In an interesting ruling, the Hon’ble Delhi High Court in the case of Asst. Commissioner of Income Tax v. State & Ors. [2025:DHC:8338] has held that funds obtained through fraud or deception cannot be treated as taxable income under the Income Tax Act, 1961, when proceedings under the Prevention of Money Laundering Act, 2002 (PMLA) are still pending. The decision came where the Court declined the Income Tax Department’s plea to release over INR 34.69 crore in fixed deposits seized during a tax raid on Stockguru India, a firm accused of operating Ponzi schemes.

Stockguru allegedly collected nearly INR 494 crore from unsuspecting investors by promising absurd returns of up to 220% in six months. In 2011, the Income Tax Department conducted raids, seizing approximately INR 34.69 crore in cash, which was later converted into fixed deposit receipts (FDRs). The Department then sought to appropriate these funds towards a tax demand of INR 345 crore for the relevant assessment years. However, the Enforcement Directorate (ED), which had initiated a money laundering case against the company and its directors, opposed the move, stating that the seized funds constituted “proceeds of crime” under the PMLA and could not be treated as legitimate income.

Upholding the trial court’s rejection of the IT Department’s application, the High Court observed that the seized funds represented money fraudulently collected from innocent investors and could not, therefore, fall within the definition of taxable income. The Court noted that such amounts appeared, prima facie, to have been generated through fraudulent investment schemes and could not be characterised as income earned from any lawful trade or business. It further noted that treating these amounts as income before the conclusion of the PMLA trial would prejudice the rights of the victims and compromise the objectives of the money laundering law.

Importantly, the Court reaffirmed that the PMLA, being a subsequent special legislation with an overriding clause, prevails over the Income Tax Act in matters involving proceeds of crime. It clarified that unless it is established that the funds constitute legitimate income, no tax liability can arise, and the question of recovery under the Income Tax Act does not even begin. The primary objective of the PMLA is to trace, attach, and eventually restore proceeds of crime to rightful claimants and the same takes precedence over revenue collection.

The judgment serves as an important reminder that when the legality of funds is under criminal scrutiny, revenue authorities cannot prematurely treat such amounts as taxable income.

Authored By
Rajat Jain, Advocate
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Mobile No. 9953887311