PMLA Section 3 & 4 | Prima Facie Case for Money Laundering Established Despite Loan Defense: Jharkhand HC

The Jharkhand High Court has affirmed that the mere assertion of legitimate financial transactions, such as loans or business payments, does not negate a prima facie case of money laundering under the Prevention of Money Laundering Act, 2002, when the prosecution presents a structured financial trail linking proceeds of crime to layered transactions.

Background & Facts

The Dispute

The petitioner, Hitesh V. Shah, proprietor of M/s Shiv Machine Tools, Chennai, is accused of involvement in a money laundering scheme connected to a criminal conspiracy to secure contracts in public sector tenders through illegal gratification paid to Upendra Nath Mandal, a public servant employed with MECON India Ltd., Ranchi. The alleged offense stems from the manipulation of tenders for the Bokaro Steel Plant Cold Rolling Mill (CRM-III) and Durgapur Steel Plant projects, where Mandal, as Senior Manager, allegedly favored M/s Shiv Machine Tools and M/s Zeal India Chemicals in exchange for bribes.

Key Facts

• The CBI registered FIR RC 08(A)/17-R on 30.10.2017 against Mandal, Ajay Jalan (of Zeal India Chemicals), and Hitesh V. Shah under Section 120B IPC read with Sections 7 and 12 of the Prevention of Corruption Act, 1988.
• A charge sheet (No. 14 of 2020) was filed on 27.11.2020, followed by a supplementary charge sheet on 28.04.2021 against Mintu Naskar.
• The scheduled offenses under the Prevention of Corruption Act triggered investigation under the Prevention of Money Laundering Act, 2002 (PMLA).
• An ECIR (ECIR/RNZO/04/2021) was recorded on 28.03.2021 and later numbered as ECIR Case No. 07 of 2023.
• The prosecution alleges that Shah paid Rs. 94.42 lakhs as illegal gratification to Mandal.
• Rs. 70 lakhs of this amount was routed through Mintu Naskar, proprietor of M/s Naskar Ceramics, under the guise of an advance payment for heavy machinery (Pelletiser Machine, Die Face Cutter, Twin Screw Extruder) purchased on 07.04.2016.
• The invoice (No. NCC/12) supporting this transaction was backdated to 14.12.2016 - five days after the CBI registered its Preliminary Enquiry on 09.12.2016.
• M/s Naskar Ceramics, a tile manufacturer with an annual turnover below Rs. 20 lakhs, had no prior or subsequent business dealings with M/s Shiv Machine Tools and lacked production capacity for the machinery allegedly sold.
• Rs. 4,14,000 was deposited in cash into the account of Smt. Binny Kumari on Mandal’s instructions.
• Shah claims the payments to Naskar and to relatives of Mandal (Smt. Sova Gayen, Shri Manabendra Nath Mandal) were loans for medical and educational purposes, repaid in cash.
• Shah produced no cash book, travel records, or documentary proof of repayment, despite multiple opportunities.
• Two blank security cheques (SBI Nos. 482758 & 482759) signed by Manabendra Nath Mandal were seized during a CBI search on 31.10.2017.
• The repayment of Rs. 12.895 lakhs occurred before the CBI’s Preliminary Enquiry (09.12.2016), and Rs. 3.5 lakhs before the FIR (30.10.2017).
• Statements under Section 50 of the PMLA were recorded from Shah, Naskar, and others.

Procedural History

• 30.10.2017: FIR registered by CBI-ACB, Ranchi.
• 27.11.2020: CBI Charge Sheet No. 14 of 2020 filed.
• 28.04.2021: Supplementary Charge Sheet filed against Mintu Naskar.
• 28.03.2021: ECIR recorded under PMLA.
• 23.11.2023: Special Judge, PMLA, Ranchi, took cognizance of offense under Section 3 read with Section 4 of PMLA.
• 11.10.2023: Prosecution Complaint filed.
• 06.08.2025: Special Judge rejected discharge petition under Section 227 CrPC.
• 25.03.2026: Special Judge framed charges against Shah under Section 3 of PMLA.
• 29.04.2026: Criminal Revisions No. 214 of 2026 and No. 440 of 2026 heard together.
• 13.05.2026: Judgment pronounced by the Jharkhand High Court.

The Parties' Positions

For the Petitioner

• Shah is not a public servant and had no direct contact with Mandal.
• The Rs. 70 lakhs paid to Mintu Naskar was for genuine machinery purchase, supported by purchase order and invoice.
• Payments to relatives of Mandal were loans, repaid in cash before any investigation.
• Absence of travel records or cash books does not prove money laundering.
• The CBI’s investigation is flawed; no overpricing or irregularity in tender process was established.
• The CIMFR report cited by ED is irrelevant to steel industry machinery.
• The ED relied on assumptions, not concrete evidence.

For the Respondent (ED)

• Shah was the generator and layerer of proceeds of crime amounting to Rs. 94.42 lakhs.
• The Rs. 70 lakh transaction with Naskar was a sham: backdated invoice, no business capacity, no prior dealings.
• Cash deposits of Rs. 4,14,000 into Binny Kumari’s account were made on Mandal’s instructions.
• Loans to relatives were a cover to disguise bribe payments.
• Shah failed to discharge burden under Section 24 of PMLA.
• Bank trails, statements under Section 50, and timing of transactions establish a clear laundering pattern.

Relief Sought

The petitioner sought quashing of the orders dated 06.08.2025 (discharge rejected) and 25.03.2026 (charges framed), and a direction to discharge him on the ground that no prima facie case existed under Section 3 of the PMLA.

The Legal Issue

The central question was whether the material on record, including bank transactions, backdated invoices, and statements under Section 50 of the PMLA, established a prima facie case under Section 3 of the Prevention of Money Laundering Act, 2002, sufficient to justify framing of charges, despite the petitioner’s claims of legitimate loans and business transactions.

Arguments Presented

For the Appellant/Petitioner

The petitioner’s counsel contended that the prosecution failed to establish any direct link between Shah and proceeds of crime. He emphasized that the Rs. 70 lakh payment to Mintu Naskar was for genuine machinery, supported by purchase order and invoice, and that the alleged loans to Mandal’s relatives were repaid before the CBI’s Preliminary Enquiry. He argued that the absence of travel records or cash books could not be treated as proof of criminal intent. He relied on State of Tamil Nadu v. N. Suresh Rajan and State of Rajasthan v. Ashok Kumar Kashyap to assert that at the discharge stage, the court must not conduct a mini-trial or weigh evidence. He further contended that the ED’s reliance on Section 50 statements was misplaced, as they were not admissible as evidence under the CrPC, and that the entire prosecution was based on surmises and assumptions.

For the Respondent/State

The ED’s counsel argued that the financial trail was unambiguous: Rs. 94.42 lakhs were generated as illegal gratification and layered through fabricated invoices and proxy accounts. The backdating of Invoice No. NCC/12 to 14.12.2016 - after the CBI’s Preliminary Enquiry - demonstrated deliberate concealment. The transaction with Naskar Ceramics was implausible given the entity’s business profile. The cash deposits and loan repayments were structured to avoid detection. The ED relied on Vijay Madanlal Choudhary v. Union of India and Rohit Tandon v. Directorate of Enforcement to assert that Section 50 statements are admissible and form part of the evidentiary record. It was submitted that the Special Judge correctly applied the test of grave suspicion and that the High Court must not interfere unless there was a patent legal error.

The Court's Analysis

The Court undertook a detailed review of the statutory framework under the Prevention of Money Laundering Act, 2002, particularly Sections 2(1)(u), 3, and 4, and the definition of “proceeds of crime” as clarified by the Supreme Court in Vijay Madanlal Choudhary. It emphasized that proceeds of crime include not only property directly derived from a scheduled offense but also any property indirectly obtained as a result of criminal activity relating to such offense.

The Court examined the legal standards for discharge under Section 227 CrPC and framing of charge under Section 228 CrPC, reaffirming that at this stage, the court must assume the prosecution’s materials to be true and determine only whether there is a prima facie case or grave suspicion warranting trial. It cited State of Tamil Nadu v. N. Suresh Rajan, M.E. Shivalingamurthy v. CBI, and Pradeep Nirankarnath Sharma v. Directorate of Enforcement to underscore that the court must not engage in a mini-trial, weigh probabilities, or evaluate the credibility of the accused’s explanations.

The Court noted that the prosecution’s case rested on a documented financial trail: Rs. 70 lakhs routed through a non-manufacturer with no prior business ties, a backdated invoice, and unexplained cash deposits. The timing of the invoice - five days after the CBI’s Preliminary Enquiry - was deemed indicative of fabrication. The so-called “loans” to relatives, repaid in cash without supporting records, were viewed as a mechanism to conceal the origin of funds.

"The alleged deliberate use of formal financial instruments and fabricated documentation to disguise illicit origins underscores conscious involvement in the laundering process and squarely attracts the mischief contemplated under Section 3 of the PMLA."

The Court held that Section 50 statements under the PMLA are admissible as evidence, as confirmed by Rohit Tandon and Abhishek Banerjee, and are not subject to the restrictions of Section 162 CrPC. These statements corroborated the documentary evidence and were not the sole basis for the prosecution.

The Court further rejected the petitioner’s jurisdictional challenge, holding that since the scheduled offense (corruption) was committed in Ranchi and the money laundering acts (layering, projection) were connected to the same location, the Special Court at Ranchi had territorial jurisdiction. The Court emphasized that money laundering is a continuing offense, and the location of the predicate offense suffices for jurisdiction.

The Court concluded that the Special Judge had correctly applied the law: the material on record gave rise to grave suspicion, and the petitioner’s explanations were demonstrably inconsistent with the documentary evidence. The rejection of discharge and the framing of charges were therefore legally sound.

The Verdict

The Jharkhand High Court dismissed both criminal revision petitions. The orders dated 06.08.2025 (rejection of discharge) and 25.03.2026 (framing of charges) under Section 3 of the Prevention of Money Laundering Act, 2002, were upheld. The petitioner shall face trial on charges of money laundering involving proceeds of crime amounting to Rs. 94.42 lakhs. The Court clarified that its observations were prima facie and not to be construed as a determination of guilt. All pending interlocutory applications stood disposed of.

What This Means For Similar Cases

Documentary Evidence Trumps Oral Explanations in PMLA Cases

• Practitioners must recognize that at the discharge stage, the court does not assess the credibility of the accused’s explanations - only whether the prosecution’s documents raise grave suspicion.
• Fabricated invoices, mismatched business profiles, and timing anomalies (e.g., post-Preliminary Enquiry documentation) are sufficient to sustain a charge.
• Absence of cash books, travel records, or bank transfers for repayment does not exonerate the accused; it reinforces suspicion.

Section 50 Statements Are Valid Evidentiary Tools

• Statements recorded under Section 50 of the PMLA are admissible and can form the basis of a prima facie case, even if the accused is not named in the FIR.
• These statements are not subject to Article 20(3) protections and are deemed judicial proceedings under Section 50(4).
• Defense counsel must prepare for their use in cross-examination during trial, not challenge their admissibility at the discharge stage.

Economic Offenses Require Full Trial - No Premature Discharge

• Courts must resist the temptation to acquit or discharge at the preliminary stage in complex economic cases.

• The Supreme Court’s directive in Pradeep Nirankarnath Sharma mandates that money laundering cases, due to their layered nature, require full trial to uncover the complete financial chain.

• The burden under Section 24 of the PMLA shifts only after the prosecution establishes a prima facie case - not before.

• Practitioners should avoid filing discharge applications based solely on denials or uncorroborated explanations.

• Focus on challenging the sufficiency of the prosecution’s documentary trail, not the plausibility of the accused’s version.

• In PMLA matters, the absence of physical seizure of assets is irrelevant - the offense lies in the process of layering and projecting proceeds.