Introduction:

The Bombay High Court has set aside the freezing of bank accounts and payment aggregator and payment gateway accounts belonging to Coda Payments India Pvt. Ltd., involving assets of approximately ₹100 crores, holding that the Adjudicating Authority failed to comply with the mandatory requirement contained in Section 8(2) of the Prevention of Money Laundering Act, 2002 (PMLA). The Court held that the statutory requirement to determine whether the property in question is actually involved in money laundering cannot be reduced to a procedural formality. It further ruled that where the Adjudicating Authority fails to record such a mandatory finding, the Appellate Tribunal cannot subsequently supply the missing finding and thereby cure the original defect.

The judgment was delivered by a Division Bench comprising Justice A. S. Gadkari and Justice Kamal Khata while hearing an appeal under Section 42 of the PMLA against an order of the Appellate Tribunal which had affirmed the continuation of freezing of the company’s bank accounts and payment aggregator/payment gateway accounts.

The proceedings arose from an Enforcement Case Information Report registered by the Directorate of Enforcement on the basis of ten First Information Reports alleging offences under Sections 420 and 120-B of the Indian Penal Code. The underlying allegations concerned users of online gaming applications who were allegedly subjected to unauthorised deductions after an initial transaction. Following investigation and searches, the Enforcement Directorate froze five identified bank accounts and merchant IDs maintained by the appellant with different payment aggregators and payment gateways.

The freezing of the accounts had substantial financial consequences for the company. According to the appellant, properties worth approximately ₹100 crores had effectively been subjected to restraint, whereas the total amount allegedly involved in the ten predicate-offence FIRs was only around ₹25 lakhs. The company therefore challenged not merely the continuation of the freezing but also the legal basis on which such a substantial quantum of property had been treated as connected with the alleged proceeds of crime.

At the centre of the controversy was Section 8(2) of the PMLA. The provision forms part of the adjudicatory mechanism under the statute and requires the Adjudicating Authority, after considering the relevant material and hearing the affected parties, to determine whether the property involved is connected with money laundering. The Bombay High Court emphasised that this statutory determination is an essential safeguard and cannot be replaced by a general statement that the material is sufficient to continue retention or freezing for the purpose of adjudication.

The Court drew a clear distinction between two different conclusions. One is a finding that material exists which warrants continuation of retention or freezing while the adjudicatory process proceeds. The other is the specific statutory determination contemplated by Section 8 as to whether the property itself is involved in money laundering. According to the Court, the latter finding must actually be recorded by the authority entrusted with that statutory function.

The judgment also raised concerns regarding the composition of the Appellate Tribunal. At the outset, the Division Bench expressed reservations about the Appellate Authority functioning with only a Chairperson and observed that the mandate under Section 6 of the PMLA required consideration. The Court held that the Tribunal ought to have addressed the objection raised by the appellant and recorded a finding demonstrating that its constitution was legally compliant, rather than simply disregarding the issue.

The Bombay High Court also examined the manner in which the alleged proceeds of crime had been quantified. It disagreed with the approach of treating the company’s gross business turnover and alleged remittances to an overseas group entity as sufficient to establish that the entire amount constituted proceeds of crime. The Court stressed that ordinary commercial turnover cannot automatically acquire the character of proceeds of crime merely because the company is under investigation or because funds have moved outside India.

The judgment consequently goes beyond the immediate dispute concerning the company’s accounts. It reinforces the principle that the statutory safeguards under the PMLA must be meaningfully applied at the stage at which Parliament has entrusted the relevant decision-making power to the Adjudicating Authority. An appellate body cannot retrospectively perform an essential adjudicatory exercise which the original authority failed to undertake.

Arguments of the Parties:

The appellant, Coda Payments India Pvt. Ltd., challenged the continued freezing of its bank accounts and payment aggregator and payment gateway accounts on several grounds. Its principal submission was that the Adjudicating Authority had failed to comply with the mandatory requirements of Section 8(2) of the PMLA.

According to the appellant, the authority had not independently and specifically determined whether the properties sought to be retained or frozen were actually involved in money laundering. Instead, the order merely stated that the material placed before it was sufficient to arrive at satisfaction that continuation of the freezing or retention of the accounts was necessary for the purposes of adjudication.

The appellant argued that such an observation was legally insufficient. Section 8(2), it was submitted, required an actual adjudicatory finding concerning the property. The authority could not avoid this statutory requirement by making a general observation about the sufficiency of material. Since the statute itself prescribed the exercise that had to be undertaken, the failure to undertake that exercise went to the root of the order.

The appellant further contended that the defect could not subsequently be repaired by the Appellate Tribunal. Once the original authority failed to record the mandatory finding, the Tribunal was required to set aside the order and direct the Adjudicating Authority to undertake the exercise prescribed by Section 8(2). The Tribunal, according to the appellant, could not itself step into the shoes of the original authority and supply a finding that had never been made in the first place.

A further challenge concerned proportionality. The appellant submitted that the authorities had frozen assets worth approximately ₹100 crores even though the total amount allegedly involved in the ten predicate-offence FIRs was only around ₹25 lakhs. The enormous difference between the alleged criminal proceeds and the value of the property restrained was relied upon to demonstrate that the freezing action lacked a proper nexus with the alleged proceeds of crime.

The appellant also challenged the manner in which the authorities had sought to connect the company’s wider business operations with the alleged offence. It was argued that the company’s overall turnover could not simply be treated as proceeds of crime. A payment company’s ordinary commercial receipts consist of legitimate business transactions, and the mere existence of an investigation into certain transactions could not transform the entire business revenue into tainted property.

The appellant further objected to the reliance placed on the movement of funds to an overseas group entity. The submission was that international remittances, without additional evidence establishing their connection with criminal activity, could not establish that all funds held by the company represented proceeds of crime.

The appellant also raised an objection concerning the constitution of the Appellate Tribunal. It was submitted that the Tribunal had functioned with only a Chairperson, despite the statutory framework under Section 6 of the PMLA. The appellant argued that this objection required a reasoned determination by the Tribunal and could not simply be brushed aside.

The Enforcement Directorate and other respondents defended the action taken against the appellant. Their case, as reflected in the proceedings, was founded upon the investigation arising from the ten FIRs and the material gathered during the investigation, including information concerning transactions carried out through online gaming applications and alleged unauthorised deductions.

The respondents sought to sustain the freezing of the accounts by relying upon the material placed before the Adjudicating Authority and the continuation of the proceedings under the PMLA. The authorities also relied upon the company’s gross revenue and alleged remittances outside India in seeking to establish the connection between the financial transactions under investigation and the property subjected to restraint.

The respondents’ position effectively required the Court to accept that the material placed before the authorities was sufficient to justify continuation of the freezing and that the subsequent findings of the Appellate Tribunal could sustain the action even if the original order did not separately articulate every statutory determination contemplated under Section 8(2).

However, the High Court’s examination focused on whether the statutory process had actually been followed, rather than merely whether there was some investigative material available. The Court therefore considered whether the authorities had established the necessary legal nexus between the property frozen and the alleged proceeds of crime, and whether the statutory adjudication had been properly undertaken.

Court’s Judgment:

The Bombay High Court allowed the appeal and quashed and set aside the impugned order sustaining the freezing of the appellant’s bank accounts and payment aggregator and payment gateway accounts. The Court’s decision rested principally on the failure of the Adjudicating Authority to comply with the mandatory requirement of Section 8(2) of the PMLA.

The Court began by examining what the Adjudicating Authority had actually recorded. It found that the authority had stated that the material placed before it was sufficient to reach satisfaction that retention or continuation of the freezing of the accounts was required for the purpose of adjudication under Section 8 of the PMLA.

However, the Division Bench found that this was not equivalent to the statutory finding required under Section 8(2). The order did not separately identify the property and record a finding that such property was involved in money laundering.

This distinction was central to the judgment. The Court emphasised that the statutory requirement cannot be treated as an empty procedural formality. The Adjudicating Authority is required to undertake a specific adjudicatory exercise concerning the property. Merely stating that the material is sufficient to continue the freezing process does not amount to a determination that the property is involved in money laundering.

The Court observed that the authority’s order “does not separately identify the property” found to be involved in money laundering. Consequently, the order did not satisfy the express requirement of Section 8(2) of the PMLA.

The Court’s reasoning is significant because proceedings under the PMLA can have serious consequences for persons and businesses whose assets are subjected to attachment, retention or freezing. The statutory safeguards therefore serve an important function. They require the authority exercising the power to demonstrate that the property subjected to the coercive measure bears the necessary connection with the offence contemplated by the legislation.

The High Court next considered whether the defect could be cured by the Appellate Tribunal. It answered the question in the negative.

The Court held that if the Adjudicating Authority omitted the mandatory finding under Section 8(2), the Appellate Tribunal could not subsequently supply that finding merely by relying upon the same material. Such an approach, the Court held, would effectively make the statutory safeguard optional.

The Division Bench observed that if the Appellate Tribunal were permitted to provide the missing statutory finding, the adjudicatory structure created by Parliament would be fundamentally altered. The statute requires the original authority to undertake the prescribed exercise. The appellate authority’s role is to examine the legality and correctness of that decision, not to retrospectively perform a mandatory function which the original authority never exercised.

The Court therefore held that the Appellate Tribunal ought to have set aside the Adjudicating Authority’s order and required the authority to undertake the exercise mandated by Section 8(2).

This aspect of the judgment reinforces a broader principle of administrative and statutory adjudication: where a statute entrusts a particular authority with a specific decision-making function, the function must ordinarily be performed by that authority in the manner prescribed by law. An appellate forum cannot automatically cure the complete absence of the statutory exercise by making the necessary finding for the first time at the appellate stage.

The High Court then examined the manner in which the authorities had approached the question of proceeds of crime. The Appellate Tribunal had apparently relied upon the gross revenue of the company and alleged remittances to an overseas group entity in determining the nature of the funds.

The Court rejected this approach as insufficient.

It emphasised that gross business turnover, by itself, cannot establish that the entire turnover constitutes proceeds of crime. A company’s revenue may comprise thousands or millions of legitimate commercial transactions. The fact that a particular business is being investigated for alleged fraudulent transactions does not automatically convert every transaction processed by that business into criminal proceeds.

The Court observed that the movement of money from India to an overseas group entity may be relevant to an investigation, but such movement, without more, does not establish that every amount standing to the credit of the company’s accounts constitutes proceeds of crime.

This reasoning is particularly important in the context of businesses operating through digital payment systems. Where a company processes a large volume of transactions, the mere fact that some transactions are allegedly fraudulent cannot logically establish that the entirety of the company’s financial activity is tainted. The authorities must establish the requisite connection between the property and the alleged criminal activity.

The Court also expressed serious concern about the quantum of assets subjected to restraint. The authorities had frozen assets worth approximately ₹100 crores, while the amount allegedly involved in the ten FIRs was stated to be approximately ₹25 lakhs.

The Division Bench questioned the basis on which such a large amount had been subjected to restraint without establishing that all transactions conducted through the relevant applications were fraudulent auto-debit transactions or involved minors.

The Court observed that it was unable to comprehend how the Enforcement Directorate could attach a total amount of approximately ₹100 crores without establishing that all transactions made through the applications were undertaken by minors or resulted from unauthorised auto-debits. It further questioned the proposition that transactions totalling approximately ₹2,854 crores could all be characterised as fraudulent auto-debit transactions or unsecured payments.

The Court’s observations demonstrate the importance of establishing a clear and evidence-based nexus between the alleged offence and the property restrained. The mere scale of a company’s business cannot become the basis for assuming that all funds are proceeds of crime.

The Court also addressed the objection concerning the constitution of the Appellate Tribunal. It expressed reservations at the Tribunal functioning with only a Chairperson and noted the statutory mandate under Section 6 of the PMLA.

The High Court held that the Tribunal ought to have addressed the appellant’s objection and recorded a finding demonstrating that its composition complied with the statutory requirements. It was not appropriate for the Tribunal simply to disregard the objection.

The Court’s observations on this issue further reinforce the principle that statutory institutions must function within the framework prescribed by the legislation. Where a party raises a specific objection concerning the constitution of the appellate forum, the forum is expected to deal with that objection through a reasoned determination.

Taken together, the defects identified by the High Court demonstrated that the continuation of the freezing order could not be sustained. The Adjudicating Authority had not made the mandatory Section 8(2) finding, the Appellate Tribunal could not retrospectively supply that missing determination, the approach to identifying proceeds of crime was legally inadequate, and serious questions remained regarding the proportionality and evidentiary basis for freezing property worth approximately ₹100 crores.

The Court therefore allowed the appeal and quashed and set aside the impugned order.

The judgment does not suggest that the PMLA authorities are powerless to investigate suspected money laundering or take lawful measures to preserve property potentially connected with crime. Rather, it reinforces that those powers must be exercised within the statutory safeguards created by Parliament.

The distinction is particularly important because the PMLA provides powerful mechanisms for dealing with property allegedly connected with criminal activity. Such powers necessarily carry significant consequences for individuals and commercial entities. The statutory process must therefore be followed with precision.

The Bombay High Court’s ruling makes clear that an authority cannot simply state that material exists to justify continuation of freezing and leave the essential statutory question unanswered. The authority must determine whether the property in question is actually involved in money laundering, as required by Section 8(2).

Equally, the appellate process cannot be used as a mechanism for retrospectively repairing an omission that goes to the heart of the original adjudication. If the original authority has failed to make a mandatory finding, the proper course is to require that authority to undertake the statutory exercise.

The Court’s decision also carries an important message concerning the identification of proceeds of crime. Business turnover is not synonymous with criminal proceeds. International remittances are not, by themselves, proof of money laundering. And the magnitude of a company’s overall transactions cannot substitute for evidence connecting particular property with the alleged criminal activity.

Ultimately, the Bombay High Court protected the statutory safeguards embedded within the PMLA while scrutinising the manner in which coercive financial measures had been applied. By setting aside the freezing order, the Court reaffirmed that serious investigative powers must remain tied to statutory requirements, evidence and a demonstrable nexus between the property and the alleged offence.

The judgment consequently stands as a significant reminder that procedural safeguards under the PMLA are substantive protections and not technical hurdles. Where the law requires an authority to make a particular finding, that finding must be made by the authority entrusted with the task, on the basis of the material properly evaluated by it. It cannot be supplied late by an appellate body merely to preserve an otherwise de