Gauhati HC Refers PMLA Question to Larger Bench: Can Reason to Believe Form Part of a Provisional Attachment Order?
Justice Manish Choudhury upheld a provisional attachment of three land plots linked to a Rs 99.31 crore fake GST input tax credit fraud, but referred a conflict between coordinate benches on whether the Enforcement Directorate's reason to believe under Section 5(1) of the PMLA is confidential and must be kept out of the attachment order itself.
The Gauhati High Court on 26 June 2026 dismissed a challenge to a Provisional Attachment Order [PAO] issued by the Enforcement Directorate against Mrig Mrinal Dhawan, sole proprietor of M/s Fama Marketing, Guwahati, in connection with a Rs 99.31 crore fake input tax credit [ITC] scheme. Justice Manish Choudhury, sitting singly, found that the Authorized Officer had adequate material to form the requisite belief under Section 5(1) of the Prevention of Money-Laundering Act, 2002 [PMLA], and that attaching property purchased before the scheduled offences were committed is permissible where the actual proceeds of crime are no longer separately available. However, the judge identified a direct conflict with a coordinate bench decision of the same court on whether the reason to believe recorded under Section 5(1) is confidential and whether its inclusion in the PAO itself causes a jurisdictional defect. That question has been referred to a larger bench.
The Dispute Before the High Court
PAO No. 03/2026 dated 30 March 2026 was passed by the Deputy Director, Directorate of Enforcement, Itanagar Sub-Zonal Office, Guwahati Zonal Office–II, under the Second Proviso to Section 5(1) of the PMLA read with Rule 3 of the Prevention of Money-Laundering (Issuance of Provisional Attachment Order) Rules, 2013. The PAO provisionally attached three plots of land in Revenue Village Sarusajai, Mouza Beltola, Dispur Revenue Circle, Kamrup Metropolitan District, Assam, belonging to the petitioner. The PAO was to remain in force for 180 days or until an order of the Adjudicating Authority under Section 8(3) of the PMLA, whichever came earlier.
The petitioner also sought a stay of a summons dated 27 April 2026 issued by the Special Judge, Papum Pare District, Yupia, Arunachal Pradesh, in PMLA Case No. 02/2026, requiring him to answer a charge under Section 44(1)(b) read with Section 45(1) of the PMLA.
The petitioner challenged the PAO on four grounds: that the reason to believe must be recorded in a separate file before the PAO is issued and cannot form part of the PAO itself; that the attached property is not directly traceable to proceeds of crime; that property purchased before the scheduled offences cannot be attached; and that the Authorized Officer had not recorded satisfaction about the urgency of attachment.
The Underlying Fraud: M/s Siddhi Vinayak and the Fake ITC Network
FIR No. 182/2024 was registered on 3 October 2024 at Itanagar Police Station on a complaint by an Inspector of CGST & Central Excise, Itanagar Commissionerate. The FIR named Sri Rakesh Sharma and Sri Ashutosh Kumar Jha for offences under Sections 120B, 420, 467, 468, 471, 473 and 474 of the Indian Penal Code. The allegation was that M/s Siddhi Vinayak Trade Merchants, a GST-registered entity in Arunachal Pradesh, issued 15,258 invoices totalling Rs 658,55,35,521/- between October 2023 and March 2024 without any actual supply of goods, enabling 58 firms across 11 states to fraudulently avail ITC amounting to Rs 99,31,36,975/-.
A search of M/s Siddhi Vinayak's declared principal place of business on 23 May 2024 found it non-existent. The entity had no bank account. GST returns showed ITC was utilised in GSTR-3B despite no corresponding data in GSTR-2A/2B. No e-way bills were generated against its GSTIN, confirming that the transactions were paper entries only. Sri Ashutosh Kumar Jha, who managed GST compliances for the shell entity, admitted it existed only on paper.
The Enforcement Directorate registered ECIR No. ECIR/ITSZO/02/2025 on 28 March 2025. Investigation established that out of the total Rs 99.31 crore of fraudulently generated ITC, approximately Rs 76.89 crore was illicitly transmitted as ineligible ITC to 15 downstream entities. M/s Krishti Enterprise received Rs 3,84,21,019/- and M/s L.S. & Company received Rs 4,39,15,230/- from this network. Both entities were found to be shell entities not operating from their declared addresses.
The Petitioner's Role and the Attachment
In his statement recorded under Section 50 of the PMLA on 19 March 2026, the petitioner admitted that M/s Fama Marketing had business dealings with M/s Krishti Enterprise and M/s L.S. & Company, two of the 58 direct beneficiary entities of M/s Siddhi Vinayak. He stated that during FY 2023–2024, M/s Fama Marketing purchased TMT bars from M/s L.S. & Company for approximately Rs 1.97 crore and from M/s Krishti Enterprise for approximately Rs 1.47 crore. M/s Fama Marketing received total ITC of Rs 52.66 lakh from these two entities.
The PAO found that M/s Fama Marketing had completely relied on ITC to discharge its GST liability during FY 2023–2024, with no tax paid in cash. Ledger entries showed an outstanding payable of Rs 1,02,82,140/- to M/s L.S. & Company for more than two years. The petitioner did not produce GSTR-2A/2B and GSTR-3B returns for FY 2023–2024 despite assurances. A search at M/s Fama Marketing's declared business premises in Imphal on 20 January 2026 found no functioning office. The petitioner described it as a virtual branch office but produced no supporting documents.
The Authorized Officer concluded that M/s Fama Marketing had acquired, possessed, used and projected as untainted property the proceeds of crime generated through fraudulent ITC, constituting an offence under Section 3 read with Section 70 of the PMLA. The three plots of land in Guwahati, purchased by the petitioner on 11 February 2022 for Rs 60,00,000/-, were attached as property equivalent in value to the Rs 52.66 lakh share of the proceeds of crime.
Whether the Writ Petition Was Maintainable
The Enforcement Directorate argued that the petitioner should pursue the statutory remedy before the Adjudicating Authority under Section 8 of the PMLA rather than approach the High Court directly. The Prosecution Complaint (Offence Report) had already been filed on 30 March 2026 before the District & Sessions Judge, Yupia, Arunachal Pradesh, and the Adjudicating Authority had issued notice under Section 8(1) of the PMLA.
Justice Choudhury acknowledged the general rule that writ jurisdiction is not to be exercised when a statutory remedy is available. However, the court held that where a challenge goes to the root of the Authorized Officer's jurisdiction — specifically, whether the conditions precedent for passing a PAO were absent — the High Court cannot decline to examine the matter. The court noted that a PAO, though provisional, prohibits transfer, conversion or alienation of property and thereby impairs the constitutional right to property under Article 300A. If the PAO was passed without authority of law, the property would remain attached without legal basis for the duration of the 180-day period. On that reasoning, the court proceeded to examine the merits.
How the Bench Reasoned on the Substantive Grounds
Reason to believe recorded in the PAO itself: The petitioner relied on a Delhi High Court decision in Aprajita Kumari v. Joint Director, Enforcement Directorate, [2018] SCC OnLine DEL 13479, to argue that the reason to believe must be noted in a separate file before the PAO is issued, and that recording it within the PAO itself is a jurisdictional defect. The court found that neither Section 5(1) of the PMLA nor the PMLA Rules, 2013 prescribe any restriction on the reason to believe forming part of the PAO. Rule 3 of the PMLA Rules, 2013 requires only that the Authorized Officer make a PAO and endorse a copy to all concerned. The PMLA Rules, 2005 govern the forwarding of the PAO and material to the Adjudicating Authority in a sealed envelope, and their purpose is to preserve the integrity of the evidence, not to mandate confidentiality of the reason to believe from the affected person.
The court held that if the reason to believe were excluded from the PAO, it would not be transmitted to the Adjudicating Authority at all, since the PMLA Rules, 2005 require only the PAO and material to be forwarded, not the separate file. That outcome would be contrary to the principles of natural justice. The court found that including the reason to believe in the PAO is consistent with fair play and reduces the possibility of subjective exercises of power.
In the present case, the Authorized Officer had recorded the reason to believe in the concerned file on 29 March 2026, one day before the PAO was issued on 30 March 2026. Those reasons were then incorporated into the PAO. The court found no jurisdictional defect in this sequence.
Existence of proceeds of crime and the petitioner's connection: The court examined the material in the Authorized Officer's possession in detail. The Authorized Officer had FIR No. 182/2024, the ECIR, documents seized during search proceedings under Section 17 of the PMLA, statements recorded under Section 50 of the PMLA from multiple persons including the petitioner, GST returns, bank account statements, and e-way bill portal data. On the basis of this material, the court found that the Authorized Officer had adequate, acceptable, reliable and verifiable material to form the belief that Rs 99,31,36,975/- was proceeds of crime and that Rs 52.66 lakh of that amount had percolated to M/s Fama Marketing through M/s Krishti Enterprise and M/s L.S. & Company.
The court applied the standard from Joti Parshad v. State of Haryana, 1993 Supp(2) SCC 497, that reason to believe is higher than suspicion but does not require absolute conviction. It held that a constitutional court cannot substitute its own opinion for that of the Authorized Officer on whether the material was sufficient; it can only examine whether there was a rational connection between the material and the belief formed.
Attachment of property purchased before the scheduled offences: The petitioner's three plots of land were purchased on 11 February 2022. The scheduled offences were committed between October 2023 and March 2024. FIR No. 182/2024 was registered on 3 October 2024 and the ECIR on 28 March 2025. The petitioner argued that property acquired before the scheduled offences cannot be attached.
The court rejected this argument by reference to the definition of “proceeds of crime” in Section 2(1)(u) of the PMLA, which includes not only property derived or obtained from criminal activity but also “the value of any such property.” Relying on Vijay Madanlal Choudhary v. Union of India, [2023] 12 SCC 1, and the Supreme Court's subsequent decision in M/s Nav Nirman Builders & Developers Pvt. Ltd. v. Union of India, 2026 INSC 130, the court held that where the actual proceeds of crime are no longer separately available — having been absorbed into the formal financial system through fraudulent ITC utilisation — property of equivalent value held by the person in possession of the proceeds can be attached. The fact that the land was purchased before the offences were committed does not immunise it from attachment where it represents equivalent value to the proceeds of crime that the petitioner had received and utilised.
The court distinguished the Punjab & Haryana High Court decision in Seema Garg v. Deputy Director, Directorate of Enforcement, 2020 SCC OnLine P&H 738, on which the petitioner had relied, noting that the PMLA's definition of proceeds of crime is wide enough to encompass value-equivalent property.
The Reference to a Larger Bench
Having dismissed all four grounds of challenge, Justice Choudhury identified a conflict that required resolution. A coordinate bench of the Gauhati High Court in Aftabuddin Ahmed and another v. Enforcement Directorate and others, [2024] 4 GLR 566, had held that the reason to believe recorded under Section 5(1) of the PMLA is confidential in character and is not to be furnished to the person affected, meaning it should not form part of the PAO. The present bench took the contrary view: that there is no statutory basis for treating the reason to believe as confidential from the affected person, and that including it in the PAO is consistent with natural justice.
The court framed two questions for reference to a larger bench:
First, whether the reason to believe, which is to be recorded in writing by the Authorized Officer on the basis of material in his possession to pass a PAO under Section 5(1) of the PMLA, is confidential in character and/or is to be furnished to the affected person.
Second, if such reason to believe is made part of the PAO, whether the PAO suffers from any jurisdictional error.
The court directed that the matter be placed before the Chief Justice on the administrative side for constitution of a larger bench.
Outcome
The writ petition filed by Mrig Mrinal Dhawan was dismissed on merits. PAO No. 03/2026 dated 30 March 2026, provisionally attaching three plots of land in Guwahati, was upheld. The court found that the Authorized Officer had reason to believe, recorded in writing on 29 March 2026, that the conditions under Section 5(1)(a) and Section 5(1)(b) of the PMLA were satisfied, and that the Second Proviso to Section 5(1) was properly invoked. The challenge to the summons dated 27 April 2026 issued by the Special Court at Yupia was not separately granted. The Registry was directed to place the matter before the Chief Justice for constitution of a larger bench to resolve the conflict on the confidentiality of reason to believe under Section 5(1) of the PMLA.