Allowed

FPA-PMLA-2199/CHN/2018 of Indian Overseas Bank v/s The Deputy Director Directorate of Enforcement, Chennai

ATFP27 Mar 2019FPA-PMLA-2199/CHN/2018

Case brief

AI extract

What is this about?

In two consolidated appeals, the Appellate Tribunal quashed the confirmation of provisional attachment orders passed against mortgage properties belonging to two lenders. The Tribunal held that the banks were innocent secured creditors and the properties were not proceeds of crime, especially given no scheduled offence existed at the time of acquisition.

What did the court decide?

Impugned order dated 17.01.2018 confirming provisional attachment was set aside; provisional attachment order quashed in favour of appellants.

FPA-PMLA-2199/CHN/2018 of Indian Overseas Bank v/s The Deputy… — Money Laundering | ATFP (2019)

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APPELLATE TRIBUNAL FOR SAFEMA, FEMA, PMLA, NDPS & PBPT ACT AT NEW DELHI

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Date of Decision: 27.03.2019

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(1) FPA-PMLA-2179/CHN/2018

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SREI Equipment Finance Ltd. … Appellant/Applicant Versus The Deputy Director Directorate of Enforcement, Chennai … Respondent (2) FPA-PMLA-2199/CHN/2018 Indian Overseas Bank … Appellant/Applicant Versus The Deputy Director Directorate of Enforcement, Chennai … Respondent

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Advocates/Authorized Representatives who appeared

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For the appellant : Shri Atul Kumar, Advocate Shri M. Senthil Kumar, Advocate Shri T.R.B. Siva Kumar, Advocate For the respondent : Shri Neeraj Atri, Advocate CORAM JUSTICE MANMOHAN SINGH : CHAIRMAN JUDGEMENT

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FPA-PMLA-2179/CHN/2018& FPA-PMLA-2199/CHN/2018

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By this common order, I propose to decide the above-mentioned appeals filed by the lenders against the impugned order passed by the Adjudicating Authority on 17.01.2018 in O.C.No.806 of 2017 confirming the provisional attachment order.

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Page 1 of 18

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Both lenders/appellants are defendant nos. 8 & 9 of the Complaint. The facts and legal issues in both appeals are almost same, therefore by single order, both appeals are being decided. Both appellants are challenging about the passing of attachment order and confirmation thereof.

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Both appellants are not arrayed in FIR. No charge-sheet is pending against them under section 3 of PML Act, 2002. Both are victim. The mortgage properties were not acquired from proceeds of crime. The same were purchased much prior to the date of FIR and complaint pending against the borrowers.

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CASE OF INDIAN OVERSEAS BANK WHO WAS 9^th DEFENDANT IN THE COMPLAINT :

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Indian Overseas Bank is a Nationalized Bank doing banking business as per the Banking Regulation Act who have not committed any offence. It is wrongly mentioned in the notice.

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4.1. It is stated on behalf of bank that Mr.P.K.Selvaraj, his wife Mrs.Santhi Selvaraj and his son Mr.Surya Prakash are doing granite export business under the name and styled of M/s.SreeMurugan Enterprises, (a partnership firm) who was enjoying credit facilities with the bank from the year 1998 onwards and there were periodical review and enhancement / reduction in the credit facilities.

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4.2. The above individuals at the first instance have mortgaged the property with the bank as early as on 23.01.1998. Apart from the above credit facilities, the above said individuals are having current account in the name of M/s.Sindhu Granites, M/s.Lakshmi Exports & M/s.Sri Santhi Exports. As on

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the date of the receipt of the order dated 18.08.2017, only M/s.SreeMurugan Enterprises is enjoying the following credit facilities with the bank :

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Facility	Amount (inCrores)
CashCredit	2.50
Secured Packing Credit	4.50
FDDBP Under Prime	2.00
Bank LC / Firm
Order
LetterofGuarantee	0.16

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4.3. The above said borrowers have deposited / re-deposited the title deeds with the bank with an intention to create an equitable mortgage in favour of the bank periodically. The last re-deposit of title deeds were made by Mr.P.K.Selvaraj & Mrs. Santhi Selvaraj on 01.11.2010 and 28.06.2012. As such the last mortgage in favour of Indian Overseas Bank was created on 01.11.2010 & 28.06.2012 for the credit facilities granted to M/s. SreeMurugan Enterprises was secured. M/s.SreeMurugan Enterprises is enjoying cash credit facility as per the Regional Office sanction letter dated 15.06.2015.

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4.4 The sanction was given by the Regional Office, Madurai only as a periodical renewal. No new credit facility was granted to M/s.SreeMurugan Enterprises by sanction dated 15.06.2015. The Bank is not aware about the alleged criminal activities of the borrowers / guarantors.

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4.5. The bank after evaluating the credit worthiness of the parties, the value of the securities, the quantum of turnover of the respective firms, have taken a credit decision to grant loan of the public money to M/s.SreeMurugan Enterprises on a bonafide belief that the above borrowers are doing business in a lawful manner following the law of the land. The various credit facilities were granted to the firms owned by the above said individuals as per the normal

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Page 3 of 18

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banking procedure after getting proper approvals etc., There is no violation of Rules of lending by the bank. The following properties were attached:-

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S.No.	Details of Properties	Guideline Value Rs.	Fair market value
1.	Vacant Land RS No. 161/3, Bharathiar street, K.K. Nagar, Madurai-20, Madurai North measuring 7,346 sq. ft. under jurisdiction of Madurai Dist SRO Thallakulam registered as Document No. 3091/2008 dated 14.07.2008 and property is in the name of Shri P.K. Selvaraj	78,74,912	4,21,21,559
2.	Land and building viz., measuring 2 grounds and 458 sq. ft. at RS No. 145/1, Plot No. 3, First East street, K K Nagar,	Land value 57,44,580 Building value	1,80,89,449
	Madurai 20 registered as	1,36,93,311
	Document No. 2901/2008 Dated: 20.07.2008 under the jurisdiction of Tallakulam SRO and the property is in the name of Smt. Santhi Selvaraj
3.	Land measuring 250 cents at Raja-gambeeram village,	4,38,17,500	5,00,00,000
	Tamaraipatti, Madurai North
	registered as Document no.
	1935/2000 Dated 14.06.2000
	under the jurisdiction of SRO,

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	Thamaraipatti and acquired for Rs. 4,23,270/- having and the property is in the name of Shri P.K Selvaraj. Payment is made in cash.
4.	Land viz., address Rajagambeeram Village, Madurai North measuring 50 cents under the jurisdiction of SRO, Tamaraipatti registered as Document No. 1933/2000 dated 19.06.2000 and acquired for Rs. 84,270/- and property is in the name of Shri P.K. Selvaraj. The payment is made in cash.	87,63,500	1,00,00,000
5.	Land & Building at D. No. 39/C, Nedumaran Street measuring 2050 sft. Land and 3500 sft. Building in Dharmapuri-636701 under the jurisdiction of Dharmapuri West SRO registered at document No. P134/2254/1995 and property is in the name of Shri P.K. Selvaraj	Land Value for the land 27,47,000 Building Value 21,34,786	Land Value 51,25,000
6.	Land and building viz., RS No. 517, Door No. 10, Soodamani Street, Vellagoundampalayam	Land Value 11,30,490 Building	Land Value 79,98,750
	Village, Dharmapuri TK,	Value
	Dharmapuri Dist measuring	29,97,715
	1777.50 sft land and 4700 sft building under the jurisdiction of

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	SRO, Dharmapuri West and the property is in the name of Smt. Santhi Selvaraj.
7.	Land at Rajagambeeram Village, Madurai North measuring 100 cents under the jurisdiction of SRO, Tamaipatti registered as Document No. 1934/2000 dated 19.06.2000 and acquired for Rs. 1,69,520/- and property is in the name of Smt. Santhi Selvaraj. The payment is made in cash from business income.	1,75,27,000	2,00,00,000
8.	Land and building at SRO No.	Value for the	Land 2,75,69,000/-
	52/2A, Ward 24, Nethaji Bye	land and	Building 1,12,00,000
	Pass Road, Dharmapuri, Land	building
	2902 sqft, Building, Building	77,77,360 &
	Basement floor to fifth floor	87,23,826
	(Total 14042 sft) registered as
	Document Nos. 899/93 dated
	29.6.93, 500/1994, dated
	30.3.94, 247/95 dt. 20.2.05, 1720/10 dt. 22.04.2010, 14 32/1996 dt. 17.7.96 under the jurisdiction of Dharmapuri West SRO and the property is jointly
	in the names of Shri P.K.
	Selvaraj and Smt. Santhil Selvaraj

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The appellant Indian Overseas Bank as mortgagee has got first charge over the properties mortgaged in favour of the bank. Similarly, Indian Overseas Bank is having hypothecation over the entire stock and machineries also. The borrower had executed hypothecation agreement periodically in favour of the bank hypothecating the stock and machineries.

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5.1. Despite of Bank as mortgagee is having first charge over the properties attached the Provisional Attachment Order No.16/2017 was passed attaching the said properties wherein the Directorate of Enforcement comes to conclusion that the properties mortgaged in favour of the bank is liable to be attached / sold, only then Indian Overseas Bank alone has got first priority over the sale proceeds. Only after wiping out of the entire loan outstanding due to Indian Overseas Bank from M/s.SreeMurugan Enterprises and Mr.P.K.Selvaraj, his wife Mrs.Santhi Selvaraj and his son Mr.Surya Prakash, the Directorate of Enforcement shall take the balance amount.

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The appellant has also produced the mortgage documents which are registered in accordance with law. In the registered documents, the date of deposit of title deeds have been mentioned.

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It is submitted on behalf of the bank that the Provisional Attachment order dated 26.07.2017 is subsequent to the mortgage deed executed in favour of Indian Overseas Bank. Since the attachment is subsequent one, Indian Overseas Bank has got first charge over the properties. The Prevention of Money Laundering Act does not provide for any priority to the State .If the properties are not purchased from the proceed of crime and prior to the date of offence if committed by the borrowers.

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Counsel has referred the decisions of the Hon‘ble Supreme Court of India who has upheld the legal position :

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a. ‖The Bank of Bihar – Vs – The State of Bihar‖ and others reported in A.I.R. 1971 Supreme Court Page 1210.

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b. ―Dena Bank - Vs – BhikhabhaiPrabhudas Parekh & Co and others‖ reported in (2000) 5 Supreme Court Cases Page 694.

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It is submitted on behalf of appellant that in case the properties were sold by the ‗State‘ in continuation of the attachment, then the Appellant / 9^th Defendant Bank will lose its valuable security and will suffer huge loss of public money. Counsel for the Appellant submits that the mortgage of the attached property has been obtained by the Appellant Bank in a bonafide manner after parting with huge public money in legal transaction. If the accused/borrowers commits any default, then the Appellant Bank is empowered to enforce the security and the ―State‖ cannot claim any right by view of the attachment if the said properties are not acquired from the proceeds of crime.

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CASE OF SREI EQUIPMENT FINANCE LTD.

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The case of appellant in appeal no. FPA-PMLA-2179/CHN/2018 is that the in course of business, one P.K. Selvaraj approached Defendant No.8/ Appellant for financial assistance in the year 2012 and accordingly loan was granted to M/s Sindhu Granites Represented by Mr. P.K. Selvaraj for the amount of Rs. 11,57,70,000/- and another loan was granted to M/s Shree Murugan Enterprises Represented by Mr. P.K. Selvaraj for the amount of Rs. 10,52,50,000/- towards purchase of equipments and to secure the said

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financial facilities, immovable property (details of the survey no are morefully described in the schedule below) started in the schedule herein having value of more than Rs. 51 crore were taken as security collateral by way of Two registered equitable mortgage vide document no. 5800/2012 registered at Hosur Sub-Registrar Office and 1934/2012 registered at Y. Othakdai SubRegistrar Office and apart from the above other securities like Personal Guarantee of Mr. P.K. Selvaraj and P.K.S. Surya Prakash son of P.K. Selvaraj were obtained. Further in the year 2015, Mr. P.K. Selvaraj requested for another Financial Facilities of Rs. 13,17,00,000/- and takeover of earlier loans which Defendant No.8 allowed to Mr. P.K.Selvaraj by Loan agreement being No. 94086 dated 22^nd September, 2015 and the Loan agreement being No. 87753 dated 1^st July, 2015 of Rs. 50,00,00,000/-.‖

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10.1. The properties it transpires that properties were purchased by the accused/borrowers from the year 1995 onwards.Sindu Granites was granted licence vide order dated 13.1.2006 for quarry of granite stones to extents of 1.08.5 hectares. Thereafter it was granted licence vide order dated 25.2.2011 from 1.3.2011 to 28.2.2031 to extent of 1.49.5 hectare.

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10.2. Allegation against Sindu granite is that it without permission of Government quarried in concealed manner 0.02.0 acres 18 meters depth and 4416.25 cbm.

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That the Appellant being the Lender caused detailed due diligence of the Borrower including title search of the immovable assets and obtained title search report from reputed senior lawyer of Chennai High Court and also caused valuation based on site visit as per the internal process and audit requirement of the Appellant financial institution. In view of the Valuation report of the Appellant has done reasonable search as any financial institution will do before granting any financial facility to any Borrower and found that FPA-PMLA-2179/CHN/2018& FPA-PMLA-2199/CHN/2018 Page 9 of 18

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and based on such reports and came to the conclusion that the immovable assets are free from encumbrances and having high valuation and good marketability and where in control and possession of the proposed Borrower. Accordingly, the security documents and financial facility documents were executed and the Appellant is continuing till date to have first and exclusive mortgage and first ranking charge over the immovable assets mentioned in the schedule herein and is a secured creditor.

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11.1. However on 18.08.2017 the Appellant received show cause notice under Section 8 of Prevention of Money Laundering Act, 2002 from Adjudicating Authority of Prevention of Money Laundering Act, New Delhi in view of a Complaint filed by Deputy Director, Director of Enforcement, Chennai Govt. of India / Respondent stating that the Appellant is supporting to appear before the Adjudicating Authority on 05.10.2017 regarding the hearing of the Complaint in provisional attachment Order No. 16/ 2017 in ECIR No. CEZO/14/2015 for attachment of immovable properties in case of M/s Sindhu Granites, P.K. Selvaraj, M/s SreeMurugan Enterprise and other and upon perusal of such notice we found due to irregularities and certain activities which has been alleged to have been done said P.K. Selvaraj, the Adjudicating Authority is in the process of taking steps and/or penal actions against P.K. Selvaraj.

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11.2. Shri P.K. Selvaraj in his initial statement dated 08.09.2016 as stated in page 21, clause 18.4 of the Provisional Attachment order submits that Land measuring 1.41 Acres comprised in survey no. 833/2, situated at Mornapalli Village, Hosur Taluk, was purchased vide sale deed no 16153/ 2011 dated 16.11.2011 form the income of granite business. However, the Appellant states herein that the Property was mortgaged in 2012 and further the said property was covered as security for further financial facilities in 2015 but nowhere in FPA-PMLA-2179/CHN/2018& FPA-PMLA-2199/CHN/2018 Page 10 of 18

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the account/ statement of account, Govt. records it was reflected that the income from granite business is under dispute and money used for purchasing the said property is proceeds out of crime.

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It has come on record that the respondent passed a provisional attachment order dated 17^th 26^th July, 2017 and subsequently filed a complaint before Adjudicating Authority.

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The respondent has filed the reply to the appeal. It is evident that the respondent has supported the reasons and findings given by the Adjudicating Authority if the entire reply is read in meaningful manner. The schedule of mortgage properties was annexed with the reply. Counsel for the appellant says that the appellant is merely concerned with the mortgaged property. However, the respondent cannot be allowed to ignore the facts and law applicable in the present case.

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The FIR no. 161/12 was registered on 6.8.2012 and Chargesheet was filed on 25.8.2013 u/s447, 379,406, 420 IPC r/w 3(1) TNFFL act & Section 4(1)A, 4(2) A, 4(3) & 21(b)(5) of Mines & Minerals Act. 1957.

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Section 447, 379,406, 420 IPC r/w 3(1) TNFFL act & Section 4(1)A, 4(2) A, 4(3) & 21(b)(5) of Mines & Minerals Act. 1957 were not in category of Scheduled offences at the relevant time and were added as Scheduled offence w.e.f. 15.2.2013. Therefore, in any case, there are no proceeds of crime from

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which the properties in question were purchased as there was no Scheduled offence under the Money Laundering Act.

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This tribunal in large number of cases has discussed the law laid down by the Supreme Court and High Courts. However, in the impugned order the same have been ignored.

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It is settled law that the bank would be entitled to recover its dues by proceeding against the mortgaged/hypothecated properties under the provisions of SARFESI Act, 2002 and the RDDBFI Act 1993, as the Directorate of Enforcement would have no lien over the property which already stands legally transferred to the bank. If the said properties are not acquired from the proceeds of crime. It was the duty of respondent to trace out the other properties of the accused/borrowers if the respondent is aware that the proposed attached properties are already mortgaged with bank and those were acquired much prior to the date of offences. The other properties can be attached equivalent to the value thereof and not mortgaged properties.

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This Tribunal has perused and examined the material available on records and has also heard the arguments of the learned counsels for both the parties and gone through the written submission filed.

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There is no denial on behalf of respondent that appellant is a Secured Creditor and is entitled to priority over all other debts and all revenues, taxes, cesses and other rates payable to the Central Government or State Government or Local Authority.

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20 . It is clear from the material placed on record that the Appellant - Bank being a Secured Creditor, since it had lent its own money to the Predicate Offender earlier, is entitled to priority over all other debts and government dues, including revenues, taxes, cesses and rates due to the Central Government, StateGovernment or local authority. Hence, the Respondent - DeputyDirector has no power to attach the property of the mortgagors. If the same are not acquired from the proceed of crime and the same were mortgaged much prior to the date of offence.

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The Hon'ble Andhra Pradesh High Court in the case of B. Rama Raju vs. Union of India &Ors. reported in (2011) 164 Comp Cases 149 in which the Hon'ble High Court has held that if the Adjudicating Authority is satisfied as to the bona fide acquisition of property, it should relieve such property from provisional attachment by declining to pass anOrder of confirmation of the provisional attachment.

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The following isthe relevant portion of the Para 103 of the said decision passed by theHon'ble Andhra Pradesh High Court :-

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“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 thereof 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, assests 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

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declining to pass an order of confirmation of the provisional attachment.

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It is not disputed by the respondent that the banks are innocent parties and victim are entitled to recover the loan amount. It is a simple case of recovery by the Appellant-Bank from its Borrower its own stressed Asset, since the Bank had already lent the money owned by it, which the Bank is entitled to recover the same as the properties were not acquired from the proceed of crime. Infact, it is failure of the respondent who has failed to investigate the matter properly. It was the duty of the respondent to trace out of other properties other than mortgage properties which no link and nexus in the criminal activities as the same were not purchased from the tainted money.

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This Tribunal in the above Judgment dated 14.07.2017 has also relied upon its own earlierJudgment dated 22.06.2017 in the case Indian Performing Right Society Ltd. vs. The Deputy Director, Directorate of Enforcement,Mumbai, wherein the Tribunal held as follows :-

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―55. Whether innocent party whose properties i.e.movable or immovable are attached can approach the Adjudicating Authority for release of attached property.

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"The Scheme of Prevention of Money Laundering Act clearly provides the mechanism whereby the innocent parties can approach the Adjudicating Authority for the purpose of release of properties which have been attached in terms of the provisions ofSection 5 of the Act. This can be seen by reading Section 8(1) and the proviso to Section 8(2) of the Act whereby Adjudicating Authority has to rule whether all or any of the properties referred to in the notice are involved in money laundering or not.

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In the present case, this Appellant - Bank is an innocent party since it had already lent its own money to the Predicate Offender and the property in question being mortgaged to the Bank which is provisionally attached by

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the Respondent— Deputy Director ought to have been released by the Adjudicating Authority under Section 8(2) of PMLA.

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The Adjudicating Authority did not appreciate that the afore mentioned moveable/Immoveable property cannot be said to have been acquired out of ― proceeds of crime ‖as defined in section 2 (1) (u) of the Prevention of Money Laundering Act (PMLA), 2002 and therefore, the same (cannot be Attached under Section 5 of the PMLA by the Enforcement Directorate vide PAO No. 16/2017 dated 26.07.2017.

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The Adjudicating Authority failed to appreciate that that there is no nexus whatsoever between the alleged crime and the two bank who are mortgagee of all the properties which were purchased before sanctioning the loan. Thus no case of money-laundering is made out against banks, who have sanctioned the amount which is untainted and pure money. They have priority to the secured creditors to recover the loan amount/debts by sale of assets over which security interest is created, which remains unpaid.

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The Adjudicating Authority failed to understand that the Appellant is the right full claimants of the said properties. It is submitted that the Respondent has filed the copies of the sale deeds/ title deed of the properties which shows the dated of acquisition of all the properties. The Appellantsare having the mortgaged charge over the property. It is submitted that the Valuable right will be lost for the Appellant, by order of attachment and eventual confiscation.

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The properties attached could not be attached under Section 5 of the PML Act because the properties are not purchased from the alleged proceeds of crime. As per the provisions of Section 5(1) (c) the primary requirement for the attachment is that the proceeds of crime are likely to be concealed, transferred FPA-PMLA-2179/CHN/2018& FPA-PMLA-2199/CHN/2018 Page 15 of 18

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or dealt with in any manner. In this case it is clear by the order of the Adjudicating Authority that the funds were transferred for the satisfaction of the bigger credit facilities taken by the respondents from the appellant, which they could not pay due.

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The Hon‘ble Supreme Court of India in the case of Attorney-General of India and others reported in AIR 1994 SC 2179 while dealing with the matter under Conservation of Foreign Exchange and Prevention of Smuggling Activities Act has defined the illegally acquired properties and has held that the illegally acquired properties are earned and acquired in ways illegal and corrupt, at the cost of the people and the state, the state is deprived of legitimate revenue to that extent 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 liable to be recovered by the Appellants.

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The property of the Appellant cannot be attached or confiscated when there is no illegality or unlawfulness 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 as there is no dispute as regards the origin of funds or the title of the properties.

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As far as the Appellants are concerned, the Appellant had to recover its outstanding dues by taking over the possession of the mortgaged properties in case the borrowers/accused persons are not able to pay back the credit facilities availed by them and by way of the SARFAESI provisions these properties will be taken in possession by the appellant, so that recovery can be made from the accounts which have become NPA.

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The respondent has no lien over the said properties as the Appellant is now the Legal transferee of said properties. Even in the criminal jurisprudence the stolen property when it is in the hands of unauthorized person that person cannot claim title to the property. The said recipient cannot retain the property over which he has no legal title and the property should be returned to the lawful owners because the Appellant is victim and even after trial, It is to receive-back the said properties being victim party in normal types of cases u/s 8(8) of the Act.

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In the present cases, the Appellant is innocent party. It is not involved in any criminal proceedings. If it is asked to await till the trial is over, the systems in these types of cases, the economy would collapse.

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The Adjudicating Authority failed to appreciate that at the time of alleged offences by the accused persons, the offences were not in scheduled offences and therefore, even otherwise, the rigors of PML Act are not applicable to present case and the alleged offences became scheduled offences w.e.f. 15.02.2013 and are not retrospective in operation.

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In the light of above, the impugned order dated 17.01.2018 is set aside with regard to the appellants. Consequently, the provisional attachment order is also quashed in favour of appellant. It is clarified that the Bank has only restricted his prayer qua attachment of mortgaged property. The complaints against the borrowers may continue as per law for which the Bank has no concerned.

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As regard to release of properties for the purpose of recovery of loan amount is concerned, the banks are at liberty to approach the Special Court for

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release of said properties being the innocent parties. The present appeals are accordingly allowed.

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