PMLA Section 5 | Provisional Attachment Orders Must Disclose 'Reason to Believe' to Satisfy Natural Justice : Gauhati HC

The Gauhati High Court's judgment in Mrig Mrinal Dhawan v. Union of India examines the procedural and substantive validity of provisional attachment orders under the Prevention of Money Laundering Act, 2002 (PMLA). The court clarifies that while confidentiality of investigative material is preserved, the 'reason to believe' recorded by the Authorized Officer must be disclosed to affected parties to uphold natural justice and prevent jurisdictional errors.

Background & Facts

The Dispute

The petitioner, Mrig Mrinal Dhawan, proprietor of M/s Fama Marketing, challenged a Provisional Attachment Order (PAO) dated 30.03.2026 issued by the Deputy Director, Directorate of Enforcement (ED), under Section 5(1) of the PMLA. The PAO attached three plots of land belonging to the petitioner, alleging these were proceeds of crime (PoC) derived from fraudulent Input Tax Credit (ITC) transactions linked to a GST fraud investigation.

Key Facts

• FIR No. 182/2024 was registered on 03.10.2024 for offences under Sections 120B, 420, 467, 468, 471, 473, and 474 of the IPC, alleging a criminal conspiracy involving fake GST invoices issued by M/s Siddhi Vinayak Trade Merchants.
• Enforcement Case Information Report (ECIR) was registered on 28.03.2025 by the ED, initiating investigation under the PMLA.
• M/s Siddhi Vinayak issued 15,258 fake invoices totaling Rs. 658,55,35,521 between October 2023 and March 2024, enabling 58 entities across 11 states to fraudulently avail ITC amounting to Rs. 99,31,36,975.
• The petitioner’s entity, M/s Fama Marketing, availed Rs. 52.66 lakhs in fraudulent ITC from two shell entities, M/s Krishti Enterprise and M/s L.S. & Company, which received Rs. 3,84,21,019 and Rs. 4,39,15,230 respectively from the PoC.
• The Attached Property (three plots of land) was purchased by the petitioner on 11.02.2022 for Rs. 60,00,000, predating the alleged Scheduled Offences (October 2023 - March 2024).

Procedural History

• 03.10.2024: FIR registered for Scheduled Offences under IPC.
• 28.03.2025: ECIR registered by ED.
• 25.07.2025 - 19.03.2026: Statements recorded under Section 50 of the PMLA from multiple entities, including the petitioner.
• 30.03.2026: PAO issued, attaching the petitioner’s property.
• 27.04.2026: Summons issued to the petitioner under Section 44(1)(b) r/w Section 45(1) of the PMLA.
• 28.03.2026: Writ petition filed challenging the PAO.

Relief Sought

The petitioner sought:

1. Quashing of the PAO dated 30.03.2026.
2. Stay on coercive actions pursuant to the PAO.
3. Stay on the summons dated 27.04.2026.

The Legal Issue

The court addressed two central questions:

1. Whether the 'reason to believe' recorded by the Authorized Officer under Section 5(1) of the PMLA must be disclosed in the PAO or kept confidential.
2. Whether properties purchased prior to the commission of the Scheduled Offence can be attached under Section 5(1) of the PMLA if they represent the value of proceeds of crime.

Arguments Presented

For the Petitioner

1. Confidentiality of 'Reason to Believe': The petitioner argued that the 'reason to believe' must be recorded in a separate file and kept confidential, not disclosed in the PAO. Reliance was placed on Aprajita Kumari v. Joint Director, ED (2018) and Aftabuddin Ahmed v. ED (2024).
2. No Proceeds of Crime: The Attached Property was not PoC, as it was purchased prior to the Scheduled Offences. The PAO was invalid as it lacked a connection between the property and the PoC.
3. Jurisdictional Error: The Authorized Officer failed to satisfy the twin conditions under Section 5(1) - possession of PoC and likelihood of dissipation - before issuing the PAO.
4. Alternative Remedy: The petitioner should have exhausted statutory remedies before the Adjudicating Authority under Section 8 of the PMLA instead of filing a writ petition.

For the Respondent (Enforcement Directorate)

1. Disclosure of 'Reason to Believe': The ED contended that there is no statutory bar on including the 'reason to believe' in the PAO. Disclosure aligns with principles of natural justice and fair play.
2. Proceeds of Crime: The fraudulent ITC availed by M/s Fama Marketing (Rs. 52.66 lakhs) constituted PoC, and the Attached Property represented its value, making it liable for attachment under Section 2(1)(u) of the PMLA.
3. Urgency of Attachment: The Second Proviso to Section 5(1) justified immediate attachment to prevent dissipation of PoC.
4. Maintainability of Writ Petition: The ED argued that the writ petition was not maintainable as the petitioner bypassed the statutory remedy before the Adjudicating Authority.

The Court's Analysis

Maintainability of Writ Petition

The court acknowledged that while alternative remedies exist under the PMLA (e.g., proceedings before the Adjudicating Authority), writ jurisdiction under Article 226 can be invoked if:

• The order violates fundamental rights (e.g., right to property under Article 300A).
• The order is without jurisdiction or violates principles of natural justice.
• The order is palpably unjust or reveals a jurisdictional error.

The court held that the PAO impairs the petitioner’s right to property, warranting judicial review despite the availability of alternative remedies.

Validity of 'Reason to Believe' Disclosure

1. Statutory Interpretation: The court analyzed Section 5(1) of the PMLA, which mandates that the Authorized Officer must record 'reason to believe' in writing before issuing a PAO. However, the statute does not prescribe whether this must be kept confidential or disclosed.
2. Precedents on Confidentiality:
   • S. Narayanappa v. CIT (1967): Under the Income Tax Act, 1922, reasons recorded for reopening assessments were not required to be disclosed to the assessee.
   • GKN Driveshafts (India) Ltd. v. ITO (2003): The Supreme Court held that the Assessing Officer must furnish reasons for reopening upon request and dispose of objections by a speaking order.
   • Arvind Kejriwal v. ED (2025): The Supreme Court ruled that 'reasons to believe' for arrest under Section 19 of the PMLA must be disclosed to the arrestee to enable challenge.
3. Natural Justice: The court emphasized that disclosure of 'reason to believe' aligns with natural justice, ensuring transparency and preventing arbitrary actions. Non-disclosure would deprive the affected party of an effective remedy.
4. PMLA Rules: The PMLA Rules, 2005 require the PAO and material to be forwarded to the Adjudicating Authority in a sealed envelope, but do not prohibit disclosure to the affected party. The PMLA Rules, 2013 mandate endorsement of the PAO to all concerned, including the person in possession of the property.
5. Conclusion: The court held that including the 'reason to believe' in the PAO does not render it invalid. Instead, it enhances procedural fairness and reduces the risk of fishing expeditions.

Attachment of Pre-Acquired Property

1. Definition of PoC: Section 2(1)(u) of the PMLA defines PoC as:
   • Property derived or obtained from criminal activity.
   • Value of such property.
   • Property equivalent in value held within or outside India.
2. Judicial Precedents:
   • Vijay Madanlal Choudhary v. UOI (2023): The Supreme Court held that value of PoC can be attached even if the original PoC is no longer available.
   • Nav Nirman Builders v. UOI (2026): Property equivalent in value to PoC can be attached under Section 5(1).
3. Application to Facts: The petitioner availed Rs. 52.66 lakhs in fraudulent ITC, which formed part of the Rs. 99.31 crores PoC. As the original PoC was dissipated, the Attached Property (valued at Rs. 60 lakhs) was liable for attachment as its equivalent value.
4. Timing of Purchase: The court rejected the argument that the property was purchased prior to the Scheduled Offence. The PMLA targets processes or activities connected with PoC, not just the timing of acquisition. The fraudulent ITC availed by the petitioner constituted continuing offence, justifying attachment.

The Verdict

The court dismissed the writ petition but referred the following questions to a larger bench for resolution:

1. Whether the 'reason to believe' recorded under Section 5(1) of the PMLA is confidential and should not be disclosed to the affected party.
2. Whether including the 'reason to believe' in the PAO renders it jurisdictionally defective.

The court directed the registry to place the matter before the Chief Justice for constitution of a larger bench.

What This Means For Similar Cases

Disclosure of 'Reason to Believe' Is Mandatory

• Natural Justice: Practitioners must argue that non-disclosure of 'reason to believe' violates principles of natural justice, depriving affected parties of an effective remedy.
• Judicial Precedents: Rely on GKN Driveshafts and Arvind Kejriwal to emphasize that transparency is essential in proceedings affecting fundamental rights.
• PMLA Rules: Highlight that the PMLA Rules, 2013 require endorsement of the PAO to all concerned, implying disclosure of reasons.

Attachment of Property as 'Value of PoC'

• Scope of PoC: The definition under Section 2(1)(u) includes property equivalent in value to PoC, even if acquired prior to the Scheduled Offence.
• Continuing Offences: Emphasize that money laundering is a continuing offence, and attachment can target layered or integrated PoC.
• Practical Application: Ensure that investigative reports establish a clear link between the attached property and the value of PoC to avoid jurisdictional challenges.