Bank Cannot Freeze Account on Its Own Suspicion: Allahabad HC Orders De-Freezing, Imposes ₹50,000 Cost on Indian Overseas Bank

The Allahabad High Court's Lucknow Bench held that a bank has no authority to freeze a customer's account on self-declared suspicion, directing de-freezing and imposing costs on Indian Overseas Bank for acting without any complaint, FIR, or order from a competent authority.

A Division Bench of the Allahabad High Court's Lucknow Bench, comprising Justice Shekhar B. Saraf and Justice Abdhesh Kumar Chaudhary, on 29 April 2026 allowed a writ petition filed by M/s S.A. Enterprises, a sole proprietorship engaged in the sale and purchase of fisheries machinery, after Indian Overseas Bank froze the firm's current account without any police complaint, FIR, court order, or direction from any regulatory authority. The bench directed immediate de-freezing of the account and imposed a cost of ₹50,000 on the Alambagh branch of Indian Overseas Bank, Lucknow, payable within four weeks of service of a certified copy of the judgment. The court held that a bank acts as a trustee of its depositors and cannot transform itself into an investigating agency, and that freezing a bank account without lawful authority violates the account holder's fundamental rights under Article 19(1)(g) and Article 21 of the Constitution of India.

The Dispute Before the Court

Rameshvar Singh, the sole proprietor of M/s S.A. Enterprises, opened a current account bearing number 381702000000301 at the Indian Overseas Bank, Alambagh branch, Lucknow, on 30 December 2025. At the time of opening the account, he declared an annual income of ₹5.76 lakhs.

On or about 16 January 2026, an amount of ₹23 lakhs was transferred into the account via RTGS by one Mrs. Anita, allegedly as payment for the purchase of machineries. On the same day, the petitioner withdrew ₹5 lakhs from the account. When he attempted a further withdrawal on 20 January 2026, bank officials orally informed him that the account had been frozen and no transactions could be permitted.

The petitioner visited the bank on several occasions seeking de-freezing. Receiving no relief, he sent a text message to the Branch Manager on 25 January 2026, followed by a formal complaint and legal notice on 9 February 2026. The bank did not act on either. The petitioner then filed Writ-C No. 1866 of 2026 before the Lucknow Bench, relying on a coordinate bench judgment in Khalsa Medical Store Through Proprietor Yashwant Singh v. Reserve Bank of India Through Governor and Three Others, Writ-C No. 12211 of 2025.

Notice was issued to the respondent bank, which filed a short counter-affidavit on 6 February 2026. The petitioner filed a rejoinder on 17 February 2026. The matter was thereafter taken up for final disposal with the consent of both parties.

The Bank's Justification and Its Infirmities

Counsel for Indian Overseas Bank, Sri Vinay Shankar, argued that the account was frozen because the ₹23 lakh credit was suspicious: the declared annual income of ₹5.76 lakhs was far lower than the amount credited, and ₹5 lakhs was withdrawn on the same day. He relied on Section 12(2) of the Prevention of Money Laundering Act, 2002 to justify the freezing.

The bank's second line of justification rested on an e-mail dated 11 March 2026 from Bank of Maharashtra, which the respondent claimed had flagged suspicious activity in the account of Mrs. Anita and requested that the amount not be released. The bank contended that the ₹23 lakhs had originated from a loan extended by Bank of Maharashtra to Mrs. Anita for fish business, and that Bank of Maharashtra had noticed fraudulent activity in her account.

The bench dismantled both arguments in sequence.

On the income-versus-credit disparity, the court invited the bank's counsel to produce any circular, notification, or guideline of any bank or the RBI that bars crediting of an amount exceeding the annual income declared in the account opening form. No such document was produced. The court found nothing unusual about the credit of ₹23 lakhs within fifteen days of opening the current account, or the same-day withdrawal of ₹5 lakhs, in the absence of any complaint of fraudulent activity.

On the Bank of Maharashtra e-mail, the bench found from the record that the e-mail dated 11 March 2026 was in fact a reply to a query raised by Indian Overseas Bank itself on 9 March 2026, meaning the respondent bank had first initiated contact and then relied on the reply to justify its own earlier act of freezing. The court found no police complaint, no private complaint, no court order, and no subsequent action by Bank of Maharashtra against Mrs. Anita pursuant to that e-mail. Critically, the petitioner's rejoinder-affidavit showed that Mrs. Anita's own account at Bank of Maharashtra remained fully functional, with normal day-to-day transactions, and Bank of Maharashtra had taken no recovery action against her. The court held that “the very foundation for suspecting the bank account of the petitioner crumbles like a pack of cards.”

Misreading of the Prevention of Money Laundering Act, 2002

The bench examined the bank's reliance on Section 12(2) of the Prevention of Money Laundering Act, 2002 and found it to be a misreading of the statute. Section 12 of the Act casts a duty on reporting entities, including banks, to maintain records of transactions. Section 12(1) requires the bank to keep such information confidential. Section 12(2) mandates that all information maintained, furnished, or verified shall be kept confidential. Section 12(3) prescribes a five-year retention period for transaction records. None of these provisions authorise or even remotely concern the freezing of a bank account by the bank itself.

The court noted that the text of Section 12(2) quoted in paragraph 4 of the bank's counter-affidavit was at stark variance with the actual statutory text. Taking it upon itself to trace the source of the bank's argument, the bench concluded that the bank's counsel had in fact been attempting to invoke Section 12AA(2) of the Act, not Section 12(2).

Section 12AA, the court explained, relates to enhanced due diligence and compliance requirements for reporting entities aimed at preventing money laundering and terrorist financing. Section 12AA(2) comes into play only when conditions under Section 12AA(1) are not fulfilled, and even then it only permits the bank to decline a specific “specified transaction”, it does not authorise freezing of an entire account. The court further found that the petitioner's transaction did not fall within any of the categories of “specified transaction” defined in the Explanation to Section 12AA(4), which covers cash withdrawals or deposits exceeding a prescribed amount, foreign exchange transactions, high-value imports or remittances, and prescribed high-risk transactions.

The bench held that the power to freeze a bank account under the Prevention of Money Laundering Act, 2002 vests exclusively under Section 17 of the Act, exercisable only by a competent authority upon satisfaction of the twin conditions of possession of information and reasons to believe. A bank has no such power on its own volition.

RBI Circular and the Settled Legal Position

The court referred to an RBI circular dated 2 July 2012 on obligations of banks under the Prevention of Money Laundering Act, 2002. Paragraph 2.16(2)(vii) of that circular expressly states that banks should not put any restrictions on operations in accounts where a Suspicious Transaction Report has been made. The bench observed that even where a bank has grounds to file an STR with the Financial Intelligence Unit, the correct course is to report not to freeze.

The bench also referred to the Supreme Court's judgment in OPTO Circuits (India) Ltd. v. Axis Bank and Others, reported in (2021) 6 SCC 707, which held that freezing of bank accounts cannot be done in a casual manner. The court added that any blanket or disproportionate freezing of a bank account, particularly where the account holder is neither an accused nor a suspect in any offence under investigation, is manifestly arbitrary and violates the fundamental rights under Article 19(1)(g) and Article 21 of the Constitution, which encompass the right to livelihood and the freedom to carry on trade and business.

The bench drew on the principles summarised by the coordinate bench in Khalsa Medical Store v. RBI, reported in 2026 SCC OnLine All 164, where Justice Shekhar B. Saraf had laid down that any freezing action must be backed by relevant information and a complaint lodged before the police or a magistrate; that a notice under Section 106 of the Bharatiya Nagarik Suraksha Sanhita, 2023 may only mark a lien on a specific amount and cannot direct blocking of an entire account; and that if a bank freezes an account on a police request without following proper procedure, the bank shall be personally liable for civil and criminal consequences.

The court held that the only instance in which a bank may freeze an account on its own volition is where it holds a lien by virtue of a loan taken by the customer, as contemplated under Section 171 of the Contract Act, 1872. No such lien existed here.

The Bank as Trustee, Not Investigator

The bench articulated the foundational principle governing the banker-customer relationship: a bank acts as a trustee when it accepts deposits and cannot transform itself into an investigating agency. It cannot accept deposits and then refuse their return. The bank may deny withdrawal only in exigencies permissible in law. No such exigency existed in the present case.

The court found it an admitted position on behalf of the bank's counsel that the petitioner was not named as an accused in any FIR and that there was nothing on record showing his involvement in any criminal or fraudulent activity. The account had been frozen by the bank itself, not on instructions from any authority empowered by law to direct such action.

The bench rejected the bank's request that, if the account were to be de-frozen, some restriction on withdrawals be imposed as a precautionary measure. Given that there was no complaint and no FIR, and that the freezing appeared vexatious and actuated with mala fides, the court found no basis for any such condition.

The bench also observed that the bank had not served any pre-freezing or post-freezing notice on the petitioner, depriving him of even the minimum entitlement to know the reasons for the action taken against his account. The court held that this illegal freezing directly undermined the petitioner's right to livelihood, which is an integral part of the right to life guaranteed under Article 21.

Order

The Division Bench allowed Writ-C No. 1866 of 2026 in the following terms:

Indian Overseas Bank, Alambagh branch, Lucknow, was directed to de-freeze Current Account Number 381702000000301 in the name of M/s S.A. Enterprises forthwith. The petitioner was declared at liberty to maintain and continue operations of the account in terms of RBI guidelines.

A cost of ₹50,000 was imposed on Indian Overseas Bank, Alambagh branch, Lucknow, through the Branch Manager, as compensation to the petitioner for the indiscriminate freezing that had paralysed the firm's day-to-day business operations and caused loss of commercial goodwill and financial consequences. The cost was directed to be paid within four weeks from the date a certified copy of the judgment is served on the respondent bank.

The judgment was authored by Justice Abdhesh Kumar Chaudhary, with Justice Shekhar B. Saraf recording his agreement.