PMLA30 August 2026

Mortgaged Properties and PMLA Attachment: Karnataka High Court Protects a Victim Bank’s Security

By C&C Law Chambers Editorial Desk · 5 reads

The Karnataka High Court’s decision in Deputy Director, Directorate of Enforcement v Sri Asadhullah Khan and connected matters, MSA No. 78 of 2020 connected with MSA Nos. 87, 88 and 89 of 2020, decided on 17 October 2025, addresses a recurring conflict between attachment under the Prevention of Money-laundering Act, 2002 and a bank’s pre-existing security over mortgaged property.

The Division Bench of D.K. Singh and Venkatesh Naik T. JJ dismissed four appeals filed by the Enforcement Directorate under Section 42 PMLA. It upheld the Appellate Tribunal’s decision setting aside confirmation of attachment over seven properties mortgaged to Syndicate Bank.

The ruling is important, but it should be stated with precision. It does not declare that every mortgaged property is immune from PMLA attachment. The outcome turned on the chronology of acquisition and mortgage, the absence of a demonstrated proceeds-of-crime nexus, the bank’s position as a victim rather than a participant, its pre-existing secured interest and recovery action, and the failure to notify the bank during adjudication.

The lending transaction and the alleged predicate offences

The CBI registered a case on 15 April 2009 against the branch manager of Syndicate Bank, H.M. Swamy, borrower Asadulla Khan and others. The prosecution alleged irregular and unauthorised lending that caused the bank a loss of approximately Rs 12.63 crore.

The alleged offences included Sections 120B, 409, 420, 467 and 471 IPC and Section 13(2) read with the then Section 13(1)(d) of the Prevention of Corruption Act, 1988. These are historical references and should remain so. For present-day orientation, IPC Section 120B corresponds in substance to Section 61(2) BNS; IPC Section 409 to Section 316(5) BNS; IPC Section 420 to Section 318(4) BNS; IPC Section 467 to Section 338 BNS; and IPC Section 471 to Section 340(2) BNS. The former Section 13(1)(d) of the Prevention of Corruption Act was materially recast by the 2018 amendment and should not be relabelled as the current Section 13. A police report under Section 173 CrPC corresponds to Section 193 BNSS, subject to the law governing the historical investigation and applicable savings provisions.

The attachment and recovery chronology

The chronology was decisive:

1. The seven properties were acquired before the alleged criminal activity and were mortgaged to Syndicate Bank to secure credit facilities.

2. The CBI case was registered on 15 April 2009.

3. The bank issued a demand notice under the SARFAESI Act on 4 August 2009 and a possession notice on 12 March 2010. It also pursued recovery before the Debt Recovery Tribunal.

4. The ED provisionally attached the properties on 14 March 2012 under Section 5 PMLA.

5. The Adjudicating Authority confirmed the attachment on 27 July 2012.

6. The PMLA Appellate Tribunal set aside that confirmation by a common order dated 18 September 2017.

7. The High Court dismissed the ED’s appeals on 17 October 2025.

This sequence showed that the bank’s mortgage and enforcement action were not devices created after the PMLA proceedings began. They were pre-existing incidents of the lending transaction.

Why a mortgage does not automatically decide the PMLA question

Section 2(1)(u) PMLA defines “proceeds of crime” by reference to property derived or obtained, directly or indirectly, as a result of criminal activity relating to a scheduled offence, including the value of such property. Sections 3 and 5 operate upon that statutory foundation.

The central inquiry is therefore not simply whether a property is mortgaged. It is whether the property attached is proceeds of crime, the value thereof, or otherwise falls within the statutory attachment power on the facts and reasons recorded by the authorised officer.

A mortgage cannot cleanse criminal proceeds. If property derived from scheduled criminal activity is mortgaged, or if the secured transaction is sham, collusive or designed to defeat confiscation, mortgage documents alone will not prevent scrutiny. Conversely, a legitimate pre-existing mortgage does not transform independently acquired collateral into proceeds of crime merely because the borrower later becomes accused of a scheduled offence.

The High Court’s proceeds-of-crime analysis

In paragraphs 11 and 12, the High Court emphasised that attachment requires the statutory connection with proceeds of crime. The properties before it had been acquired before the alleged offences. They were offered as collateral to obtain loans; they were not alleged to have been purchased from the loan funds or from property generated by the alleged criminal conduct.

Once the mortgages were created, the borrowers retained a right of redemption subject to the bank’s security. The Court regarded the bank’s interest as a real, pre-existing proprietary claim that could not be ignored while examining whether the attached assets represented criminal proceeds.

The Court also considered the timing of the PMLA Schedule as it applied to the alleged offences. Its reasoning reinforces a broader rule: the ED must identify the scheduled criminal activity, the property said to have resulted from it, and the link between the two. Suspicion arising from a borrower’s prosecution is not a substitute for tracing or legally establishing that nexus.

The bank was the alleged victim, not a laundering participant

Paragraphs 14 to 17 distinguish the bank from the persons accused of manipulating the lending process. Syndicate Bank was not alleged to be a conspirator or beneficiary. On the prosecution’s own case, it was the institution that suffered loss.

The funds advanced by the bank were described as public and untainted money. The alleged wrongdoing concerned the means by which credit was obtained and handled; it did not make the bank’s own funds criminal property. The Court therefore rejected an approach that would impair the victim bank’s legitimate security without first showing that the collateral itself represented proceeds of crime.

This distinction is essential. The misconduct of an officer or borrower does not automatically attribute criminal knowledge to the lending institution. The reasoning does not, however, protect a lender shown to have participated in a sham transaction, received criminal proceeds with the necessary knowledge, or created security merely to obstruct attachment.

Notice to a third-party claimant under Section 8 PMLA

The procedural failure was independently important. The proviso to Section 8(1) requires notice to a person who claims property held on behalf of the noticee. Section 8(2) requires the Adjudicating Authority to consider replies and relevant material, hear the aggrieved person and the Director or authorised officer, and record a finding whether the property is involved in money-laundering. Its proviso addresses property claimed by another person and requires that claimant also to receive an opportunity of being heard to prove that the property is not involved in money-laundering.

The High Court held that the bank, as mortgagee and secured creditor asserting a direct interest, should have been notified and heard. The absence of notice deprived the adjudication of the party whose security and recovery rights would be directly affected. Paragraph 19 treats that failure as a decisive reason supporting dismissal of the ED’s appeals.

Section 8 is therefore not a contest confined mechanically to the ED and the person named in the provisional attachment. Where records disclose a genuine third-party interest, fair adjudication requires that the claimant be brought before the authority and its documents and chronology be examined.

PMLA and SARFAESI must be analysed through the property’s origin

The bank had already invoked the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and pursued DRT remedies. The High Court considered it contrary to the object of PMLA to frustrate the victim bank’s recovery by attaching collateral that was prima facie not proceeds of crime.

This reasoning should not be reduced to a universal rule that SARFAESI always prevails over PMLA, or vice versa. The first question remains the character of the property. If the asset is proved to be proceeds of crime, PMLA’s confiscatory regime serves a different public purpose from ordinary debt recovery. If it is genuine collateral acquired independently of criminal proceeds and charged to an innocent lender, the secured interest and statutory recovery process cannot be displaced merely by labelling the asset attached property.

The party relying on the mortgage should place the complete transaction before the authority: title documents, acquisition dates, valuation, sanction records, disbursement trail, mortgage creation, registration particulars, repayment history, default date, SARFAESI notices and DRT filings. The ED, in turn, must test whether the transaction is genuine, whether criminal proceeds financed the acquisition, whether value was layered into the asset, and whether the security was created before or after the alleged criminal activity.

Section 8(8) and restoration to a legitimate claimant

The High Court also referred to Section 8(8), which permits restoration of confiscated property or part of it to a claimant with a legitimate interest who suffered quantifiable loss from money-laundering, acted in good faith and took reasonable precautions, subject to the statutory conditions and rules.

Section 8(8) is not identical to the earlier adjudicatory question whether provisional attachment should be confirmed. Yet it confirms that PMLA recognises the interests of bona fide victims and legitimate claimants. The statutory scheme is not designed to enrich the State at the expense of an innocent person whose own property or enforceable interest is unconnected with laundering.

What the judgment does—and does not—establish

The ruling supports five propositions.

First, attachment must be anchored to the statutory definition of proceeds of crime; the borrower’s criminal prosecution alone is insufficient.

Second, the timing and source of acquisition matter. Property acquired before the alleged criminal activity may still require scrutiny, particularly where value-based attachment is invoked, but chronology is powerful evidence against a claim that the asset was derived from that activity.

Third, a genuine pre-existing mortgage creates a legally cognisable third-party interest. The authority must examine that interest rather than treating the borrower as the unencumbered owner.

Fourth, an innocent victim bank stands differently from a collusive lender or participant. Institutional status alone is not enough; the record must demonstrate good faith, an authentic transaction and absence of involvement.

Fifth, failure to give the affected claimant notice and a hearing under Section 8 can invalidate confirmation of attachment.

The judgment does not hold that secured creditors enjoy absolute priority over confiscation in every case, that every asset acquired before the scheduled offence is untouchable, or that a mortgage defeats value-based attachment without examination. Those questions depend on the statutory basis actually invoked, the recorded reasons, the property trail and the claimant’s evidence.

Practical framework for banks, borrowers and the ED

For a bank or financial institution, an immediate response to attachment should establish the acquisition-and-security timeline, show the source and route of disbursement, prove creation and perfection of the mortgage, document recovery action, and formally seek notice and hearing before the Adjudicating Authority. It should also explain whether it is the victim of the alleged predicate offence and demonstrate the precautions taken during sanction and monitoring.

For the property owner, a bare assertion that the asset predates the offence is inadequate. Title and payment records must demonstrate how it was acquired, whether later criminal proceeds were invested in improvement or discharge of debt, and what proprietary interest remained after the mortgage.

For the ED, the attachment record should identify whether the case concerns direct proceeds, indirect proceeds, transformed property or equivalent value; explain the mortgage’s effect; address the lender’s knowledge and good faith; and ensure that every disclosed third-party claimant receives the process required by Section 8.

Conclusion

Deputy Director, Directorate of Enforcement v Sri Asadhullah Khan places the proceeds-of-crime inquiry before institutional labels. A property does not become attachable merely because it belongs to an accused borrower, and it does not become immune merely because a bank holds a mortgage. The legal result follows from the property’s origin, the timing and authenticity of the security, the claimant’s conduct, and procedural fairness under Section 8.

On the record before it, the Karnataka High Court found that the seven properties predated the alleged offences, secured untainted bank lending, were already under recovery action, and belonged to a transaction in which the bank was the alleged victim. With no sufficient proceeds-of-crime nexus and no notice to the bank, confirmation of attachment could not stand.

Sources

Karnataka High Court, Deputy Director, Directorate of Enforcement v Sri Asadhullah Khan and connected matters, MSA No. 78 of 2020 connected with MSA Nos. 87, 88 and 89 of 2020, decided 17 October 2025: https://indiankanoon.org/doc/152333399/

India Code, Prevention of Money-laundering Act, 2002, Sections 2(1)(u), 3, 5, 8 and 42: https://www.indiacode.nic.in/indiacode/handle/123456789/2036?view_type=browse

India Code, Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002: https://www.indiacode.nic.in/handle/123456789/2006

India Code, Bharatiya Nyaya Sanhita, 2023: https://www.indiacode.nic.in/bitstream/123456789/20062/1/a2023-45.pdf

India Code, Bharatiya Nagarik Suraksha Sanhita, 2023: https://www.indiacode.nic.in/bitstream/123456789/20099/1/eng.pdf

Disclaimer: This article is for general informational purposes and does not constitute legal advice. Readers should consult the full judgment and current statutory text for advice concerning any specific facts.

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