PMLA Prevails Over Income Tax Act: Delhi HC Denies ITD's Plea to Recover Tax from Seized 'Proceeds of Crime' - 2025-09-18

Financial Frauds and Statutory Priority: High Court Rules PMLA Takes Precedence Over Income Tax Claims

In a significant ruling regarding the competing claims of state agencies over seized assets, the Delhi High Court has clarified the hierarchy of statutory powers when dealing with "proceeds of crime." Justice Neena Bansal Krishna, presiding in Asst. Commissioner of Income Tax vs State , held that the Prevention of Money Laundering Act (PMLA), 2002, holds precedence over the Income Tax Act, 1961 , when funds held by an accused are suspected to be the result of criminal activities.

The Rise and Fall of the "Copper King"

The case stems from the infamous "Stockguru India" Ponzi scheme, which lured thousands of investors with promises of exorbitant financial returns. Following reports of massive investor fraud, the Income Tax Department carried out search and seizure operations in 2011, attaching bank accounts and seizing approximately Rs. 34.69 crore.

Subsequently, separate FIRs were filed by the Economic Offences Wing (EOW) for cheating and criminal conspiracy, followed by a formal complaint by the Directorate of Enforcement (ED) under the PMLA. The central dispute arose when the Income Tax Department—seeking to recover massive outstanding tax demands—applied under Section 226 (4) of the IT Act to move the seized funds (now held in Fixed Deposit Receipts) toward tax liabilities.

The Legal Tug-of-War

The Income Tax Department argued that its stature as a "secured creditor" and the specific provisions of the IT Act allowed for the immediate attachment and recovery of funds. Conversely, the Directorate of Enforcement maintained that the funds were "proceeds of crime" derived from illegal activities under the PMLA. They argued that money gained through fraud does not legally constitute "income" subject to taxation and that the PMLA, as a later, specialized statute with an overriding non-obstante clause ( Section 71 ), must prevail.

Decoding the Court’s Analysis

Justice Neena Bansal Krishna closely examined the "dominant purpose" of both statutes. The Court emphasized that for funds to be recognized as taxable income, the assessee must hold proprietary rights over them. However, since the funds were allegedly generated through deception and embezzlement, they represent "proceeds of crime" rather than lawful business income.

The Court held that the income tax authorities could not effectively "tax" money that was never legally earned. The ruling leaned heavily on the principle that special laws enacted later in time—and designed to combat specific threats to the country’s financial integrity, like the PMLA—carry greater weight in cases of direct statutory conflict.

Key Observations

The judgment clarifies that the character of the funds must first be determined by the criminal court before they can be treated as assets.

> "As the proceeds of crime... can in no way be termed as the income of the Accused at this stage, as the trial in the PMLA case is yet to be concluded... the Income Tax Department cannot appropriate them for tax liability."

> "The dominant purpose of PMLA is to forfeit proceeds of crime and restore such property to legitimate claimants... The IT Act’s purpose of revenue collection becomes secondary when the very foundation of taxable income is disputed."

> "Any loss or expenditure arising from illegality or offence (including confiscation or penalty) is not allowable as a business loss, irrespective of whether the underlying business is lawful or unlawful."

The Road Ahead

The High Court ultimately dismissed the Income Tax Department’s application to release the funds, ruling that any such move would be premature and would prejudice the ongoing PMLA proceedings. By prioritizing the PMLA, the Court has provided a roadmap for future cases involving multi-agency claims over frozen assets. The ruling affirms that in the battle between revenue collection and the eradication of financial systemic threats, the latter holds foundational priority until the nature of the funds is legally established.