The Delhi High Court has held that amounts obtained by fraud cannot be treated as taxable income of the company or its directors; instead, such sums constitute “proceeds of crime” under the Prevention of Money Laundering Act, 2002 (PMLA). Justice Neena Bansal Krishna emphasized that to treat such ill-gotten gains as income recoverable by the Income Tax Department prior to the PMLA trial or adjudication would be legally incorrect.
The case concerned a plea by the Assistant Commissioner of Income Tax challenging an order of a trial court that dismissed its application to release fixed deposit receipts (FDRs) held by an entity called Stockguru India and four of its officials, including the directors. The Income Tax Department sought to release the FDRs so that the tax demand could be recovered. The company and its officials were accused of inducing investors into a Ponzi scheme promising extremely high returns—220% in six months—with allegations that they defrauded investors.
In 2011, raids were conducted on the firm’s premises and the residences of its officials, leading to seizure of incriminating documents, details of bank accounts, various properties, and cash totaling ₹34.69 crore. An FIR was registered based on a complaint that one complainant had invested ₹60 lakh in 2010 and ₹1 crore in 2011 via cheques, and alleged that he and other investors were cheated. Subsequently, an application was filed by the Enforcement Directorate under Section 44 of the PMLA, as it had filed a complaint in court against the company and its officials for money laundering.
The Income Tax Department had sought the release of the FDRs so that the demand under the Income Tax Act could be realized, but the trial court refused. The tax authority appealed, contending that the trial court erred in dismissing its recovery application by holding that it was not maintainable because the PMLA is a special law that should prevail over the Income Tax Act.
The High Court rejected the tax department’s plea. The Court observed that a key distinction must be made between sums that legitimately qualify as income of the accused and amounts that are proceeds of crime. If such amounts are proceeds of crime, they do not lawfully belong to the accused and thus cannot give rise to a tax liability. The Court noted that the defrauded or embezzled amounts could not be characterized as income of the director or the company since they were obtained through fraudulent schemes and did not arise from lawful business or profit-making operations.
The Court further held that in a situation where the trial under PMLA has not been concluded, one cannot prematurely treat those funds as taxable income and enable recovery on that basis. Such a course would undermine the investigative and adjudicatory process under PMLA. The Court remarked that the embezzled money claimed by a director cannot be viewed as a benefit derived from the company’s profits or operations; instead, it is illicit and must be addressed as criminal proceeds.
On these grounds, the High Court dismissed the Income Tax Department’s challenge and sustained the trial court’s refusal to release the FDRs for tax recovery, thereby reinforcing that defrauded money should be treated under the PMLA regime, not under the ordinary tax recovery mechanism.
0 Comments
Thank you for your response. It will help us to improve in the future.