The question becomes difficult because the PMLA does not begin with the underlying dispute. It begins one step later. Once an FIR alleges a scheduled offence, the Enforcement Directorate (“ED”) may investigate whether property generated by that criminal activity constitutes “proceeds of crime”.² The danger lies in the sequence being reversed: a disputed commercial transaction is first given a criminal colour, and the money involved is then treated as criminal proceeds.
That was the concern before the Allahabad High Court in Tulsiani Construction and Developers Ltd. v. State of U.P.1 The ED had initiated PMLA proceedings on the basis of multiple FIRs arising from disputes involving a real estate developer, a bank and flat buyers. The Special Court subsequently took cognizance of offences under Sections 3 and 4 of the PMLA.
The High Court quashed the proceedings. Its reasoning turned on a foundational limit within the PMLA: the existence of a scheduled-offence FIR does not, by itself, create “proceeds of crime”. There must be property derived or obtained as a result of criminal activity relating to the scheduled offence.
Analysis
The ED’s case arose from FIRs alleging, among other things, failure to complete projects, deliver flats, execute sale deeds and meet financial obligations. One of the principal FIRs had been lodged by Punjab National Bank in relation to four home loans. The ED also relied on other FIRs involving flat buyers and alleged that approximately ₹9.948 crore constituted proceeds of crime.
The High Court did not treat the mere existence of these FIRs as conclusive of the PMLA question. It examined the nature of the disputes underlying them.
In relation to the bank’s case, one of the four loan accounts had not been declared an NPA, two had resulted in No Dues Certificates, and the remaining account was subject to a One Time Settlement under which payment had commenced. Other FIRs relied upon by the ED arose from similar disputes concerning possession, transfer of flats and refund of money. The Court also referred to its earlier finding in Anil Kumar Tulsiani v. State of U.P.2 that one such dispute predominantly appeared to be civil in nature and that criminal proceedings had been initiated to coerce redress of civil grievances.
The legal issue was therefore not whether a commercial transaction can ever give rise to a criminal offence. It plainly can. The question was whether the underlying allegations in this case disclosed the criminal activity necessary to generate “proceeds of crime”.
Section 2(1)(u) of the PMLA defines “proceeds of crime” as property “derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence”. Relying on Vijay Madanlal Choudhary v. Union of India3, the High Court emphasised that property cannot be assumed to be proceeds of crime merely because a scheduled offence has been registered.
This distinction was decisive. The Court found that the alleged scheduled offences were, in substance, commercial disputes that had been given a “colour of criminality”. It relied on Indian Oil Corporation v. NEPC India Ltd.4 and Sarabjeet Kaur v. State of Punjab5, which caution against using criminal proceedings to enforce civil claims and reiterate that breach of contract does not amount to cheating unless fraudulent or dishonest intention existed at the inception of the transaction.
The Court therefore rejected the use of the PMLA as a second layer of coercion over disputes it considered civil in substance. If the underlying transaction did not generate property through criminal activity, the money involved could not become “proceeds of crime” merely because the dispute had first been framed as a scheduled offence.
The judgment also addressed the attachment of a flat purchased in 2012. The provisional attachment order was issued in 2024, against the background of one of the FIRs relied upon by the ED. The Court found that the flat had been acquired before the alleged criminal activity and had not been acquired from any proceeds of crime.
The ED relied on the expression “the value of any such property” in Section 2(1)(u). The High Court rejected an interpretation that would allow any pre-existing legitimate asset to be treated as proceeds of crime merely because it represented an equivalent value. Relying on Pavana Dibbur v. Directorate of Enforcement6 and Seema Garg v. Deputy Director, Directorate of Enforcement7, it held that the necessary nexus between the alleged criminal activity and the attached property was absent. The attachment was consequently held to be illegal and without jurisdiction.
There was also a defect in the cognizance order itself. The Special Court’s order dated 30 January 2026 referred to the applicants’ objections but did not deal with their substance or assign reasons for rejecting them, merely stating that they were “not maintainable”. The High Court held that such an unreasoned order could not sustain the summoning of the applicants. Although this defect could ordinarily have resulted in remand, the Court declined to send the matter back because it had examined the merits and concluded that no case for taking cognizance was made out.
The High Court accordingly quashed both the cognizance order and the entire PMLA proceedings under Section 482 CrPC.
Conclusion
The significance of Tulsiani Construction lies in the sequence it restores to a PMLA prosecution.
A scheduled-offence FIR is necessary to the prosecution framework, but it does not automatically convert every amount involved in the underlying transaction into “proceeds of crime”. The statutory inquiry remains whether property was actually “derived or obtained” as a result of criminal activity relating to the scheduled offence.
The ruling does not create a general shield for commercial transactions. Fraud committed through a contract may still constitute a scheduled offence, and a later settlement does not erase genuine criminality. The High Court’s conclusion was tied to its finding that the disputes before it were civil or commercial in substance and had been given a criminal colour.
The takeaway is therefore narrower and more useful in PMLA litigation: before tracing, attaching or alleging laundering of property, there must first be identifiable criminal activity capable of generating “proceeds of crime”. The PMLA can follow the proceeds of a crime; it cannot supply the criminal character that the underlying transaction itself lacks.
Citations
Expositor(s): Adv. Jahnobi Paul
