Karnataka High Court Examines Enforcement Directorate's PMLA Actions Against Former MUDA Commissioner
- Sunny S
- May 24
- 10 min read
1. Short Introduction
This briefing note summarizes a significant order passed by the High Court of Karnataka on January 27, 2025, in the case of Dr. Natesha D.B. v. Directorate of Enforcement. The petitioner, Dr. Natesha D.B., a former Commissioner of the Mysore Urban Development Authority (MUDA), challenged actions taken against him by the Directorate of Enforcement (ED) under the Prevention of Money-Laundering Act, 2002 (PMLA). Specifically, the petition contested the legality and validity of a search and seizure operation conducted at his residence, a statement recorded during that search, and multiple summons issued to him by the ED. These actions stemmed from an Enforcement Case Information Report (ECIR) registered by the ED, based on an FIR filed by the Lokayukta concerning a predicate offence related to the alleged illegal allotment of sites by MUDA during the petitioner's tenure.
2. Issues before the Court
The High Court formulated the following key issues for consideration based on the arguments presented by both sides:
Whether the authorization issued to conduct the impugned search and seizure at the petitioner's residence on October 28-29, 2024, and the consequent statement recorded under Section 17 of PMLA, 2002 suffers from lack of jurisdiction.
Whether the said impugned search and seizure and the statement recorded, is bad in law for lack of the requisite “reason to believe” under section 17(1) of PMLA, 2002, and is therefore, an abuse of process of law.
Whether the impugned summons/notices issued under Section 50 of PMLA, 2002 and the various statements recorded thereunder, be sustained under the law.
Whether, in the course of its administration and execution of the PMLA, 2002, the attachment of property under Section 5 of the Act must mandatorily precede the conduct of search and seizure under Section 17 of the said Act.
3. Defence Submissions
Shri K. Arvind Kamath, the learned Additional Solicitor General representing the Directorate of Enforcement, advanced several arguments in defense of the agency's actions:
He contended that the writ petition challenging the summons under Section 50 of the PMLA was premature and lacked merit, as the summons were merely procedural steps in an ongoing investigation and had not caused any prejudice to the petitioner.
Section 50 explicitly empowers the competent authority to summon any person, compel their attendance, and require the production of records or evidence during an investigation, making the summons issued to the petitioner lawful and within the ED's statutory powers.
The investigation was initiated concerning proceeds of crime derived from a scheduled offence related to the illegal allotment of sites by MUDA. The sites themselves, derived from this criminal activity, fall within the definition of "proceeds of crime" under Section 2(1)(u) of the Act.
It was argued that the petitioner, as the former Commissioner of MUDA, assisted the accused in the illegal allotment and might be in possession of relevant records or properties.
Regarding the challenge to the authority authorizing the search and seizure, the ASG submitted that the Joint Director is an authority under Section 48 of the PMLA and is ranked above a Deputy Director. He argued that Section 17 empowers the Joint Director to authorize an Assistant Director to conduct search and seizure. This was supported by a Circular dated September 27, 2011, issued by the Directorate of Enforcement, which authorizes Assistant and Deputy Directors to conduct searches under Section 17 subject to the prior approval of the Joint Director, reinforcing the legality of the authorization in this case.
He asserted that the Joint Director had duly recorded the "reason to believe" in writing as required under Section 17(1), and these reasons clearly indicated the petitioner's role in the illegal allotment of sites. The ASG argued that the sufficiency or adequacy of these "reasons to believe" cannot be examined in a writ petition, as it constitutes the subjective satisfaction of the competent authority. He further distinguished the standard for recording reasons under Section 17(1) (for search/investigation) from that required under Section 19 (for arrest/punitive action).
The petitioner had suppressed material facts, specifically his involvement as the former Commissioner of MUDA in allotting the fourteen sites that constituted proceeds of crime. This suppression, he argued, disentitled the petitioner from seeking relief.
The PMLA contains in-built safeguards against arbitrary actions and misuse of power, such as requiring reasons to be forwarded to the adjudicating authority and Section 62 providing for punishment for vexatious searches.
4. Court Observations
The High Court, after considering the arguments and reviewing relevant provisions and precedents, made the following observations:
The Court defined key terms under the PMLA, including "investigation", "proceeds of crime", and the "offence of money-laundering". It noted that the offence under Section 3 requires the existence of proceeds of crime from a scheduled offence and actual involvement or intent in an activity connected with these proceeds. Mere inadvertent possession or incidental handling without criminal intent is insufficient.
Issue 1: Lack of Jurisdiction: The Court examined Section 17 and Section 48 of the PMLA and the relevant Circular. It found that the Director had authorized the Joint Director (an officer above the rank of Deputy Director as per Section 48) via the Circular dated September 27, 2011, for the purposes of Section 17. The Joint Director had then issued the authorization letter dated October 27, 2024, authorizing the Assistant Director to conduct the search. Further, the Joint Director forwarded the recorded reasons to the Adjudicating Authority after the search as required by Section 17(2). Based on this, the Court concluded that the conduct of the search and seizure under Section 17 cannot be faulted for lack of jurisdiction.
Issue 2: Lack of "Reason to Believe": The Court extensively reviewed precedents from the Supreme Court and High Courts on the interpretation of "reason to believe" under the PMLA. It emphasized that "reason to believe" is not subjective, must be based on material evidence, exceed mere suspicion, and have a rational connection to the formation of belief. For search/seizure under Section 17, there must be sufficient cause indicating the commission of the money laundering offence and a justification for seizing property/records to prevent their dissipation. For possession of proceeds, the reasons must specifically show the person had control over and intent to use or manage them, not merely holding them by chance. The Court reviewed the reasons recorded by the ED (provided in a sealed cover). It found that the reasons mentioned improper allotment by the petitioner and his closeness to realtors, but did not indicate the petitioner's involvement in any act constituting money laundering, or being in possession of proceeds of crime, records, or property related to money laundering. There were no specific allegations or evidence to substantiate the suspicion that the petitioner received illegal gratification, layered proceeds, or knowingly assisted in such activities. The Court held that in the absence of material to probablize the petitioner's involvement, the conclusion necessitating the search did not satisfy the threshold of "reason to believe" but was no more than a mere suspicion. Thus, the Court found that the impugned search and seizure was unwarranted, based on unfounded suspicion, and was an abuse of process of law.
Issue 3: Validity of Section 50 Summons/Statements: The Court considered Section 50 of the PMLA and precedents regarding its use. It reiterated the Supreme Court's position that proceedings under Section 50 are for inquiry and gathering evidence, not investigation for prosecution, and therefore, the constitutional guarantee against self-incrimination under Article 20(3) is not applicable at this stage. However, the Court distinguished this case based on its finding regarding the lack of "reason to believe" for the preceding search and seizure. It observed that the authority can summon a person to record a statement or produce documents only where there is credible evidence that an offence under Section 3 of PMLA has been committed. Since the Court found that no prima facie case for an offence under the PMLA had been established and no incriminating material was found during the search and seizure, the issuance of summons to the petitioner lacked legal authority. Compelling the petitioner to appear and record statements or produce documents would unjustly infringe upon his personal liberty.
Issue 4: Attachment under Section 5 must precede Search under Section 17?: The Court rejected the petitioner's argument that Section 5 attachment must mandatorily precede Section 17 search based on the placement of sections. It clarified that Section 17 is an investigative tool. While Section 5 can precede Section 17 if there is sufficient information for provisional attachment, it is not required. The attachment of movable property, as covered under the definition of "property" in Section 2(v), often necessitates an incidental search. The Court held that the exercise of these investigative tools is left to the agency's discretion based on case facts, and attachment under Section 5 is not mandated to precede search and seizure under Section 17.
Other Observations: The Court briefly addressed the respondent's argument about suppressed facts, noting that the petitioner was not an accused in the predicate offence, and he could not be expected to disclose past duties unless informed that the search and summons were related to his role in the alleged illegal allotment to an accused. The Court emphasized that the ED, as a premier investigative agency, is expected to act with fairness. It highlighted that the right to liberty and privacy under Article 21 protects against arbitrary searches. A search conducted "under the garb of investigation" without prima facie evidence of a Section 3 offence is an abuse of process. The ED cannot disregard the procedural fairness elements within the PMLA, and any curtailment of civil liberties must adhere to due process.
Based on these observations, the Court allowed the petition. The search and seizure conducted at the petitioner's residence on October 28-29, 2024, and the subsequent statement recorded under Section 17(1)(f) were declared invalid and illegal due to the absence of 'reason to believe'. The statement recorded under Section 17(1)(f) was ordered to be retracted. The summons issued under Section 50 dated October 29, 2024, and November 6, 2024, and the various statements recorded under Section 50 were quashed. The petitioner was granted liberty to initiate action under Section 62 of the PMLA against the officer concerned before the appropriate forum, noting that whether the search was vexatious is a matter of trial.
Frequently Asked Questions
What is the core issue in this writ petition before the Karnataka High Court?
The writ petition challenges the legality of search and seizure operations conducted by the Directorate of Enforcement (ED) at the petitioner's residence, as well as the subsequent recording of his statement and the issuance of summons under the Prevention of Money-Laundering Act, 2002 (PMLA). The petitioner, a former Commissioner of the Mysore Urban Development Authority (MUDA), argues that these actions were invalid and illegal due to a lack of jurisdiction, absence of a valid "reason to believe," and procedural irregularities under the PMLA and the Indian Constitution.
What specific actions of the Enforcement Directorate are being challenged?
What is the basis for the Enforcement Directorate's action against the petitioner?
What is the petitioner's primary argument regarding the search and seizure?
How does the Enforcement Directorate justify its actions?
What is the significance of "reason to believe" under Section 17 of the PMLA according to judicial precedents cited?
What is the court's finding regarding the "reason to believe" in this specific case?
What is the court's decision regarding the search, seizure, and summons?
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