PMLA Section 3 | Proceeds of Crime Must Stem from Scheduled Offence; Civil Disputes Over Project Delays Cannot Be Criminalized : Allahabad HC

The Allahabad High Court has delivered a significant ruling clarifying the limits of the Prevention of Money Laundering Act, 2002, holding that civil disputes arising from delayed real estate project delivery cannot be transformed into money laundering offences merely because financial institutions suffer losses. The Court quashed PMLA proceedings against a construction company and its directors, emphasizing that proceeds of crime must be directly traceable to a scheduled offence and that criminal law cannot be weaponized to resolve commercial grievances.

Background & Facts

The Dispute

The applicants - Tulsiani Construction and Developers Ltd. and its directors Mahesh Kumar Tulsiani and Anil Kumar Tulsiani - are accused of money laundering under the Prevention of Money Laundering Act, 2002 (PMLA), following an Enforcement Directorate (ED) complaint based on alleged fraud by home buyers and Punjab National Bank (PNB). The core dispute stems from the failure of the company to deliver residential flats in Sushant Golf City, Lucknow, despite receiving home loan proceeds from PNB on behalf of four buyers. The buyers defaulted on loan repayments, and PNB alleged that the company siphoned the loan amounts without executing sale deeds, causing a loss of Rs. 4.63 crores.

Key Facts

• On 24.09.2022, Punjab National Bank filed FIR No. 336/2022 at Police Station Hazratganj, Lucknow, under Sections 409 and 420 IPC, alleging criminal breach of trust and cheating.
• The bank had sanctioned four home loans totaling Rs. 4,63,10,000 to the following buyers:
  • Mr. Narendra Singh Verma & Smt. Shashi Verma: Rs. 2,80,00,000
  • Baldeep Arora & Smt. Jaya Arora: Rs. 90,50,000
  • Hemant Tulsiani & Manohar Kumar Tulsiani: Rs. 75,00,000
  • Tarun Shekhar Singh & Smt. Sarika Singh: Rs. 40,00,000
• Tripartite and quadripartite agreements dated 27.10.2015, 31.12.2015, and others required the builder to execute sale deeds within 30 days and hand them over to PNB as security.
• The company failed to deliver flats or execute sale deeds, leading to loan defaults.
• On 03.03.2023, the Allahabad High Court, while rejecting bail for Anil Kumar Tulsiani in FIR No. 336/2022, directed the ED to investigate possible money laundering, noting the scale of the loss and the pattern of non-delivery.
• The ED registered ECIR No. ECIR/LKZO/43/2023 and filed a complaint on 30.01.2026, taking cognizance of offences under Section 3 of PMLA.
• The ED also attached properties worth Rs. 3.06 crores (company) and Rs. 1.5 crores (Anil Kumar Tulsiani) under provisional attachment orders dated 07.06.2024 and 28.11.2024.
• The flat attached under the 28.11.2024 order was purchased by Anil Kumar Tulsiani on 02.03.2012 - nearly a decade before the alleged scheduled offence.
• The ED aggregated proceeds of crime at Rs. 9.948 crores by including multiple FIRs, including those already settled or quashed.
• By 2024 - 2026, PNB issued No Dues Certificates for two loan accounts (Baldeep Arora and Hemant Tulsiani) and entered into a One Time Settlement (OTS) with Narendra Singh Verma, receiving the first installment.
• The fourth loan account (Tarun Shekhar Singh) was never declared NPA.
• The ED also included FIR No. 595/2021 filed by intervener Sanjeev Agarwal, relating to a 2012 flat purchase, which the High Court had earlier held was a civil dispute with mala fide criminal intent.
• The company faced 20 similar complaints, 10 of which were quashed, and two referred to mediation.

Procedural History

• 24.09.2022: FIR No. 336/2022 registered by PNB at Hazratganj PS, Lucknow.
• 03.03.2023: Allahabad High Court rejects bail application of Anil Kumar Tulsiani and directs ED to investigate for possible money laundering.
• 29.03.2023: Supreme Court dismisses SLP (Crl.) No. 4117/2023, directing ED to examine material independently, uninfluenced by High Court observations.
• 07.06.2024: Provisional attachment order issued against company properties worth Rs. 3,06,95,700.
• 28.11.2024: Provisional attachment order issued against Anil Kumar Tulsiani’s flat purchased in 2012, worth Rs. 1.5 crores.
• 30.01.2026: Special Judge, Anti-Corruption, CBI/E.D., Lucknow, takes cognizance under PMLA and issues summons.
• 02.07.2026: Application under Section 482 CrPC filed before Allahabad High Court challenging cognizance and attachment orders.

The Parties' Positions

For the Applicants

• Argued that the entire dispute is civil in nature, involving breach of contract and delayed project delivery, not criminal fraud.
• Contended that the loan accounts in question were either regular, settled, or no longer NPA, negating the existence of a scheduled offence under PMLA.
• Asserted that the flat attached under the 28.11.2024 order was acquired in 2012, long before any scheduled offence, and thus cannot be proceeds of crime under Section 2(u) of PMLA.
• Cited Vijay Madanlal Choudhary v. Union of India (2023) and Pavana Dibbur v. Directorate of Enforcement (2023) to argue that proceeds of crime must be directly traceable to a scheduled offence already committed.
• Highlighted that the ED illegally aggregated multiple FIRs, including those quashed or settled, inflating the proceeds of crime to Rs. 9.948 crores.
• Emphasized that the ED failed to address objections before taking cognizance, violating principles of natural justice.

For the Respondent (ED & State)

• Argued that the diversion of funds to other projects and repayment of SIDBI loans constituted money laundering under Section 3 of PMLA.
• Relied on Vijay Madanlal Choudhary to assert that provisional attachment under Section 5 does not require a prior registered FIR, and that interconnected transactions can be presumed linked under Section 23.
• Claimed that the phrase "value of such property" in Section 2(u) allows attachment of any property equivalent to proceeds, even if not directly traceable.
• Contended that the settlement of loan accounts does not negate the prior criminality, as the money was allegedly laundered before settlement.

Relief Sought

The applicants sought quashing of:

• The cognizance order dated 30.01.2026 under PMLA;
• The summoning order;
• The provisional attachment orders dated 07.06.2024 and 28.11.2024;
• The entire PMLA proceedings.

The Legal Issue

Can proceedings under the Prevention of Money Laundering Act, 2002, be initiated and sustained where the alleged scheduled offence is essentially a civil dispute over delayed project delivery and loan defaults, and where the property sought to be attached was acquired years before the alleged offence?

Arguments Presented

For the Appellant/Petitioner

The applicants relied on Vijay Madanlal Choudhary v. Union of India (2023) 12 SCC 1 to argue that proceeds of crime under Section 2(u) of PMLA must be directly or indirectly derived from a completed scheduled offence. They contended that the four loan accounts were either regular, settled, or no longer in default, meaning no scheduled offence under IPC Sections 409/420 existed at the time of ED’s action. They cited Pavana Dibbur to assert that property acquired before the scheduled offence cannot be proceeds of crime. The applicants also relied on Seema Garg v. Deputy Director, ED (2020) to argue that "value of such property" cannot include unrelated assets. They emphasized that the ED’s aggregation of 20 FIRs, including quashed and settled cases, was arbitrary and inflated the proceeds of crime. The applicants further cited Indian Oil Corpn. v. NEPC India Ltd. (2006) and Sarabjeet Kaur v. State of Punjab (2023) to argue that civil disputes cannot be criminalized to coerce settlement. They also highlighted that the trial court failed to address their objections, violating natural justice.

For the Respondent/State

The Enforcement Directorate argued that the diversion of funds from home buyer payments to other projects and repayment of SIDBI loans demonstrated a pattern of laundering. They relied on Vijay Madanlal Choudhary to assert that provisional attachment under Section 5 does not require a prior FIR, and that Section 23 allows presumption of interconnected transactions. They contended that the settlement of loans occurred after the alleged laundering and did not erase the criminality. They also argued that the flat purchased in 2012 was linked to the overall financial misconduct of the company, and that the "value" of property under Section 2(u) includes any asset acquired with illicit funds, even indirectly.

The Court's Analysis

The Court undertook a rigorous analysis of the statutory framework of PMLA, particularly Sections 2(u), 3, and 23, in light of binding precedents. It held that the definition of "proceeds of crime" under Section 2(u) is not a catch-all for any property owned by the accused, but must be directly or indirectly derived from a scheduled offence. The Court emphasized that the phrase "derived or obtained as a result of criminal activity relating to a scheduled offence" requires a causal link between the offence and the property.

"It is only such property which is derived or obtained, directly or indirectly, as a result of criminal activity relating to a scheduled offence that can be regarded as proceeds of crime."

The Court found that the flat attached on 28.11.2024 was purchased in 2012, nearly a decade before the alleged scheduled offence in 2022. The ED failed to establish any nexus between the 2012 purchase and the 2022 loan defaults. The Court held that attaching such property was illegal and contrary to Pavana Dibbur and Seema Garg.

The Court further observed that the ED’s calculation of proceeds of crime at Rs. 9.948 crores included amounts from four settled or quashed cases, including the 2012 dispute with Sanjeev Agarwal, which this Court had already held was a civil dispute with mala fide criminal intent. The Court noted:

"The fact that the complainants have entered into settlements resolving their monetary disputes makes it manifest that the disputes in fact were essentially of civil nature and the criminal law is merely being weaponised by the complainants in their favour to make it easier for them to achieve their ends."

The Court also held that the trial court’s order dated 30.01.2026 was legally unsustainable because it failed to address the applicants’ objections, violating the principles of natural justice as laid down in Kranti Associates and S.N. Mukherjee. The Court reiterated that judicial orders must be reasoned, and "reasons are the soul of any judicial order."

The Court distinguished Vijay Madanlal Choudhary’s observation on provisional attachment under Section 5, clarifying that while such attachment may proceed without a prior FIR, the subsequent prosecution under Section 3 still requires a valid scheduled offence. Since none of the four loan accounts constituted a live scheduled offence at the time of cognizance, the foundation for PMLA proceedings collapsed.

The Verdict

The applicants succeeded. The Allahabad High Court quashed the cognizance order dated 30.01.2026, the summoning order, and the entire PMLA proceedings arising from ECIR No. ECIR/LKZO/43/2023. The provisional attachment orders dated 07.06.2024 and 28.11.2024 were set aside, and all consequences flowing from them were declared void. The Court held that the proceedings were maliciously instituted with an ulterior motive to coerce settlement of civil disputes and constituted an abuse of process under Section 482 CrPC.

What This Means For Similar Cases

Civil Disputes Cannot Be Criminalized Under PMLA

• Practitioners must challenge PMLA proceedings where the predicate offence is a delay in project delivery, non-execution of sale deeds, or loan defaults without proof of fraudulent intent at inception.
• Settlements or No Dues Certificates issued by banks after the fact negate the existence of a live scheduled offence.
• Courts must scrutinize whether the alleged scheduled offence is a genuine criminal act or a disguised civil claim.

Attachment of Pre-Offence Property Is Illegal

• Any property acquired before the commission of the scheduled offence cannot be treated as proceeds of crime, even if owned by the accused.
• The phrase "value of such property" in Section 2(u) does not permit attachment of unrelated assets; there must be a direct or indirect derivation from the scheduled offence.
• ED must provide specific evidence linking the attached property to the proceeds of the specific scheduled offence, not general financial misconduct.

Procedural Compliance Is Non-Negotiable

• Trial courts must record reasons for rejecting objections before taking cognizance under PMLA; failure to do so renders the order void.
• Aggregation of multiple FIRs, including quashed or settled cases, to inflate proceeds of crime is arbitrary and invalid.
• Courts must apply Bhajan Lal principles to prevent abuse of process under Section 482 CrPC where the allegations, even if accepted, do not constitute a criminal offence.