J. SEKAR @ SEKAR REDDY vs. DIRECTORATE OF ENFORCEMENT

REPORTABLE IN THE SUPREME COURT OF INDIA  CRIMINAL APPELLATE JURISDICTION CRIMINAL APPEAL NO. 738   OF 2022 (Arising out of Special Leave Petition (Crl.) No. 8305 of 2021) J.Sekar @Sekar Reddy                                           …Appellant Versus Directorate of Enforcement                                  ...Respondent J U D G M E N T       Leave granted. 2. This  appeal   arises   out   of   the  judgment  dated 04.02.2021 passed by the Division Bench of the High Court of Madras in Crl. O.P. No. 24200 of 2017 which was filed for quashing of  the proceedings in C.C. No. 2 of 2017. The High Court, while dismissing the petition under Section 482 of the Criminal Procedure Code (for short ‘Cr.P.C.’) inter­alia rejected the argument  of the appellant that the FIR with respect to Signature Not Verified Digitally signed by Rachna Date: 2022.05.06 16:49:56 IST Reason: schedule offence was closed for want of evidence and in absence of connected evidence with a crime of schedule 1 offence, the prosecution for offences under Sections 3 & 4 of the Prevention of Money Laundering Act, 2002 (for short “PMLA”) is unsustainable. It is also held that though the commission   of   schedule   offence   is   a   fundamental   pre­ condition for initiating the proceedings but the offence of money laundering is independent of the schedule offence because the PMLA deals with the process or activity with respect  to  the   proceeds   of   crime   including   concealment, possession, acquisition or use, however in the light of the explanation of Section 44(1) of PMLA, the argument of the appellant was repelled.  The High  Court further held that if any observation has come in the bail application, having no material to connect with the commission of any offence, would not be enough to quash the proceedings.  The Court relied   upon   the   seizure   made   by   the   I.T.   Department including  that of the currency notes of denomination of Rs. 2000   in   the   context   that   the   currency   notes   of denomination of Rs. 500 and Rs. 1000  ceased to be legal tender   by   order   of   the   Government   at   the   time   of demonetization and the people were in queue to exchange 2 those old currency notes for new ones.   As the seizure of currency notes of Rs. 33 crores in the denomination of Rs. 2000   was   made,   therefore,   the   closure   report   made   by Central Bureau Investigation (in short ‘CBI’)  in schedule offence cannot be relied upon. 2. Briefly,   the   facts   relevant   for   the   purpose   of   the appeal   are   that   the   appellant   J.   Sekar   Reddy   is   the Managing   Partner   of   M/s   SRS   Mining   which   is   a partnership firm engaged in sand mining since 2013 and he had deposited Rs 312.64 Crores in three bank accounts of the firm. On 08.12.2016 and 09.12.2016, the Income Tax Department,   Chennai   (for   short   “I.T.   Department”) conducted search in the official/commercial premises of the appellant   and   others   and   seized   currency   amounting   to Rs.106,98,89,800/­   and   128.495   kg   of   gold   (valued   at Rs.36,72,07,311). 3. Thereafter, from 08.12.2016 to 12.12.2016, appellant joined inquiry before the IT Department   about the seizure of currency notes and gold .   Subsequently on 19.12.2016, the CBI registered RC 40(A) 2016/CBI/ACB/CHENNAI for 3 offences   under   Sections   120­B   r/w   409,   420   of   Indian Penal Code (in short ‘IPC’) and Section 13(2), r/w 13(1)(c) and 13(1)(d) of the Prevention of Corruption Act,1988 (in short ‘PC Act’) against the appellant and two others.   4. The Enforcement Directorate after perusing the FIR of the CBI felt that in addition to the scheduled offences, the   provisions   under   Sections   2(1)(x)   and   2(1)(y)   of   the PMLA would attract, however registered the offence at ECIR No. 19 of 2016 dated 19.12.2016 against the appellant and others. The respondent had enquired and conducted the investigation and, recorded the statement of the appellant and others and found new currency notes of denomination of   Rs.2,000/­   of   a   total   value   of   Rs.33,74,92,000/   in   a subsequent search on the official and commercial premises of the appellant.  5. In   the   meantime,   the   CBI   had   filed   the   custody petition   which   was   dismissed   by   the   Special  Court  vide order dated 30.12.2016 .   The CBI had also registered two FIRs being Crime No. RC MA1 2016 A0051 at 1500 hrs. and RC MA1 2016 A0052 at 1510 hrs on 30.12.2016 by a 4 margin of ten minutes time.   The appellant filed the bail application   in  RC   MA1   2016   A0040   and   RC   MA1   2016 A0051 before the Principal Special Judge for CBI Cases, Chennai.     The   Special   Court,   by   order   dated   17.3.2017 granted bail to the appellant imposing certain conditions. 6. Subsequently,   Deputy   Director   (ED),   Chennai   in ECIR   CEZO/19/2016   passed   an   order   for   provisional attachment in exercise of the power under Section 5(1) of PMLA for a specified period of one month.  On submitting the complaint OC No. 785 of 2017 before the Adjudicating Authority   for   confirmation   of   the   order   of   provisional attachment,  it refused to confirm the order of attachment and dismissed the same.   In the order, the Adjudicating Authority stated that the description of the bank or bank officers is not on record.  In absence of any identification, who   were   the   bank   officers   who   converted   the denomination of old currency notes into new and that too from which bank, there was no material with the Deputy Director for making a reasonable belief for change of old into   new   currency   notes   through   the   bank   officers   and 5 observed that the said allegation is based on speculations, which are not legally tenable. 7. It is relevant to note that RCMA1 2016 A0051 and RCMA1 2016 A0052 were challenged by the appellant as well as other co­accused before the Madras High Court by filing Crl. O.P. Nos. 24200 and 24202 of 2017 invoking the power under Section 482 Cr.P.C., which were decided by a common order dated 27.6.2018 and the High Court in para 32 quashed the RC MA1 2016 A0051 and RC MA1 2016 A0052 against the appellant and other co­accused giving liberty to the CBI to treat the allegations made in FIRs as supplementary allegations or to merge the same in first FIR RC MA1 2016 A0040. 8 It is most relevant to note that CBI after investigation in the main case in RC MA1 2016 A0040 submitted the closure report before the Additional Sessions Judge, CBI Court, Chennai in exercise of power under Section 173(2) Cr.P.C.     The   said   report   was   accepted   vide   order   dated 25.9.2020 with an observation that for lack of sufficient evidence, nothing incriminating is found which may surface 6 on the part of accused persons.  Therefore, from the above facts, it is clear that the CBI registered three cases out of which in the main case RC MA1 2016 A0040, the final closure   report   was   submitted   by   CBI   itself   which   was accepted by the Court and in remaining two cases bearing Nos.  RC MA1 2016 A0051 and RC MA1 2016 A0052, the High   Court   quashed   the   FIRs   with   respect   to   schedule offence. 9 So   far   as   the   investigation   made   by   the   I.T. Department on the basis of search is concerned, the same is closed.   The appellant sought information from the I.T. Department   vide   communication   dated   11.5.2019.     In respect to the same, the I.T. Department vide letter dated 16.5.2019 provided the details of seizure made by it  from the appellant.  It is apparent that the new currency notes of denomination  of  Rs.   2000   belonged  to  M/s  SRS  Mining which is recorded in its cash book.  Those currency notes seized are from the proceeds of the sand sales by M/s SRS Mining.  The details of the tax,  paid before or  after self­ assessment   for   Financial   Year   2016­17   satisfied     the 7 Authority that money so seized was accounted money or tax paid. 10. The   appellant   contending   all   the   above   facts, approached   the   High   Court   of   Madras   invoking   the jurisdiction under Section 482 Cr.P.C. seeking quashment of the proceedings related to PMLA case and prayed for the following reliefs : (i) To stay all further proceedings in CC No. 2 of 2017 on the file of the Hon’ble Principal Sessions Court, Chennai pending disposal of the above criminal original petition. (ii) To call for the records in CC No. 2 of 2017 on the file of the Hon’ble Principal Sessions Court, Chennai and quash the same and pass such further other order, orders as deemed fit and proper in the circumstances of the case and thus render justice. By the impugned order dated 4.2.2021, the High Court of Madras dismissed the said petition. 11.  We  have   heard   Shri   Vikram   Chaudhari,   learned Senior   Counsel   for   the   appellant   and   Shri   S.V.   Raju, learned   Additional   Solicitor   General   on   behalf   of   the respondent. 8 12 Learned senior counsel for the appellant urged that for   invocation   of   PMLA,   pre­existing   occurrence   of   the scheduled offence is required because the proceeds of crime are essential property derived from criminal activity of the said offence.    The  Adjudicating  Authority dealt with  the order of the Deputy Director (ED) and for lack of evidence refused   to   pass   an   order   for   attachment.       As   per   the material   available   on   record,   the   offence   of   money laundering specified in Section 2(1)(p) and also in Section 3 of PMLA is not made out.   It is further urged that as per Section 8(1) of PMLA, a show cause notice may be issued regarding   the   attached   property   if   the   said   Authority   is having reason to believe that any person has committed an offence under Section 3 or is in possession of proceeds of crime.     The   adjudication   proceedings   and   criminal proceedings are independent to each other but the material for commission of offence recorded by the authorities in those proceedings may be a relevant factor, in particular when for lack of evidence, the Authority itself is satisfied that   the   attachment   of   the   proceedings   in   PMLA   case 9 cannot  be  continued.   Reliance has  been placed on the judgments   of   this   Court   in   Radheshyam   Kejriwal   Vs. State   of   West   Bengal   (2011)3SCC   581   and   Ashoo Surendranath   Tewari   vs.   Deputy   Superintendent   of Police, EOW, CBI and Another  (2020) 9 SCC 636. 13. On   the   other   hand,   Shri   S.V.   Raju,   learned Additional   Solicitor   General  on   behalf   of   the   respondent contends   that   the   order   passed   by   the   Adjudicating Authority under Section 5(5) PMLA is subject to the appeal which is pending before the Appellate Authority.  Therefore, the   order   of   the   Adjudicating   Authority   and   the   finding recorded therein are not sufficient to quash the proceedings in the present case.   Learned ASG is not in a position to controvert the arguments on merits as advanced by the learned senior counsel for the appellant. 14. After having heard learned  counsels and on perusal of the material available on record, it is clear that the I.T. Department   made   search     in     the   official/commercial premises   of   the   appellant   and   other   connected   persons. Later,   I.T.   Department     vide   communication     dated 10 16.5.2019 which was issued  in response to the letter of the appellant dated 13.5.2019   was   satisfied that the cash which   was   recovered   from   the   officials/commercial premises of the appellant is explained and  tax was paid in the self­assessment for the Financial Year 2016­17 .     The said letter is reproduced as thus : “GOVERNMENT OF INDIA OFFICE OF THE JOINT DIRECTOR OF INCOME-TAX(INV)(OSD) UNIT-2(1), nd Room No. 223, 2 Floor, Income Tax Investigation Wing, M G Road Nungambakkam, Chennai-600 034. Telefax : 044-28253651 Kg.arunraj@incometax.gov.in UNIT2(1)/2019-20 16.05.2019 To: The Managing Partner M/s SRS Mining 317, Elite Empire G-12, Valluvarkottam High Road Nungambakkam Chennai-34 Sir, Sub: Search in the case of M/s SRS Mining and others-request to provide information-Reg Ref: Your letter dated 01.05.2019 received in this office on 13.05.2019 Please refer to the above. 2. The details requested by you are given below point wise:- (i) The date of initiation of search action in the case of M/s SRS Mining and others is 08.12.2016. This office didn’t refer the case to the CBI and the CBI suo-moto initiated proceedings after news of seizure of huge amount of new Rs 2000 notes emerged. (ii) The seized cash and gold belong to M/s SRS Mining, a partnership firm whose partners are Shri S. Ramachandran, Shri K.Rethinam and Shri J.Sekar (iii) From the residence of Shri J.Sekar cash of Rs. 12,00,000/- in old currencies was seized (iv) The details of seizure of new currencies of Rs. 2000 notes made in the various premises are given below:-

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The new currencies belong to M/s SRS Mining and they were recorded in the parallel cash book of M/s SRS Mining. (v) As per the seized documents, the source of new currencies seized is from proceeds of sand sales by M/s SRS Mining. (vi) The details of prepaid tax paid by SRS Mining before the search action are given below:-

Post Search, M/s SRS Mining has paid Rs. 22,00,00,000/- towards self- assessment tax for AY 2017-18 relevant to FY 2016-17. Yours faithfully (K G ARUNRAJ IRS) Joint Director of Income Tax (Inv.) (OSD) Unit 2 (1), Chennai” Therefore, the proceedings started on the basis of intriguing recovery of cash and other items in fact, does not exist and the I.T. Department itself was satisfied with the recovery 12 after investigation in the year 2019.  Therefore, the finding recorded   in   the   impugned   order   by   the   High   Court     in paragraph   14   with   regard   to     recovery   of   new   currency notes   of   denomination   of   Rs.   2000   cannot   be countenanced. 15. Reverting to the issue of registration of the main FIR by the CBI bearing No. RC MA1 2016 A0040 and thereafter two other cases  RC MA1 2016 A0051 and RC MA1 2016 A0052 are based upon the information furnished by the I.T. Department.   As discussed above, the cases bearing Nos. RC MA1 2016 A0051 and RC MA1 2016 A0052 have been quashed   by   the   High   Court   vide   order   dated   27.6.2018 passed in Criminal O.P. No. No. 409 of 2017. Thereafter in the   main   FIR   RC   MA1   2016   A0040,   CBI   submitted   its closure report. The said closure report has been accepted by the Court in exercise of the power under Section 173(2) Cr.P.C. on 25.9.2020.     The relevant extracts of   closure report find mention in the court order is  reproduced thus: “ The   Inspector   of   Police,   CBI,   ACB,   Chennai   has submitted   a   final   report   through   Senior   Public Prosecutor, CBI, praying an order to close the FIR pending before this court in RC MA1 2016 A 0040 13 U/s 120­B r/w 409, 420 IPC and Sec. 13(2) r/w 13 (1) (c) (d) of PC Act, 1989 ……………    ­­   ­­      ­­           ­­     ­­           ­­      ­­ 3.   This   court   perused   all   the   relevant   records including the FIR, Statement recorded under Section 161   of   Cr.P.C.,   the   documents   collected   during investigation, by the Investigating Officer and   in the final report it is submitted that this court may be pleased to accept this Closure Report under Section­ 173(2) of Cr.P.C. and may drop the action against A1 to   A6   for   lack   of   sufficient   Evidence.   There   was nothing incriminating surfaced on the part of accused persons, as these accused 1 to 6 had in conspiracy with   unknown   bank   officials   and   public   servants cheated the Government of India. 4.   The evidence on record is not adequate to launch prosecutable   case   against   the   accused   persons beyond   reasonable   doubt   to   establish   that   they fraudulently converted the unauthorised cash held by them in old currency notes in to NHD, thereby depriving the public, in enforcing their right and thus the accused 1 to 6 had in conspiracy with unknown bank   officials   and   public   servants   cheated   the Government of India. ­­   ­­      ­­           ­­     ­­           ­­      ­­ 6.       The   investigation   has   not   established   the allegations levelled against A1 to A6. On the basis of statement   of   witnesses   of   LW1   to   170   and documents   D1   to   D879   and   M.O.I   to   8   collected during   the   investigation,   there   is   no   sufficient evidence to launch prosecution against the accused 1 to 6 persons, for the offences of Criminal Conspiracy, Cheating, Criminal misconduct. 7.     As per the oral and documentary evidence, the allegations in the FIR to the effect that the accused persons  have  caused  wrongful  loss to   the  Government of India to the tune of approximately 247.13   Crores   and   obtaining   corresponding wrongful   gain   to   themselves,   is   not substantiated   with   prosecutable   evidence. Hence   the   final   report   has   been   filed   for recommending closure of the case. 8.       …..Hence   this   court   is   convinced   and satisfied to accept the prayer of closure of the case….. 14 9.   …..The reasons submitted by the prosecution for   closure   of   F.I.R.   in   the   absence   of   any evidence is acceptable.” Thus,   it   is   clear   that   the   FIR   with   respect   to   schedule offence registered by the CBI with respect to proceeds of the crime including property attached has been closed. 16. On   the   basis   of   the   intimation   given   by   the   I.T. Department and registration of the FIR by the CBI which was     closed,   the   Directorate   of   ED   registered ECIR/CEZO/19/2016 under Sections 3, 4 & 8(5) of PMLA . After the said FIR, Deputy Director (ED) passed an order under   Section   5(1)   of   PMLA   on   1.6.2017   attaching   the property.   For confirmation of attachment, OC No. 785 of 2017 was filed by the Department which is rejected by the Adjudicating  Authority  while  exercising the  power under  Section 5(5) of PMLA.  The Adjudicating Authority observed as thus: “ It is pertinent to note that about two years have lapsed since passing of the said bail order dated 17.03.2017, and   over   two   years   have   passed   after   filing   of   FIR, however   till   date   no   Final   Report   is   filed   by   the concerned   Investigating   Officer   investigating   the scheduled offences. Most material is the fact that so far no bank or bank officers are identified, either by the 15 officer investigating the schedule offences or even the Enforcement   Directorate,   Chennai.   In   view   of   the absence   of   any   bank   or   bank   officers   having   been identified, it was necessary for the Deputy Director to consider the absence and/ or non­identification of any bank or bank officers. Nothing is adduced or available on record as to which banks and which bank officers are   involved,   who   have   unauthorizedly   converted demonetized   old   currency   into   new   currency.   The reasonable belief as is formed by the Deputy Director reveals that the vital aspect concerning the fact that no such bank or bank officers are existing or found is not considered   by   the   Deputy   Director   at   all.   The Reasonable   Belief   is   thus   impaired.   The   Reasonable Belief formed by the Deputy Director inter alia is that the accused persons have laundered their unaccounted money in conspiring with the bank officials of various banks   who   helped   them   laundering   the   unaccounted money. There is nothing on record which reveals the name of even single bank, much less, the various banks as stated by the Deputy Director. Similarly not a single bank official is identified or named and there is nothing on record which reveals any such detail. Consequently the   Reasonable   Belief   becomes   baseless   and   is   mere speculation of the Deputy Director. Such a belief can not be justified and sustained. The aspect concerning non­identification and/ or non­availability of any bank and bank officials, goes to the root of the formation of the entire Reasonable Belief. The Additional Director/ Joint Director/ Deputy Director ought to have directed the Enforcement Directorate Officers to investigate or cause to be investigated the aspect concerning the bank or   bank   officers.   The   Deputy   Director   ought   to   have deliberated on the issue and proceeded, which is not done.   In   the   absence   of   such   basic   material   the Reasonable Belief entertained by  the Deputy Director specifically   forming   the   Reasonable   Belief   that   the accused   laundered   their   unaccounted   money   in conspiring with the bank officials of various banks who helped them in laundering the unaccounted money, can not be legally tenable. The Reasonable Belief of the Deputy Director  further upon it’s analysis indicates that the Deputy Director has entertained the Reasonable Belief as stated in para 21, 26 & 27 of the Provisional Attachment Order, only in respect   of   a   part   of   the   seized   amount   of   Rs. 16 334792000/­, without specifying as to what quantum and   as   to   what   part   of   the   seized   amount   of   Rs. 334792000/­   in   the   form   of   movable   properties   is related to the schedule offences. The formation of the Reasonable Belief only for part of the   seized   amount   and   yet   proceeding   to   attach   the entire   seized   amount   vitiates   the   entire   Reasonable Belief   and   renders   it   as   illegal.   It   is   seen   from   the Reasonable Belief that such an exercise was not carried out by the Deputy Director. The   reasonable   belief   formed   by   the   Deputy   Director that the new currency, which were seized by the Income Tax Authorities are nothing but the currency received in lieu   of   exchange   of   old   currency   notes   (demonetized currency)   inclusive   of   commission   for   such   exchange received by S/ Shri J. Sekar Reddy, M. Premkumar, S. Srinivaslu, S. Ramachandran & K. Rethinam, is neither based on any specified material nor is justified.  It   is   therefore,   concluded   that   the   reasonable   belief formed by the Deputy Director in this regard cannot be sustained,   the   same   having   been   not   based   on   any specifically material and the same is merely surmises, conjectures and speculation.  Considering the material in O.C., the written replies/ additional written reply/ submissions of the Defendants and   the   arguments   above   referred,   I   find   that   the property   provisionally   attached   by   PAO   No.   14/2017 dated 12.06.2017, i.e. 49,480 kgs of gold valued of Rs. 13,96,88,246 mentioned in para 22 of PAO(para 1 of this order) is not involved in money laundering. ” 17. In the said sequel of facts, the legal position emerges by   the   judgment   of     (supra)   is Radheshyam   Kejriwal relevant in which this Court has culled out the ratio of the various other decisions pertaining to the issue involved and has observed as thus: 17

18

Court   relied   upon   the   judgment   of   Radheyshyam   (supra) and set­aside the judgment of the High Kejriwal Court while exonerating the appellants because the chance of conviction in a criminal case in the  same facts appeared to be bleak. 18. In   view   of   the   aforesaid   legal   position   and   on analysing the report of I.T. Department and the reasoning given by CBI while submitting the final closure report in RC MA1 2016 A0040 and the order passed by the Adjudicating Authority, it is clear that for proceeds of crime, as defined under Section 2(1)(u) of PMLA, the property seized would be 19 relevant and its possession with recovery and claim thereto must   be   innocent.       In   the   present   case,   the   schedule offence has not been made out because of lack of evidence. The   Adjudicating   Authority,   at   the   time   of   refusing   to continue the order of attachment under PMLA, was of the opinion that the record regarding banks and its officials who may be involved, is not on record.  Therefore, for lack of identity of the source of collected money, it could not  be reasonably believed by the Deputy Director (ED) that the unaccounted money is connected with the commission of offence under PMLA.  Simultaneously, the letter of the I.T. Department   dated   16.5.2019   and     the   details     as mentioned, makes it clear that for the currency seized, the tax is already paid, therefore, it is not the quantum  earned and used for money laundering.   In our opinion, even in cases of PMLA, the Court cannot proceed on the basis of preponderance   of   probabilities.     On   perusal   of   the statement of Objects and Reasons specified in PMLA, it is the stringent law brought by Parliament to check money laundering.  Thus,   the allegation must be proved beyond 20 reasonable   doubt   in   the   Court.   Even   otherwise,   it   is incumbent upon the Court to look into the allegation and the material collected in support thereto and to find out whether the prima facie offence is made out.   Unless the allegations are substantiated by the authorities and proved against a person in the court of law, the person is innocent. In   the   said   backdrop,   the   ratio   of   the   judgment   of   (supra) in paragraph 38 (vi) and Radheshyam Kejriwal (vii)  aptly applicable in the facts of the present case.  19. As discussed above, looking to the facts of this case, it is clear by a detailed order of acceptance of the closure report of the schedule offence in RC MA1 2016 A0040 and the   quashment   of   two   FIRs   by   the   High   Court   of   the schedule offence and of the letter dated 16.5.2019 of I.T. Department   and   also   the   observations   made   by   the Adjudicating Authority in the order dated 25.2.2019, the evidence of continuation of offence in ECR CEZO 19/2016 is not sufficient. The Department itself is unable to collect any incriminating material and also not produced before this Court even after a lapse of 5 ½ years to prove its case 21 beyond reasonable doubt.   From the material collected by the Agency, they themselves are prima facie not satisfied that   the   offence   under   PMLA   can   be   proved   beyond reasonable  doubt.     The  argument  advanced by  learned ASG regarding pendency of the appeal against the order of Adjudicating Authority is also of no help because against the   order   of   the   Appellate   Authority   also,   remedies   are available.     Thus,   looking   to   the   facts   as   discussed hereinabove and the ratio of the judgments of this Court in  (supra) and  Radheshyam Kejriwal Ashoo Surendranath Tewari  (supra), the chance to prove the allegations even for the purpose of provisions of PMLA in the Court are bleak. Therefore,  we are of the firm opinion that the chances to prove those allegations in the Court are very bleak. It is trite to say,   till the allegations are proved, the appellant would be innocent. The High Court by the  impugned order has recorded the finding without due consideration of the letter of the I.T. Department and other material in right perspective.  Therefore, in our view, these findings  of the High Court cannot be sustained.  22 20. Accordingly, we set­aside the impugned order passed by the High Court.   Consequently, this appeal is allowed. ECR CEZO 19/2016 including Complaint bearing No. 2 of 2017 stands quashed.  ………………………….J. [ VINEET SARAN ] ……………………………J. NEW DELHI ; [ J.K. MAHESHWARI ] MAY 5, 2022. 23