Delhi High Court: Defrauded Investor Funds Not Taxable as Company or Director’s Income; Classified as Proceeds of Crime Under PMLA, Tax Department’s Plea for Release of FDRs Dismissed
Isabella Mariam
The High Court of Delhi Single Bench of Justice Neena Bansal Krishna held that money defrauded from investors does not constitute taxable income of a company or its directors but amounts to proceeds of crime under the Prevention of Money Laundering Act, 2002. The Court dismissed a petition by the Assistant Commissioner of Income Tax seeking release of fixed deposit receipts to recover tax dues, finding that such amounts cannot be appropriated as revenue before completion of the PMLA trial. The petition concerned recovery proceedings against Stockguru India and four of its officials.
The petition sought directions to release FDRs made from cash and funds seized during a search operation against respondents Ulhas Prbhakar Khair, Priyanka Saraswat, Nitin Sinha, and Naresh Kharab, who, along with their partnership firm M/s Stockguru India, were accused in criminal proceedings.
On 18 January 2011, a search and seizure operation under Section 132 of the Income Tax Act was carried out by the Investigation Wing of the Income Tax Department at the residential and office premises of the accused and their firm. Cash amounting to Rs. 34.69 crore, along with bank account details and incriminating documents, were seized. The Department also served a seizure order on HDFC Bank, Dwarka, restricting transactions in the accounts of the accused.
Parallel criminal proceedings were initiated based on complaints of investors who alleged being cheated of large sums invested in Stockguru India. FIR’s were registered under IPC sections for cheating, forgery, conspiracy, and under provisions of the Prize Chits and Money Circulation Schemes (Banning) Act, 1978. Investors alleged they had deposited crores of rupees in the scheme run by Ulhas Khair and Priyanka Saraswat but were defrauded.
During assessment, the Income Tax Department determined tax liabilities of over Rs. 345 crores against Stockguru India and issued demand notices. The petitioner filed an application under Section 226(4) of the Income Tax Act seeking release of seized funds to adjust against outstanding tax dues. However, the Directorate of Enforcement, having initiated proceedings under PMLA, also laid claim to the same amounts, asserting that they constituted proceeds of crime.
The Special Judge dismissed the Income Tax Department’s application on 05 February 2018, holding that PMLA, being a later special enactment, prevailed over the Income Tax Act. The Income Tax Department challenged this decision in the High Court.
Justice Neena Bansal Krishna recorded: “The question which thus, arises is whether the tax liability of the Respondent would take precedence over the trial under PMLA to ascertain whether the amounts traced in the various accounts, is proceed of crime.” The Court noted that the Income Tax Act aims to levy and collect taxes on legitimate income, while PMLA is designed to forfeit proceeds of crime and restore them to rightful claimants.
The Court observed: “Therefore, it becomes 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.” Referring to Section 2(24) of the Income Tax Act, which defines income, the Court held: “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 further stated: “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.”
Addressing the conflict of laws, the Court relied on precedents, stating: “When there are two special Acts then the one which is subsequent in point of time shall prevail. The PMLA Act has been enacted subsequent to Income Tax Act.” The judgment reiterated that even applying the “dominant purpose” test, PMLA would prevail, as its primary objective is to forfeit proceeds of crime, which directly related to the issue in dispute.
The Court distinguished the petitioner’s reliance on Commissioner of Income Tax vs. Piara Singh, noting that it concerned confiscation losses in smuggling and was not applicable in this context. The Court also cited recent judgements, including Commissioner of Income Tax Jaipur vs. Prakash Chand Lunia, to affirm that proceeds of crime cannot be considered taxable income.
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 Income Tax Department cannot appropriate for tax liability by holding it as the income of the Company/Directors.”
“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.”
“There is no merit in the present Petition, which is hereby dismissed. The Petition stands disposed of accordingly.”
Advocates Representing the Parties:
For the Petitioner: Mr. Sanjeev Rajpal, Advocate.
For the Respondents: Mr. Ajay Vikram Singh, APP for the State; Mr. Balendu Shekhar, CGSC with Mr. Raj Kumar Maurya and Mr. Krishna Chaitanya, Advocates; Mr. Anupam S. Sharma, SPP
Case Title: Assistant Commissioner of Income Tax v. State & Ors.
Neutral Citation: 2025: DHC:83338
Case Number: CRL.M.C. 2198/2018
Bench: Justice Neena Bansal Krishna
