Reverse Burden Applies: Tribunal Upholds Bank Freeze Where Source of Funds Not Proved under PMLA

Debabrata Mallick Vs Deputy Director (Appellate Tribunal Under Safema At New Delhi)

Reverse Burden Applies: Tribunal Upholds Bank Freeze Where Source of Funds Not Proved under PMLA

The Appellate Tribunal under SAFEMA dismissed the appeal challenging freezing of bank accounts and seizure of documents under Sections 17 and 17(1A) of the PMLA, holding that sufficient material existed to establish the appellant’s involvement in money laundering activities linked to diversion of bank loans by M/s BISWA and related entities. The Tribunal noted that the appellant, though claiming to be merely a Director and son of the main accused, was actively connected with multiple entities involved in layering of funds, and was found in possession of key financial records and data relating to loan disbursement and utilization.

Rejecting the argument of independent income (gym earnings and LIC commission), the Tribunal emphasized the principle of reverse burden under Section 24 of PMLA, holding that once foundational facts are established by the Enforcement Directorate, the onus shifts to the accused to prove legitimate sources. The appellant failed to produce bank statements or supporting evidence, and mere assertions were held insufficient.

The Tribunal further clarified that liability under PMLA cannot be tested on principles applicable to other statutes, and being a Director does not automatically absolve involvement where evidence suggests participation in the offence. Since the appellant failed to rebut the statutory presumption or explain the source of funds, the continuation of freezing and seizure was held valid, and the appeal was dismissed.

FULL TEXT OF THE ORDER OF APPELLATE TRIBUNAL UNDER SAFEMA AT NEW DELHI

By this appeal filed under Section 26 of the Prevention of Money Laundering Act, 2002 ( in short “the Act of 2002”), a challenge has been made to the order dated 20.05.2025 passed by the Adjudicating Authority allowing retention of the seized documents/records, digital devices and continuance of the freezing of the bank accounts. Seizure of the documents and the digital devices apart from the freezing of the bank account was made during the course of search operation under Section 17 of the Act of 2002. The bank accounts were frozen under Section 17(1A) of the Act of 2002 while seizure of the records under Section 17(1) of the Act of 2002.

Brief facts of the case:

2. It is a case where an FIR was registered by CBI, EOB, Kolkata on 29.01.2021 for an offence under Section 13(2) read with Section 13(1)(d) of the Prevention of Corruption Act, 1988 and Sections 120-B, 420, 468 and 471 of the Indian Penal Code, 1980 on the basis of the complaint submitted by the Regional Manager, Central Bank of India, Sambalpur region. After investigation, a charge-sheet was filed by the CBI finding a case of cheating and fraud by the main accused, M/s Bharat Integrated Social Welfare Agency (BISWA). It was for diversion of the loan meant for lending to Self Help Groups and joint liabilities groups by BISWA. The funds were utilized by the Chairman of the Company, Shri Khirod Chandra Mallick and others for their personal gains. Shri Khirod Chandra Mallick in conspiracy with Shri Pitabash Sethi defrauded the bank with dishonest intention. The amount of Rs.2.74 Crores was utilized for repayment of other loans availed by BISWA and Rs. 2.47 Crores was utilized by Shri Khirod Chandra Mallick. The accused submitted fake utilization certificate for disbursement of loan amount in the account of BISWA due to which the bank had to suffer a loss to the tune of Rs. 8.32 Crores (approx.).

3. The loan amount taken from the Central Bank of India was utilized by the accused persons for the purpose other than for which it was sanctioned and thereby defrauded the bank.

4. Another FIR was registered earlier by EOW, Bhubaneswar on 25.10.2014 for the offence under Sections 403, 420 and 120­B of IPC and Section 4, 5 & 6 of Prize Chit and Money Circulation Scheme (Banning) Act. A charge-sheet in pursuance of it was filed after completion of the investigation.

5. It was revealed that Shri Khirod Chandra Mallick had taken loan to the tune of Rs.231 Crores from various financial institutions and formed various companies and entities for the purpose of laundering of the funds. The detail of those companies have been given in the impugned order.

6. During the course of the investigation, it was revealed that Shri Khirod Chandra Mallick misutilized the funds and also started accepting the deposits from the public. It was not permissible as per the Reserve Bank of India guidelines. Many serious allegations were levelled against the main accused, Shri Khirod Chandra Mallick. However, he is no more but seizure of the documents/ records and the freezing of the bank account have been continued finding involvement of the company and others for commission of crime.

7. So far as this appeal is concerned, it has been filed by Shri Debabratra Mallick, who is none else but the son of Shri Khirod Chandra Mallick and was Director of many companies involved in laundering of the money and thereby the appellant was also made accused in the prosecution complaint.

8. Since the documents have been seized apart from freezing of the bank account of the appellant, the present appeal has been filed to challenge the order of freezing and seizure. It is apart from the impugned order passed by the Adjudicating Authority for retention.

Arguments of the Ld. Counsel for the appellant:

9. Ld. Counsel for the appellant submitted that without any nexus to the commission of crime and even material to show receipt of the proceeds of crime by the appellant, bank accounts have been frozen apart from seizure of the documents.

10. Ld. The appellant was running Gym and was earning even out of commission of LIC policies. He was thus having independent source to possess the amount lying in the bank account. However, it has been taken to be proceeds of crime and accordingly freezing of the bank account has been continued without any reason.

11. Ld. Counsel further submitted that the appellant was only the Director of the company which was run by his father Shri Khirod Chandra Mallick. The appellant had no authority to enter into any transaction or even signatory of any document to get involved in the case. Without any nexus of appellant in commission of crime, his bank account has been frozen.

12. Ld. Counsel for the appellant further submitted that amount of Rs. 14 lakhs in one bank account and other amount in other bank accounts were out of the earning of the appellant from running a Gym and out of commission of LIC policies. It was wrongfully taken to be the proceeds of crime without any proof for transfer of money acquired by the appellant’s father out of proceeds of crime. The freezing of the bank accounts and its continuance by the Adjudicating Authority is solely based on the presumption.

13. Ld. Counsel further submitted that when the appellant was having source of earning then there was no reason to continue the freezing of the bank account and it could not have been only for the reason that the appellant was the son of the main accused and otherwise the Director of the company owned by his father and involved in commission of crime. The appellant was not conversant with the working of the company, BISWA, in fact, he was at the age of 21 years when taken as a Director and merely that he was the Director of the company, the liability could not have been fastened. The respondent failed to analyze the issue aforesaid while causing freezing of the bank account.

14. Ld. Counsel for the appellant made reference of several judgments of the High Courts and Supreme Court to indicate the liability of the Director. It was submitted that merely a Director of the company would not make him liable for freezing of the bank account when the sources were disclosed by the appellant. On the other hand, the respondent failed to disclose the material to prove involvement of the appellant in commission of crime. The burden was on the respondent to prove the allegations but they failed to discharge burden of proof. The reference of the several judgments was given to indicate limited liability of the Director. The prayer was made to cause interference in the impugned order.

15. Ld. Counsel for the appellant did not raise any other arguments than referred to above. It is more so when this Tribunal invited the Ld. Counsel for the appellant to make any factual or legal issues. However, Ld. Counsel for the appellant recorded her satisfaction to the arguments referred to above and closed her arguments.

Arguments of the Ld. Counsel for the respondent:

16. Ld. Counsel for the respondent made elaborate arguments to contest each and every issue raised by the Ld. Counsel of the appellant. It would be referred while recording findings to avoid repetition of one and the same facts and for the sake of brevity.

Findings of the Tribunal:

17. It is a case where FIRs were registered for commission of predicate offence and accordingly after investigation, the charge-sheet was filed by the CBI, The main accused was Shri Khirod Chandra Mallick. He was running BISWA and other companies and accordingly allegations were made against him for misutilization of the loan amount other than for which it was sanctioned by the various financial institutions. It was with allegation that the loan amount availed by BISWA was diverted to various companies formed by Shri Khirod Chandra Mallick and in which the appellant, Shri Debabrata Mallick was the common Director. The appellant was found to be key person involved in the affairs of BISWA and in possession of the documents/ records pertaining to the loan availed from various financial institutions. The data related to various self-help groups and joint liabilities groups to whom BISWA had extended loan was also found in possession of the appellant. The properties were acquired by Late Shri Khirod Chandra Mallick out of loan were also found with the appellant who was not otherwise having any legal source of income.

18. Ld. Counsel submitted that the appellant was only the Director of the Company run by his father. He is not shown to be active in commission of crime or layering of proceeds, yet his bank accounts were frozen in ignorance of the fact that the appellant was having source to possess the amount. The sources were out of Gym and commission out of LIC policies.

19. I need to analyze the first issue. The allegation against the appellant is not only that he was the Director of the company involved in commission of crime but with other companies also where the proceeds was layered. The companies were established by his father but the appellant remained connected with those companies involved in commission of crime. The Ld. Counsel submitted that merely a Director of the company would not shoulder the responsibility or liability of the nature imposed by the respondent. Several judgments of the High Court and the Supreme Court were cited to show the extent of the liability of the Director.

20. I have considered the submissions and find that the judgments cited by the appellant are in reference to the provisions of the different statutes and not under the provisions of the Act of 2002. The responsibility of the Director can be examined and determined as per the provisions of law which may be under the Companies Law or any other statutes. The judgment in relation to those statutes would not be applicable to the case under the Act of 2002. It is for the reason that the judgments are rendered by the Courts while giving interpretation to the provisions of the statute applicable on the facts of the case. Thus, cannot be applied on a case governed by a different statute. Therefore, none of the judgment cited by the appellant provides assistance to the appellant in the present appeal. It is more so when direct allegation exists against the appellant for his involvement in the companies committed offence. It is with the further submission that the appellant remains recipient of the proceeds of crime. The allegations made against the appellant have been referred in the impugned order. However, Ld. Counsel for the appellant submitted mere making allegations are not sufficient. The Enforcement Directorate failed to bring any evidence to prove its case and in absence of it, the impugned order should not sustain. It is with the further argument that initial onus to prove the case remained on the ED. They miserably failed to prove their case and therefore the appellant deserves relief.

21. I have considered the submissions and find that after registration of the FIR, investigation was caused by the CBI and separate investigation by the respondent after recording of the ECIR. The appellant found involved of which reference has been given in the impugned order. He was not simply a Director of the Company but active and therefore only the relevant documents for extension of the loan and its utilization to self-help groups and joint liabilities groups of BISWA were found with the appellant. It is, otherwise, settled law of the land that the allegations have to be defended by the accused by submitting sufficient evidence. It is as per Section 24 of the Act of 2002, which is quoted hereunder:

24. Burden of proof.—In any proceeding relating to proceeds of crime under this Act,— (a) in the case of a person charged with the offence of money-laundering under section 3, the Authority or Court shall, unless the contrary is proved, presume that such proceeds of crime are involved in money-laundering; and

(b) in the case of any other person the Authority or Court, may presume that such proceeds of crime are involved in money-laundering.]

22. The provision quoted above puts onus on the accused to bring evidence in defence in view of presumption about involvement of proceeds of crime. In the instant case, the appellant has failed to reverse the presumption and accordingly the respondent rightly frozen the bank accounts. The appellant failed to prove the source for securing lakhs of rupees in two bank accounts. Thus, reference of Section 24 of the Act of 2002 has been given for the reason that the Ld. Counsel for the afppellant was harping on the ED to prove its case in ignorance of the fact that once a foundational fact have been disclosed by the ED, it becomes case of reverse burden on the accused.

23. Counsel for the appellant was asked to refer the bank accounts of the appellant to show his income from Gym and commission of LIC policies. The Ld. Counsel for the appellant was fair to admit that bank accounts have not been submitted. The reverse burden otherwise lies on the accused and if they failed to prove its case consequence would obviously be adverse to the person.

24. I may, further, refer to Section 8(1) of the Act of 2002 and thus quoted hereunder:-

8. Adjudication.—(1) On receipt of a complaint under sub-section (5) of section 5, or applications made under sub-section (4) of section 17 or under sub-section (10) of section 18, if the Adjudicating Authority has reason to believe that any person has committed an 1[offence under section 3 or is in possession of proceeds of crime], it 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 sub-section (1) of section 5, or, seized 2[or frozen] under section 17 or section 18, 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:

Provided that where a notice under this sub-section specifies any property as being held by a person on behalf of any other person, a copy of such notice shall also be served upon such other person:

Provided further that where such property is held jointly by more than one person, such notice shall be served to all persons holding such property.

25. The notice under Section 8(1) of the Act of 2002 is given to seek source of the amount found involved in money laundering. The appellant was served with the notice under Section 8(1) of the Act of 2002 but he failed to produce evidence to disclose the source for possession of the amount in the bank accounts at the time of freezing. If the amount lying in the bank was earned out of the working in Gym or commission out of the LIC policies it was required to be proved by the appellant but the appellant failed to prove it as admitted by the Ld. Counsel for the appellant. Mere saying that the amount was earned out of the working of Gym and commission out of the LIC policies cannot be taken to be sufficient and further statement that the appellant was merely a Director of the Company. The facts aforesaid have been narrated in ignorance of the material on record and therefore, I am not in agreement with the argument raised by the Ld. Counsel for the appellant for causing interference in the impugned order. At this stage, I may again clarify that liability of the Director of the company remains under different statutes and otherwise to be examined in reference to the statutory provisions applicable in a given case. It cannot have a general application and more specifically under the provisions of the Act of 2002 which is a special legislation. Thus, I am unable to accept any of the arguments raised by the appellant. Accordingly, appeal fails and is dismissed.