The Madhya Pradesh High Court has reaffirmed that enforcement actions under the Prevention of Money Laundering Act, 2002 cannot be triggered by suspicion alone. In a significant ruling, the Court quashed the legal foundation of a search operation conducted by the Enforcement Directorate, emphasizing that Section 17 of the PMLA demands a reasoned, material-based belief in the existence of proceeds of crime - not speculative or retaliatory action.
Background & Facts
The Dispute
The petitioner, Nitin Shambhukumar Kasliwal, former Chairman and Managing Director of M/s S. Kumar's Nationwide Limited (M/s SKNL), faced financial and legal fallout after the company’s collapse. M/s SKNL, which had availed substantial credit facilities from IDBI Bank and Union Bank of India, was declared a Non-Performing Asset (NPA) and later wound up under the Insolvency and Bankruptcy Code, 2016. The lenders unilaterally classified the loan accounts as fraudulent under RBI Directions, triggering a five-year ban on the petitioner accessing banking finance. Concurrently, two FIRs were registered against him under Section 420 IPC and Section 13(2) read with 13(1)(d) of the Prevention of Corruption Act, 1988.
Procedural History
- April 2018: NCLT admitted insolvency petition against M/s SKNL and ordered liquidation.
- 2021 - 2022: Two FIRs registered by CBI against petitioner based on lender complaints.
- December 2023 - 2024: High Court granted interim stay on coercive actions against petitioner in connected writ petitions.
- 18 December 2025: Court quashed travel restrictions imposed on petitioner based on the same FIRs.
- 22 December 2025: Enforcement Directorate issued Search Authorization under Section 17 of PMLA.
- 23 December 2025: Search and seizure conducted at petitioner’s residences in Indore and Mumbai.
- 24 December 2025: Satisfaction Note filed with adjudicating authority.
- 15 January 2026: ED filed application under Section 17(4) PMLA before adjudicating authority.
Relief Sought
The petitioner sought quashing of the search authorization and seizure, return of seized assets, and declaration that all actions were void ab initio for lack of jurisdiction, mala fide intent, and violation of natural justice.
The Legal Issue
The central question was whether Section 17(1) of the PMLA, 2002 permits a search and seizure based solely on the existence of a scheduled offence, or whether it requires a documented, material-based reason to believe that the property in question constitutes proceeds of crime.
Arguments Presented
For the Petitioner
The petitioner’s counsel argued that the ED’s search authorization lacked any tangible material demonstrating control, concealment, or intent to launder proceeds of crime. Reliance was placed on Pavana Dibbur v. Enforcement Directorate, Vijay Madanlal Choudhary v. Union of India, and V. Senthil Balaji v. Deputy Director, which hold that Section 3 (money laundering) and Section 17 (search) are interdependent and require proof of proceeds of crime. The Calcutta and Karnataka High Courts were cited to show that suspicion or a pending FIR is insufficient. The timing of the search - immediately after the Court lifted travel restrictions - was argued as evidence of mala fide and retaliatory intent.
For the Respondent
The Additional Solicitor General contended that the petition was premature, as the petitioner had an alternative remedy under Section 17(4) PMLA to challenge the search before the adjudicating authority. It was submitted that the Satisfaction Note was duly recorded and forwarded, and that the petitioner would have full opportunity to raise objections in the pending proceedings. The ED also argued that the Court’s earlier orders stayed only the scheduled offences, not the independent money laundering proceedings under Section 3, which are distinct under Vijay Madanlal Choudhary.
The Court's Analysis
The Court examined the statutory framework of Section 17 of the PMLA, which mandates that an authorized officer must have a reason to believe that any person possesses proceeds of crime before conducting a search. The Court emphasized that this belief must be grounded in material evidence, not conjecture or suspicion. The Court noted that the ED’s Satisfaction Note did not articulate any specific link between the seized assets and the proceeds of the scheduled offences. Mere possession of property, or recovery during a search, does not satisfy Section 3 or Section 17.
"The existence of a scheduled offence is only the starting point; it does not automatically translate into a reason to believe that the property seized constitutes proceeds of crime."
The Court rejected the ED’s argument that the petitioner’s remedy lay solely before the adjudicating authority, noting that Article 226 permits judicial review where fundamental rights are violated or jurisdiction is palpably absent. The timing of the search - just five days after the Court granted relief to the petitioner - raised serious concerns about malice. While the Court did not conclusively establish mala fide, it held that the absence of any material to substantiate the belief rendered the search arbitrary and violative of Article 14.
The Court further clarified that while Vijay Madanlal Choudhary recognizes Section 3 as distinct from scheduled offences, it does not permit bypassing the statutory precondition of reason to believe under Section 17. The ED’s reliance on procedural remedies ignored the substantive illegality of the search’s foundation.
The Verdict
The petition was dismissed on grounds of alternative remedy, but the Court’s analysis effectively nullified the legal basis of the search. The Court held that Section 17 PMLA cannot be invoked without credible material establishing proceeds of crime, and that a search based on suspicion or retaliatory timing is legally unsustainable.
What This Means For Similar Cases
Reason to Believe Must Be Material, Not Conjectural
- Practitioners must challenge PMLA searches where the Satisfaction Note lacks specific facts linking seized assets to proceeds of crime.
- Merely citing a scheduled offence or FIR is insufficient; the ED must demonstrate control, concealment, or intent to launder.
- Courts may intervene under Article 226 if the search is manifestly arbitrary or lacks any evidentiary basis.
Timing and Context Matter in Assessing Mala Fides
- Searches conducted immediately after judicial relief to a petitioner raise red flags.
- While direct proof of mala fide is not always required, circumstantial evidence of retaliatory timing can support a finding of arbitrariness under Article 14.
- Legal teams should document and highlight temporal proximity between judicial orders and enforcement actions.
Alternative Remedy Does Not Bar Writ Jurisdiction When Fundamental Rights Are Violated
- The existence of an adjudicating authority under Section 17(4) does not oust High Court jurisdiction where the search is void ab initio.
- Writ petitions remain maintainable when the statutory precondition for action is entirely absent.
- Practitioners should not assume that PMLA proceedings are immune to constitutional scrutiny.
