Defrauded Money Not Taxable Income Of Company Or Director, Would Constitute Proceeds Of Crime Under PMLA: Delhi High Court

The Delhi High Court has observed that defrauded money is not a taxable income of a company or its director but would constitute proceeds of crime under the Prevention of Money Laundering Act, 2002.

Justice Neena Bansal Krishna said that to treat such amounts as taxable income recoverable by the Income Tax Department, prior to the conclusion of the PMLA trial or adjudication, would be erroneous.

The Court dismissed a plea filed by the Asst. Commissioner of Income Tax challenging a trial court order dismissing its plea to release all the FDRs, for recovery of Tax Demand against an entity Stockguru India and its four officials, including the directors, pursuant to a criminal case.

It was alleged that the company and its officials induced and allured people to invest in a Ponzi scheme which guaranteed exorbitant returns of 220% return to investors within a short span of six months.

In 2011, the Firm and residential premises of its officials in question were raided by the income tax department in which number of incriminating documents, details of all Bank Accounts with all kind properties, articles, etc. in their names, including cash of Rs.34,69,00,000, were seized.

An FIR was registered on the complaint of a man who allegedly paid Rs.60 lakh in 2010 and Rs. 1 crore in 2011 in cheques to the company's official for investment of which he and other investors were cheated.

Later, an application was filed by ED under Section 44 of the PMLA in 2016 as it had filed a complaint before the Court against the company's officials for money laundering.

In 2018, the income tax department's application for release of FDRs for dismissed by the trial court vide the impugned order.

The income tax department challenged the order on the ground that The Special Judge had wrongly dismissed its Recovery Application by incorrectly holding that the same was not maintainable, as the PMLA is the later Special Law which would prevail over the Income Tax Act.

The question before the Court was whether the tax liability of the company and its officials would take precedence over the trial under PMLA to ascertain whether the amounts traced in the various accounts were proceed of crime?

Rejecting the plea, the Court said that it is significant to consider whether it is the legitimate income of the accused persons on which the liability to pay the income tax exists or it is a proceed of crime which is liable to be confiscated and returned to the rightful persons.

It added that the determination was crucial because if the funds constitute proceeds of crime rather than legitimate income, “no tax liability can arise” on money that never legally belonged to the accused persons and which is liable to be confiscated or restored to its legitimate claimants.

The Court said that in the case in hand, it wasn't the money which was relatable to the Income of the Accused persons, adding that prima facie, it was evident that the money must have been fraudulently obtained by the accused persons by floating fraudulent schemes under the name of various Companies.

“The proceeds of crime as in the present case, can in no way be termed as the income of the Accused at this stage, as trial in PMLA case is yet to be concluded,” the Court said.

“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,” it added.

Further, Justice Krishna said it cannot be said at this stage that the Accused persons had entered into trade or business and the income generated from it can be termed as an income on which tax liability arises because of concealment.

“It is evident from the definition of the „trade‟ that the modus operandi of the functioning of the Accused Company cannot be termed as an activity of trade and business. As has been discussed above, it is a money which is accumulated by fraud and deception and infact, prima facie comes within the definition of proceeds of crime,” the Court said. 

It concluded: “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.”

Title: ASST. COMMISSIONER OF INCOME TAX v. STATE & ORS

Citation: 2025 LiveLaw (Del) 1173

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