Page 9 – Vaish Associates Advocates

Defrauded Funds Cannot Be Considered as Taxable Income — PMLA Prevails Over Income Tax Act: Delhi High Court

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
Email: [email protected]
Mobile No. 9953887311

CBI/ Police Cannot Ask To Furnish Demand Draft Or Deposit Money Under Section 91 of the Code of Criminal Procedure, 1973

In a significant ruling, the Hon’ble Delhi High Court in Exclusive Motors Pvt. Ltd. v. Central Bureau of Investigation & Ors., 2025:DHC:5662, ruled that investigating agencies cannot compel private parties to deposit money under Section 91 of the Code of Criminal Procedure, 1973 (CrPC).

Exclusive Motors, an authorized dealer of Bentley vehicles in India, received Rs. 50 Lakhs as advance from a buyer for a Bentley Mulsanne. The vehicle was imported from Bentley UK, but the buyer failed to pay the remaining amount and take delivery. As per the agreed terms, Exclusive Motors forfeited the advance and later sold the car at a loss.

Subsequently, the CBI initiated an investigation into the buyer’s company for alleged illegal collection of public funds. During the probe, it was found that the Rs. 50 Lakhs paid to Exclusive Motors came from tainted funds and was “proceeds of crime.”

The CBI then issued a notice under Section 91 CrPC directing Exclusive Motors to furnish a Demand Draft of Rs. 50 lakhs.

The Court held that Section 91 CrPC is limited to compelling the production of documents or tangible evidence which is in possession of the person and not for seeking monetary deposits Such a demand is beyond the scope of the provision and has no legal backing.

The judgment clarifies that Police or CBI cannot seek recovery of money or issue monetary demands under Section 91 CrPC. Any such action is liable to be challenged as unlawful and contrary to procedural safeguards under criminal law.

Authored By
Rajat Jain, Advocate
Email: [email protected]
Mobile No. 9953887311

Freezing of Bank Account on Mere Suspicion Cannot Sustain — “Reasons to Believe” Under PMLA Cannot Be a Mere Formality

The Delhi High Court in the case of Directorate of Enforcement v. Poonam Malik [2025:DHC:9981-DB] has strongly reprimanded the Enforcement Directorate (ED) for freezing a bank account purely on the basis of suspicion, without complying with the statutory safeguards under the Prevention of Money Laundering Act, 2002 (PMLA). The Court held that both the ED and the Adjudicating Authority (AA) acted mechanically and in disregard of the distinct procedural stages mandated under the Act.

The case involved freezing orders that were subsequently confirmed by the AA. The Appellate Tribunal set aside those orders and directed unfreezing, prompting the ED to approach the High Court. The Division Bench upheld the Tribunal’s order and recorded clear disapproval of the ED’s manner of proceeding.

The Court observed that the PMLA provides for separate events and acts of seizure, freezing, retention, continuation and confirmation and each event has its own statutory requirements. These terms are not interchangeable. However, in the present case, the ED’s application and the AA’s order “conflated all these terms and served up what can at best be called a khichdi.” The ED sought “confirmation,” styled the application as one for “continuation,” and ultimately managed to secure an order of “retention.”

Importantly, the Court clarified that retention under Section 20 requires fresh satisfaction recorded by the authorised officer and cannot be granted automatically merely because a freezing order exists. Similarly, continuation of a freezing order under Section 17 must be preceded by a properly recorded “reason to believe.” These safeguards are integral to the statutory scheme and cannot be bypassed for convenience. The AA therefore cannot, immediately after a seizure or freezing, rubber-stamp retention or continuation without complying with the express mandate of the Act.

The Court also found that the initial freezing orders were cryptic and unsupported by any material. They merely stated that “it is suspected” that the funds in the accounts were linked to alleged laundering activities of the respondent’s husband, who was under investigation. Suspicion of this nature, the Court held, falls far short of the mandatory threshold of “reasons to believe” under Section 17. An action freezing a bank account without meeting statutory requirements infringes the constitutional right to property under Article 300A.

The judgment reiterates that a freezing order lacking application of mind, failing to establish a nexus with alleged proceeds of crime, or overlooking the mandatory statutory checks cannot be sustained.

Authored By
Rajat Jain, Advocate
Email: [email protected]
Mobile No. 9953887311

Seminal Decision of the Delhi High Court on Constitution of Service Permanent Establishment

We are pleased to share with you a copy of our in-house publication – “TaxBuzz”, wherein we have analysed the recent ruling of Delhi High Court in the case of CIT v. Clifford Chance Pte. Ltd.: ITA No. 353/2025 and 354/2025 wherein the Hon’ble High Court held that in absence of a specific clause in the India-Singapore DTAA, it was not open to the tax authorities to import the concept of Virtual Service Permanent Establishment into the India-Singapore DTAA to bring to tax, the profits of the non-resident taxpayer in India.

Further, for computation of the number of days spent in India for determining constitution of Service PE in terms of Article 5(6)(a) of the DTAA, the Hon’ble High Court held that, the days on which the employees of the taxpayer were on vacation and the days spent in India on business development needs to be excluded.

We trust that you will find the same useful.

For any details and clarifications, please feel free to write to:

Mr. Aditya Vohra, Partner at [email protected]

Mr. Kunal Pandey, Principal Associate at [email protected]

Netflix India Transfer Pricing Case: ITAT Mumbai Delivers Landmark Ruling on Digital Distribution Model‌

ITAT Mumbai Deletes ₹445 Cr TP Adjustment in Netflix India Case; Clarifies Characterisation of Digital Distribution Model.

The Mumbai Bench of the Income Tax Appellate Tribunal has delivered a landmark ruling in the case of Netflix Entertainment Services India LLP (AY 2021-22), deleting a transfer pricing adjustment of ₹445 crores proposed by the TPO.

The Tribunal held that Netflix India functions solely as a limited-risk distributor of access to the global streaming platform and does not own or exploit any intellectual property, technology, or content. Rejecting the TPO’s recharacterisation, the ITAT confirmed that all DEMPE functions, key assets, and entrepreneurial risks rest with foreign Associated Enterprises.

Upholding TNMM as the Most Appropriate Method, the Tribunal observed that Netflix India’s 1.36% margin fell squarely within the arm’s-length range and that the TPO’s use of the “Other Method” and royalty benchmarks was factually and legally untenable. The DRP’s ad-hoc attribution of 43% revenue to the Indian entity was also dismissed as lacking economic rationale.

For any clarification, please write to [email protected]

High Court cannot review or reopen an order passed under Section 11(6) of the Arbitration and Conciliation Act once the arbitral process has commenced – SC

In Hindustan Construction Company Ltd. v. Bihar Rajya Pul Nirman Nigam Ltd. (SLP (C) No. 4211 of 2025; 2025 INSC 1385), the Supreme Court held that a High Court cannot review or reopen an order passed under Section 11(6) of the Arbitration and Conciliation Act once the arbitral process has commenced.

The Court observed that the power under Section 11 is narrow and there is no statutory basis for a review or reconsideration of such orders, especially after parties have actively participated in the arbitration. It reiterated that the Arbitration Act is a self-contained code, and once an arbitrator is appointed, the referring court becomes functus officio.

The Court further held that the arbitration agreement under Clause 25 was valid and subsisting, noting that both parties had invoked the clause on multiple occasions, participated in over seventy hearings, and jointly sought extensions under Section 29A, signifying clear waiver of any objections to arbitrability.

Accordingly, the Supreme Court restored the arbitral process and clarified that in circumstances where the arbitrator becomes unable to continue, the appropriate course is to appoint a substitute arbitrator under Section 15(2), rather than nullifying the proceedings altogether.

For any clarification, please write to [email protected]