Unexplained Is Not Laundered: When Unaccounted Assets Become “Proceeds of Crime” under PMLA

An unexplained bank balance, cash deposit or asset disproportionate to declared income may justify inquiry under tax, company, foreign-exchange, corruption or general criminal law. It does not become “proceeds of crime” under the Prevention of Money-Laundering Act, 2002 merely because its owner cannot immediately explain it. PMLA jurisdiction begins with a different and indispensable question: was the identified property derived or obtained, directly or indirectly, as a result of criminal activity relating to an offence in the Schedule?

This distinction is not a technical escape route. It preserves the statutory boundary between unexplained wealth and laundered property. At the same time, it does not require the Enforcement Directorate to trace the same currency notes through every transaction. Indirect proceeds, substituted assets and property representing the value of unavailable proceeds may fall within Section 2(1)(u). The correct analysis therefore rejects both extremes: unexplained property is not automatically tainted, but sophisticated layering does not cleanse property that can be connected to scheduled criminal activity.

The statutory architecture

Section 2(1)(u) 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, or the value of such property. Where the property is taken or held outside India, equivalent-value property held in India or abroad is included. The 2019 Explanation clarifies that the definition also reaches property directly or indirectly derived or obtained from criminal activity relatable to the scheduled offence.

Section 3 then addresses a person’s knowing involvement in a process or activity connected with proceeds of crime, including concealment, possession, acquisition, use, projecting it as untainted or claiming it as untainted. The existence of proceeds of crime is therefore logically anterior to the laundering offence. Suspicious conduct may help prove knowledge or participation; it cannot create proceeds of crime where the statutory source-link is absent.

Three questions should be kept separate:

1. Is there criminal activity relating to an offence included in the PMLA Schedule?

2. Did that activity generate or yield identifiable property, directly or indirectly?

3. Did the person accused under Section 3 knowingly engage in a specified process or activity connected with that property?

Collapsing these questions into the single statement that “the money is unexplained” reverses the statutory inquiry.

The controlling Supreme Court rule

In Vijay Madanlal Choudhary v. Union of India, 2022 INSC 757, (2023) 12 SCC 1, the Supreme Court held in paragraphs 105–108 that proceeds of crime are the core ingredient of money-laundering and the expression must be construed strictly. Property involved in a scheduled offence is not necessarily property derived from that offence. The Court used the example of a vehicle employed to commit an offence: it may be case property under the general criminal law without being proceeds of crime under Section 2(1)(u).

The same judgment directly addressed unexplained property. Paragraph 106 explains that unaccounted property acquired through lawful means may attract tax consequences but is not proceeds of crime unless the property was derived or obtained as a result of criminal activity relating to a scheduled offence. This remains the controlling rule and was reproduced and applied by the Supreme Court in M/s Nav Nirman Builders & Developers Pvt. Ltd. v. Union of India, 2026 INSC 130, paragraphs 18–20.

The 2019 Explanation does not remove the source-link

It is sometimes argued that the word “relatable” in the Explanation to Section 2(1)(u) permits a much wider inference. Vijay Madanlal rejected the suggestion that the Explanation enlarges the definition beyond its original limits. The Explanation was treated as clarificatory: direct or indirect derivation may be established, but the property must still result from criminal activity connected with a scheduled offence.

Nav Nirman Builders reaffirmed this construction in 2026. Paragraph 19 also emphasises the separate value limb: when actual proceeds are unavailable, property equivalent in value may be attached. That power does not eliminate the need first to identify and quantify proceeds generated by scheduled criminal activity. “Equivalent value” is a method of reaching property after proceeds of crime are established; it is not a licence to designate any unexplained asset as the original proceeds.

A concrete bail-stage application: Chandrama Parsad Singh

Chandrama Parsad Singh @ Tuntun Singh v. State of Bihar, Criminal Appeal No. 569 of 2024, decided on 2 February 2024, demonstrates how the rule operates at the bail stage. Eight scheduled-offence FIRs existed, but the Supreme Court found that the PMLA complaint did not even indicate that the alleged proceeds were derived or obtained from criminal activity relating to those offences. The highest allegation against the appellant was possession of unaccounted money and illegal acquisition of immovable property; prima facie, the assets were not linked to the predicate offences.

The Court granted bail after holding that the Section 45(1)(ii) conditions were satisfied on the material then available. Paragraph 8 expressly confined the observations to bail and left all complaint issues open. The order is therefore not a final acquittal or a universal rule that unexplained assets can never be proceeds of crime. Its importance lies in the evidentiary discipline it imposes: the mere coexistence of scheduled-offence allegations and unexplained property does not establish the necessary connection between them.

Scheduled offence and proceeds must both exist

In Pavana Dibbur v. Directorate of Enforcement, 2023 INSC 1029, the Supreme Court explained that the person prosecuted for money-laundering need not necessarily be an accused in the scheduled offence. A person who knowingly deals with proceeds generated by another may still incur Section 3 liability. But the judgment preserves the anterior requirement that proceeds must have arisen from criminal activity relating to a scheduled offence.

Yash Tuteja v. Union of India, 2024 INSC 301, supplies the corresponding jurisdictional consequence. Where the offences relied upon were not scheduled offences, the Court quashed the PMLA complaint because there could be no proceeds of crime within Section 2(1)(u) and consequently no Section 3 offence. The Court also applied Pavana Dibbur to conspiracy: Section 120-B of the Indian Penal Code, 1860 was not an independent scheduled offence in that case because the alleged conspiracy was not to commit an offence otherwise included in the Schedule.

For post-1 July 2024 conduct, references to historical IPC offences must be checked against the Bharatiya Nyaya Sanhita, 2023 and the contemporaneous PMLA Schedule. A numerical substitution should never be assumed. The precise offence, date of conduct, commencement and savings provisions, and Schedule entry must be verified before treating a predicate allegation as scheduled.

What evidence can establish the required nexus?

The prosecution need not always prove a straight-line transfer from the victim to the accused’s account. Section 2(1)(u) expressly includes indirect proceeds. The evidence may consist of the amount and timing of scheduled criminal receipts; the accused’s role; bank and accounting records; sham contracts or accommodation entries; beneficial ownership; layering through related entities; conversion into immovable property or securities; and later substitution or dissipation.

But an inference must be anchored in facts. A legally sustainable case should identify:

• the scheduled criminal activity said to generate value;

• the approximate property or economic benefit generated;

• the route, transaction or factual mechanism linking that benefit to the property proceeded against;

• whether the case concerns actual proceeds, indirect or transformed proceeds, or equivalent-value property; and

• the conduct said to bring the accused within Section 3.

Turnover is not automatically proceeds. Nor is every asset held by an accused automatically equivalent-value property. Quantification should avoid double counting the same economic value at different stages of movement.

The role of presumptions and the defence burden

Section 24 contains a rebuttable statutory presumption in proceedings relating to proceeds of crime. It does not authorise the prosecution to begin with the conclusion that every unexplained asset is criminal property. As Vijay Madanlal explains, the foundational connection to criminal activity relating to a scheduled offence remains essential.

Once the statutory foundation is established, lawful-source material becomes practically important. Relevant evidence may include contemporaneous sale documents, loan agreements and proof of disbursement, audited ledgers, bank trails, tax records, invoices, construction records, inheritance documents and evidence concerning beneficial ownership. A tax return is neither a magic cure nor proof of laundering: disclosure does not legitimise property generated by crime, while non-disclosure alone does not establish that the property came from a scheduled offence.

Attachment, prosecution and bail require distinct analysis

The same definition of proceeds of crime governs attachment, adjudication, confiscation and prosecution, but the procedural questions differ. A provisional attachment under Section 5 depends on recorded statutory satisfaction and is tested through Section 8 adjudication and appeal. Criminal guilt under Sections 3 and 4 requires proof of knowing involvement beyond reasonable doubt. Bail under Section 45 applies a prima facie reasonable-grounds assessment rather than a final trial.

Nav Nirman Builders also confirms that Section 8 gives the noticee and other property claimants an opportunity to establish their source and interest. Its principal holding concerned the relationship among confirmation, appeal and the Special Court’s powers under Sections 8(7) and 8(8); it did not dispense with the proceeds-of-crime foundation. The judgment is useful here because it both reaffirms the definition and illustrates the staged safeguards governing property.

Practical implications

For investigators, the complaint and attachment record should articulate the generating scheduled activity, the property trail and the legal category under which each asset is reached. Treating unexplained wealth as a substitute for tracing creates vulnerability at attachment, bail and trial stages.

For the defence, it is insufficient merely to assert that the prosecution lacks a perfect rupee-to-rupee trail. The defence should test whether the scheduled activity generated the alleged amount, examine chronology, demonstrate lawful sources with contemporaneous records, expose duplicate valuation and distinguish actual proceeds from equivalent-value property.

For banks, purchasers and other third parties, the issues include title, consideration, timing, notice, source of funds and whether the asset represents actual or value-equivalent proceeds. Good faith does not automatically defeat every provisional restraint, but the PMLA provides a hearing and appellate structure through which independent interests can be asserted.

Conclusion

PMLA is not a general unexplained-assets statute. The statutory trigger is property derived or obtained from criminal activity relating to a scheduled offence. The prosecution may establish that relationship through direct or circumstantial evidence and may reach indirect, transformed or equivalent-value property. What it cannot do is replace the source-link with suspicion arising solely from non-disclosure, disproportion or defective accounts.

The disciplined formulation is therefore: unexplained property may be evidence calling for investigation, but it becomes proceeds of crime only when the statutory relationship with scheduled criminal activity is established. That distinction protects both effective recovery of genuinely laundered value and the limits Parliament placed on PMLA’s exceptional powers.

Sources

Vijay Madanlal Choudhary v. Union of India, 2022 INSC 757, (2023) 12 SCC 1, particularly paragraphs 105–108: https://api.sci.gov.in/supremecourt/2014/19062/19062_2014_3_1501_36844_Judgement_27-Jul-2022.pdf

M/s Nav Nirman Builders & Developers Pvt. Ltd. v. Union of India, 2026 INSC 130, particularly paragraphs 18–20 and 21–25: https://api.sci.gov.in/supremecourt/2023/21046/21046_2023_4_1501_67910_FinalOrder_06-Feb-2026.pdf

Chandrama Parsad Singh @ Chandrama Parsad @ Tuntun Singh v. State of Bihar & Anr., Criminal Appeal No. 569 of 2024, Supreme Court order dated 2 February 2024, particularly paragraphs 3–8: https://api.sci.gov.in/supremecourt/2023/37109/37109_2023_7_8_50022_Order_02-Feb-2024.pdf

Pavana Dibbur v. Directorate of Enforcement, 2023 INSC 1029: https://api.sci.gov.in/supremecourt/2022/42568/42568_2022_8_1501_48657_Judgement_29-Nov-2023.pdf

Yash Tuteja v. Union of India, 2024 INSC 301: https://api.sci.gov.in/supremecourt/2023/14771/14771_2023_8_68_52049_Judgement_08-Apr-2024.pdf

Prevention of Money-Laundering Act, 2002, particularly Sections 2(1)(u), 3, 5, 8, 24 and 45 and the Schedule: https://www.indiacode.nic.in/handle/123456789/15402

This article provides general legal information and does not constitute advice concerning any investigation, attachment, bail application or prosecution.

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