Telangana High Court

M/S Smartcoin Financials Private ... vs The Deputy Director And Another on 6 November, 2024

      THE HONOURABLE SMT. JUSTICE K. SUJANA


           CRIMINAL PETITION No.2090 of 2023


ORDER:

This Criminal Petition is filed under Section 482 of Code

of Criminal Procedure, 1973 (for short 'Cr.P.C') to quash the

proceedings against the petitioner/accused in

ECIR/HYZO/04/2021 dated 18.01.2021.

2. The brief facts of the case are that the petitioner-

Company, represented by Mr. Shashank Mudhra, is engaged

in microfinance business in India. It is being investigated by

the Enforcement Directorate based on an FIR filed under

various sections, including 420, 506 of IPC, Section 67 of IT

Act, 2008, and Section 3 of Telangana Money Lenders Act,

1349F. The Company seeks to quash proceedings under the

Prohibition of Money Laundering Act (PMLA), 2002, stemming

from ECIR No.ECIR/HYZO/04/2021. The FIR, registered by

Cyber Crime, Cyberabad, implicated the petitioner-Company

i.e., Smartcoin Application. The Company aims to nullify

these proceedings initiated by respondent No.1.

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3. On 23.12.2020, Sri K. Satish filed a complaint with

Cyber Crime Police Station, Cyberabad Commissionate,

leading to FIR No.1187 of 2020. He alleged that after

downloading Cash TM, a microloan app, and uploading

identification documents, he received a loan of Rs.2,292/- but

was harassed by unknown persons demanding repayment.

They allegedly accessed his contacts, sent abusive messages,

and defamed him. Although Smart Coin, belonging to the

Petitioner, was mentioned, it is clarified that Cash TM and

Smart Coin are unrelated. Based on the FIR, Respondent

No.1 registered an ECIR under PMLA, 2002, on 18.01.2021.

4. On 02.08.2022, a Provisional Attachment Order (PAO)

was issued against the Petitioner under PMLA, 2002,

attaching properties worth Rs.17,99,88,957/-. Despite the

failure of Enforcement Directorate to provide the ECIR copy,

the PAO and the order of the Adjudicating Authority reveal

that the case of Enforcement Directorate relies solely on the

FIR allegations. During the investigation, the Petitioner

cooperated with Cyber Crime Police, Cyberabad, providing

necessary documents. Key findings revealed the Complainant

was a habitual user of loan apps, having availed three loans

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from the application of the Petitioner-Company prior to

12.12.2020, with no complaints. The Complainant fully

repaid two loans and had no overdue payments. The

Petitioner adheres to applicable laws, prohibiting extortionate

recovery methods. The investigation concluded with the

Petitioner being found innocent and placed in Column 12 of

the Charge Sheet. As no cognizance was taken by the

Magistrate, the Petitioner seeks quashing of PMLA

proceedings, citing the findings of the Investigation Agency

and the inability to sustain the case under PMLA.

5. Heard Sri T. Niranjan Reddy, learned Senior Counsel

representing Sri TRVSSSV Prasad, learned counsel appearing

on behalf of the petitioner as well as Sri Anil Prasad Tiwari,

learned Standing Counsel for Enforcement Department,

appearing on behalf of respondent No.2.

6. Learned counsel for the petitioner submitted that the

investigation of the predicate agency found no evidence of the

involvement of the petitioner in the alleged offences, and the

final report was accepted by the learned IX Additional

Metropolitan Magistrate, Kukatpally, absolving the petitioner

of all charges. He further submitted that as the petitioner was

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not charged, there is no criminal activity to justify money

laundering proceedings under PMLA, 2002 and that without a

predicate offense, the proceedings are unauthorized and must

be vitiated, as settled by law; if the predicate offense ceases to

exist, PMLA proceedings cannot continue.

7. Learned counsel for the petitioner relied on the principle

of law stated in M/s Jagati Publication Limited v.

Enforcement Directorate, Officer of Kendriya Sedan,

Hyderaba 1 , which cited the decision of the Honourable

Supreme Court in Vijay Madanlal Chaudhary and Ors v.

Union of India and Ors 2, wherein it is held as follows:

"27.2. Thus, the Supreme Court has expressed the view that expression proceeds of crime which is the very essence of the offence of money laundering needs to be construed strictly only such property which is derived or obtained, directly or indirectly, as a result of criminal activity relating to a scheduled offence can be regarded as proceeds of crime. On the above basis, Supreme Court has held that in the event the person named in the criminal activity relating to a scheduled offence is finally absolved by a Court of competent jurisdiction either on account of discharge or acquittal or quashing of the criminal case (scheduled offence), there can be no action for money laundering against such a

Criminal Petition No.1072 of 2021

2022 SCC OnLine SC 929

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person or a person claiming through him in relation to the property linked to the stated scheduled offence. No other view is possible."

8. It is further observed in M/s. Jagati Publication

Limited (supra), which reads as follows:

"28. Supreme Court has thus taken the view that the offence under Section 3 is dependent on the wrongful and illegal gain of property as a result of criminal activity relating to a scheduled offence. The property must qualify the definition of "proceeds of crime" under Section 2(1)(u) of PMLA. All or whole of the crime property linked to the scheduled offence need not be regarded as proceeds of crime, but all properties qualifying the definition of "proceeds of crime" under Section 2(1)(u) will necessarily be crime properties. What is significant, however, to note is the clear enunciation by the Supreme Court that in the event of acquittal of the person concerned or being absolved from allegation of criminal activity relating to the scheduled offence, and if it is established in the Court of law that the crime property in the concerned case has been rightfully owned and possessed by him, such a property by no stretch of imagination can be termed as crime property and ex-consequenti proceeds of crime within the meaning of Section 2(1)(u). Supreme Court noted that in the trial in connection with the scheduled offence, the Court would be obliged to direct return of such property as belonging to the person concerned. It would then be paradoxical to still regard such property as proceeds of crime despite such adjudication by a Court of

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competent jurisdiction. Significantly, Supreme Court also says that it would be well within the jurisdiction of the concerned Court trying the scheduled offence to pronounce on that matter. Though PMLA is a complete Code in itself, it is only in respect of matters connected with the offence of money laundering, or for that matter, existence of proceeds of crime within the meaning of Section 2(1)(u) of PMLA is quintessential. In the absence of proceeds of crime, the authorities under PMLA cannot step in or initiate any prosecution".

9. Learned counsel for the petitioner further submitted

that the previous observation of the court directly applies to

this case, emphasizing the exoneration of the petitioner from

the predicate offense, indicating no involvement in criminal

activity and thus, no illegal gain. However, despite being

cleared, the provisional attachment order of 02.08.2022,

freezing of assets of the petitioner worth Rs.17,99,88,957/-,

will cause irreparable loss and injustice, as confirmed by the

PMLA Adjudicating authority on 27.01.2023. This contradicts

the ruling of the Hon'ble Supreme Court ruling and the

finding of this court in M/s Jagati Publication Limited. The

Judgment of the Delhi High Court in M/s Prakash Industries

Limited v. Union of India and Anr 3 supports this stance,

highlighting the issue of provisional attachment under the

2023/DHC/000481

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Prevention of Money Laundering Act, and the same is

extracted hereinunder:

"The essential connection between the commission of a predicate offence and that of money laundering is further evident from the Supreme Court in Vijay Madanlal finding that if a person named in proceedings relating to a scheduled offence is finally acquitted or absolved, no further action for money laundering could be sustained. It was thus essentially held that once a person stands acquitted of the predicate offence, it would be impermissible for the ED to either draw or continue proceedings under the PMLA, treating property to be tainted and falling within the scope and ambit of proceedings in crime."

10. Learned counsel for the petitioner contended that since

the petitioner has been cleared of FIR allegations, the

subsequent ECIR registration and proceedings should also be

quashed. Citing the legal maxim "sublato fundamento cadit

opus" (when the foundation is removed, the superstructure

falls). He emphasized that without a scheduled offense, there

can be no proceeds of crime. As the predicate agency absolved

the petitioner, assumptions of criminal activity or proceeds of

crime are unfounded, and PMLA authorities cannot act on

assumptions alone. In support of the aforesaid contention, a

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reference was made in M/s. Prakash Industries (supra),

wherein in paragraph No.86, it is held as follows as follows:

"86. Regard must be had to the fact that initiation of action under Section 5 of the Act is premised on the competent authority having reason to believe that a person is in possession of proceeds of crime. The formation of opinion under the said provision is not related to the commission of a scheduled offense. Property, in order to be recognized even prima facie as being proceeds of crime must necessarily be preceded by - criminal activity relating to a scheduled offense. This is also evident from the use of the expressions - as a result of and - derived or obtained in Section 2(1)(u) of the Act. The evidence of criminal activity would be either a First Information Report, a complaint or a charge sheet as envisaged under various statutes. However, in absence thereof it would be wholly impermissible for the ED to itself become the arbiter of whether a schedule offense stands committed."

11. Learned counsel for the petitioner further contended

that the entire process is based on an unfounded assumption

that the petitioner has committed a criminal activity

generating proceeds of crime. Since there are no pending

criminal charges against the petitioner regarding the predicate

offense, which forms the foundation of the money laundering

charge, the ECIR and subsequent proceedings should be

quashed. The investigation by the Cyber Crime Police found

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no criminality in the conduct of the petitioner, rendering the

investigation of the respondent under ECIR

No.ECIR/HYZO/04/2021 is baseless. As per the principle

established in the Vijay Madanlal Choudhary (supra), if the

predicate offense is not proven or found to be non-existent,

PMLA proceedings cannot continue. The refusal of the

Enforcement Directorate to supply the ECIR copy, citing it as

an internal document, further supports quashing the

proceedings. In essence, without evidence of culpability and

with no predicate offense, the money laundering charge and

attachment order lack a legitimate basis.

12. Per contra, learned Standing counsel for Enforcement

Directorate filed counter affidavit, denying the averments

made by the learned Senior Counsel appearing on behalf of

the petitioner stating that the Cyber Crime Police Station,

Rachakonda Commissionerate, had registered five FIRs

related to instant loans in 2020. This led to the arrest of

Parshuram Lahu Takve, Liang Tian Tian, a Chinese national,

and Shaik Aaqib on 26.12.2020, at call center office of Jiya

Liang Infotech Pvt. Ltd in Pune. Jiya Liang Infotech had

partnered with three companies - Bienance Infracture

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Technology, Ajaya Solutions Private Limited, and Taelde

Technology Private Limited - to provide tele-caller services for

loan repayment. These companies offered online instant loans

through various apps, sanctioning unsecured loans to

borrowers, and then handed over customer data to Jiya Liang

Infotech for collection. The employees of the company used

personal mobile numbers to contact borrowers, often resorting

to abuse, harassment, and threats, and even sending fake

legal notices to the relatives and friends of the borrowers. This

operation was carried out without adhering to RBI regulations,

with employees using laptops, desktops, and network routers

procured from China.

13. Learned Standing Counsel further stated that the Cyber

Crime Police Station, Cyberabad Commissionerate, registered

10 FIRs in 2020 related to instant loans, leading to searches

at companies operating loan apps. Investigations revealed that

Zixia Zhang, a Chinese national and Director of Sky Line

Innovation Technology India Pvt. Ltd, and Mr. Arjun,

Managing Director of Baryonyx Technologies Pvt. Ltd, as

masterminds behind the offenses. Further, 28 FIRs were

registered by the Cyber Crime Police Station, Hyderabad,

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implicating Bangalore-based companies running call centers

with around 1,400 tele-callers, handling 42 loan apps, and

involving 350 virtual bank accounts. These loan apps charged

exorbitant interest rates and fees without valid RBI licenses.

Complainants received threatening calls and emails

demanding repayment, with their data being shared with tele-

caller companies that used abusive language and suggested

taking more loans to repay existing ones, trapping customers

in debt. The Cyber Crime Police Station filed charge sheets in

two FIRs under various sections of the IT Act and IPC.

14. Learned Standing Counsel further submitted that an

investigation was initiated based on FIRs filed across the

Telangana, leading to the recording of ECIR/HYZO/04/2021.

The probe revealed that around 365 mobile apps were involved

in offering instant microloans and recovering payments

through tele-callers. These apps used payment gateways like

Paytm, Cashfree, and Razorpay for transactions, opening

merchant IDs to facilitate pay-in and pay-out transactions.

According to the payment gateways, most apps claimed to

have Memoranda of Understanding (MoUs) with one or more

Indian Non-Banking Financial Companies (NBFCs), with

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multiple NBFCs involved, each having MoUs with multiple

apps.

15. Learned Standing Counsel contended that the

Directorate of Enforcement, Hyderabad, launched an

investigation under the Prevention of Money Laundering Act

(PMLA), 2002, against various accused, including the

petitioner, by recording ECIR. A Provisional Attachment Order

was issued on 02.08.2022, attaching properties, including

those of the petitioner, followed by an Original Complaint on

30.08.2022. The Adjudicating Authority issued a Show Cause

Notice on 22.09.2022, and confirmed the attachment order on

27.01.2023. However, the Central Crime Police Station,

Cyberabad Commissionerate, filed a charge sheet in Crime No.

1187/2020 without accusing the management of the

petitioner-Company due to lack of evidence. The petitioner

seeks to quash ECIR/HYZO/04/2021 proceedings, citing no

predicate offense or criminality. But, according to the ruling

of the Hon'ble Supreme Court's in Vijay Madanlal

Choudhary, money laundering charges cannot be dropped

unless the accused is discharged or acquitted, or the case is

quashed. Since the charges are still pending and the

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petitioner has not been discharged or acquitted, the

application is not maintainable.

16. Learned Standing Counsel further submitted that

Section 5(1) of the Prevention of Money Laundering Act (PMLA)

is not limited to those accused in a scheduled offense. It

applies to anyone involved with proceeds of Crime, as ruled by

the Hon'ble Supreme Court in Vijay Madanlal Choudhary.

This means that even if someone is not accused in the initial

Crime, they can still face consequences and be named in a

complaint under Section 3 of the PMLA. Further, The Madras

High Court, in P Rajendran vs Assistant Director,

Directorate of Enforcement 4 , upheld that a person not

prosecuted for the initial crime can still be prosecuted for

money laundering. Meanwhile, the Jharkhand High Court, in

Prem Prakash vs Union of India 5, emphasized that money

laundering is an independent offense, requiring separate

accusations. Therefore, there are serious allegations leveled

against the petitioner, which requires full-fledged trial and

prayed the Court to dismiss the criminal petition.

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17. In support of the submissions of the learned Standing

Counsel for Enforcement Directorate appearing on behalf of

the respondents, he relied upon the judgments of the Hon'ble

Supreme Court and various High Courts in Umsaw Khwan

Village Durbar and others v. Enforcement Directorate and

others 6 , Pawan Insaa v. Directorate of Enforcement 7 , Y.

Balaji v. karthik Desari and Anr 8 , Pavana Dibbur v. The

Directorate of Enforcement 9 and Pankaj Bansal v. Union of

India and Others 10.

18. In the light of the submissions made by the parties and

a perusal of the material available on record, it appears that

the petitioner, representing M/s. Smartcoin Financial Private

Limited, seeks to quash the Enforcement Case Information

Report (ECIR) proceedings due to the lack of a predicate

offense.

19. At this stage, it is pertinent to note that on the principle

of law stated in M/s Jagati Publication Limited, which cited

the decision of the Hon'ble Supreme Court in Vijay Madanlal

2022 LawSuit (Gau)995

2024: PHHC: 049512

SLP(Crl.) Nos.12779-12781 of 2022

Criminal Appeal No.2779 of 2023

2023 SCC OnLine SC 1244

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Chaudhary. This decision established that if a competent

forum concludes that a scheduled offense has not occurred,

then proceedings under the Prevention of Money Laundering

Act, 2002 (PMLA) related to property derived from that offense

cannot continue. In other words, if someone is acquitted or

discharged from a scheduled offense, they cannot be

prosecuted for money laundering related to that offense. The

Supreme Court clarified that the offense of money laundering

is dependent on the illegal gain of property as a result of

criminal activity relating to a scheduled offense. This ruling

resolves conflicting decisions from various High Courts,

providing clarity on the relationship between scheduled

offenses and money laundering proceedings under PMLA.

20. Further, as observed by the Hon'ble Supreme Court on

the offence under Section 3 of the Prevention of Money-

Laundering Act (PMLA). Essentially, for a crime to fall under

Section 3 of PMLA, it must involve illegally gained property

through a scheduled offence. This property must meet the

definition of "proceeds of crime" outlined in Section 2(1)(u) of

the PMLA. Not all properties linked to a scheduled offence are

considered proceeds of crime, but any property that fits this

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definition is automatically considered a crime property. The

Supreme Court also clarified that if someone is acquitted or

cleared of allegations related to a scheduled offence, and it is

proven they rightfully own and possess the property, then that

property cannot be considered proceeds of crime. In such

cases, the Court must return the property to its rightful

owner. It would be contradictory to still consider it proceeds

of crime after a competent Court has made this ruling. The

Supreme Court emphasized that the Court while deciding the

matter, the scheduled offence has the authority to decide the

matter. Ultimately, the PMLA can only be applied if there are

proceeds of crime involved; without them, the authorities

cannot initiate prosecution.

21. Further, in the Judgment of the Vijay Madanlal

Choudhary (supra), in paragraph No.467(d), it is held as

under:

"467(d). The offence under Section 3 of the 2002 Act is dependent on illegal gain of property as a result of criminal activity relating to a scheduled offence. It is concerning the process or activity connected with such property, which constitutes the offence of money laundering. The authorities under the 2002 Act cannot prosecute any person on notional basis or on the assumption that a

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scheduled offence has been committed, unless it is so registered with the jurisdictional police and/or pending enquiry/trial including by way of criminal complaint before the competent forum. If the person is finally discharged/acquitted of the scheduled offence or the criminal case against him is quashed by the Court of competent jurisdiction, there can be no offence of money laundering against him or any one claiming such property being the property linked to stated scheduled offence through him."

22. Learned Standing Counsel for the respondent opposed

the above said judgment stating that the scope of paragraph

No.467(d) of Vijay Madanlal case stating that the Court should

not interpret the law beyond its explicit meaning, stating that

"law is not always logic" and should not be expanded through

logical reasoning alone. In other words, the law should not be

stretched beyond its clear meaning, as logic does not always

apply in legal interpretations. The Judgment of the Madras

High Court in P. Rajendran (supra) supports the stance of the

respondent, stating that prosecution for money laundering

can occur even without being charged for the predicate

offense. The Judgment of the Jharkhand High Court in Prem

Prakash also emphasizes that money laundering is an

independent offense.

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23. Reverting to the facts of the case on hand, the crime

was registered against the petitioner-Company based on a

complaint by one K. Satish, and although the police filed a

charge sheet, the petitioner-Company was mentioned in

column 12 as not being charged due to unproven complicity.

Therefore, since the petitioner was not charged under Section

420 of the IPC, there is no predicate offense, making the PMLA

proceedings an abuse of process.

24. It is the specific stand of the learned Standing Counsel

that the case of the Vijay Madan Lal law applies only when a

person is finally acquitted or absolved in Scheduled Offence

proceedings, rendering further money laundering actions

unsustainable. However, since the petitioner was neither

charged nor acquitted/discharged (as no charges were

framed), this precedent is inapplicable, where the petitioner

was not charged with the predicate offence. When there is no

charge, question of acquittal, discharge or quash does not

arise and thus, PMLA proceedings cannot continue. If the

predicate offence is revived in the future, fresh PMLA

proceedings can be initiated, but until then, the current

proceedings against the petitioner must cease.

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25. At this stage, it is significant to note the judgment of the

Hon'ble Supreme Court in Pavana Dibbur v. The Directorate

of Enforcement 11, wherein in paragraph No.15, it is held as

under:

"15. Coming back to Section 3 of the PMLA, on its plain reading, an offence under Section 3 can be committed after a scheduled offence is committed. For example, let us take the case of a person who is unconnected with the scheduled offence, knowingly assists the concealment of the proceeds of crime or knowingly assists the use of proceeds of crime. In that case, he can be held guilty of committing an offence under Section 3 of the PMLA. To give a concrete example, the offences under Sections 384 to 389 of the IPC relating to "extortion" are scheduled offences included in Paragraph 1 of the Schedule to the PMLA. An accused may commit a crime of extortion covered by Sections 384 to 389 of IPC and extort money. Subsequently, a person unconnected with the offence of extortion may assist the said accused in the concealment of the proceeds of extortion. In such a case, the person who assists the accused in the scheduled offence for concealing the proceeds of the crime of extortion can be guilty of the offence of money laundering. Therefore, it is not necessary that a person against whom the offence under Section 3 of the PMLA is alleged must have been shown as the accused in the scheduled offence. What is held in paragraph 270 of the decision of this Court in the case of Vijay Madanlal Choudhary1

Criminal Appeal No.2779 of 2023

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supports the above conclusion. The conditions precedent for attracting the offence under Section 3 of the PMLA are that there must be a scheduled offence and that there must be proceeds of crime in relation to the scheduled offence as defined in clause (u) of subsection (1) of Section 3 of the PMLA."

26. As seen from the above extracted portion, it is noted

that Section 3 of the Prevention of Money Laundering Act

(PMLA) makes it an offense to assist in concealing or using

proceeds of crime, even if unconnected to the original crime.

For instance, if someone commits extortion (a scheduled

offense) and another person helps hide or use the extorted

money, that person can be guilty of money laundering under

Section 3 of PMLA. This requires two conditions: a scheduled

offense must occur, and proceeds of crime must exist, as

defined in Section 2(u) of PMLA. Notably, a person accused

under Section 3 need not be an accused in the scheduled

offense, as supported by the decision in Vijay Madanlal