PMLA Prevails Over Income-tax Recovery Where Funds Are Alleged Proceeds of Crime: Delhi HC
ACIT (Central Circle-13) v. State & Ors. CRL.M.C. 2198/2018
Facts:
1. A search under section 132 of the Income-tax Act resulted in seizure of ₹34.69 crore, later converted into FDRs. Subsequent block assessments raised tax demands exceeding ₹345 crore.
2. Parallelly, criminal proceedings for cheating and money-laundering proceedings under PMLA were initiated, treating the same funds as proceeds of crime.
3. The Income-tax Department sought release of FDRs under section 226(4) to adjust tax dues. The Special Judge (PMLA) rejected the request.
Hon Delhi HC held as below:
1. The money obtained through fraud and deception cannot be treated as “income” under section 2(24) of the Income-tax Act unless and until criminal proceedings conclude otherwise. If money never legally belonged to the accused, no tax liability can arise on it.
2. Section 71 of PMLA (non obstante clause) gives it overriding effect, even over another special statute like the Income-tax Act. Where the very nature of funds is under criminal scrutiny, PMLA must prevail.
3. Recovery under section 226(4) is permissible only over property in which the assessee has proprietary rights. Funds allegedly belonging to defrauded investors cannot be prematurely diverted to satisfy tax dues.
4. FDRs cannot be released for tax recovery until PMLA trial concludes, and it is judicially determined that the funds are legitimate income of the assessee.
The copy of the order is as under:
