The High Court of Karnataka, in a significant judgment, has dismissed four appeals filed by the Directorate of Enforcement (ED), upholding an order by the PMLA Appellate Tribunal that quashed the attachment of seven properties mortgaged to Syndicate Bank.
The Division Bench, comprising Justice DK Singh and Justice Venkatesh Naik T, ruled that properties mortgaged to a bank—which itself was a victim of fraud by its employees—could not be attached as ‘proceeds of crime’ under the Prevention of Money Laundering Act, 2002 (PMLA). The Court also highlighted a critical procedural lapse, noting that the Adjudicating Authority had confirmed the attachment without issuing any notice to the bank, which held a security interest in the properties.
The judgment, dated October 17, 2025, was delivered in a batch of Miscellaneous Second Appeals (MSA No. 78 of 2020 and connected matters) filed by the Deputy Director, Directorate of Enforcement, under Section 42 of the PMLA.
Background of the Case
The case originated from a complaint by the Chief Vigilance Officer of Syndicate Bank, leading to the Central Bureau of Investigation (CBI) registering a case on April 15, 2009. The CBI chargesheet named Sri H.M. Swamy (then Branch Manager, Syndicate Bank), Sri P.K. Vitthaldas (then Manager), Sri Asadulla Khan (borrower), and others.
The core allegation was that the bank officials had entered into a criminal conspiracy with Sri Asadulla Khan, disbursing temporary overdrafts and loans “in gross violation of the procedures, banking norms and in excess of their delegated financial powers.” This conspiracy resulted in a financial loss of Rs. 12,63,65,210/- to Syndicate Bank.
Following the CBI case, the Directorate of Enforcement initiated proceedings under the PMLA. A Provisional Attachment Order (No. 02/2012) was issued on March 14, 2012, attaching seven properties. These properties, held in the names of Sri Asadulla Khan, his two wives (Smt. Ayesha Najam and Smt. Nasreen Taj), and his mother-in-law (Smt. Zareen Taj), were all mortgaged to Syndicate Bank as security for the loans.
The Adjudicating Authority (PMLA) confirmed the attachment on July 27, 2012. However, the respondents successfully challenged this before the Appellate Tribunal (PMLA) in New Delhi, which quashed the confirmation order on September 18, 2017. The ED then appealed the Tribunal’s decision to the High Court of Karnataka.
High Court’s Analysis and Findings
The High Court formulated the primary question for consideration: “whether the mortgaged properties with the Bank could have been attached or not?”
Properties Not ‘Proceeds of Crime’
The Bench concluded that the properties, having been offered as collateral, did not fit the definition of “proceeds of crime” under Section 2(u) of the PMLA. The Court observed that the judgment of the Appellate Tribunal noted these properties were acquired prior to the alleged offences.
The Court held: “The properties which can prima facie be said to be the properties acquired from the proceeds of the crime only can be subjected to the attachment proceedings under the provisions of the PMLA. The properties offered as collateral security against the loans… could not be described as proceeds of crime as defined under Section 2(u) of the PMLA. These properties had not been acquired from the proceeds of the crime and cannot be confiscated by the Central Government.”
Bank as Victim, Not Conspirator
The Court emphasized that Syndicate Bank itself was the victim, and its funds could not be tainted. “The Bank, as an institution, was not party to the conspiracy,” the judgment stated. “The loans were advanced from the funds of the Bank. The source of funds of the Bank could not be described as illegal or tainted money.”
Reinforcing this, the Court noted, “In fact, the Appellate Tribunal has rightly observed that the Bank has been the victim of the crime committed by the Branch Manager and the Manager in conspiracy with the borrowers.”
Critical Procedural Flaw: No Notice to Bank
A decisive factor for the High Court was the Adjudicating Authority’s failure to involve Syndicate Bank in the proceedings, despite the bank being the mortgagee of all seven properties.
The Court found: “It is not in dispute that the Syndicate Bank was not a party to the proceedings before the Adjudicating Authority. No notice was issued by the Adjudicating Authority to the Syndicate Bank…”
Citing the PMLA, the judgment declared, “it was incumbent upon the Adjudicating Authority to have issued notice to the Syndicate Bank in terms of Section 8(1) proviso and Section 8(2) proviso for being heard to prove that the properties were not involved in money laundering.”
Conflict with SARFAESI Act
The High Court also addressed the conflict between the PMLA attachment and the bank’s rights as a secured creditor. The bank had already initiated recovery proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, issuing a demand notice in 2009 and taking possession of one property in 2010.
The Bench observed that the PMLA attachment would unfairly prejudice the bank. “By attaching these properties, the Bank would not be able to proceed against these properties to recover its loans and that cannot be the object of the PMLA,” the Court stated.
It further warned that allowing the ED’s attachment to stand would undermine the bank’s statutory rights under the SARFAESI Act, placing the bank “in a precarious position.”
The Decision
Concluding that the Appellate Tribunal’s order was correct, the High Court found no error in its reasoning, particularly given the Adjudicating Authority’s failure to serve notice to the bank.
“In view of the aforesaid and also considering the mandate of Section 8, as the Adjudicating Authority had failed to serve a notice to the Syndicate Bank… we find that no error is committed by the Appellate Tribunal,” the Court ruled.
“We, therefore, dismiss these appeals filed by the Directorate of Enforcement.”
