Bengaluru, October 17: In a crucial ruling reinforcing the distinction between a financial institution and its errant officers, the Karnataka High Court on Friday dismissed four appeals filed by the Directorate of Enforcement (ED) against Syndicate Bank and several private respondents, including Smt. Nasreen Taj. The court observed that mortgaged properties belonging to borrowers could not be treated as proceeds of crime under the Prevention of Money Laundering Act (PMLA), 2002, since the loans were sanctioned using public funds, not tainted money.
The bench, comprising Justice D.K. Singh and Justice Venkatesh Naik T, upheld the 2017 decision of the Appellate Tribunal (PMLA), New Delhi, which had quashed the ED’s attachment of seven properties linked to the ₹12.63 crore loan scam involving the Mandya branch of Syndicate Bank.
Background
The case dates back to 2009, when the Central Bureau of Investigation (CBI) filed an FIR against H.M. Swamy, then Branch Manager of Syndicate Bank, Mandya; Asadullah Khan, a local businessman; and others. They were accused of criminal conspiracy, cheating, forgery, and corruption in connection with fraudulent loan disbursals under the Syndicate Jai Kisan and other schemes.
According to the charge sheet, the accused allegedly conspired to sanction overdrafts and loans far beyond permissible limits, flouting internal procedures and financial norms. The defaulted loans caused a loss of ₹12.63 crore to the bank.
Following the CBI investigation, the Enforcement Directorate initiated proceedings under the PMLA, attaching several properties - including agricultural lands, houses, and industrial units in Mandya - belonging to Khan, his wives Ayesha Najam and Nasreen Taj, and his mother-in-law, Smt. Zareena Taj.
The ED argued that these properties were acquired using proceeds of crime and thus liable for confiscation. However, the Appellate Tribunal in 2017 held otherwise, prompting the ED to challenge the order before the Karnataka High Court.
Court's Observations
The High Court delved deeply into whether mortgaged assets could be considered proceeds of crime under Section 2(u) of the PMLA. Justice Singh observed that the funds lent by the bank originated from legitimate sources - public money - and that the institution itself was not a conspirator.
"The bank was the victim, not the beneficiary of the alleged fraud," the bench remarked, adding that attaching its secured properties would defeat the very purpose of justice.
The court noted that the alleged criminal acts occurred before June 1, 2009 - the date when cheating and conspiracy were added to the PMLA’s Schedule. Consequently, the law could not be retrospectively applied to transactions preceding that date.
The bench further criticised the ED and the Adjudicating Authority for procedural lapses, particularly their failure to serve notice to Syndicate Bank, as required under Section 8(1) and 8(2) of the Act.
"When the Adjudicating Authority was aware that the properties were mortgaged to the bank, it was incumbent upon it to issue notice and allow the bank to explain its position," the judgment stated.
Court's Decision
Concluding that the properties were not derived from illicit funds, the bench dismissed all four appeals filed by the Enforcement Directorate.
"When prima facie the properties mortgaged to the bank are not proceeds of the crime, the attachment order cannot be justified in law," Justice Singh wrote.
Reinforcing the bank’s right to recover dues through lawful means, the court emphasised that recovery under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act must take precedence.
"Blocking recovery under SARFAESI would cause grave prejudice to the bank. It would not be in the interest of justice or public interest to punish the institution for acts committed by its officers," the bench said.
Ultimately, the High Court upheld the Tribunal’s decision, noting that the ED's appeal lacked merit. With the appeals dismissed, all related interlocutory applications were also disposed of.
Case Title: Deputy Director, Directorate of Enforcement, Bangalore Zonal Office vs. Smt. Nasreen Taj & Others
