Deputy Director Vs Sovereign International Hotels & Ors. (Appellate Tribunal under SAFEMA, New Delhi)
Independent Income and Disclosure in Accounts Do Not Defeat PMLA Attachment When the Money Trail Links the Property to Project Fund
Background of the Dispute
The Enforcement Directorate challenged an order of the Adjudicating Authority declining to confirm attachment of approximately 5.81 acres of land at Ooty, valued at ₹6,97,50,000.
The proceedings arose from allegations concerning the Sovereign Unnathi housing project in Bengaluru, developed by M/s. Sovereign Developers and Infrastructure Ltd. Several homebuyers complained of false promises, failure to deliver flats within the agreed period and demands for additional payments.
FIRs and charge-sheets included allegations under provisions concerning cheating and criminal conspiracy, constituting scheduled offences under the Prevention of Money Laundering Act, 2002. The ED initiated an investigation and provisionally attached the Ooty property.
The Adjudicating Authority declined to confirm the attachment by its order dated 11 January 2021. The Tribunal reversed that decision and allowed the ED’s appeal.
ED Alleged Diversion of Homebuyers’ Project Funds
The ED’s case was that substantial amounts collected from prospective homebuyers were maintained in an escrow account with Karnataka Bank for the Sovereign Unnathi project.
According to the Department, analysis of bank transactions and statements recorded under section 50 of PMLA showed that project funds were utilised for purposes other than construction and development, including acquisition of the Ooty property.
The ED relied particularly on statements of Prakaash Kumar Singh and Deepakk Kumar Singh, who managed the developer’s affairs. Their statements addressed the project accounts, banking arrangements and acquisition of the Ooty land.
The Department contended that the cumulative material established a connection between the attached property and funds generated from the project.
Respondents Relied on Independent Funds and Accounting Disclosure
The respondents argued that only approximately ₹1.06 crore of the purchase consideration had been paid from the Karnataka Bank project account. The remaining consideration, they submitted, came from accounts maintained with State Bank of India and HDFC Bank.
They also maintained that the developer had substantial capital and income from an independent contracting business. Consequently, every amount lying in the project account could not automatically be treated as homebuyers’ money or project borrowing.
Further, the investment had been disclosed in the company’s financial statements, and information concerning it had been furnished to the Income Tax Department in response to a notice under section 133(6).
The respondents also attributed the project’s difficulties to cost escalation, regulatory restrictions and disruption of cash flows. They submitted that substantial expenditure had already been incurred on construction and denied diversion of funds.
FIRs Alone Do Not Make Every Asset Proceeds of Crime
The Tribunal recognised an important limitation: registration of FIRs and filing of charge-sheets do not, by themselves, establish that every asset of an accused or its company constitutes proceeds of crime.
The specific property must be connected, through cogent material, with proceeds generated from criminal activity relating to a scheduled offence, or represent the value of such proceeds.
However, the Tribunal found that the ED’s case went beyond the existence of criminal proceedings. The bank-account analysis and section 50 statements, considered together, disclosed movement of project funds towards acquisition of the Ooty property.
Mixed Funding Did Not Automatically Remove the Alleged Taint
The Tribunal rejected the proposition that payment of only part of the consideration from the project account necessarily placed the property outside PMLA.
It held that the source of funds and their intermingling had to be examined through the complete money trail, rather than by viewing individual payments in isolation.
Referring to section 2(1)(u) and the Supreme Court’s decision in Vijay Madanlal Choudhary v. Union of India, the Tribunal emphasised that proceeds of crime include property obtained directly or indirectly from criminal activity relating to a scheduled offence, as well as the value of such property.
Once a prima facie trail connected project funds with the acquisition, the mere existence of other income sources did not automatically sever that nexus.
Financial Statements and Tax Disclosure Were Not Conclusive
The Tribunal also rejected reliance on disclosure of the property in the financial statements and the Income Tax Department’s awareness of the investment.
Such disclosure did not answer the separate question of whether the funds used for acquisition represented proceeds of crime.
The Tribunal found that the ED possessed sufficient material to support its reasons to believe under section 5(1). It held that the Adjudicating Authority had inadequately considered the cumulative effect of the bank transactions, statements and connection with the project funds.
Accordingly, the ED’s appeal was allowed, the impugned order was set aside, and the Tribunal held that a case for confirmation of attachment under section 8 had been established. This was an attachment decision, not a final criminal conviction for money laundering.
Author’s Comments
Disclosure establishes that an investment was reported; it does not establish that its funding was lawful. Accounting recognition and income-tax correspondence therefore cannot independently resolve a PMLA source-of-funds dispute.
Equally important is the Tribunal’s acknowledgment that criminal allegations do not contaminate every asset automatically. The Department must establish a connection with the particular property sought to be attached.
For businesses maintaining accounts containing several sources of funds, a general assertion of sufficient capital may be inadequate when transaction-level evidence points towards project receipts. The defence requires a clear reconciliation of fund origins, transfers and acquisition payments.
The mixed-funding conclusion should remain tied to the evidence in this case. The Tribunal examined the cumulative trail at the attachment stage; the order should not be presented as a universal rule that any payment from a disputed account conclusively establishes money laundering.
Cases Discussed
- Vijay Madanlal Choudhary v. Union of India [(2022) SCC OnLine 929]
FULL TEXT OF THE ORDER OF APPELLATE TRIBUNAL UNDER SAFEMA
This Order disposes of the Appeal No. FPA-PMLA-3949/BNG/ 2021 filed by The Deputy Director, Directorate of Enforcement, Bengaluru, against the Order dated 11.01.2021 (Impugned Order) passed by the Ld. Adjudicating Authority (AA) under the Prevention of Money Laundering Act, 2002 (PMLA) in the Original Complaint No. 1233/2019 (OC). The Provisional Attachment Order bearing No. 09/2019 dated 28.11.2019 (PAO) with respect to the property viz 5.81-1/8 Acres of land in R.S. No. 251/1B, New RS No. 657/2 and RS No. 251/1A, New RS No. 657/4 situated at Ootacamund (Ooty) Village, Doddabetta Panchayat, Nilgiris District, Tamilnadu valued at Rs.6,97,50,000/-, issued in ECIR No. ECIR/BGZO/ 08/2016 dated 27.06.2016 was not confirmed vide the Impugned Order.
2. Ld. Counsel for the Appellant Department submitted that on the basis of a complaint received from one Shri Srivatsava K, the FIR vide Crime No: 465/2013 dated 19.10.2013 was registered at Ramamurthy Nagar Police Station against Shri Prakaash Kumar Singh and Shri Deepakk Kumar Singh and others. The charge sheet was filed by Ramamurthy Nagar Police Station in CC No: 9848/15 in February 2015 in the IV-ACMM Bengaluru, Nrupathunga Road, Bengaluru under Sections 120(B), 406, 420 and 34 of IPC 1860 along with the relevant provisions of Karnataka Ownership Flats (Regulation of the Promotion of Construction, Sale, Management and Transfer) Act, 1972, against Shri Deepakk Kumar Singh and Shri. Prakaash Kumar Singh and others. These two persons were managers of the Company M/s. Sovereign Developers and Infrastructure Limited (SDIL). Two more FIRs both dated 09.06.2015 were registered against Shri. Deepakk Kumar Singh and Shri Prakaash Kumar Singh, and others at Ramamurthy Nagar Police Station based on the complaint filed by Lt. Col. Sudhir Kumar Chakravarthy and his son Shri Shubhir Kumar Chakravarthy. The charge sheets were filed by Ramamurthy Nagar Police Station in CC No:19893/2017 and CC No. 19894/2017 in the IV- ACMM Bengaluru, Nrupathunga Road, Bengaluru under Sections 120(B), 406, 420, 421 and 34 of IPC 1860 along with the relevant provisions of Karnataka Ownership Flats (Regulation of the Promotion of Construction, Sale, Management and Transfer) Act, 1972. Subsequently, FIRs dated 01.03.2016 under Section 406 of IPC, 1860 based on the Complaint filed by Shri Pramod T was filed. Yet another FIR in Crime No. 732/2016 dated 31.12.2016 under Sections 406, 420 r/w 120(B) of IPC, 1860 was registered at Ramamurthy Nagar Police Station based on the Complaint filed by S/Shri Rachith Garg, T. Gajendra kumar, Amjadulla Khan, Rajnish Kumar, Krishnan P, Vishal Poonater and Gaurav Maheshewari.
3. Ld. Counsel for the Appellant Department submitted that as per the charge sheet Special CC No.9848/15 in Crime No. 465/2013 dated 19.10.2013, Shri Prakaash Kumar Singh of SDIL signed an agreement for joint development of project called Sovereign Unnathi located at Survey No.586, Kalkere Village, K. R. Puram Hobli, Bengaluru East with one Shri. K. S. Munihanumiah and six others (S/Shri K. M. Kalappa, K M Muthappa, K M Krishnamurthy, K M Vasudevamurthy, K M Patalappa and K M Kanakaraj) who were the owners of the said land. On 02.09.2009, Shri Prakaash Kumar Singh of SDIL signed an agreement with above said owners of the land and with two other parties/entities namely Krishil Capital Holdings Pvt. Ltd., represented by its Directors Shri K.R.Choudhary and Shri. R. Ramesh for Joint Development of a Project called Sovereign Unnathi in the survey no. 586 located at Kalkere Village, K.R.Puram Hobli, Bengaluru East.
4. Ld. Counsel for the Appellant Department pleaded that as per the advertisements of M/s. SDIL in various newspapers and web portals in the year 2010, the buyers could buy the BBMP approved, pre-launch flat at a base price of Rs.14 Lakhs only. A few customers enquired about the same and collected information from corporate office of M/s. SDIL. Later on, accused took interested customers to the proposed project place and showed them a model flat which was already built. They explained to those customers that only 30% of the land would be utilized to build flats and the rest would be used for Garden, Swimming Pool, Gym, Recreation Club, Super Market, a Bank branch etc., along with other basic amenities. They also promised the buyers that construction would be completed within 2 years’ time. One of the Customers believed their words and decided to buy the flat no: C5-05-2 and entered into the sale deed on 28.03.2011. As per the sale deed, SDIL should have completed the project by May 2013, but instead they sent Notices to 1000 odd buyers demanding Rs. 7 to 8 Lakhs more money towards additional expenditure/cost giving the reason that the rise in prices of cement, sand, TMT, construction materials and labour charges etc., occurred. From the investigation it has been confirmed that accused Shri Deepakk Kumar Singh and Shri Prakaash Kumar Singh made false promises and collected Rs. 14 Lakhs each from hundreds of flat buyers and made sale agreements with them, but failed to handover the flats within the stipulated period. Ld. Counsel for the Appellant submitted that furthermore, the Respondents over and above demanded more money from the buyers and not paid relevant taxes, fees, charges to the related departments, from the collected amount. The offences mentioned in the FIR were scheduled offence as defined under Section 2 (1) (x) & (y) of PMLA.
5. Ld. Counsel for the Appellant Department submitted that based on the FIRs registered in Crime No. 465/2013 dated 19.10.2013, in Crime No. 325/2015 and 326/2015 both dated 09.06.2015, in Crime No. 126/2016 dated 01.03.2016 and Crime No. 732/2016 dated 31.12.2019 and charge sheet in CC No. 9848/15 in Crime No. 465/2013, CC No. 19893/2017 in Crime No. 326/2015 and CC No. 19894/2017 in Crime No. 325/2015, the offences under Sections 120(B) and 420 of IPC 1860 were registered by Ramamurthy Nagar Police Station, Bengaluru, which are schedule Offences as defined in Sections 2(1) (x) and 2(1) (y) of PMLA. Hence, the Directorate of Enforcement recorded an Enforcement Case Information Report (ECIR) vide No. ECIR/BGZO/08/2016 dated 27.06.2016 and initiated the investigation under PMLA. Ld. Counsel for the Appellant submitted that statement under Section 50 of PMLA of Shri Prakaash Kumar Singh recorded on 22.12.2017, reveals that before starting his own projects under name and style of M/s Sovereign Developers & Infrastructure Ltd., he was working as a Contractor in L & T, B.G. Shirke, and Shapoorjee Palonji. He started a Company by name M/s Sovereign Developers & Infrastructure Ltd. in the year 1996 and M/s Sovereign Homes around 2010-11. M/s Sovereign Developers & Infrastructure Ltd. was engaged in the activity of land development & construction. He had started M/s Sovereign Homes with the purpose of construction of buildings, but presently this entity is closed. He was the Proprietor of M/s Sovereign International Hotel situated in Ooty. He purchased the land measuring about 6 Acres for about Rs. 6.97 Crore. He further stated that Shri Deepakk Kumar (elder brother) and Shri. Satyabrat Singh (his father) are the shareholders in the Company. He and his brother were holding 50% of the shares each and his father is holding One share in the entity. He and his brother are the authorized signatories of M/s SDIL. He further stated that they started one company by name M/s Sovereign Homes Pvt. Ltd. during the year 2012 registered with Registrar of Companies, Bengaluru. He and his brother Shri Deepakk Kumar were Directors of the Company. They were planning to start one new project under this Company. However, the Company did not take up any business activity and no Bank account was opened. The said Company was therefore dissolved. In 1999, he started one entity by name M/s Eagle Sanitation & Company which was a partnership firm, with his brother as another partner. When they started M/s. Sovereign Developer & Infrastructure Ltd. in the year 2006, they stopped the business activity of M/s Eagle Sanitation & Company. This entity had been engaged in the activity of plumbing contractor.
6. Ld. Counsel for the Appellant Department submitted that Shri Prakaash Kumar Singh on being enquired about the properties furnished the immovable property details as listed below:
- Ancestral – One ancestral residential house which is in the name of his mother, located at C/o Satyabrat Singh, in front of MIT, 1st gate, Lakshmi Chowk, District: Muzaffarpur, Bihar.
- Personal – There is one property which is jointly held with his brother Shri Deepakk Kumar situated at Doddabetta in Ooty measuring 6 acres of land. This land was purchased in the year 2012 for an amount of about Rs. 6 Crores registered with Sub Registrar Office, Ooty, Tamilnadu.
Shri Prakaash Kumar Singh further stated that about 1000 cases have been registered against M/s. Sovereign Developer & Infrastructure Ltd. in various courts and fora. Presently about 200 cases are still pending. Further, summons dated 13.11.2018 was issued to Shri. Prakaash Kumar Singh, under Section 50(2) of PMLA to appear on 29.11.2018, but he failed to appear. Shri Prakaash Kumar Singh’s statement was recorded as deposed under Section 50(3) of PMLA on 29.01.2019. Ld. Counsel for the Appellant submitted that Shri Deepakk Kumar Singh’s statement was recorded under Section 50(3) of PMLA on 13.12.2017. He stated that he possesses one personal property which is in joint name, with his brother Shri Prakaash Kumar Singh, situated at Doddabetta in Ooty. This land was purchased in the year 2012 for an amount of about Rs. 8 Crores registered with Sub Registrar Office, Ooty, in contrast to the statement of Shri Prakaash Kumar Singh that the property costed them Rs. 6 Crores. Shri Deepakk Kumar Singh, stated that various cases were registered against M/s SDIL in various courts and fora. Further, summons dated 16.08.2018 was issued to Shri. Deepakk Kumar, under Section 50 of PMLA. Further Shri. Deepakk Kumar’s statement was recorded under Section 50 of PMLA on 11.09.2018. Shri. Deepakk Kumar in his voluntary statement tendered on 11.09.2018 stated that 5 criminal cases were filed at Ramamurthy Nagar Police Station against Company M/s. SDIL and it’s Directors. He stated that no other bank loan was availed. Out of Rs.25 crores loan sanctioned from the Karnataka Bank, as on date Rs.17 crore was disbursed by the Karnataka Bank and Rs.17 crores was invested on the Unnathi project and subsequently Rs. 2.5 Crores was also disbursed but adjusted in the loan account as repayment. In 2014, Karnataka Bank declared this account as NPA and in March 2016, Karnataka Bank assigned the loan as per SARFAESI Act to Phoenix ARC (promoted by Kotak Mahindra Bank). Phoenix Asset Reconstruction Company (ARC) had given Rs.5 Crores Loan against the office property in June 2016. Up to March 2016, total principal and interest due with respect to SDIL was Rs.26.8 Crores and this was accepted by them. The funds were invested in project Unnathi which was routed through the two escrow accounts maintained with Karnataka Bank and one escrow account which was opened with Phoenix Asset Reconstruction Company after the closure of two escrow accounts maintained with Karnataka bank. He stated that on 12.09.2018, the project Sovereign Unnathi at site no. 511 & 586 Horamavu Kalkeri main road, opposite BP petrol pump, Horamavu Post, Bengaluru measuring 12.5 acres had three phases comprising of 1584 flats. He paid Rs. 3 Crores to the land owner of which Rs.50 lakhs was paid vide IDBI account, Malleswaram branch in 2009 and remaining Rs. 2.5 Crores was paid from the project Unnathi fund. The required funds for the project were collected from the prospective buyers and bank loans. One parcel of land was purchased in the year 2012 for an amount of Rs.8 Crores and registered with Sub-Registrar Office, in joint name of Shri Prakaash Kumar Singh and Shri. Deepakk Kumar. The entire amount of Rs. 8 Crore required for the purchase of the vacant land was paid from the ESCROW account.
7. Ld. Counsel for the Appellant Department submitted that during the investigation, it was seen that many allegations or complaints were made against the Company and against the persons for tax evasion such as Service tax, VAT etc. Bank related violations viz violation of mandatory RBI guidelines, the issue of NOC, mortgage from a bank, loan to SDIL were also noticed. There were cases filed in the Economic Offence Court Bangalore for Company related violations. It was also found that SDIL did not file the statutory audited balance sheet with ROC Bengaluru for the years 2012-13, 2013-14 and 2014-15. Shri Prakaash Kumar Singh’s written statement given under Section 50(3) of PMLA on 22.12.2017 revealed that many cases had been registered against M/s. Sovereign Developer & Infrastructure Ltd in various courts and presently about 200 cases are pending.
8. Ld. Counsel for the Appellant Department submitted that Shri. T. Gajendra Kumar, in his statement which was recorded under Section 50 of PMLA on 21.06.2019, stated that till date they did not hand over the property to the complainant and also alleged that M/s SDIL had availed a loan of Rs. 25 crores towards the Project in May, 2010 with subject project as primary or collateral security. This was not made known to the prospective buyers during the sale agreement. Furthermore, the sale agreement specifically mentioned that the project was free from any encumbrances. Shri B. K. Nageswar one of the prospective buyers in the project Sovereign Unnathi in his statement which was recorded under PMLA on 06.11.2019 informed that 36 Apartments of the project Unnathi were transferred to Shri K. M. Muthappa by the erstwhile Board of Directors of SDIL. The same was not reflected in simple mortgage, which was made and executed on 13.05.2010 at Bengaluru and was also not shown in rectification deed made and executed on 03.07.2010 at Bengaluru among 7 land owners and SDIL. Further, it was also learnt that NCLT had passed an order dated 14.06.2019 to initiate Corporate Insolvency Resolution Process (CIRP) proceedings under IBC to safe guard the interest of the home buyers. It was also learnt that Karnataka State Consumer Dispute and Redressal Commission, Bengaluru (KSCDRC) had issued an order in September 2019. Shri Deepakk Kumar had been put under judicial custody for not obeying of KSCDRC order of handing over the flats to the home buyers with all necessary permissions where ever required and return the amount to those who opted for it. Ld. counsel for the Appellant Department further submitted that based on the interconnected transaction and analysis of bank account it was established that the diversion of funds from the respondents ESCROW account held with Karnataka Bank to other bank account to purchase the property attached in the said PAO occurred. In the Joint Development Agreement (JDA) terms and conditions there was no provision incorporated to pay any amount in future by the SDIL to any of the seven signatories of the JDA. On the perusal of the ESCROW account No. 09420001001640001 maintained with Karnataka Bank, Bengaluru in which prospective home buyers of the Sovereign Unnathi project had deposited the money in that account, it was noticed that from that account, money was paid specifically to S/Shri K M Muthappa, R. Ramesh and K. R. Choudary and his Company, Krishil Capital Holding Pvt. Ltd. Ld. Counsel for the Appellant submitted that on 19.02.2013, Karnataka bank made a dispersal of Rs. 2.5 Crore from the loan account on the same day. The said amount of Rs. 2.5 Crore was deposited by SDIL back to the same account. As per the sanction letter, loan was given for the development of Unnathi Project only. Hence, the Company had also diverted project loan money which was taken from the Karnataka Bank for specific purpose of construction of Unnathi Project but the same loan amount was used towards repayment of the same loan and in fact, Karnataka Bank in its letter dated 30.01.2014 admitted that loan money was indeed used towards repayment of the loan for the convenience of its borrowers. Ld. Counsel prays for allowing the Appeal.
9. Ld. Counsel for the Respondents submitted that on 02.08.2012, the Directors of SDIL purchased land in Ooty, Tamil Nadu for a sale consideration of Rs. 6,97,50,000/- (Rs. 6 Crore, Ninety-Seven Lakh, Fifty-Seven Thousand) as per the sale deed dated 01.08.2012. From the details of the demand drafts, it was clear that only a sum of Rs. 1,06,60,000/- (Rs. one crore six lacs sixty thousand) was paid from Karnataka Bank, operated for the Project Sovereign Unnathi. In this account, Karnataka Bank had deposited the disbursed loan amount and the amount collected from prospective buyers. Out of the total consideration of Rs. 6,97,00,000/- only a sum of Rs. 1,06,60,000/- was from the account of Karnataka Bank. Rest of the payment of Rs. 5,90,50,000/- (Rs. Five Crore Ninety Lacs Fifty Thousand) was made from the account of the State Bank of India and HDFC. Ld. Counsel for the Respondents submitted that the SDIL had disclosed such investment as partner capital in the financials of the Company under non-current assets. This has also been shown in the balance sheet of the Company as investment of a partner, in Sovereign International Hotel. In the audited balance sheet of SDIL for financial year 2015-16, in the section notes to the Balance Sheet it is shown under point no. 8. The Income Tax Department had also issued a notice dated 06.01.2015 related to this investment in immovable property. The tax department had asked for several information under Section 133 (6) of the Income Tax Act, 1961. This was replied by SDIL on 06.04.2015. The reply to Income Tax Department clarified the details of investment made in SDIL. Ld. Counsel for the Respondents submitted that from the details of the payment made for purchase of the property at Ooty in Tamil Nadu, it is clear that only a sum of Rs. 1,06,50,000/- was paid from the account of Karnataka Bank maintained for the project of Unnathi of SDIL. The Flat-buyers who made police complaint as well as the IO of the Appellant department were under false impression that every penny lying in the Karnataka Bank was either of the loan amount sanctioned for the project or the amount was collected from the customers. They overlooked the fact that the Company started the project with huge funds. Every one overlooked the fact that when SDIL started the Unnathi Project, its own capital was Rs. 14.45 Crore, as per the Balance-sheet of financial year 2009-10. Before starting the Unnathi project, the Company was a reputed contractor for the civil work of government and non- government organizations. Apart from the Unnathi project the Company was executing other contract work up to 2013 and had generated gross revenue of Rs. 39.74 Crore, during the FY 2010-11, FY 2011-12, FY 2012-13 and even if 20% profit is taken, this would add about Rs. 7.94 Crore to the capital net worth of the SDIL Company. This amount had nothing to do with the collections from the customers of the Unnathi project. This clearly showed and was rightly appreciated by the Ld. AA that the Company had its own capital partly from contract income of about Rs. 21.39 Crore, before buying the alleged property. The amount withdrawn from the Escrow account of Karnataka Bank is in fact nothing but a withdrawal of the own funds of the company. From the balance sheet/account statement of the SDIL, it was clear that after withdrawal of the fund from the account in Karnataka Bank, the capital investment of the SDIL Company in the Unnathi project reduced from about Rs. 21.39 Cr. to Rs. 13.72 Cr. It is important to note that SDIL was incorporated in 2006 and the bank account was opened in 2010. The total receipt from the contractor business in the year ending 2008 was approx. Rs.28 Crore and in the year 2009 was of Rs.32 Crore.
10. Ld. Counsel for the Respondents submitted that the project Sovereign Unnathi started in 2009 with own funds. It received all the approvals for Project from the competent authorities before launching the project in market for sale of the flats. The structure present on the site of the project shows that more than 90% of the construction work had been completed. From the balance sheet, it was clear that SDIL had invested in project more than what was collected from the customers. The problem started when the new regulations of the State Government and the order of National Green Tribunal (NGT) stopped the construction work. This led to irregular payment of instalment to Bank and finally the Bank declared the project as NPA. Ld. Counsel for the Respondents submitted that an important aspect for consideration here is that the customer who lodged FIR against the Respondents were not looking at the whole project standing at the site or the investment made by the SDIL. They filed the various Complaints as counterblast to the additional demand raised by the Company. They were aggrieved due to delay in handing over the possession. In fact, the customers ought to have considered that SDIL had offered flats at the base price which was minimum i.e. Rs.14 lacs. They ought to have considered that the company was left with no choice but to raise an additional demand. Admittedly there was steep rise in the labour cost due to revision of minimum wages by the Karnataka Government and there was scarcity of building material which led to rise in the cost of construction. Ld. Counsel for the Respondents submitted that the SDIL had already spent Rs. 240 Crore on the project Unnathi whereas the total collection from the customer was Rs. 196 Cr. This was Rs.44 Crore more than what was collected from customers. An independent agency M/s Civil Aid calculated and reported the cost escalation of Unnathi Project on the basis of CPWD rate and found that the cost of project had escalated from Rs. 220 Crore to Rs.330 Crore. In the background of these facts, it can be safely concluded that there was no diversion of fund as alleged by the customers and accepted by the present Complaint. Ld. Counsel for the Respondents submitted that out of 1200 customers, only a handful of customers went against the Company and filed Complaints before Police, Consumer Court, IT Department, Finance Ministry, Banks and other institutions including media. They worked against the interest of 1200 flat buyers. These customers were working at the behest of other builders and for ulterior motive. M/s SDIL tried to provide the flat at very low cost in comparison to other builders. These few customers protested all out against the additional demand and refused to pay causing disruption in cash flow and leading to project being declared NPA by Bank. Later on, this additional demand was recognized by the Hon’ble Karnataka State Consumer Dispute Redressal Commission, Bangalore.
11. Ld. Counsel for the Respondents submitted that because there was no perversity in the order dated 11.01.2021 passed by Ld. AA, it was very much within its power to decline the prayer of Complainant to confirm the provisional attachment as the same was not sustainable on fact or in law. Ld. Counsel for the Respondents submitted that Ld. AA had correctly found that the offence of money laundering had not taken place, or property was not involved in money laundering and so he released the property, as per Section 8 (6) of PMLA. The alleged acts of commission and omission imputed on Respondents cannot come within the ambit of Section 3 of PMLA. The Respondents have either directly or indirectly not attempted to indulge or knowingly assisted or knowingly is a party or is involved in concealment, possession, acquisition of any proceeds of crime. Ld. Counsel for the Respondents submitted that there was nothing on record to show that the defendants were projecting the attached property as untainted property. The attached property had been acquired by the Respondents from their hard-earned money. There is no direct or indirect connection with scheduled offence. Ld. Counsel for the Respondent pleaded for dismissing the Appeal.
12. We have carefully considered the submissions advanced by the Ld. Counsels for the parties, the material available on record and the findings recorded by the Ld. Adjudicating Authority. The principal issue which arises for consideration is whether the property provisionally attached by the Respondent can be said to constitute direct or indirect “proceeds of crime” or the “value thereof” within the meaning of Section 2(1)(u) of the PMLA. In the present case, there is no dispute that several FIRs were registered against M/s Sovereign Developers & Infrastructure Ltd. and its Directors alleging cheating, criminal breach of trust and related offences in connection with the Sovereign Unnathi project. However, the mere registration of FIRs and filing of charge-sheets cannot, by themselves, establish that every asset of the accused or of the Company constitutes proceeds of crime. The essential question remains whether the specific property attached in the present proceedings has been shown, by cogent material, to have been acquired from or to represent the value of the proceeds generated from the scheduled offence. The material placed before us shows that the property at Ooty was purchased in the year 2012 for approximately Rs.6.97 crore. The Appellant Department has substantially relied upon certain payments emanating from the Karnataka Bank account/escrow account associated with the Sovereign Unnathi project. It is not in dispute that several FIRs and charge-sheets were registered against M/s Sovereign Developers & Infrastructure Ltd. and its directors for offences including Sections 406, 420 and 120-B IPC in relation to the Sovereign Unnathi project. The offences constitute scheduled offences under the PMLA. The material further shows that substantial amounts were collected from prospective home-buyers for the project and were maintained through the escrow account with Karnataka Bank. The investigation conducted by the Department revealed that funds from the said escrow account, which was maintained for the Sovereign Unnathi project, were utilised for purposes other than the construction and development of the project. The statements recorded under Section 50 of the PMLA and the bank-account analysis, read together, disclose the movement of project funds towards acquisition of other assets, including the Ooty property.
13. The contention of the Respondents that only a part of the consideration for the Ooty property was paid from the Karnataka Bank account cannot, at this stage, remove the taint from the property under purview of the PMLA. The concept of proceeds of crime under Section 2(1)(u) includes property derived or obtained, directly or indirectly, from criminal activity relating to a scheduled offence as well as the value of such property. The source of the funds and the manner in which these were intermingled with other funds are matters to be appreciated by looking at the complete web of money trail and not by merely examining individual transactions in isolation. In this regard the judgement of the Hon’ble Supreme Court, in the matter of Vijay Madanlal Choudhary v. Union of India [(2022) SCC OnLine 929] reiterated that the property which is not only derived or obtained directly, but also indirectly, as a result of criminal activity relating to a scheduled offence can be regarded as proceeds of crime. Relevant paragraph of the Judgement Vijay Madanlal Choudhary (Supra) is reproduced below:
“65. As aforesaid, in this backdrop the amendment Act 2 of 2013 came into being. Considering the purport of the amended provisions and the experience of implementing/ enforcement agencies, further changes became necessary to strengthen the mechanism regarding prevention of money- laundering. It is not right in assuming that the attachment of property (provisional) under the second proviso, as amended, has no link with the scheduled offence. Inasmuch as section 5(1) envisages that such an action can be initiated only on the basis of material in possession of the authorised officer indicative of any person being in possession of proceeds of crime. The precondition for being proceeds of crime is that the property has been derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence. The sweep of section 5(1) is not limited to the accused named in the criminal activity relating to a scheduled offence. It would apply to any person (not necessarily being accused in the scheduled offence), if he is involved in any process or activity connected with the proceeds of crime. Such a person besides facing the consequence of provisional attachment order, may end up in being named as accused in the complaint to be filed by the authorised officer concerning offence under section 3 of the 2002 Act.”
The amplitude of the definition of the ‘proceeds of crime’ under Section 2(1) (u) of PMLA is very wide. The words like ‘indirect’ and ‘value thereof’ inserted in the Section is to limit the scope of layering of the ‘proceeds of crime’ and succeed in doing the money laundering. The statements of Shri Prakaash Kumar Singh and Shri Deepakk Kumar Singh recorded under Section 50 of the PMLA are admissible. The statements disclose that funds for the Sovereign Unnathi project were maintained in escrow accounts and that the Ooty property was purchased during the period when the project funds were being received and utilised. The admission regarding utilisation of the escrow funds, coupled with the bank- account analysis, constitutes relevant material connecting the property with the proceeds generated from the project. The Respondents have not disputed the existence of substantial independent business activities. The Appellant has placed reliance upon the audited financial statements. Thus, we find that the Appellant Directorate had enough reasons to believe under Section 5 (1) of PMLA. Once the Appellant Department has demonstrated a prima facie trail showing utilisation of funds originating from the project account towards acquisition of the property, the mere availability of other sources of income cannot automatically sever the nexus. The argument that the property was reflected in the financial statements or that the Income Tax Department was aware of the investment does not undermine the findings that the funds utilised for its acquisition constituted the direct proceeds of crime under the PMLA.
14. In view of the foregoing discussion, we are of the considered opinion that the Ld. Adjudicating Authority erred in appreciating the material available on record and in releasing the property without properly and adequately considering the cumulative effect of the bank transactions, the statements under Section 50 of PMLA and the close nexus between the acquisition of the Ooty property and the funds generated exclusively for Unnathi Project. The Department has therefore made out a case for confirmation of the attachment under Section 8 of the PMLA.
15. In view of the aforementioned discussions and analysis, we allow the Appeal No. FPA-PMLA-3949/BNG/2021 filed by the Deputy Director, Directorate of Enforcement, Bengaluru. We therefore set aside the Impugned Order. Applications pending, if any, stand disposed of accordingly.
