The Allahabad High Court’s Lucknow Bench has quashed Enforcement Directorate (ED) held that commercial and contractual disputes cannot be transformed into money laundering prosecutions merely by giving them a criminal colour.
The bench of Justice Subhash Vidyarthi, while allowing a petition under Section 482 CrPC, set aside the Special PMLA Court’s order taking cognizance of offences under Sections 3 and 4 of the PMLA and quashed the entire proceedings arising out of ECIR.
The controversy originated from an FIR lodged by Punjab National Bank in September 2022 alleging that the developer had obtained housing loans in the names of flat purchasers for apartments in a Lucknow housing project but failed to complete the project, execute sale deeds, or ensure repayment of the loans, causing an alleged loss of Rs. 4.63 crore to the bank.
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Pursuant to an earlier direction of the High Court issued while rejecting the bail application of one of the directors, the Enforcement Directorate registered an ECIR and initiated proceedings under the PMLA. The ED alleged that the company had diverted approximately Rs. 9.948 crore of “proceeds of crime” into other real estate projects and personal use, and provisionally attached several immovable properties belonging to the company and one of its directors.
The Special Court subsequently took cognizance of the alleged offences and summoned the company and its directors, prompting the present challenge before the High Court.
The petitioners argued that the entire dispute was essentially contractual and commercial in nature, arising out of delays in project completion and settlement of housing loan liabilities.
They pointed out that One of the four loan accounts had never become a Non-Performing Asset (NPA); Two loan accounts had already been settled and the bank had issued No Due Certificates; a One-Time Settlement (OTS) had been reached in respect of another loan account; and the alleged attachment of a flat purchased in 2012 was legally unsustainable because it had been acquired nearly a decade before the alleged scheduled offence occurred.
The petitioners further contended that the ED had improperly clubbed multiple FIRs and wrongly calculated the alleged proceeds of crime.
The Enforcement Directorate maintained that multiple FIRs against the company and its directors established a pattern of fraud involving diversion of funds received from banks and flat buyers. According to the agency, the amounts received for one project had been diverted to other ventures and liabilities, thereby constituting money laundering under the PMLA.
The ED also argued that the expression “value of such property” under Section 2(u) of the PMLA permitted attachment of equivalent-value properties even if the original proceeds of crime were unavailable.
The Court undertook an extensive examination of the statutory provisions governing “proceeds of crime” under Sections 2(u), 2(v), 2(zb), and Section 3 of the PMLA, along with several landmark decisions of the Supreme Court, including Vijay Madanlal Choudhary v. Union of India, Pavana Dibbur v. Directorate of Enforcement, Indian Oil Corporation v. NEPC India Ltd., and Sarabjeet Kaur v. State of Punjab.
The Court reiterated that only property derived or obtained from criminal activity relating to a scheduled offence can constitute “proceeds of crime.”
It held that property acquired long before the alleged commission of the scheduled offence cannot legally be treated as proceeds of crime merely because the accused is later implicated in criminal proceedings.
A significant aspect of the judgment is the Court’s conclusion that the disputes primarily concerned delayed delivery of flats, execution of sale deeds, and repayment of housing loans—matters that fall squarely within the realm of civil and commercial law.
The Court observed that the complainants had effectively used criminal proceedings as a means to compel settlement of contractual disputes instead of pursuing appropriate civil remedies.
According to the Court, such an approach runs contrary to settled Supreme Court jurisprudence discouraging the criminalisation of purely civil disputes.
The High Court also held that the ED had no jurisdiction to attach a flat purchased in 2012 because it had been acquired nearly ten years before the alleged scheduled offence arising from the 2022 FIR.
Relying on the Supreme Court’s ruling in Pavana Dibbur, the Court held that property acquired prior to the commission of the scheduled offence cannot be linked to proceeds of crime under the PMLA.
The Court further found fault with the Special PMLA Court for passing the cognizance order without addressing the detailed objections raised by the accused.
Referring to settled principles requiring reasoned judicial orders, the Court observed that reasons constitute the “soul” of judicial decision-making and that the Special Court’s failure to consider the petitioners’ objections rendered its order legally unsustainable.
The Court ultimately concluded that the scheduled offences themselves were fundamentally commercial disputes; the loan liabilities had substantially been settled; criminal proceedings had been initiated to pressure the parties into resolving civil claims; and invoking the PMLA in such circumstances amounted to an abuse of the legal process.
Accordingly, the High Court quashed the Special Court’s order dated 30 January 2026, the summons issued to the applicants, and the entire PMLA proceedings arising from the ECIR.
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