Writ Court Can Permit Salary Payments from PMLA-Frozen Accounts When the Adjudicating Authority Lacks Interim Powers

Case: DIRECTORATE OF ENFORCEMENT v. ZO PVT LTD

Court: Karnataka High Court (Division Bench)

Date: 09-03-2026

Proceeding: Writ Appeal No. 492 of 2026 (GM-RES) challenging portions “B”, “C” and “D” of the Single Judge’s order dated 02.02.2026 in W.P. No. 962/2026

1) Introduction

The Directorate of Enforcement (“ED”) appealed against a Single Judge’s order passed in a writ petition filed by Zo Pvt Ltd (“Zo”), whose bank accounts had been frozen under Section 17(1A) of the Prevention of Money Laundering Act, 2002 (“PMLA”) by order dated 30.12.2025. While the Single Judge largely declined to interfere with the freezing (relegating Zo to the Adjudicating Authority for statutory remedies), the Single Judge nevertheless permitted Zo to submit an employee list and directed ED to verify and communicate to the bank to enable salary payment for January 2026.

ED’s challenge was narrowly focused: it objected to the direction enabling salary payments from funds it asserted formed part of “proceeds of crime”.

Key Issues

  • Whether a writ court, after relegating a party to the PMLA’s adjudicatory mechanism, can still grant limited operational relief (salary payments) from frozen accounts.
  • How the concept of “proceeds of crime” must remain linked to a live predicate/scheduled offence and cannot be assumed to cover all funds of the entity.
  • Whether Mangal Rajendra Kamthe v. Tahsildar, Purandhar and others bars interim relief when statutory remedies exist, even where the statutory forum cannot grant interim relief.

2) Summary of the Judgment

The Division Bench dismissed ED’s appeal and upheld the Single Judge’s direction permitting salary payments. It held that since the Adjudicating Authority under Section 8 PMLA has no power to grant interim relief (including partial defreezing to pay salaries), the Single Judge’s limited discretionary direction was neither perverse nor unwarranted. The Bench distinguished Mangal Rajendra Kamthe v. Tahsildar, Purandhar and others on this basis.

3) Analysis

A) Precedents Cited (and their Role in the Decision)

  • Vijay Madanlal Choudhary and others v. Union of India and others, (2023) 12 SCC 1

    This was the anchor precedent on the meaning of “proceeds of crime” under Section 2(1)(u) PMLA. The High Court extracted and relied upon the Supreme Court’s core propositions: (i) “proceeds of crime” must be construed strictly; (ii) attachment/freezing must be confined to property derived/obtained “as a result of” criminal activity relating to a scheduled offence; (iii) ED cannot proceed on assumptions of scheduled offence/proceeds of crime without a live predicate offence being registered/pending. The Bench used these principles to reject ED’s broad submission that the “entire amount” in Zo/Winzo-related accounts necessarily represented proceeds of crime, especially where the surviving predicate allegation cited involved a comparatively limited amount.

  • OPTO Circuit India Ltd. v. Axis Bank and others, Order dated 03.02.2021 in Crl.A.No.102/2021

    The Bench relied on this decision for two connected propositions: (i) freezing under Section 17/17(1A) is procedure-sensitive (reason-to-believe, recording, and statutory follow-through); and (ii) the Supreme Court’s readiness, in appropriate circumstances, to allow payments of statutory dues despite freezing. While the present case concerned salaries (not statutory dues), the citation reinforced the broader judicial approach that freezing powers, though potent, are not immune from calibrated relief to prevent undue hardship.

  • Mangal Rajendra Kamthe v. Tahsildar, Purandhar and others, 2026 SCC OnLine SC 297

    ED invoked this case to argue that once a constitutional court relegates parties to statutory remedies, it should not grant interim relief under Article 226. The Division Bench distinguished it: that principle applies where the statutory forum can itself address the interim situation. Here, the Bench recorded the crucial factual-legal constraint that the PMLA Adjudicating Authority cannot grant interim directions such as partial defreezing for salary payments. Therefore, the rationale of Mangal Rajendra Kamthe did not control.

  • M/s. Rashmi Metaliks Ltd. and Another v. Enforcement Directorate, Order dated 10.08.2022 in W.P.A 17454/2022

    Cited by Zo to emphasize linkage between “proceeds of crime” and the predicate offence, and constraints on ED actions beyond the scheduled offence framework. The Karnataka High Court’s reasoning aligned with this approach by reiterating the necessity of tethering “proceeds of crime” to a live scheduled offence and rejecting assumption-driven expansion.

  • Abdullah Ali Balsharaf and Anr. v. Directorate of Enforcement and others, 2019 SCC OnLine Del 6428

    Cited by Zo; noted by the Bench while concluding that the Single Judge’s discretion was not perverse. Its relevance lies in judicial scrutiny over coercive financial restraints and the need for procedural and substantive justification.

  • Wander Ltd., and another v. Antox India P. Ltd., 1990 (Supp) Supreme Court cases 727

    Typically cited for the limited scope of appellate interference with discretionary/interlocutory orders. In effect, it supports the Division Bench’s restraint in not substituting its view for the Single Judge’s balanced interim direction absent perversity.

  • Other decisions cited (contextual relevance in this judgment)

    • R.D.Chaitra v. Directorate of enforcement (order dated 15.10.2025, W.P.No.26754/2025): relied on by ED to support strict non-interference with PMLA measures; the Bench, however, decided on the narrower “interim salary relief” axis.
    • M/s.Kumar Food Industries Ltd. v. Union of India & Ors. (order dated 10.03.2022, W.P.(C) 12033/2021 & CM Nos.): cited by ED; not determinative in the Division Bench’s final ratio.
    • Satyendar Kumar Jain Vs. Directorate of Enforcement (MANU/SC/0209/2024): cited by ED; not central to the salary-relief holding.
    • JSW Steel Limited others v. Deputy Director, Directorate of Enforcement and others (Criminal appeal Nos.4183-4184/2025): cited by ED; not pivotal to the outcome here.
    • Dr.Natesha.D.B v. Directorate of Enforcement (order dated 27.01.2025, W.P.No.32956/2024): cited by Zo in support of writ scrutiny/relief in appropriate PMLA contexts.
    • R.K.M Powergen Private Limited, v. Assistant Director, Directorate of Enforcement, Govt. of India and another, 2025 SCC Online Mad 3272: cited by Zo; consistent with courts’ insistence on statutory discipline and proportionality in coercive measures.
    • DoIT Resort (Goa) Pvt. Ltd. and Ors. v. Directorate of Enforcement and Ors. (order dated 29.07.2020, W.P.NO.1321/2020): cited by Zo; generally invoked for limits on ED’s coercive steps and for measured relief.
    • Ravinder Kumar Sharma v. State Of Assam and others, (1999) 7 SCC 435: cited by Zo; supports broader principles on exercise of writ discretion and fairness.

B) Legal Reasoning

1. Statutory scheme: freezing is subject to adjudication, but interim relief gap is real

The Bench first mapped the PMLA architecture: “proceeds of crime” (Section 2(1)(u)), scheduled offences (Section 2(1)(y)), money-laundering offence (Section 3), provisional attachment (Section 5), and search/seizure/freezing (Section 17, especially 17(1A)). It emphasized that freezing/attachment is ultimately subject to adjudication under Section 8, with appellate and Special Court layers thereafter.

However, critically, the Bench recorded (as “admitted before us”) that the Adjudicating Authority under Section 8 has no power to grant interim directions such as partial defreezing to meet salary obligations. This absence created a remedial vacuum: relegation to the statutory forum would not address immediate hardship.

2. “Proceeds of crime” must be tethered to a live predicate offence (strict construction)

Relying on Vijay Madanlal Choudhary and Others v. Union of India and others, the Bench reiterated that:

  • “Proceeds of crime” is the core ingredient and must be construed strictly.
  • ED action cannot proceed on assumption; property must be shown to be derived/obtained “as a result of” criminal activity relating to a scheduled offence.
  • ED cannot treat “all properties” of the person/entity as proceeds of crime merely because a scheduled offence is alleged.

Applying this, the Court rejected ED’s categorical stance that the entire sums in Zo/Winzo accounts represent proceeds of crime when the surviving predicate complaint referred to by the Court involved a cheating allegation of about Rs.42 Lakhs.

3. Distinguishing the “no interim relief upon relegation” line

ED’s argument from Mangal Rajendra Kamthe v. Tahsildar, Purandhar and others was met with a functional distinction: where the statutory authority has power to address the interim situation, a writ court should not ordinarily grant interim relief while relegating the parties. But where the statutory forum lacks the power to grant interim relief (as under Section 8 PMLA), the writ court’s limited intervention to prevent immediate prejudice is not barred.

4. Deference to the Single Judge’s calibrated discretion

The Bench framed the Single Judge’s direction as a pragmatic, limited measure (verification of employee list; communication to bank) rather than an adjudication of merits on whether the freeze was lawful or whether the monies were proceeds of crime. It held the exercise of discretion was not “perverse or unwarranted,” and therefore did not merit appellate interference.

C) Impact

  • Recognized “interim relief gap” under PMLA adjudication: The judgment underscores a practical limitation in PMLA proceedings—Section 8 adjudication does not offer interim defreezing relief. This can justify narrowly tailored writ directions to prevent salary paralysis while parties pursue statutory remedies.
  • Reinforces predicate-offence linkage and strictness for “proceeds of crime”: Although the appeal concerned salary payments, the Bench’s reasoning strengthens the principle that ED cannot justify sweeping freezes by invoking speculative future FIRs or generalized assertions; proceeds must be linked to criminal activity relating to a scheduled offence.
  • Guidance for future writ courts: The decision provides a structured basis for granting minimal operational relief (e.g., salaries) without finally adjudicating PMLA merits, especially where employees/third parties face collateral harm.
  • Operational compliance for ED: By invoking OPTO Circuit India Ltd. v. Axis Bank and others, the judgment indirectly cautions that freezing actions must be procedurally robust and mindful of legitimate necessities, reducing vulnerability to writ-court calibrated interventions.

4) Complex Concepts Simplified

  • Predicate/Scheduled offence: A “scheduled offence” is an offence listed in the PMLA Schedule. ED’s money-laundering case generally depends on a registered/pending scheduled offence (the “predicate”).
  • ECIR: An internal ED case-registration document (Enforcement Case Information Report) to commence PMLA investigation, often based on predicate FIRs.
  • “Proceeds of crime” (Section 2(1)(u)): Property obtained directly/indirectly as a result of criminal activity relating to a scheduled offence. Not every asset of an accused/entity becomes “proceeds of crime.”
  • Freezing under Section 17(1A): If physical seizure is impracticable, ED can “freeze” property (including bank accounts), stopping transfers/operations without prior permission.
  • Adjudicating Authority (Section 8): The statutory forum that decides whether attachment/freezing should be confirmed/continued. In this judgment, it was accepted that it cannot grant interim partial-defreeze relief for salaries.
  • Relegation to statutory remedy vs. interim protection: Courts often send parties to the statutory forum; however, if that forum cannot grant urgent interim relief, writ courts may provide limited protection to avoid irreparable harm.

5) Conclusion

The Karnataka High Court’s central contribution is a practical and rights-sensitive rule in PMLA litigation: even when a writ petitioner is relegated to the PMLA’s statutory adjudication, the High Court may still grant narrowly tailored relief (such as enabling salary payments) where the statutory forum lacks interim powers. At the same time, the Court reaffirmed the Supreme Court’s strict construction of “proceeds of crime” and the necessity of linking any restraint to a live predicate offence, rejecting assumption-based expansion of “proceeds of crime” to all funds of an entity.