In a landmark judgment dated September 18, 2025, the Delhi High Court in Asst. Commissioner of Income Tax v. State & Ors (CRL.M.C. 2198/2018) clarified a critical legal principle regarding the taxation of funds acquired through fraudulent means. The ruling underscores that money obtained via deception or illegal activities, such as the proceeds of crime under the Prevention of Money Laundering Act, 2002 (PMLA), cannot be treated as taxable income. This decision has significant implications for tax authorities, law enforcement, and victims of financial fraud, particularly in cases involving entities like Stockguru India.
The case originated from a search and seizure operation conducted by the Income Tax Department on January 18, 2011, at the premises of Stockguru India and its partners, including Ulhas Prbhakar Khair and Priyanka Saraswat. The operation unearthed incriminating documents and cash exceeding Rs. 34.69 crore, linked to a scheme where investors were promised exorbitant returns of up to 220% within six months. Allegations of misappropriation led to FIRs under various IPC sections and the Prize Chits and Money Circulation Schemes (Banning) Act, 1978. Subsequently, the Directorate of Enforcement initiated PMLA proceedings, classifying the funds as proceeds of crime.
The Income Tax Department sought to recover tax dues by releasing Fixed Deposit Receipts (FDRs) created from the seized amount, arguing that the funds represented taxable income. However, the trial court rejected this application, a decision upheld by the Delhi High Court.
The Delhi High Court, presided over by Justice Neena Bansal Krishna, ruled that funds acquired through fraudulent schemes do not constitute legitimate income liable for taxation. The court emphasized that:
1. Proceeds of Crime vs. Taxable Income: Money obtained by misleading investors does not originate from genuine business activities. As such, it cannot be deemed the lawful income of the accused, and no tax liability can be imposed until its legal character is established.
2. Priority of PMLA: The objective of PMLA is to trace, freeze, and restore illegally obtained funds to defrauded victims. Allowing tax recovery prior to the conclusion of PMLA proceedings would undermine this goal and prejudice ongoing investigations.
3. Jurisdictional Limits: The court held that civil courts and lower judicial forums lack the authority to impede recovery proceedings initiated by the Income Tax Department under the Income Tax Act, 1961 (IT Act). However, this does not extend to funds classified as proceeds of crime under PMLA.
4. Precedents and Statutory Interpretation: The court distinguished cases like Rakesh Kumar Aggarwal v. Bansal Commodities (2013), which supported the adjustment of seized amounts under Section 132 of the IT Act, noting that such provisions do not apply to illegally acquired funds. It also rejected reliance on Solidare India Ltd. v. Fair Growth Financial Service Ltd (2001), which pertains to financial institutions, as inapplicable.
This judgment reinforces that tax liability arises only from legitimate earnings. Funds held in bank accounts or investment vehicles do not automatically become taxable if obtained dishonestly. The ruling prioritizes victim restitution over revenue recovery, ensuring that defrauded investors are not further disadvantaged during legal proceedings.
For tax authorities, the decision serves as a reminder to ascertain the lawful ownership of seized assets before initiating recovery actions. It also highlights the supremacy of PMLA over conflicting claims under the IT Act when dealing with proceeds of crime, aligning with the statute’s intent to combat money laundering.
The Delhi High Court’s ruling in the Stockguru India case is a pivotal development in Indian tax and criminal law. By classifying fraudulent gains as proceeds of crime rather than taxable income, the court has set a precedent that balances the interests of revenue collection with the rights of victims. This decision is likely to influence future cases involving financial fraud, emphasizing the need for a thorough determination of fund legitimacy before imposing tax obligations.
For legal professionals, businesses, and individuals navigating tax disputes or fraud investigations, this judgment offers clarity on the interplay between the IT Act and PMLA. It underscores the importance of prioritizing justice for victims while ensuring that tax laws are applied judiciously.