PMLA Seizure Under S. 8(3)(a) Limited to 365 Days If No Complaint Against Person/Property: Delhi HC - 2024-01-31

Delhi High Court Restricts ED's Power to Retain Seized Property Under PMLA

New Delhi: In a significant ruling concerning the powers of the Directorate of Enforcement (ED) under the Prevention of Money Laundering Act, 2002 (PMLA), the Delhi High Court has clarified the time limit for retaining seized documents, digital devices, and other property. The Court held that under Section 8(3)(a) of the PMLA, the retention of seized property confirmed by the Adjudicating Authority cannot extend beyond 365 days unless a prosecution complaint specifically against the person from whom the property was seized, or relating to the seized property, is filed before a Special Court.

The judgment, delivered by the bench of Justice Navin Chawla on January 31, 2024, came in a petition filed by Mr. Mahender Kumar Khandelwal against the Directorate of Enforcement.

Case Background

Mr. Khandelwal , who served as the Interim Resolution Professional and later the Resolution Professional for M/s Bhushan Power and Steel Ltd. ( BPSL ) under the Insolvency and Bankruptcy Code (IBC), claimed to have unearthed fraud by the company's ex-promoters.

Based on a CBI FIR against BPSL and others (in which Mr. Khandelwal was not named as an accused but later cited as a witness in ED's prosecution complaint), the ED registered an ECIR under PMLA. In August 2020, the ED conducted search and seizure operations at Mr. Khandelwal 's premises, seizing various documents, digital devices, and jewellery valued at over Rs. 85 lakhs.

The Adjudicating Authority, vide an order dated February 10, 2021, confirmed the retention of these seized items under Section 8(3) of the PMLA, citing the need for continued investigation and adjudication.

Petitioner's Challenge

Mr. Khandelwal approached the High Court seeking the return of the seized items, arguing that more than 365 days had passed since the Adjudicating Authority's confirmation order, and no prosecution complaint had been filed against him or specifically mentioning the seized property. His counsel contended that the "pendency of the proceedings relating to any offence under this Act before a court," as stipulated in Section 8(3)(a) for extended retention, must refer to proceedings involving the person from whom the property was seized as an accused, or proceedings seeking confiscation of that specific property. Reliance was placed on a similar view taken by the Punjab & Haryana High Court.

The petitioner also argued that a prior Delhi High Court order restraining ED from taking "coercive action" against him did not amount to a stay on investigation and thus did not extend the 365-day limit under the Explanation to Section 8(3).

ED's Defence

The ED opposed the petition, stating that their investigation had revealed Mr. Khandelwal 's involvement in siphoning funds from BPSL , leading to a separate provisional attachment order against him (which is also under challenge). The ED's counsel argued that the main prosecution complaint filed against BPSL and others, in which cognizance has been taken by the Special Court, constitutes the "pendency of the proceedings" under Section 8(3)(a), irrespective of whether Mr. Khandelwal is named as an accused therein (where he is currently a witness). They argued that cognizance is taken of the offence, not the offender, and the term "proceedings" should be interpreted broadly.

The ED further contended that other pending writ petitions filed by Mr. Khandelwal challenging summons, attachment orders, and the search/seizure action itself, as well as another WP that stayed the trial of the main prosecution complaint, should be considered as proceedings extending the retention period. They also argued that the "no coercive action" order against Mr. Khandelwal effectively stayed the investigation, triggering the Explanation to Section 8(3) for extending the period. Lastly, the ED claimed that Section 8(3)(a) does not specify any consequence for the expiry of the 365-day period, implying the retention could continue.

Court's Interpretation and Reasoning

Justice Chawla carefully examined Section 8(3)(a) and other relevant provisions of the PMLA. The Court emphasized that the power of attachment, seizure, and freezing of property under PMLA is "draconian" and must be "strictly construed," citing the Supreme Court's judgment in Radha Krishnan Industries v. State of Himachal Pradesh & Ors.

The Court held that the expression "'the proceedings relating to any offence under this Act before a Court' appearing in Section 8(3)(a) of the Act... has to be read in light of the above provisions to mean only a proceeding that is pending before a Special Court in relation to the property or records that are so attached or seized or frozen or with the respect to the person from whom such property was seized or recovered."

The Court noted that the prosecution complaint (CC no. 01/2020) filed against BPSL and others did not name Mr. Khandelwal as an accused, nor did it specifically mention the documents or property seized from him. While acknowledging that cognizance is of the offence, the Court found that for the retention of seized property/documents under Section 8(3)(a) to continue beyond 365 days, the pending criminal proceedings must have a direct nexus with the seized property or the person from whom it was seized (as an accused).

Dismissing the ED's reliance on other pending writ petitions, the Court stated that these were challenges to orders passed under the Act, not "proceedings relating to any offence under this Act before a Court" in the context of the trial.

Regarding the "no coercive action" order, the Court clarified that this merely restrained physical arrest/coercion and did not constitute a stay on the investigation itself. The Explanation to Section 8(3) applies only when the investigation is stayed by a court. The ED had the option to seek vacation or clarification of this order if it impeded specific investigative steps like custodial interrogation, which it admittedly did not do.

Finally, the Court rejected the ED's argument that the absence of a specified consequence for the expiry of the 365-day period meant retention could continue indefinitely. The Court held that continuation of seizure beyond this period, without the required corresponding legal proceedings, would be "confiscatory in nature, without authority of law and, therefore, violative of Article 300A of the Constitution of India," citing M.C. Mehta v. Union of India and Ors. The natural consequence of the time limit expiring without relevant proceedings is the lapsing of the seizure and the return of the property.

Verdict and Implications

Accordingly, the Delhi High Court directed the Directorate of Enforcement to forthwith return all documents, digital devices, property, and other material seized from Mr. Mahender Kumar Khandelwal in August 2020, subject to any contrary order from a competent court.

The judgment reinforces the statutory time limit for the retention of seized property under PMLA Section 8(3)(a), ensuring that such retention is closely tied to ongoing prosecution efforts specifically targeting the seized assets or the individual from whom they were recovered. It underscores the principle of strict construction for draconian powers and protects property rights under Article 300A of the Constitution against indefinite retention without due legal process culminating in a trial related to that property or person.