Seized Amounts Subject To PMLA Investigation Are Proceeds Of Crime, Can’t Be Treated As Taxable Income Prior To Conclusion Of Trial: Delhi High Court

The Petition before the High Court was filed under Section 482 of the Code of Criminal Procedure, 1973 (CrPC) on behalf of the Petitioner/Asst. Commissioner of Income Tax (ACIT), to challenge the Order of the Special Judge dismissing the Application under Section 226(4) of the Income Tax Act, 1961. The Petitioner had sought a direction to release all the FDRs, for recovery of Tax Demand against the Respondents.

The Single Bench of Justice Neena Bansal Krishna held, “The seized amounts in the present case subject to investigation under PMLA are prima facie proceeds of crime, and not lawful income from trade or business. Therefore, till such time the trial is concluded under PMLA/the FIR No.84/2011 dated 07.04.2011 (regarding cheating the investors) and it is established that the income/money recovered from the various Bank accounts which has been put in FDRs was indeed the income of the accused persons, the Income Tax Department cannot appropriate for tax liability by holding it as the income of the Company/Directors. Therefore, 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.”

Advocate Sanjeev Rajpal represented the Petitioner while APP Ajay Vikram Singh represented the Respondent.

Factual Background

A search and seizure operation under Section 132 of the IT Act, 1961, was carried out by the Investigation Wing of Income Tax Department at the residential and office premises of the Respondents and the Firm M/s Stockguru India in which number of incriminating documents, details of Bank Account deposits with all properties, articles, etc. in their names including the cash of Rs.34,69,00,000 were seized by the Investigation Wing of the Income Tax Department, under Section 132(3) of the IT Act. An FIR also came to be registered on the complaint of one Sunil Kumar who allegedly paid Rs 60 lakh and Rs l Crore by cheques to the third Respondent for investment of which he and other investors were cheated.

The Block Assessment proceedings of the Respondents and M/s Stockguru India, were initiated by the Income Tax Department and Special Audit under the IT Act, was conducted for the Financial Year 2004- 2005 to the Financial Year 2010-2011. As the assessment in the search cases was for the block period of six years, Attachment Orders under Section 281B of IT Act, were issued to all Bank Accounts. All its bank accounts were seized by the investigation wing of the Income tax Department.

An FIR was committed by the CMM (West) to Special Judge, New Delhi. An Application was filed under Section 44 of the Prevention of Money Laundering Act, 2002 (PMLA) by the second Respondent/Directorate of Enforcement as it had filed a Complaint before that Court against the Respondents for money laundering. The Application of the Petitioner/ACIT under Section 226(4) IT Act, for release of FDRs, was rejected by the Special Judge vide the impugned Order. This Order thus came to be challenged before the High Court.

Reasoning

On a perusal of the facts of the case, the Bench noticed that the case of the Prosecution was that about 2,05,062 investors invested a total amount of Rs.493,94,44,584 in M/s Stockguru India and during the investigations, Complaints were received from 15,000 investors.

The Bench noted that there were competing claims of the Income Tax Department to adjust the recovered amounts towards tax liability and of the individuals who had been defrauded of their investments made with Respondents and whether the recovered amounts were proceeds of crime to be dealt as per provisions of PMLA. The Bench further noticed that it was not the money which was relatable to the Income of the Accused. Prima facie, this was the money which had been fraudulently obtained by the accused persons by floating fraudulent schemes under the name of various Companies. Noting that the money was the defrauded/embezzled amounts of innocent investors acquired by the Accused through illegal means, the Bench held that these funds would not come within the income of the Accused.

“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”, it further added.

Considering the objective and purpose of PMLA and the Income Tax Act and also the fact that PMLA is a subsequent Act, the Bench 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, was rightly rejected and could not be entertained until the conclusion of the trial in the criminal case, as any premature release would prejudice the ongoing PMLA proceedings.

Thus, finding no merit in the Petition, the Bench dismissed the same.

Cause Title: Asst. Commissioner of Income Tax v. State (Neutral Citation: 2025:DHC:8338)

Appearance

Petitioner: Advocate Sanjeev Rajpal

Respondent: APP Ajay Vikram Singh,CGSC Balendu Shekhar, Addvocates Raj Kumar Maurya, Krishna Chaitanya, SPP Anupam S. Sharma

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