Introduction

The Directorate of Enforcement (Directorate) has in recent times stepped up its crackdown on the offence of money laundering. Money laundering has obviously become a hot topic as of late and both Advocates and Chartered Accountants have found themselves on the front lines in preparing their client’s defence. The offence of money laundering has largely been considered to be oblivious to income tax proceedings and prosecutions. Neither the Income-tax Act, 1961 nor the Goods and Services Tax Act, 2016 ( hereinafter referred to as ‘Acts’) are included in the schedule to the Prevention of Money Laundering Act, 2002 (PMLA). This therefore would imply that offences that under the two acts would not give rise to money laundering proceedings. However, the complaints for prosecution under these acts are not necessarily in an isolated vacuum. It is observed that from time to time offences under the Indian Penal Code, 1860 (IPC/Code) are also invoked. Certain sections from the Indian Penal Code do find mention in the Schedule to the PMLA. One such Section is Section 120-B.

Relevant Legislative Overview of the PMLA

Before we launch into an in-depth discussion, it would be wise for us to consider some important statutory provisions of the PMLA.

Section 2(1)(u) of the PMLA defines proceedsof crime as under:

“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;]

Section 3 of the PMLA defines the offence of money laundering as under:

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.

[Explanation.—For the removal of doubts, it is

hereby clarified that,—

1. a person shall be guilty of offence of money- laundering if such person is found to have directly or indirectly attempted to indulge or knowingly assisted or knowingly is a party or is actually involved in one or more of the following processes or activities connected with proceeds of crime, namely:—
   1. concealment; or
   2. possession; or
   3. acquisition; or
   4. use;
      or
   5. projecting as untainted property; or
   6. claiming as untainted property, in any manner whatsoever,
2. 
   the process or activity connected with proceeds of crime is a continuing activity and continues till such time a person is directly or indirectly enjoying the proceeds of crime by its concealment or possession or acquisition or use or projecting it as untainted property or claiming it as untainted property in any manner whatsoever.]

It can therefore be seen that the presence of schedule offence is sine qua non for the purposes of action initiated under the PMLA. This proposition has now been affirmed by the Hon’ble Supreme Court in the landmark decision of Vijay Madanlal Choudhary v. Union of India [2022] 140 taxmann.com 610. The Delhi High Court in the case of Directorate of Enforcement v. Gagandeep Singh [2022] 137 taxmann.com 329 (Delhi) held that offence of Money Laundering is not to be appreciated in isolation but is to be read with offenses listed under schedule of the Act. Again, in Mahanivesh Oils & Food Pvt. Ltd. v. Directorate of Enforcement in 2016 SSC On Line Del 475 held that occurrence of a Scheduled Offence is a substratal condition for giving rise to any proceed of crime and consequently, the application of Section 5(1) of the Act. A commission of a scheduled offence is a pre-condition for any proceeding under the Act as without a scheduled offence being committed, the question of proceeds of crime being committed does not arise. It is therefore clear that an offence needs to be scheduled for the Directorate to take cognizance and initiate proceedings. As the offences contemplated in the two taxation Acts taken as examples are not scheduled, it would seem that no offence of Money Laundering would be made out against those accused of committing offences under those Acts. In fact, The Supreme Court in Vijay Madanlal Choudhary v. Union of India[2022] 140 taxmann.com 610 SC held that possession of unaccounted property acquired by legal means may be actionable for tax violations and yet, will not be regarded as proceeds of crime unless the concerned tax legislation prescribes such violation as an offence is included in the Schedule of Prevention of Money Laundering Act.

Criminal Conspiracy

It is however completely possible that general Sections of the Code are invoked in the complaint for prosecution for tax offenses. This would largely depend upon the facts and circumstances of the case. One such offense that has been known to be invoked from time to time is the offense of Criminal Conspiracy.

Section 120-B of the Code is included in Part A of the Schedule of PMLA. This is only one of the many Sections of the Code that are contained in the schedule however, it is also the most ambiguous and therefore lends itself to provide a possible backdoor for the Directorate to initiate action under the PMLA. Though it is Section 120-B that is scheduled, Section 120-A is also important for our discussion as it contains the definitions of criminal conspiracy. They are both defined as hereunder :

120-A. Definition of criminal conspiracy.-

When two or more persons agree to do, or cause to be done,-

1. an illegal act, or

2. an act which is not illegal by illegal means, such an agreement is designated a criminal conspiracy:

   Provided that no agreement except an agreement to commit an offence shall amount to a criminal conspiracy unless some act besides the agreement is done by one or more parties to such agreement in pursuance thereof.

   Explanation.-It is immaterial whether the illegal act is the ultimate object of such agreement, or is merely incidental to that object.

   120-B. 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.]

      It is therefore clear that Section 120-A and Section 120-B go hand in hand. In Ratanlal and Dhirajlal ‘The Indian Penal Code’. 34th Edition the author notes that:

      “To establish a charge of criminal conspiracy the prosecution must prove the following:

      1. An agreement between two or more parties
      2. The agreement must do or caused to be done some illegal act or some act which is not illegal, by illegal means, provided that where the agreement is other than one to commit the offence, the prosecution must further prove;
      3. That some act besides the agreement was done by or more of the parties in pursuance to it.”

This offence is not one that is made out under the income tax act, but it is all pervasive in nature. As stated in Ratanlal and Dhirajlal, the objects and reasons of introducing Section into the code was to make a mere agreement to do an illegal act or an Act that is not illegal by legal means, punishable. Section 120-B provides for the punishment defined under Section 120-A. Those that have been acquainted with tax jurisprudence shall immediately identify the much-debated topic that is even today discussed and debated- the difference between tax evasion and tax planning. Tax evasion is illegal under Section 276C of the income tax act while tax planning as reiterated down by the Hon’ble Supreme Court in the celebrated case of Supreme Court of India v. Azadi Bachao Andolan [2003] 132 Taxmann 373(SC), is not. Section 120-A and Section 120-B of the Code while talking about criminal conspiracy include both, an agreement between two people, to do or cause to be done, tax evasion or tax planning by illegal means an offence. Though we have taken the example of Section 276C it would not be the only section under the two acts that could facilitate the invocation of Section 120- B any offence under any act would facilitate the same. A general stand alone section like Section 120-B included in the schedule to the PMLA can be considered to be a very dangerous backdoor for the Directorate to initiate proceedings under the PMLA. Even when all other offences are not scheduled as is often the case with tax prosecution.

The offence of Criminal Conspiracy is a stand alone offence and has been acknowledged to be fairly difficult to prove. Often available evidence is circumstantial in nature. The offence of Criminal Conspiracy is similar but yet different from the offence of common intention as contemplated under Section 34 of the Code. It is to be noted that the offences contemplated under criminal conspiracy do not disappear merely because the other sections invoked for other offences fail. In that sense it is a stand alone offence. It is completely possible that Section 120B may be invoked in a complaint which includes otheroffences such as those contemplated under the two acts, however an acquittal or a discharge or even quashing of those other offences would not automatically cause an acquittal for the offence under Section 120-B.

At this point it is important to note that the gravity of the Scheduled offense is immaterial when it comes to the offence under PMLA as laid down in Vijay Madanlal Choudhary v. Union of India [2022] 140 taxmann.com 610. Therefore the fact that the offence may fall within either Section 120-B(1) or 120-B(2) is immaterial. The Directorate of Enforcement is not required to wait for the results of a prosecution of a scheduled offence in order to initiate proceedings under Section 3 of PMLA. Though proceedings under PMLA require the existence of scheduled offence for their initiation and continuation, the offence itself is distinct and stand alone from the scheduled offence. It is not required that all the offences made out against the accused need to be scheduled. It would be enough even if a single one is scheduled, and the Directorate can then take cognizance of the offence of money laundering.

The prosecutions under the Income Tax Act are non-cognizable in nature and the Special Court charged with taking cognizance of the same is required to apply its mind to the complaint before issuing process. This is perhaps the strongest safeguard available with regard to a mechanical invocation under Section 120-B of the Code. However, the accused does not have the right to be heard before the issue in process.

Conclusion:

While it is true that those offences (such as those contemplated by the two taxation Acts discussed in this Article) that are not included in the schedule and therefore do not give riseto proceeds of crime as defined by the PMLA cannot give rise to the proceedings under PMLA. However, the invocation of Section 120-B in tax prosecution is neither unheard of nor can be ruled out. This has the potential to be the perfect backdoor for invocation of PMLA proceedings by the Directorate if it chooses to do so. The standalone nature of Section 120-B of the code as read with Section 120-A would provide justification for the maintainability of such proceedings. Needless to say, that the invocation of the said Section 120-B cannot be mechanical or fanciful in nature. Criminal Law has some established feature and requiring an offence to fall squarely within the four corners of the charging statute is one of them. If necessary conditions for invocation of Section 120-B are not made out, the special court may refuse to issue process for the same. Even if process is issued by the special court, it would always be open for the accused to seek discharge or seek to invoke the inherent powers of the High Court under the relevant proceeding the Criminal Procedure Code, 1973 to quash the same. The invocation of the said section 120B of the code may not be possible in every tax prosecution, however, it does allow the Directorate to exercise its jurisdiction under the PMLA in appropriate cases, even if the primary offences made out are only those that are under those taxing acts do not find a place in the schedule. It is not necessary that certain general offences will take the colour of specific primary offences that are alleged against the accused.

It does however make one thing clear, just because the primary offences are not scheduled under the PMLA, does not mean that provisions of the PMLA cannot be invoked if other general offences, that are scheduled are made out.