Proceeds of crime in money laundering cases not taxable income; PMLA overrides IT Act: Delhi High Court

The Delhi High Court recently held that the provisions of the Prevention of Money Laundering Act, 2002 (PMLA) prevail over the Income Tax Act, 1961 (IT Act) [Asst. Commissioner of Income Tax v. State & Ors]..Thus, the Court ruled that proceeds of crime can in no way be termed as the income of an accused when the trial in the PMLA case is incomplete.“The embezzled money by the Director of a Company cannot constitute a benefit of pre-requisite obtained from the Company and cannot be called his income. In the present case, the money is the defrauded/embezzled amounts of innocent investors acquired by the Accused through illegal means. These funds would not come within the income of the Accused,” the Court stated.Justice Neena Bansal Krishna said that PMLA was introduced after the IT Act and serves a more dominant purpose in matters involving money laundering. “Even if, arguendo, the ‘dominant purpose’ test noted in Dyani Antony Paul, (supra) were to be applied in determining which special enactment should prevail when both contain non-obstante clauses, PMLA would still take precedence in the present circumstances. The dominant purpose of PMLA is to forfeit proceeds of crime and restore such property to legitimate claimants, which directly addresses the core issue in this case - whether the seized funds constitute proceeds of crime obtained through fraudulent schemes or legitimate income subject to taxation,” the Court said. .It underscored that the IT Act’s purpose of revenue collection becomes secondary when the very foundation of taxable income is disputed and under criminal investigation..Justice Krishna rendered these findings while rejecting a petition filed by the Income Tax Department seeking release of fixed deposits worth ₹34.69 crore seized from the offices and associates of Stockguru India, the firm accused of running one of the country’s biggest Ponzi schemes.The Assistant Commissioner of Income Tax (ACIT), who filed the plea, argued that following a 2011 raid on Stockguru India, the department froze bank accounts and seized cash, which was later converted into fixed deposit receipts (FDRs). After assessment, the firm and its partners were found liable for over ₹345 crore in unpaid taxes for assessment years 2010–2012. The department insisted that under the Income Tax Act, it had first claim over the seized funds to recover dues.However, the Enforcement Directorate (ED) opposed the request, maintaining that the funds had been collected by Stockguru through fraudulent investment schemes promising returns of up to 220 percent. The ED said that over two lakh investors were cheated of nearly ₹494 crore, and the seized money was part of the criminal proceeds under investigation. It further stressed that the PMLA, enacted after the Income Tax Act, overrides earlier laws in cases involving money laundering..After considering the case, the High Court ruled in favour of the ED. “Prima facie, it is evident that this money was fraudulently obtained by the accused persons by floating deceptive investment schemes. Proceeds of crime cannot be treated as taxable income,” the Court noted.It underscored that allowing the tax department to recover dues from these funds would prejudice ongoing PMLA proceedings and undermine the rights of victims. “Considering the objective and purpose of PMLA and Income Tax Act as detailed above and also considering that PMLA is a subsequent Act, it is hereby held that the Application of the Income Tax Department for release of the FDR amounts to be appropriated towards the alleged tax liability of the accused persons, has been rightly rejected and cannot be entertained until the conclusion of the trial in the criminal case, as any premature release would prejudice the ongoing PMLA proceedings,” the Court held. .Advocate Sanjeev Rajpal appeared for the Income Tax Department.Advocate Ajay Vikram Singh represented the State. Advocates Balendu Shekhar along with Raj Kumar Maurya and Krishna Chaitanya appeared for the Union of India. Special Public Prosecutor (SPP) Anupam S Sharma represented the Central Bureau of Investigation. .[Read Judgment]