Banks cannot unilaterally freeze customer accounts on mere suspicion without formal complaints or orders from competent authorities.

The Petitioner, a sole proprietorship engaged in the fisheries machinery business, maintained a current account with the Indian Overseas Bank (Respondent Bank).

On January 16, 2026, ₹23 lakhs was credited to the account via RTGS from a Mrs. Anita for a business transaction, and the Petitioner withdrew ₹5 lakhs.

On January 20, 2026, the Bank orally informed the Petitioner that the account was frozen due to "suspicious transactions," citing that the credit amount exceeded the Petitioner’s declared annual income.

The Bank later claimed the freeze was based on an email from the Bank of Maharashtra alleging "suspicious activity" in Mrs. Anita’s account, though no police complaint, FIR, or court order existed.

The Petitioner sought a writ for de-freezing the account.

1. Whether a bank has the legal authority to unilaterally freeze a customer's account solely on the suspicion that the credited amount exceeds the declared annual income or based on informal queries from other banks.

2. Whether Section 12(2) or Section 12AA of the Prevention of Money Laundering Act (PMLA), 2002 empowers a reporting entity to freeze a bank account on its own volition.

3. Whether the Bank’s action violated the Petitioner’s fundamental rights under Articles 19(1)(g) and 21 of the Constitution of India.

The Court applied Section 12 and 12AA of the PMLA, 2002, noting that these provisions mandate record-keeping and "enhanced due diligence" but do not authorize banks to freeze accounts; such power resides with competent authorities under Section 17 of the PMLA.

It relied on the RBI Circular dated July 2, 2012, which explicitly instructs banks not to restrict operations in accounts even where Suspicious Transaction Reports (STR) are filed.

The Court followed the precedent in OPTO Circuits (India) Ltd. v. Axis Bank (2021) 6 SCC 707, holding that freezing accounts cannot be done casually.

Khalsa Medical Store v. RBI (2026), established that police/authorities must follow strict procedural safeguards under Section 106 of the BNSS before freezing accounts.

Section 171 of the Contract Act, 1872, stating a bank can only freeze an account on its own volition if it exercises a valid lien.

The Court observed that the Respondent Bank acted as an "Investigating agency" rather than a trustee of the depositor's funds.

It found the "suspicion" regarding declared income versus actual credit to be legally baseless, as no regulation bars credits exceeding declared income.

The Bank's reliance on Section 12(2) of the PMLA was deemed "misconceived" and "illegal," as that section pertains to confidentiality of records, not account freezing.

The Court further noted that even if the Bank suspected money laundering, Section 12AA only allows for aborting a "specified transaction," not a blanket freeze of the entire account.

Crucially, the Court highlighted the Bank's mala fides: the Bank of Maharashtra (the source bank) had not even frozen the account of the alleged fraudster, Mrs. Anita, yet the Respondent Bank froze the Petitioner's account without any FIR or judicial order.

This unilateral action was held to be a "serious breach of trust" and a violation of the right to livelihood.

The Court allowed the writ petition and issued a Mandamus directing the Respondent Bank to de-freeze the Petitioner’s account forthwith.

Finding the Bank’s action "vexatious and actuated with mala fides," the Court imposed a cost of ₹50,000/- on the Indian Overseas Bank to be paid to the Petitioner as compensation for financial and reputational damage.