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Delhi HC rules coal allocation itself not “proceeds of crime” in Prakash Industries case. Allocation, if fraudulent, may lead to subsequent gains constituting proceeds. Legal analysis of court findings on money laundering charges, allocation’s connection to criminal activity, and limitations under PMLA Sections 2(1)(u) and 3. Key insights on the court’s interpretation of property creation, misrepresentation, and fraud in obtaining allocation. Explore the implications of the judgment in relation to Article 20(1) of the Constitution and the retrospective application of the Prevention of Money Laundering Act, 2002 (PMLA).

Delhi Highs Court Court explains that the phrase ―value of such property does not mean and include any property which have no link direct or indirect with the property derived or obtained from commission of scheduled offence i.e., the alleged criminal activity. under the PMLA

The Delhi Highs Court Court in its judgment in M/S Prakash Industries Ltd. & Anr. Vs Directorate of Enforcement on 19 July, 2022, interpreted the definition of “Proceeds of Crime” under the Prevention of Money Laundering Act, 2002 (PMLA) is to be determined.

FACTS

1. PIL is stated to have applied for the grant of a mining lease on 25 May 1992.

2. According to the petitioners, PIL installed a Sponge Iron Plant at Chotia in the State of Chhattisgarh with a production capacity of 1.5 LTPA on 01 November 1993.

3. On 30 September 1996, the Ministry of Coal is stated to have apprised PIL of its decision to permit it to explore the Hasdeo-Arand coal block for captive development.

4. Pursuant to the aforesaid communication, PIL is stated to have apprised the Ministry of Coal of it having undertaken preparatory steps for exploration of the Chotia block falling within the Hasdeo-Arand and Panchvahini coalfields.

5. The application for allocation of the Chotia coal block remained pending for consideration till it was allocated to PIL on 04 September 2003.

6. On 07 April 2010, the first FIR came to be registered. That FIR alluded to acts of PIL which were alleged to amount to a misrepresentation with respect to its captive activity, submission of false and incorrect information in order to obtain allotment of the coal block and diversion of coal extracted from that block in the open market.

Value of Property

7. From the disclosures made in the counter affidavit which has been filed in these proceedings, the Court takes note of the allegation that PIL mined coal in a wrongful manner between2006-2015 and extracted coal valued at Rs.951.77 crores. It is further alleged that based on the revenues generated as a result of the said criminal activity, various properties were purchased by PIL acting through its related and sister concerns.

8. However, and as noticed in the introductory part of this judgment, the impugned proceedings rest upon the allegations which form part of the second charge sheet. That charge sheet takes due notice of the fact that the original FIR as well as the first charge sheet already stands quashed. It is perhaps in that background that the said charge sheet restricts itself to activities and events which transpired up to the allocation of the coal block itself on 04 September 2003.

9. Agarwal also submitted forged CA’s Certificate to Ministry of Coal and the Ministry of Steel. The accused persons Sh. V. P. Agarwal, Sh. A. K. Chaturvedi and the Company M/s Prakash industries Limited conspired with each other and thus got the Chotia coal block allocated fraudulently and dishonestly from the Ministry of Coal. Hence, the said accused persons committed the offences punishable under section 120-B r/w 420 and 471 of IPC and substantive offences thereof. It is, therefore, most respectfully prayed that the above named accused persons, may kindly be summoned, tried and punished in accordance with law, in the interest of justice.

10. The Court notes that while the second charge sheet restricts itself to events which occurred up to 04 September 2003 only, the provisional order of attachment takes cognizance of acquisition of properties which occurred prior to as well as after the allocation of the coal block itself. It is in the aforesaid backdrop that petitioners have laid a challenge to the initiation of proceedings.

11. On 1 December 2021 the respondents passed the impugned provisional order of attachment. It was this order which was placed for confirmation before the Adjudicating Authority which issued notice calling upon the petitioners to submit their explanation.

CONTENTIONS

1. The Petitioners contended that the allocation of coal cannot be construed as being proceeds of crime since it clearly does not represent property which may be said to be derived or obtained as a result of criminal activity relating to a scheduled offence.

2. It was submitted that the allocation of coal in itself cannot possibly be understood as being proceeds of crime since it only conferred upon the petitioner the right to apply for the grant of a mining lease. It was submitted that the entire allegation levelled against PIL is of having obtained that allocation by way of misrepresentation and fraudulent conduct. According to Petitioner it was only monies and profits that may have been generated by the utilization of that allocation which could have possibly fallen within the scope of the expression―proceeds of crime as defined in Section 2(1) (u) of the Act.

3. Petitioner then submitted that the allocation of coal would also not fall within the ambit of Section 3 since that also proceeds on the basis of a party being involved in any process or activity connected with proceeds of crime and which process or activity may include the concealment, possession, acquisition or use of property along with conduct which may amount to projecting or claiming it to be untainted property.

4. Petitioner submitted that the allocation of coal was made by the Union Government and it cannot possibly be alleged that it was property which was concealed, possessed, acquired or used nor can it be alleged that the same was projected or claimed as untainted property.

5. It was submitted that the allocation of coal was made by a public act of a competent authority in the Union Government and existed as such till it was ultimately quashed and set aside in Manohar Lal Sharma. In view of the above, it was contended that the coal allocation cannot possibly be construed as falling within the contours of Section 3 and thus evidencing the commission of an offence of money laundering.

6. It was then submitted that it is only proceeds of crime that may have been obtained as a result of criminal activity and which is then utilized for acquisition of property which may be claimed or projected as untainted which can form the subject matter of proceedings under the Act.

7. According to the Petitioner, both on account of the fact that the allocation cannot amount to proceeds of crime and secondly since it would not fall within Section 3 of the Act, the impugned proceedings are rendered wholly without jurisdiction and are liable to be quashed.

8. Reverting then to the particular facts of the main writ petition, it was submitted that undisputedly the allocation of coal was made on 04 September 2003 and thus evidently at a time when neither the Act was in force nor an offence of money laundering in existence. It was pointed out that the Act itself came to be promulgated on 01 July 2005.

9. The Petitioners also drew the Court’s attention to the fact that Sections 120B and 420 of the Penal Code came to be included as scheduled offences only on 1 June 2009. According to the Petitioners bearing in mind the fact that the allocation of coal was made on 04 September 2003, the invocation of the provisions of the Act would clearly amount to violation of Article 20(1) of the Constitution.

10. As per Section 3 of the PMLA, any person who has directly or indirectly attempted to indulge or knowingly assisted or knowingly is a party or is involved in concealment, possession, acquisition or use or projecting as untainted property or claiming as untainted property shall be guilty of an offence.

11. If property purchased prior to commission of alleged offence or property not derived or obtained from commission of scheduled offence is declared as proceeds of crime, every person who is concerned with sale, purchase, possession or use of said property would be guilty of offence of money laundering.

12. A person who is not connected with commission of scheduled offence as well property derived from said offence but had dealt with any other property of a person, who had committed scheduled offence, would fall within the ambit of Section 3 of the PMLA, which cannot be countenanced in law.

Counter arguments from the Respondents:

1. The learned ASG submitted that merely because the predicate offence may have been committed prior to the enforcement of the Act that would not invalidate the proceedings initiated by the respondents. Mr. ASG drawing the attention of the Court to the written submissions submitted by the learned ASG in proceedings before the Supreme Court has contended that it is well settled that merely because a part of the requisite for action initiated under a statute is drawn from a point prior to the enforcement of the Act that does not make the Act retrospective. Learned ASG has referred to the decision of the U.S.

2. The learned ASG then drew the attention of the Court to the decision of the Supreme Court in Mohan Lal vs. State of Rajasthan. It was submitted that Article 20(1) of the Constitution of India cannot come to the aid of the petitioner since all that it prohibits is a conviction or sentence under an ex post facto law. On the basis of the submissions noticed and the principles enunciated in Mohan Lal, it was urged that the date of coming into force of the Act as well as the date of the predicate offences having been committed was irrelevant.

3. The learned ASG submitted that if a scheduled offence is committed even before the enactment of the Act or a particular offence as specified in the Penal Code comes to be added in the Schedule subsequently, that in itself cannot mean that the invocation of the penal provisions of the Act would amount to its retrospective application. It was submitted that the Act penalizes a 20 1925 SCC online US SC 42 21 (2015) 6 SCC 222 separate and distinct offence of money laundering and it is therefore this offence alone which would determine the validity of proceedings.

ISSUES

1. The Court bears in mind the language of Section 3 of the Act which links the activities and processes of money laundering to proceeds of crime. Section 2(1) (u) creates an indelible link between property derived or obtained and criminal activity relating to a scheduled offence.

2. It is only when it is found that a person has derived property as a result of criminal activity that the offence of money laundering can be said to have been committed.

3. Absent the element of criminal activity, the provisions of the Act itself would not be attracted.

4. The offence of money laundering is essentially aimed at depriving persons of the fruits and benefits that may have been derived or obtained from criminal activity. However, once it is found that a criminal offence M/S Prakash Industries Ltd. & Anr. Vs Directorate of Enforcement on 19 July, 2022 does not stand evidenced, the question of any property being derived or obtained therefrom or its confiscation or attachment would not arise at all and in any case, proceedings if initiated under the Act would be wholly without jurisdiction or authority.

5. It was argued by the learned ASG that acquittal of the person after trial of a scheduled office would not release the order of attachment under PMLA till the trial for an offence under Section 3 of the PMLA is completed.

6. This contention is based on an erroneous assumption that a trial for an offence of ―money laundering• under the PMLA would survive. One is hard pressed to 23 2014 SCC OnLine Del 4889 imagine how a trial for an offence of money laundering can continue where the fundamental basis – the commission of a schedule offence – in this case offence under Section 307 IPC – has been found to be disproved.

7. In view of the above, the contention that the Act is completely independent of the principal crime (scheduled offence) giving rise to proceeds of crime is unmerited.

8. In that view of the matter, the properties purchased before the commission of the offence, cannot fall within the definition of ―proceeds of crime and cannot be attached or confiscated under the Act. Consequently, the attachment and subsequent proceedings before the Adjudicating authority for confiscation of the properties in Table-I of the impugned order would be without jurisdiction and would have to be struck down.

9. Finally, this Court finds that the phrase ―value of such property does not mean and include any property which have no link direct or indirect with the property derived or obtained from commission of scheduled offence i.e., the alleged criminal activity.

WHETHER ALLOCATION OF COAL IS PROCEEDS OF CRIME

1) The allegations in the second charge sheet essentially are that the petitioners submitted false and forged documents in support of their application for allocation of the coal block, misrepresented facts pertaining to proceedings pending before the BIFR and thus fraudulently and dishonestly obtained the coal allocation.

2) As noted hereinbefore, the aforesaid charge sheet and the proceedings relating to the same form subject matter of challenge in Special Leave to Appeal (Crl.) Nos. 656-657/2022 in which by an order of 06 May 2022, further proceedings before the Trial Court have been stayed. The impugned proceedings emanate from the second charge sheet and relate to the provisional attachment of properties held by sister concerns and entities of PIL.

3) It becomes pertinent to highlight here that while the second charge sheet restricts itself to events which occurred up to 04 September 2003 when the coal block was allocated to PIL, the impugned show cause notices and the provisional attachment orders cover properties acquired prior to as well as post that date.

4) As noticed earlier, the allocation of coal block by the Central Government results in the selection of beneficiary which entitles the beneficiary to get the prospecting license and/or mining lease from the State Government. Obviously, allocation of a coal block amounts to grant of largesse.

5) The allocation letter, therefore, confers a valuable right in favour of the allottee. Obviously, therefore, such allocation has to meet the twin constitutional tests, one, the distribution of natural resources that vest in the State is to sub serve the common good and, two, and the allocation is not violative of Article 14.”

6) On a consideration of the procedure for allotment of coal blocks and their allotment, it is manifest that the allocation of a coal block cannot stricto sensu be construed either as property or conferment of a right in property.

7) It is the financial gains that may be derived and obtained or proceeds generated from such allocation which could be considered as falling within the net of Section 2(1) (u).

8) When viewed in that light, it is evident that the allocation per se cannot possibly be viewed or understood as representing proceeds of crime in itself. It is the illegal gains obtained and derived by the utilization of that allocation and the concealment or conversion of those gains into assets or properties which could possibly be understood as amounting to an act of money laundering.

9) J. IMPACT OF ALLOCATION NOT BEING PROCEEDS OF CRIME 89. The quintessential element of money laundering is the washing of criminal proceeds and its conversion into property as defined in Section 2(1) (v). For reasons set out hereinabove, the Court has come to the definite conclusion that the allocation would not constitute proceeds of crime. If therefore the scope of enquiry were to be restricted up to this point of the sequence of events alone [and as the Court is mandated to do in light of the scope of the second charge sheet], it is apparent that an allegation of money laundering would not be sustainable at all.

10) This since the allocation of the coal block only represented a permission to obtain rights to extract minerals. Its utilization thereafter, the extraction of coal, the generation of moneys, the investment of the same, the acquisition of properties are all actions which ensued thereafter and relate to the period post 04 September 2003.

11) The charge sheet which forms the bedrock of the impugned proceedings restricts itself to activities leading up to the allocation of the coal block alone. The Court also bears in mind the undisputed fact that the allocation came to be made on 04 September 2003. Till that time and date, no allegation of proceeds of crime having been obtained or generated is laid against the petitioners.

12) Para 90. In order to uphold the invocation of the Act resting on events leading up to the allocation of the coal block on 04 September 2003 and going no further, it was incumbent upon the respondents to M/S Prakash Industries Ltd. & Anr. Vs Directorate of Enforcement on 19 July, 2022 establishes that proceeds of crime came to be acquired or obtained on that date.

13) This they have woefully failed to do. As noted hereinabove, the gamut of allegations with respect to the generation of proceeds of crime relate to activities and events which ensued after 04 September 2003. That for reasons which stand recorded cannot be taken cognizance of for the purposes of evaluating the validity of proceedings under the Act.

14) Within the ambit of Section 2(1) (u). 91. That leads the Court to the irrefutable conclusion that once it is found that the allocation of coal would not fall within the scope of the definition of proceeds of crime, proceedings initiated based on a contrary assumption under the Act would also necessarily crumble and disintegrate. The aforesaid conclusion flows as a necessary sequitur to the Court finding that the allocation would not constitute “proceeds of crime”.

15) An allegation of money laundering is premised and dependent upon the commission of a criminal offense. Unless proceeds are found to have been derived or obtained from criminal activity, the question of money laundering would not arise. Money laundering, as noted above, is concerned with the commission of an offense which may have yielded revenues or profits and which are then concealed and conferred a sheath of legitimacy.

16) Once the charge of commission of a scheduled offense levelled against a person or entity stands annulled by virtue of a judicial declaration with the Court specifically holding that an offense could not be said to have been committed, it would be wholly impermissible to allege that the person or entity indulged in money laundering. The Court bears in mind the fact that the expression proceeds of crime has been defined under the Act itself as the acquisition of property and assets by any person as a result of ―criminal activity relating to a scheduled offense.

17) The initiation of proceedings under the Act is predicated on the commission of an offense finding mention in the Schedule. The Court is thus of the firm view that it would be wholly illogical and irrational to hold that an allegation of money laundering would survive in the absence of an allegation that a person committed an offense mentioned in the schedule to the Act. 96. If the charge of criminal activity ceases to exist in law, a charge of money laundering would neither sustain nor survive. This was the view which was expressed by a learned Judge of this Court in Rajiv Chanana and Gagandeep Singh.

18) On a cumulative consideration of the conclusions recorded in respect of Issues H, I and J hereinabove, the Court finds itself unable to uphold the validity of the impugned proceedings.

19) The Court has already found that the allocation would not fall within the ambit of the expression ―proceeds of crime as set forth in Section 2(1) (u). The sine qua non for Section 3 coming into play is the existence of proceeds of crime. The activity or process of money laundering which constitutes an essential element of the offense under Section 3 has an enduring and ineffaceable link to proceeds of crime.

20) Absent the commission of a criminal offense, the foundation of proceedings initiated under the Act would undoubtedly fall and self-destruct. Regard must be had to the fact that not every criminal activity falls within the ambit of Section 3. While criminal activity may represent or evidence the commission of a predicate offense under the Penal Code, it is only activity relating to the laundering of proceeds of crime which can form subject matter of proceedings under the Act.

21) However, once it is found that the allocation would not represent or fall within the scope of the expression proceeds of crime as defined under the Act, the question of money laundering would not arise at all. In view of the aforesaid, it cannot be said that Section 3 is attracted.

22) While the commission of a predicate offense may be a condition precedent for an allegation of money laundering being laid, it is the activities of money laundering alone which would determine the validity of proceedings initiated under the Act.

FINDINGS

1. We find that on the date the offence was committed or came to be known, one of the ingredients of the offence i.e. submission of charge-sheet and cognizance of offence of specified nature in more than one case within the preceding period of ten years, has not been satisfied. Therefore, we have no other option than to hold that the accused cannot be prosecuted for the offence under Section 3 of MCOCA.

2. An allocation of coal cannot possibly be viewed as amounting to proceeds of crime per se.

3. That document at best enabled the holder thereof to obtain a mining lease. Viewed in that backdrop it cannot be said that the allocation of coal is property as contemplated under the Act. It is pertinent to note that the Act essentially seeks to confiscate properties and assets that may be derived or obtained from criminal activity and which may then be concealed.

4. It is thus evident that it is only gains that may have been obtained by the utilization of the allocation which could have possibly been viewed as proceeds of crime. X. It is the gains that may be obtained from criminal activity which are concealed or projected to be untainted that can form the subject matter of the offense under the Act.

5. The allocation of a coal block in itself did not give rise to any monetary gains. It was only when the same was utilized that the question of illegal gains would have arisen. Y

COMMENT

1) The allegation is that the Petitioners have obtained the Coal Block allocation letter using misrepresentation of facts

2) The Court has observed that obviously, allocation of a coal block amounts to grant of largesse.

3) The allocation letter, therefore, confers a valuable right in favour of the allottee. Obviously, therefore, such allocation has to meet the twin constitutional tests, one, the distribution of natural resources that vest in the State is to sub serve the common good and, two, and the allocation is not violative of Article 14.”

4) The Court also confirms that on a consideration of the procedure for allotment of coal blocks and their allotment, it is manifest that the allocation of a coal block cannot stricto sensu be construed either as property or conferment of a right in property.

5) It further states that

a. The allocation cannot per se be recognized as representing proceeds of crime. It would be the subsequent and consequential utilization of that allocation, the working of the lease that may be granted, the generation of revenues from such operations and the investment of those wrongfully obtained monetary gains that can possibly give rise to an allegation of money laundering.

b. It is the financial gains that may be derived and obtained or proceeds generated from such allocation which could be considered as falling within the net of Section 2(1) (u).

6) When viewed in that light, it is evident that the allocation per se cannot possibly be viewed or understood as representing proceeds of crime in itself. It is the illegal gains obtained and derived by the utilization of that allocation and the concealment or conversion of those gains into assets or properties which could possibly be understood as amounting to an act of money laundering.

7) In order to uphold the invocation of the Act resting on events leading up to the allocation of the coal block on 04 September 2003 and going no further, it was incumbent upon the respondents to M/S Prakash Industries Ltd. & Anr. Vs Directorate of Enforcement on 19 July, 2022 establishes that proceeds of crime came to be acquired or obtained on that date.

8) This they have woefully failed to do. As noted hereinabove, the gamut of allegations with respect to the generation of proceeds of crime relate to activities and events which ensued after 04 September 2003. That for reasons which stand recorded cannot be taken cognizance of for the purposes of evaluating the validity of proceedings under the Act.

9) Within the ambit of Section 2(1) (u). 91. That leads the Court to the irrefutable conclusion that once it is found that the allocation of coal would not fall within the scope of the definition of proceeds of crime, proceedings initiated based on a contrary assumption under the Act would also necessarily crumble and disintegrate. The aforesaid conclusion flows as a necessary sequitur to the Court finding that the allocation would not constitute “proceeds of crime”.

10) It was submitted that the entire allegation levelled against PIL is of having obtained that allocation by way of misrepresentation and fraudulent conduct. According to Mr. Sibal it was only monies and profits that may have been generated by the utilization of that allocation which could have possibly fallen within the scope of the expression―proceeds of crime• as defined in Section 2(1)(u) of the Act.

11) Mr. Sibal for petitioners then submitted that the allocation of coal would also not fall within the ambit of Section 3 since that also proceeds on the basis of a party being involved in any process or activity connected with proceeds of crime and which process or activity may include the concealment, possession, acquisition or use of property along with conduct which may amount to projecting or claiming it to be unto

12) According to Mr. Sibal, the counsel for the Petitioners it was only monies and profits that may have been generated by the utilization of that allocation which could have possibly fallen within the scope of the expression―proceeds of crime• as defined in Section 2(1)(u) of the Act

13) The petitioner’s counsel himself confirms that earnings by using the allocation would constitute Proceeds of crime under Section 2(1) (u) of the PMLA.

14) But the Court has concluded that since the contention of the ED is only up to the date of allocation letter and not beyond, and that by mere allocation letter no property is created, the provisions of Section 3 would not apply.

15) But it is a chronology that allocation letter if obtained by fraudulent means, it will subsequently entitle the allottee the right to use the coal block for profits and subsequent creation of property using the profits.

16) It is not understood how the subsequent transactions could be excluded from coal block allocation and the activity of somehow getting the allocation by any means is not proceeds of crime under section 2 (1)(u)

17) In no place whether getting the coal block allocated using misrepresentation and fraudulent conduct. It was not even contested by the petitioners.

18) Their argument centered on the subsequent gains obtained by usage of the allocation which happens after the letter got allocated.

19) Court takes the position that since as on the date of coal allocation, no property gets created, the same shall not come within the definition of proceeds of crime under section 2(1)(u) of PMLA

20) Whether the practice of misrepresentation and fraud in getting the allocation letter not sufficient to invoke Section 3? – I have not understood 

Source:

1) W. P.(C) 14999/2021, CM Nos. 47329/2021, 553/2022, 10949/2022 M/S PRAKASH INDUSTRIES LTD. & ANR.

2) Section 2(1)(u) of PMLA

3) Section 3 of PMLA

4) Schedule to the PMLA which defines Schedule and Predicate offences

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