In a stark example of the abuse of the process of law, the provisions of the Prevention of Money Laundering Act, 2002 (“PMLA”) are being invoked in a circuitous manner in Income Tax prosecution proceedings. This is not only contrary to the intention for invoking the money laundering law, but also the mandate of the Legislature. What this article analyses is whether the Income Tax (“IT”) Authorities under the Income-tax Act, 1961 (“IT Act”) namely the Assessing Officer, while initiating the prosecution proceedings under the IT Act, is competent to invoke the provisions of other penal laws so as to expand the horizon of the prosecution.

It is trite that the IT Act is a code in itself and the offences under the IT Act for which prosecutions can be initiated have to be qua the offences specifically mentioned under the said Act. However, recent trends have shown that the IT Authorities in a very cavalier manner and being incompetent to do so, are invoking the provisions of the Indian Penal Code, 1860 (“IPC”), which dramatically shifts the arena from mere IT prosecution to a prosecution under the PMLA.

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. The then Finance Minister of India, whilst delivering his speech at the time of introduction of PMLA in the Parliament, categorically stated that:

“…money-laundering, that is the cleansing of proceeds of crimes such as extortion, treason, drug trafficking, gun running etc. poses a serious threat to the integrity and sovereignty of a country and also to its financial systems. This threat to the nation and its economy has been recognised the world over and several UN and other international conventions have called upon member countries to take legislative and other preventive measures to combat the menace of money laundering…”

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 IPC; the Narcotic Drugs and Psychotropic Substances Act, 1985; the Explosive Substances Act, 1908 et. al. However, the way the schedules of the PMLA have been subsequently amended, so as to bring within its ambit other laws, which have no relationship to crimes being committed and having only financial consequences under the respective laws, evidences a departure from its original intent/rationale. Despite these amendments expanding the scope of the PMLA, the provisions of the IT Act were specifically kept out of the contours of PMLA. However, as pointed out above, for reasons best known to themselves, the IT Authorities under the IT Act have now started blending a cocktail of the provisions of the IT Act as well as IPC so as to enlarge the scope of such prosecutions.

The other issue, which is thought provoking, is that the Apex Court has clearly held that the IT Authorities are not competent to dwell into other laws and come to any determination qua such laws. Thus, one fails to understand as to how the IT Authorities has any expertise or capability to invoke provisions of the IPC, while initiating a prosecution under the IT Act. One also has to keep in mind that a serious consequence like prosecution cannot be on whims and fancies of an IT Authority and the allegation of violation of a law, having serious consequences, has to be made with responsibility and in proper discharge of the functions and powers vested with such Authority.

Before discussing the misuse of the provisions of the PMLA in IT prosecutions, it would be apposite to refer to the key provisions of the PMLA.

Section 3 of the PMLA defines the term money-laundering to mean as under:

“3. Offence of money-laundering — Whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or activity connected with the proceeds of crime including its concealment, possession, acquisition or use and projecting or claiming it as untainted property shall be guilty of offence of money-laundering.”

Further, the term “proceeds of crime” as appearing in section 3 of the PMLA has been defined under section 2(1)(u) of the PMLA, which reads as under:

“(u) “proceeds of crime” means any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence or the value of any such property or where such property is taken or held outside the country, then the property equivalent in value held within the country or abroad;

Explanation. —For the removal of doubts, it is hereby clarified that “proceeds of crime” include property not only derived or obtained from the scheduled offence but also any property which may directly or indirectly be derived or obtained as a result of any criminal activity relatable to the scheduled offence;”

Moreover, “scheduled offence” has also been defined under section 2(1)(y) of the PMLA, which reads as under:

“(y) “scheduled offence” means—

• the offences specified under Part A of the Schedule; or
• the offences specified under Part B of the Schedule if the total value involved in such offences is one crore rupees or more; or
• the offences specified under Part C of the Schedule.”

A conjoint reading of above provisions indicates that the commission of a predicate offence is sine qua non for triggering the consequences of money laundering.^[1] Further, in terms of the law laid down by the Apex Court^[2], proceedings under the PMLA cannot be initiated unless the complaint of a predicate offence is registered under the applicable law.

It has been further held that in the eventuality, if the person against whom proceedings under the PMLA have been initiated is absolved/acquitted of the scheduled offence, as a natural corollary, the offence registered under section 3 or 4 of the PMLA would also become unsustainable.

With the passage of time and given the dynamic environment we live in, the meaning of the term “money laundering” has also evolved and should not be understood in stricto sensu i.e., in its dictionary/ traditional sense. The Legislature whilst acknowledging the same, has consistently expanded the horizons of the PMLA by encompassing different economic offences under scheduled offences, triggering the applicability of the PMLA. A perfect example of such inclusion is the proceedings under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, which has been made a scheduled offence under the PMLA.^[3] However, what is not understood is as to how the offences under Paragraph 16, 17, 20 to 29 of the Schedule have any criminal activity associated with it.^[4] Secondly, what is also troubling is that the offences referred to above, may not necessarily generate “proceeds of crime”. In that eventuality, how the PMLA becomes applicable is a mystery. This is also contrary to the original intent of the Legislature to bring within its foray offences which compromised the sovereignty and integrity of the nation. This also allows the Enforcement Agencies (“EA”) to misuse the harsher provisions under the PMLA for offences, which neither have semblance with a criminal activity nor generate any “proceeds of crime”.

As mentioned above, the Legislature in its wisdom has specifically kept offences under the IT Act outside the purview of the PMLA. In this regard, useful reference can be drawn to the observation of the Hon’ble Apex Court in the case of Vijay Madanlal Choudhary v. Union of India^[5]:

“251…similarly, possession of unaccounted property acquired by legal means may be actionable for tax violation and yet, will not be regarded as proceeds of crime unless the concerned tax legislation prescribes such violation as an offence and such offence is included in the Schedule of the 2002 Act…”

The clear logic for not bringing the IT prosecutions under the schedule offences of the PMLA was that many offences under the IT Act are technical, for example where prosecutions can be initiated for mere non filing of the returns of income in time or signing an incorrect verification etc. Under no circumstances these are remotely related to any criminal activity and in any case these technical offences do not generate any “proceeds of crime”. The quandary which arises is that while initiating prosecution under the IT Act, for example for a technical offence, can provisions of the IPC such as “criminal conspiracy” as envisaged under section 120B of the IPC be invoked? This would be an ideal case of abuse of the process of law and targeted individuals may be subjected to harsher provisions of the PMLA merely by inserting an allegation in the IT prosecution proceedings of criminal conspiracy.

What cannot be done directly – Should not be done indirectly

The legal maxim “Quando aliquid prohibetur ex directo, prohibetur et per obliquum” i.e., what cannot be done directly, should not be done indirectly, appears to have been given a complete go bye by the EA in recent times. As stated above, although the offences envisaged under the IT Act do not form part of the scheduled offence under the PMLA, invocation of other scheduled offences such as section 120B of the IPC in proceedings under the IT Act, has resulted in invocation of the PMLA against the taxpayers by the EA.

Section 120B of the IPC reads as under:

120B. Punishment of criminal conspiracy.—(1) Whoever is a party to a criminal conspiracy to commit an offence punishable with death, imprisonment for life or rigorous imprisonment for a term of two years or upwards, shall, where no express provision is made in this Code for the punishment of such a conspiracy, be punished in the same manner as if he had abetted such offence.

(2) Whoever is a party to a criminal conspiracy other than a criminal conspiracy to commit an offence punishable as aforesaid shall be punished with imprisonment of either description for a term not exceeding six months, or with fine or with both.”

Recent trends evidence that in certain cases where prosecution proceedings were initiated against the taxpayer under the IT Act, offence under section 120B of the IPC was also alleged to have been committed, which in turn being scheduled offence became the foundation for initiating proceedings under the PMLA by the EA. The question, which arises for consideration, is whether the offence of section 120B as alleged in the IT proceedings can be used to trigger the applicability of the PMLA de hors conviction for the offence committed under the IT Act. Meaning thereby, where the principal allegation against the taxpayer is of breach of tax laws whether the invocation of section 120B of the IPC enables the EA to initiate proceedings under the PMLA.

In this context, various High Courts of the Country^[6] whilst adjudicating the said issue, negated the plea of the Petitioners that the offence under section 120B of the IPC cannot be viewed in isolation and unless offence/s committed under the IT Act are scheduled offences under the PMLA, the same ought not to be the foundation for invocation of the PMLA against the taxpayer. In furtherance thereto, the High Court’s categorically opined that the offence of criminal conspiracy being an independent offence could be invoked on a standalone basis so as to initiate proceedings under the PMLA and hence, upheld such actions of the EA.

As highlighted above, the pertinent question which requires consideration is whether an IT Authority being a creature of the IT Act has the necessary knowledge and expertise so as to allege violation under other statues? If the answer is in the affirmative, section 120B of the IPC may not be the only offence which the taxpayers ought to be vary of. Offences such as section/s 417 (punishment for cheating), 418 (cheating with knowledge that wrongful loss may ensue to person whose interest offender is bound to protect), 420 (cheating and dishonestly inducing delivery of property) of the IPC et. al. are also scheduled offences under the PMLA and may be invoked during the course of prosecution proceedings under the IT Act^[7], creating a perfect back door entry for EA.

Today, the settled law dictates that initiation of criminal prosecution under the IT Act can be initiated de-hors the framing of the assessment.^[8] Hence, a taxpayer may be subjected to prosecution along with proceedings under the PMLA irrespective of the fact that the assessment proceedings are yet to be finalised.

Conclusion

While the intention and objective of invoking laws such as the PMLA is laudable given the international commitments which India has, but these laws should not become a tool for harassment and applicability where there is not even a remote connection with a “criminal activity” or “proceeds of crime”. A legislation like the IT Act in any case has financial and other consequences like imprisonment etc. for the offences contained therein, one still fails to understand as to why the provisions of the PMLA would be invoked to such prosecutions. The need of the hour is for either the Legislature or the regulators to lay down guidelines so as to prevent the abuse of law.

Footnotes:

[1] P. Chidambaram v. Directorate of Enforcement, (2019) 9 SCC 24 (SC); see also: Babulal Verma v. Enforcement Directorate, 2021 SCC OnLine Bom 392 (Bom. HC).

[2] Vijay Madanlal Choudhary v. Union of India, (2022) SCC OnLine SC 929 (SC). It is relevant to highlight that a review petition has been preferred against the said decision which is pending before the Hon’ble Supreme Court of India.

[3] Section 88 of Act 22 of 2015 (w.e.f. July 01, 2015, vide S.O. 1790(E), dated July 01, 2015).

[4] Paragraph 16 – Offences under the Juvenile Justice (Care and Protection of Children) Act, 2000; Paragraph 17 – Offences under the Emigration Act, 1983; Paragraph 20 – Offences under the Copyright Act, 1957; Paragraph 21 – Offences under the Trade Marks Act, 1999; Paragraph 22 – Offences under the Information Technology Act, 2000; Paragraph 23 – Offences under the Biological Diversity Act, 2002; Paragraph 24 – Offences under the Protection of Plant Varieties and Farmers Rights Act, 2001; Paragraph 25 – Offences under the Environment Protection Act, 1986; Paragraph 26 – Offences under the Water (Prevention and Control of Pollution) Act, 1974; Paragraph 27 – Offences under the Air (Prevention and Control of Pollution) Act, 1981; Paragraph 28 – Offences under the Suppression of Unlawful Acts against safety of maritime navigation and fixed platforms on continental shelf Act, 2002; Offences under the Companies Act, 2013.

[5] Supra note 2.

[6] Sachin Narayan v. ITO, [2019] 417 ITR 641 (Kar. HC); see also: Ahsan Ahmad Mirza v. Enforcement Directorate, (2019) SCC OnLine J&K 1026 (J&K HC); Tahir Hussain v. Asst. Director, Enforcement Directorate, [2023] 296 DLT 106 (Del. HC).

[7] H.D.F.C. Bank v. State of Bihar, [2022] 448 ITR 103 (Patna HC); see also: Kothari & Sons Industries (P.) Ltd. v. N. Subramanian, ITO, [2001] 171 CTR 663 (Mad. HC).

[8] Radheshyam Kejriwal v. State of W.B., (2011) 3 SCC 581 (SC); see also: Sasi Enterprises v. CIT, (2014) 5 SCC 139 (SC).