The Prevention of Money Laundering Act, 2002 (‘PMLA’) was introduced to combat the menace of money-laundering as persisting in the country and as a mark of India’s commitment towards the international community to resolve such issue. Hence, to protect the financial integrity and combat the nuisance of money laundering, PMLA was enacted in 2002 to counter the legitimisation of illicit money generated / earned from committing scheduled offence(s) under the Indian Penal Code, 1860 (‘IPC’); the Narcotic Drugs and Psychotropic Substances Act, 1985; the Explosive Substances Act, 1908 et. al.

A bare perusal of Section 3 read with Sections 2(1)(u) and 2(1)(y) of the PMLA evidences that the provisions of the PMLA can be invoked once an accused derives or obtains a property directly or indirectly, resulting from a criminal activity relating to a scheduled offence. Hence, to invoke the provisions of the PMLA, committing of a scheduled offence is sine qua non. With the passage of time, the Legislature in its wisdom, has consistently expanded the horizons of the PMLA by including different economic offences under scheduled offences such as the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015. At this juncture, it is relevant to highlight that despite such amendments and inclusions, the provisions of the Income Tax Act, 1961 (‘IT Act’) were specifically kept out of the contours of PMLA.

Recent trends evidence that in certain cases where prosecution proceedings were initiated against an Assessee under the IT Act, offence under Section 120B of the IPC (criminal conspiracy) was also alleged to have been committed, which in turn being a scheduled offence became the foundation for Enforcement Authorities to initiate proceedings under the PMLA. Such invocation of the PMLA on the basis of an allegation of the offence under Section 120B of the IPC on a standalone basis was challenged by various taxpayers before different High Court(s) of the Country^[1]. The fundamental plea raised before the High Courts was that the offence under Section 120B of the IPC could not be viewed in isolation and in the absence of the predicate offence i.e., offence(s) committed under the IT Act being scheduled offences under the PMLA, initiation of proceedings under the PMLA were void. However, the High Court(s) whilst rejecting such arguments upheld the invocation of the provisions of the PMLA.

Recently, the Supreme Court of India^[2] whilst dealing with an identical scenario, categorically held that proceedings under the PMLA could not be invoked on a standalone allegation of Section 120B of the IPC. Whist holding so, the Apex Court categorically observed that unless Section120B i.e., criminal conspiracy is for committing an offence which in itself is a scheduled offence, invocation of the provisions of PMLA would be against the mandate of the statute. In other words, in the absence of the predicate offence being a scheduled offence, proceedings under the PMLA could not be initiated.

This decision of the Apex Court assumes significance especially owing to the fact that such standalone invocation of Section 120B of the IPC in income tax prosecution proceedings was approved by various High Court(s) in these decisions. The judgement paves way for taxpayers against arbitrary actions being adopted by the Enforcement Authorities.

[1] Sachin Narayan v. Income-tax Officer, [2019] 417 ITR 641 (Karnataka High Court); see also: Ahsan Ahmad Mirza v. Enforcement Directorate, (2019) SCC OnLine J&K 1026 (Jammu & Kashmir High Court); Tahir Hussain v. Asst. Director, Enforcement Directorate, [2023] 296 DLT 106 (Delhi High Court).

[2] Pavana Dibbur v. The Directorate of Enforcement, 2023 INSC 1029 (Supreme Court).