Prologue:

The development of law is a dynamic process. One may have heard that our Indian Constitution is an organic Constitution. What this phrase means is that the Indian Constitution is an organic document that evolves over a period of time to suit requirements that changing times may pose on the original language, intent, and interpretation.

India has also adopted the common law system in its own manner to suit its requirements. The words of the statute may remain static in the absence of amendments, but the law conveyed by those very words may be interpreted differently by the courts. Statutes may not be organic but the law that they espouse may nevertheless changes. In this dynamic context as the Constitutional and Appellate courts lay down the interpretations over a period of time, our interpretations and understanding of the law must also change accordingly.

In my article published in the May issue of the AIFTP journal, we had explored whether the offence under Section 3 of the Prevention of Money Laundering Act,2002 (PMLA) could be triggered by offences under the taxing statute. The conclusion reached then was that “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”. </em >Much water has flowed under the bridge already since that conclusion. A recent judgement of the Supreme Court in the case of Pavana Dibbur v Directorate of Enforcement [2023] 157 taxmann.com 10 (SC) render as recently as on 29th November 2023 has somehow changed the positions of law as espoused in that Article.

The case of Pavana Dibbur was not a case relating to taxation. It is therefore a fit time to revisit whether PMLA proceedings can be invoked in prosecutions that are born out of taxing statutes. It would therefore be fitting to revisit the conclusion we reached last time.

Introduction to relevant statutory provisions under the PMLA

Section 2(1)(u) of the PMLA defines proceeds </strong >of 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:</strong >

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,—

i. 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,

ii. 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 is by now established law that the scheduled offences as per PMLA are the very legs upon which PMLA proceedings stand. A scheduled offence is that offence (as the nomenclature suggests) which finds its place in the schedule to the PMLA. A perusal of the schedule to the PMLA makes for an interesting reading. The offences contained therein look at first blush a motley bunch of offences, drawn from diverse statutes. These include offenses under the Indian Penal Code (IPC) , Narcotics & Psychotropic Substances Act, Explosive Substances Act, Unlawful Activities Prevention Act, Arms Act, Wildlife protection, Immoral Traffic (Prevention) Act, Prevention of Corruption Act, Explosives Act, Antiques and Art treasures Act, Customs Act, Bonded Labour, Child Labour, Juvenile Justice, Emigration, Passports, Foreigners, Copyrights, Trademarks, Biological Diversity, Protection of plant varieties and farmer’s rights, Copyright Act, Environment protection Act, Water / Air pollution control, Unlawful Acts against safety of maritime navigation and fixed platforms on continental shelf, etc.

Offences emanating from taxing statutes (with the sole exception of The Customs Act,1962) are conspicuous by their absence in the schedule. It would therefore seem that tax evasion ipso facto would not be a trigger for the offence of money laundering in India. Other offences under the taxing statutes would similarly stand excluded once it is established that the existence of a scheduled offence would be the sine qua non for attracting the full force of the PMLA as laid down by the Hon’ble Supreme Court in the landmark judgement of Vijay Madanlal Choudhary v. Union of India [2022] 140 taxmann. com 610 (SC). As already discussed in our earlier article (May 2023 issue), the Supreme Court in Vijay Madanlal Choudhary </em >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. The position taken by the Supreme Court was quite clear *6– no scheduled offence, no offence of money laundering.

We had also discussed Section 120-B of the Indian Penal Code which did find itself in the schedule to the PMLA. We had made averments as to its ambiguity and hypothesized as to it being a possible backdoor to invoke PMLA in non-scheduled offences including those under the tax statutes. It is this hypothesis that now needs to be analysed in light of the Supreme Court’s decision in Pavana Dibbur (supra).

Introduction to the relevant sections dealing with Criminal Conspiracy from the Indian Penal Code, 1860</strong >

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.]

The Pavana Dibbur case

The observations in the Pavana Dibbur case were somewhat resonating before a three Judge Division bench of the Supreme Court which was considering whether or not to refer the Vijay Madanlal Choudhary case to a constitution bench for reconsideration. However, that bench was dissolved due to the expected retirement of one of the Judges on the Bench which would not leave much time for the hearing or for the order to be passed. However, it was not much later that the two Judge Division Bench of the Supreme Court gave the Judgement of Pavana Dibbur and gave clarity to the law.

In Pavana Dibbur, the offences for which the properties of the accused were sought to be attached were not included in the schedule to the PMLA, with the sole exception being Section 120-B of IPC. It was contended by the petitioners before the Supreme Court that Section 120-B of the IPC by itself, in the absence of any other scheduled offence, cannot sustain a charge under the PMLA. It was submitted that unless there is an allegation regarding a conspiracy to commit any scheduled offence, the prosecution under the PMLA could not lie. It was further urged that if Section 120-B of the IPC can be treated a standalone offence to attract prosecution under the PMLA, a complaint under the PMLA could be filed where the allegation is of a criminal conspiracy to commit an offence which is not a scheduled offence.

Per contra, the Ld. Additional Solicitor General appearing for the Directorate submitted that wherever the legislature intended, it has made a particular offence read with another offence as a scheduled offence. After pointing out certain parts of the schedule to show the legislature’s intention, he submitted that schedule must be read as it is and that nothing can be added or subtracted from the schedule considering the objects of the PMLA. He also pointed out that the validity of the schedule had been upheld in the case of Vijay Madanlal Choudhary (supra).

The court observed that many offences which may generate proceeds of crime have not been included in the schedule to the PMLA. After going through the schedule of the PMLA the court further observed that many offences under Chapter XVII of the IPC become scheduled offences only if they have cross-border implications such as offences of dishonest misappropriation of property, criminal breach of trust or theft. The court noticed that if the position taken by the Directorate was to be accepted, any offence not included in Parts A, B or C of the schedule will become a scheduled offence if a conspiracy to commit the offence is alleged. The court further observed that by that logic, a conspiracy to commit any penal law which is capable of generating proceeds, can be converted into a scheduled offence by applying Section 120-B of the IPC though the offence is not a part of the schedule. The court held that this cannot be the intention of the Legislature.

Delving into interpretations of the intention of the Legislature, the court observed that penal laws must be construed according to the legislative intent as expressed in the enactment. Penal statutes are required to be strictly construed. If two reasonable interpretations can be given to a particular provision of a penal statute, the court should generally adopt the interpretation which is more lenient i.e., the interpretation that avoids the imposition of penal consequence needs to be adopted.

The court held that the legislative intent behind the definition of the scheduled offence as contained in the PMLA is that every crime which may generate proceeds of crime need not be a scheduled offence. Only certain specific offences have been included in the schedule and if the submissions of the Directorate are accepted, the schedule would become meaningless or redundant as even if an offence registered is not a scheduled offence, the provisions of the PMLA and in particular Section 3 would be invoked by applying Section 120-B.

While taking a closer look at Section 120- B of the IPC, the court observed that only because there is a conspiracy to commit an offence, the same does not become an aggravated offence. The object of Section 120- B is to punish those involved in a conspiracy to commit a crime, though they may not have committed any overt act that constitutes the offence. Conspiracy, being an agreement between accused to commit an offence only incorporates the principle of vicarious liability. If no specific punishment is provided in the statute for conspiracy to commit a particular offence, the section treats a conspirator of the main accused as an abettor for the purposes of imposing punishment. A perusal of the punishments under Section 120-B would make it evident that it is not an aggravated offence.

The Supreme Court further observed that the interpretation suggested by the Directorate would defeat the legislative object of making only a few selected offences as scheduled offences and if accepted, the statute may attract the vice of unconstitutionality for being manifestly arbitrary. It was held that it cannot be the legislatures intention to make every offence not included in the schedule a scheduled offence by applying Section 120-B. The court held that an offence punishable under Section 120-B of IPC would become a scheduled offence only if the conspiracy alleged is of committing an offence which is otherwise a scheduled offence.

Key Take aways

It would be apt to say that the Pavana Dibbur case is a watershed moment with regards to the jurisprudence regarding the invocation of PMLA proceedings. In one fell swoop not only does it reinforce the ratio that was propounded in Vijay Madanlal Choudhary that the genesis of the offence of money laundering as envisaged by Section 3 of the PMLA is in fact a scheduled offence but also takes it one step forward by saying that the general offence of a criminal conspiracy cannot purport to add to the schedule offences that are not already there indirectly without running the risk of being manifestly arbitrary and risking the guillotine of the test of constitutionality. It therefore follows that the mere invocation of 120-B of the IPC will not by itself give rise to penal proceedings or prosecution under the PMLA.

There is however one important caveat. The Income-tax Act may not have the level of interplay with other statutes that the PMLA does, however it does not exist in a vacuum. Section 280A(2) of the Income-tax Act, 1961 envisages that the accused who may be charged under the Code of Criminal Procedure for offences not under the said Act may also be tried by the Special Court. It is completely possible other sections of the IPC may be attracted to the particulars of a case that may have its genesis in the Income-tax Act or other taxing statutes and that these sections of the IPC may be scheduled under the PMLA. If so, then PMLA proceedings can be invoked as it is not necessary that every offence alleged against an accused needs to be scheduled for PMLA proceedings to be invoked.

It is therefore apparent that a very dangerous backdoor for invoking PMLA proceedings in non – scheduled offences has been shut and locked by the Supreme Court. But as things stand, our original hypothesis which was the conclusion in our earlier article (though diluted) still stands :

“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.</em >”