The Karnataka High Court’s Decision in the D.K. Shivakumar Case: Facets of PMLA Clarified.

By Sameer Sharma

Introduction

Amidst recent developments in the INX Media case involving former Union Finance Minister Mr. P. Chidambaram relating to allegations of money-laundering, a new legal and political storm seems to have broken out with a politician from the South in the fray. Congress bigwig and their go-to troubleshooter in Karnataka, Mr. D.K. Shivakumar, former minister and sitting MLA from Kanakapura, was arrested by the Enforcement Directorate (ED) on allegations of money-laundering on September 3, 2019. This comes as big news, with Congress members in Karnataka calling for a state-wide bandh as protests turned ugly, alleging that the arrest is politically motivated. Mr. Shivakumar is expected to be produced before a Special Court in New Delhi, with the ED seeking to obtain fourteen days of custody to interrogate Mr. Shivakumar. Mr. Shivakumar’s arrest has evoked sympathetic response from politicians crossing party lines, with Karnataka Chief Minister and B.J.P.’s Mr. B.S. Yediyurappa stating that he will be the “happiest” if Mr. Shivakumar is released.

While any developments in this case over the coming few days will no doubt be watched closely, the purpose of this write-up is to take a step back and analyse the judicial decision which was instrumental in this entire matrix. On August 29, 2019, a single-judge bench of Justice Aravind Kumar of the Karnataka High Court dismissed a batch of writ petitions, preferred by Mr. Shivakumar, among others. While each of the many Writ Petitions sought for different reliefs, the Court was finally required to adjudicate on the issue of quashing of summons dated 15.02.2019 and 25.02.2019 by the ED to the petitioners, as well as subsequent proceedings relating thereto. The reasoning of the Court in this judgement is commendable and has far-reaching implications pertaining to the conception of the offence of money-laundering in the pre-2019 Amendment era (for an overview of the changes effected by the 2019 Amendment to the PMLA, see here. To understand whether the 2019 Amendment Act applies retrospectively or prospectively, see here).

Brief Background to the Writ Petitions

A search action came to be conducted by the Income Tax Department under Section 132 of the Income Tax Act, 1961 (“IT Act”), at various premises in New Delhi. This was said to have resulted in seizure of more than seven crores in cash. Statements recorded by the IT Department of some of the persons involved led to a complaint being filed under Section 200 of Code of Criminal Procedure, 1973. This complaint related to offences punishable under the Sections 276 C (I), 277 and 278 of the IT Act as well as Sections 193 and 199 read with Section 120B of the Indian Penal Code, 1860 (“IPC”). The jurisdictional court seized of this complaint granted sanction under Section 279(1) of the IT Act and took cognizance of the matter. Proceedings under the IT Act are underway.

Based on the aforesaid search proceedings conducted by the IT Department, the ED registered an ECIR (complaint) under provisions of the PMLA, pursuant to which investigations were commenced under Sections 50(2) and 50(3) of the PMLA. Summons were issued by the ED to the petitioners in the instant matter under the said Sections 50(2) and 50(3) in pursuance of the investigation which was commenced. It is pertinent to note here that the very initiation of prosecution against the petitioners for offences punishable under the IT Act as well as Section 120B of the IPC was challenged by way of W.P. No. 32593/2018 before a coordinate bench of the Karnataka High Court. An order of stay was granted by the said co-ordinate bench relating to the proceedings under the IT Act.

Arguments Advanced by the Counsels

A bevy of senior counsels, including Mr. Kapil Sibal, Mr. A. Shankar, Mr. B.V. Acharya and Mr. Shashikiran Shetty, appeared for the Petitioners. Arguments canvassed by them are summarized as follows, which provides an interesting insight into the interpretation of the provisions of the IT Act, the IPC and the PMLA: –

1. The offences against which proceedings under the IT Act were commenced, which are Sections 276 C (I), 277 and 278, are not Scheduled Offences under the PMLA. Since the said offences are not categorized as Scheduled Offences under the PMLA, any property derived from such offences would not constitute “proceeds of crime”, the existence of which is the central requirement u/S 3 of the Act (definition of offence of money-laundering). Thus, in such case, there is no question of commission of offence of money-laundering. As a result, proceedings initiated by the ED under the PMLA lack statutory basis and are hence, bad in law.
2. The offence of criminal conspiracy (Section 120A of the IPC defines criminal conspiracy whereas Section 120B of the IPC provides for punishment for the same) under Section 120B, which was relied upon by the ED as a Scheduled Offence under the PMLA to initiate money-laundering proceedings, is not an independent offence. For a case to be made out under Section 120B of the IPC, the object of such conspiracy (an illegal act) must also be made out. Therefore, since the offences under the IT Act are not Scheduled Offences under the PMLA (which would in turn be the object of such alleged conspiracy), the offence of conspiracy u/S 120B cannot solely be relied upon to initiate a money-laundering proceeding.
3. Since the very initiation of prosecution and subsequent proceedings thereto, relating to offences under the IT Act were stayed by an order of a co-ordinate bench of the HC in W.P. No. 32593/2018, the summons issued by the ED under the PMLA must also be quashed. The underlying rationale for this is that the impugned issue of summons is a mere continuation of the proceedings under the IT Act. When the said underlying proceedings are stayed, money-laundering proceedings under the PMLA cannot be sustained.
4. The commission of the underlying Scheduled predicate offence is the substratal condition for giving rise to proceeds of crime and the consequent application of Section 3 of the PMLA. Thus, for the ED to initiate proceedings under the PMLA and to issue summons, the commission of the underlying offences had to be first made out.
5. It is legally untenable for tax authorities to invoke Section 279 of the IT Act to grant sanction for prosecution of an offence u/S 120B of the IPC.

On the other hand, counsels appearing for the Respondents, including the ED, among others, primarily contended that the Scheduled Offence of criminal conspiracy is an independent offence. Resultantly, it need not be proven that the object of such conspiracy actually occurred. Thus, they argued, that the ED could proceed with money-laundering allegations solely on criminal conspiracy. They further argued that proceedings under the IT Act against the Petitioners are completely distinct from those under the PMLA, and that the former must not affect the validity or tenability of the latter.

As can be observed from the nature of submissions made, the Court was seized of important interpretational questions. These involved the nature of the offence of money-laundering, the nature of the offence of criminal conspiracy, the role criminal conspiracy plays as a Scheduled Offence under the PMLA and the interplay between the IT Act and the PMLA.

Judgment of the Court

The Court rendered a reasoned 69-page order thereby dismissing the writ petitions preferred by the Petitioners. In doing so, the Court grappled with multiple interpretive questions spanning different  statutes. The reasoning of the Court is detailed as follows: –

1. As a preliminary issue, the Court was faced with a plea that the writ petitions are not maintainable at the stage at which they have been filed, as only a show-cause notice has been issued to the Petitioners to appear for investigation. The Court noted that the summons issued by the ED and the authority to issue such summons were under challenge as being violative of Article 21 of the Constitution. In light of the gravity of such situation, the Court held that the writ petitions must be entertained, with Articles 226 and 227 of the Constitution being wide enough for carrying out such exercise.
2. The Court interpreted Section 3 of the PMLA, which pertains to the offence of money-laundering. The Court referred to the Statement of Objects and Reasons of the Prevention of Money-Laundering Bill, to trace the purpose as to why the legislation came to be enacted and the mischief which was sought to be cured. Interpreting Section 3 in light of the said objects of the Act, the Court held that the offence of money-laundering is independent of the commission of the predicate Scheduled Offence. What Section 3 of the Act criminalizes is the process or activity connected with the proceeds of crime, which includes its concealment, possession, acquisition, use, projection or claiming of such proceeds as untainted property. The effect of such interpretation is that proceedings before other authorities relating to the commission of the Scheduled Offence have no bearing on money-laundering proceedings under the PMLA. Thus, if proceedings relating to the Scheduled Offences are dropped, that would not ipso facto lead to the cessation of money-laundering proceedings under the Act. Furthermore, it can so happen that the person being prosecuted for the offence of money-laundering may not be proceeded against as far as the Scheduled Offence is concerned. In other words, there can be two separate persons being tried for the offence of money-laundering and the Scheduled predicate offence.
3. The PMLA is a special enactment, thereby providing for a distinct procedure at the initial stage, followed by prosecution at a later stage. Initiation of prosecution under the PMLA cannot be equated with prosecution initiated under criminal proceedings for offences under the IPC. Thus, initiation of action under the PMLA has no bearing in respect of registration of cases under the IPC or other penal laws.
4. The ingredient of mens rea is distinctly present in Section 3 of the Act, as can be seen from usage of the word “knowingly”. Thus, it is not the case that Section 3 of the Act criminalises a person possessing no intention to commit the offence of money-laundering.
5. The Court also reaffirmed the view that constitutional courts under writ jurisdiction must be slow to interfere with proceedings which are at the stage of issuance of show-cause notice, charge sheet, summons or notice to appear. The underlying reason behind the same is that issuance of the aforesaid does not give rise to any cause of action or does not adversely affect the rights of a party. However, interference by the Court is permissible in cases where the authority issuing the aforesaid has no power or jurisdiction to do so. In questions relating to jurisdiction, the Court said that it would be appropriate to direct parties to raise jurisdictional objections before such authority and upon being aggrieved by an adverse order, assail such order under appellate or revisional forums. Thus, the Court held that mere issuance of show-cause notice to the Petitioners would not amount to an Article 21 violation, which would necessitate a writ remedy.

Commenting on the nature of the offence of criminal conspiracy, the High Court relied on judgements rendered by the Supreme Court to re-iterate that the said offence is independent in nature. The Court stated that a mere agreement between two or more persons to commit an illegal act or to commit a legal act by illegal means is sufficient to constitute the offence of conspiracy. It is not necessary that the object of conspiracy must take place for the offence of criminal conspiracy to be made out. As to how it is proven that such an agreement exists, the Court must assess this in light of direct and circumstantial evidence. Thus, the Court rejected the argument canvassed by the counsels for Petitioners that the ED could not have solely relied on conspiracy as mentioned in the Schedule to the PMLA to initiate money-laundering proceedings.

Analysis

As I have written earlier, High courts across the country are divided as to whether the offence of money-laundering is independent of the commission of the Scheduled Offence. There is no authoritative judgement by the Supreme Court also on this point. While the 2019 Amendment to the PMLA has clarified the position of law regarding this question, the instant ruling by the Karnataka High Court is fundamental vis-à-vis the pre-Amendment version of the PMLA. It lays down, quite assertively, that the offence of money-laundering as contained in Section 3 of the Act is independent of the commission of the underlying offence – and that the incidence of liability under Section 3 of the Act is the occurrence of one of the many activities or processes connected with the proceeds of crime [which includes: (i) concealment; (ii) possession; (iii) acquisition; (iv) use; (v) projection; or (vi) claiming of as untainted property]. In fact, the characterization of the offence of money-laundering by the Court as being independent of the underlying offence, validates the view that the 2019 Amendment to the PMLA is clarificatory in nature (as to whether the 2019 Amendment to the PMLA is clarificatory or substantive, see here). The instant judgement is also commendable insofar as it sequesters the legality of proceedings under the PMLA from proceedings under other statutes.

Additionally, the factual scenario before the High Court in the instant matter was very unique, involving an interplay among three legislations – namely the PMLA, the IPC and the IT Act. Arguments by counsels for Petitioners, that since the offences under the IT Act are not Scheduled Offences under the PMLA, initiation of money-laundering proceedings on the basis of such offences is impermissible, seems cogent and attractive. Taken to its logical conclusion, this argument is sound in law, otherwise, the very purpose of inserting specific offences into the Schedule of the PMLA appears redundant. However, the Court did not find favour in this argument. The compelling reason for the same, although not explicitly stated in so many words, is that the ED initiated proceedings under the PMLA by relying only on the offence of criminal conspiracy (Section 120B of the IPC), while completely sidestepping the offences under the IT Act. This becomes clear if the relevant part of ED’s Statement of Objections to the Writ Petitions is looked at (the relevant part of the Statement of Objections is contained in the text of the judgement). With this being the case, it now stands to reason as to why the Court did not deliberate upon the interplay between IT Act offences and the PMLA, despite submissions being made on that point. However, if one were to ask this question in abstract, it would be legally sound to opine that offences finding no mention in the Schedule to the PMLA must not be used as a basis for initiating money-laundering proceedings under the PMLA. While utmost attempts have to be made to give full effect to the objects of the PMLA, adherence to statutory framework and provisions cannot be done away with. Therefore, to ensure consistency and certainty, it is my view that the Schedule to the PMLA must be used as the sole reference point for initiating prosecution against the offence of money-laundering.

Last but not the least, the instant judgement is also essential for its exposition on the role criminal conspiracy plays as a Scheduled Offence. The Court has followed case-law which states that the offence of criminal conspiracy is independent in nature. Thus, it has reiterated that the object of such conspiracy need not be proven for a money-laundering proceeding to be commenced on the basis of criminal conspiracy.

 

[The author is a final-year law student at National Law University, Jodhpur.]