pronouncement of this Court, the High Courts continue to ignore the availability of statutory remedies under the DRT Act and the SARFAESI Act and exercise jurisdiction under Article 226 for passing orders which have serious adverse impact on the right of banks and other financial institutions to recover their dues. We hope and trust that in future the High Courts will exercise their discretion in such matters with greater caution, care and circumspection.

¶129

56. Insofar as this case is concerned, we are convinced that the High Court was not at all justified in injuncting the appellant from taking action in furtherance of notice issued under Section 13(4) of the Act. In the result,

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the appeal is allowed and the impugned order is set aside. Since the FPA-PMLA-1853/JP/2019 Page 28 of 38

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respondent has not appeared to contest the appeal, the costs are made easy.”

¶132

B. RAMA RAJU V. UOI AND ORS. Reported in (2011) 164 company case 149(AP)(DB) who has dealt with the aspect of bonafide acquisition of property in para 103. The same read as under:-

¶133

“ 103. Since proceeds of crime is defined to include the value of any property derived or obtained directly or indirectly as a result of criminal activity relating to a scheduled offence, where a person satisfies the adjudicating authority by relevant material and evidence having a probative value that his acquisition is bona fide, legitimate and for fair market value paid therefor, the adjudicating authority must carefully consider the material and evidence on record (including the Reply furnished by a noticee in response to a notice issue under Section 8(1) and the material or evidence furnished along therewith to establish his earnings, assets or means to justify the bona fides in the acquisition of the property); and if satisfied as to the bona fide acquisition of the property, relieve such property from provisional attachment by declining to pass an order of confirmation of the provisional attachment; either in respect of the whole or such part of the property provisionally attached in respect whereof bona fide acquisition by a person is established, at the stage of the section 8(2) process…”

¶134

The Appellant undertakes to deposit any amount realized, which is in excess of its outstanding dues, with the ED.

¶135

The appellant is the rightful claimants of the said properties which are already in the possession of the appellant under the SARFAESI Act. The Hon‟ble Supreme Court of India in the case of Attorney General of India and Ors. (AIR 1994 SC 2179) while dealing with the matter under Conservation of Foreign

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Exchange and Prevention of Smuggling Activities Act has defined the illegally acquired properties and held that such properties are earned and acquired in ways illegal and corrupt, at the cost of the people and the state, hence these properties must justly go back where they belong, the state. In the present case as the money belongs to the Appellant it is public money. The appellant has the right to property under the Constitution of India. The property of the appellant cannot be attached or confiscated if there is no illegality in the title of the appellant and there is no charge of money laundering against the appellant. The mortgage of property is the transfer under the transfer of property act.

¶139

The objective of Prevention of Money Laundering Act, 2005 has a greater relation to crimes connected with reference to Illicit Traffic in Narcotic Drugs and Psychotropic Substances, drug crimes and other connected activities. None of the provisions are applicable in the facts of the present case. As far as the borrowers are concerned, we are not expressing any opinion with regard to matters pending before the Special Court in relation to schedule offences and the complaint under this Act. Those complaints are to be decided as per law.

¶140

Adjudicating Authority failed to apply its mind at the time of issue of the Show Cause Notice (“ SCN ”). No reason to believe can be discerned from the SCN, or the provisional attachment order accompanying the SCN under Section 8 of the PMLA, as to how there was reason to believe that the Appellant was in possession of „ proceeds of crime ‟. Adjudicating Authority, in its discussions, did not even consider the reply of the Appellant, let alone discuss it.

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Reasons to believe pertaining to the appellant

¶144

Counsel appearing on behalf of ED submits that it is not necessary to record the reasons to believe prior to passing the provisional attachment order and it could only be recorded in order of provisional attachment order itself.

¶145

Copy of the same is not to be served to aggrieved party even at the stage of arguments in the main appeal or any subsequent proceedings. These cannot be shown to the appellant.

¶146

The guidelines of recording the reason to believe have been laid

¶147

down in various judgements of Apex Court and High Courts. It is held time and again by the said Hon‟ble Courts directing that the approach should be not the subjective satisfaction of the officer concerned. Such power given to the officer concerned is not an arbitrary power and has to be exercised in accordance with the restraints imposed by law. The belief must be that of an honest and reasonable person based upon reasonable grounds, the officer concerned may act on direct or circumstantial evidence but not on mere suspicion or the allegations mentioned in the FIR or charge-sheet so that the same can be scrutinized in order to verify whether they are relevant and germane or not.

¶148

He cannot proceed further on the basis of opinion already formed by someone else. The officer who is supposed to write down his reasons to believe independently applying his mind in every case. It should not be merely a mechanical reproduction of the words mentioned in the statute in order to complete the formality as PMLA cases (being independent proceeding) as submitted on behalf of the respondent. If the person

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concerned are more than one, the officer authorized is to record the independent/separate, reasons to believe for each „person concerned‟.

¶152

If no valid reasons to believe are recorded, the issuance of notice to the „person concerned‟ or without going into the material and nonapplication of mind, the same would be considered as invalid notice. It is settled law that if the Show-Cause notice fails to fulfil the basic ingredients as laid down by a Constitutional Bench of the Hon‟ble Supreme Court in Khem Chand v. Union of India [AIR 1958 SC 300], the Show-Cause Notice itself is bad in law. Thus, it is vitiating the proceedings. Similar view was taken in another judgement in the case of

¶153

Aslam Mohammad Merchant v. Competent Authority [2008 (14) SCC

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186] in this regard .

¶155

In the present case, copy of reason to believe has not been filed. Counsel for the respondent submits that reason to believe is not required prior to the order of passing the provisional attachment order. The attachment order shows that after recording the facts, the IO has just used the expression by repetition of language of section 5(1) in the provisional attachment order. The respondent must know that unlike other statute under this Act, the burden of proof lies with person concerned. There is no procedure of cross-examination. Till the provisional attachment order is passed, no notice of appearance is served. The said proceedings are completed almost ex-parte. The notice is served after attachment alongwith the copy of provisional attachment and other material and copy of complaint. Thus, it is virtually not possible for any party to discharge the burden of proof unless he knows the nature allegations. The reason to belief is recorded as per the FPA-PMLA-1853/JP/2019 Page 32 of 38

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guidelines given by the Hon‟ble Supreme Court and High Courts. If the provisional orders are read, it appears that the details of facts are recorded and in the last para the extract language of Section 5(1) of the Act is reproduced. There is no discussion as why properties are being attached. Even if there is no signed of concealing and transferring or dealing with the properties in order to frustrating the proceedings, still without any material or evidence, the formal order in mechanical manner is passed by repeating the same language of Section 5 (1) of the Act. The same is acceptable as per settled law.

¶157

In the case of C.B. Gautam vs. Union of India (1993(1) SCC 78) ,a Constitution Bench of the Hon'ble Supreme Court of India held that the

¶158

reasons to be recorded in writing shall not only be incorporated in the

¶159

order but also shall be communicated to the affected parties. The

¶160

relevant extract from the judgement is as under:

¶161

“Sec. 269UD(1), in express terminology, provides that the appropriate authority may make an order for the purchase of the property for reasons to be recorded in writing‟. Sec. 269UD(2) casts an obligation on the authority that it "shall cause a copy of its order under sub-s. (1) in respect of any immovable property to be served on the transferor". It is, therefore, inconceivable that the order which is required to be served by the appropriate authority under sub-s. (2) would be the one which does not contain the reasons for the passing of the order or is not accompanied by the reasons recorded in writing. It may be permissible to record reasons separately but the order would be an incomplete order unless either the reasons are incorporated therein or are served separately along with the order on the affected party. Reasons for the order must be communicated to the affected party . ”[

¶162

The above referred to decision has been followed in various

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judgments by many High Courts, as well the Hon'ble Supreme Court of

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India in subsequent decisions.

¶167

a) In Kranti Associates v. Masood Ahmed Khan (2010) 9 SCC 496, the

¶168

legal position was summarized as under:-

¶169

a. In India the judicial trend has always been to record reasons, even in administrative decisions, if such decisions affect anyone prejudicially.

¶170

b. A quasi-judicial authority must record reasons in support of its conclusions.

¶171

c. Insistence on recording of reasons is meant to serve the wider principle of justice that justice must not only be done it must also appear to be done as well.

¶172

d. Recording of reasons also operates as a valid restraint on any possible arbitrary exercise of judicial and quasi-judicial or even administrative power.

¶173

e. Reasons reassure that discretion has been exercised by the decision maker on relevant grounds and by disregarding extraneous considerations.

¶174

f. Reasons have virtually become as indispensable a component of a decision making process as observing principles of natural justice by judicial, quasi-judicial and even by administrative bodies.

¶175

g. Reasons facilitate the process of judicial review by superior Courts.

¶176

h. The ongoing judicial trend in all countries committed to rule of law and constitutional governance is in favour of reasoned decisions based on relevant facts. This is virtually the life blood of judicial decision making justifying the principle that reason is the soul of justice. i. Judicial or even quasi-judicial opinions these days can be as different as the judges and authorities who deliver them. All these decisions serve one common purpose which is to demonstrate by reason that the relevant factors have been objectively considered. This is important for sustaining the litigants' faith in the justice delivery system.

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j. Insistence on reason is a requirement for both judicial accountability and transparency.

¶178

k. If a Judge or a quasi-judicial authority is not candid enough about his/her decision making process then it is impossible to know whether the person deciding is faithful to the doctrine of precedent or to principles of incrementalism.

¶179

l. Reasons in support of decisions must be cogent, clear and succinct. A pretence of reasons or `rubber-stamp reasons' is not to be equated with a valid decision making process.

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m. It cannot be doubted that transparency is the sine qua non of restraint on abuse of judicial powers. Transparency in decision making not only makes the judges and decision makers less prone to errors but also makes them subject to broader scrutiny. (See David Shapiro in Defence of Judicial Candor (1987) 100 Harvard Law Review 731-737).

¶183

n. Since the requirement to record reasons emanates from the broad doctrine of fairness in decision making, the said requirement is now virtually a component of human rights and was considered part of Strasbourg Jurisprudence. See (1994) 19 EHRR 553, at 562 para 29 and Anya vs. University of Oxford, 2001 EWCA Civ 405, wherein the Court referred to Article 6 of European Convention of Human Rights which requires, "adequate and intelligent reasons must be given for judicial decisions".

¶184

o. In all common law jurisdictions judgments play a vital role in setting up precedents for the future. Therefore, for development of law, requirement of giving reasons for the decision is of the essence and is virtually a part of "Due Process".

¶185

b) In Income Tax Officer v. LakhmaniMewaldas 1976 (3) SCR 956,

¶186

the Supreme Court held that there should be a live link or close

¶187

nexus‖ between the material before the ITO and the formation of his belief that income had escaped assessment. More recently, in Aslam Mohd Merchant v. Competent Authority (2008) 14 SCC 186, the entire legal position has been explained elaborately by the Supreme Court as under:

¶188

28. It is, however, beyond any doubt or dispute that a proper application of mind on the part of the competent authority is imperative before a show cause notice is issued. Section 68H of the Act provides for two statutory requirements on the part of the authority viz: (i) he has to form an opinion in regard to his reason to believe'; and (ii) he must record reasons therefor. Both the statutory elements, namely, reason to believe' and `recording of reasons' must be premised on the materials produced before him. Such materials must have been gathered during the investigation carried out in terms of Section 68-E or otherwise. Indisputably therefore, he must have some materials before him. If no such material had been placed before him, he cannot initiate a proceeding. He cannot issue a show cause notice on his own ipse dixit. A roving enquiry is not contemplated under the said Act as properties

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sought to be forfeited must have a direct nexus with the properties illegally acquired.

¶192

29. It is now a trite law that whenever a statute provides for `reason to believe', either the reasons should appear on the face of the notice or they must be available on the materials which had been placed before him. We have noticed hereinbefore that when the authority was called upon to disclose the reasons, it was stated that all the reasons were contained in the show cause notices themselves. They, however, in our opinion, do not contain any reason so as to satisfy the requirements of sub-section (1) of Section 68H of the Act.

¶193

c) In Joti Parshad Vs. State of Haryana [1993 Supp (2) SCC 497] , the Hon‟ble Supreme Court observed that „suspicion‟ and „reason to believe‟ are not the same thing. “Reason to believe” is a higher level of state of mind and there must exist reason to believe. The following observations are relevant in this regard-

¶194

“5. …We are now concerned with the expressions „knowledge‟ and „reason to believe‟. „Knowledge‟ is an awareness on the part of the person concerned indicating his state of mind. „Reason to believe‟ is another facet of the state of mind. „Reason to believe‟ is not the same thing as „suspicion‟ or „doubt‟ and mere seeing also cannot be equated to believing. „Reason to believe‟ is a higher level of state of mind. Likewise, „knowledge‟ will be slightly on a higher plane than „reason to believe‟. A person can be supposed to know where there is a direct appeal to his senses and a person is presumed to have a reason to believe if he has sufficient cause to believe the same. Section 26 IPC explains the meaning of the words „reason to believe‟ thus:

¶195

26. Reason to believe – A person is said to have „reason to believe‟ a thing, if he has sufficient cause to believe that thing and not otherwise.”

¶196

In the light of above, it is held that the provisional attachment order in the present case is bad as no valid reason to believe pertaining to appellant herein has been recorded within the meaning of the provision of Section-5(1) of the Act. Recording of reason to believe under the said provision is not a formality rather it is the duty of the authorized

¶197

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officer to record the valid reason to believe. As far as reason of believe within the meaning of Section 8(1) is concerned, if the Adjudicating Authority chooses to record the same, after having gone through the entire material and copy of complaint and provisional attachment order, it must be satisfied the mandatory condition that the person concerned has committed the offence within the meaning of Section 3 of the Act or is in possession of proceed of crime. Only than, the notice under section 8(1) is to be issued.

¶199

In the present appeal, prima facie, there is no valid findings with the properties mortgaged with the appellant as to who is the financial institution and possession of the proceeds of crime or the same is likely to be concealed, transferred or dealt with in any manner as the said properties are already mortgaged with the appellant.

¶200

In the present appeal, it is evident that Adjudicating Authority failed to apply its mind at the time of issunce of the Show Cause Notice (“ SCN ”). No reason to believe can be discerned from the SCN, or the order dated 29.06.2018 accompanying the SCN under Section 8 of the PMLA, as to how there was reason to believe that the Appellant was in possession of „ proceeds of crime ‟. Adjudicating Authority, in its discussions did not even consider the reply of the Appellant, let alone discuss it.

¶201

In the light of above, the impugned order is liable to be set aside qua attachment of the 23 properties mentioned in Table no. I at page 2737 of the impugned order. The sum of Rs. 8,23,77,774/- mentioned in

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Table no. VI at page 61-65 of the impugned order is set aside and quashed. The appeal filed by the Syndicate Bank is allowed. The provisional attachment order is also quashed.

¶205