Money accumulated by fraud and deception not income from trade and business but is proceeds of crime – High Court
In a recent judgment, Hon’ble Delhi High Court has held that money accumulated by fraud and deception can not be said to have been earned by trade and business and it comes within the definition of proceeds of crime.
ABCAUS Case Law Citation:
4750 (2025) (09) abcaus.in SC
A firm had floated a Scheme promising high returns on a minimum investment of and registration Fee. The investor was assured to high return. Post-dated cheques for repayment of monthly instalment plus a promissory note as security was given to the investors on registration. The modus operandi adopted for inducing and alluring people to invest in such Ponzi scheme, was to guarantee exorbitant returns i.e. 220% return to investors within a short span of six months.
When the firm was unable to handle demand for redemption it led to a widespread dissent and distrust among the investors who then started complaining to the agents. This eventually resulted in raids by Income Tax Department which prompted the investors to demand their money back.
As a result of the search u/s 132 carried out by the Investigation Wing of Income Tax Department on accused associates of the firm, a number of incriminating documents, and cash of more than Rs. 30 crores were seized. A seizure order was also served upon their Bank qua Bank Accounts of the accused with the direction not to deal with them, without prior approval.
On the application of the banks, the Chief Metropolitan Magistrate (CMM) directed that though the amounts lying with the various Banks had been under attachment by different Departments, the amounts be converted into FDRs with existing lien of the Department on those amounts.
On application of the Income Tax Department, the CMM allowed application of cash seized and held that the Court holds no Appellate or Revisional powers over the Income Tax Department and that no order passed by the CMM Court, shall impede the Income Tax Department in applying the seized money towards recovery of its dues in terms of the IT Act.
Subsequently, Assessments were completed determining the tax liability of the accused and the demand Notices were issued for payment of the outstanding taxes.
The Assessing Officer (AO) filed an Application under Section 226(4) of the Act before the CMM for recovery of the outstanding Tax demand praying for release of all the FDRs made. In view of the fact that Enforcement Directorate filed an application u/s 44 of the Prevention of Money Laundering Act, 2002. As a result, the case was transferred from CMM to the Special Judge, PMLA. The application of the AO was rejected by the Special Judge, PMLA holding that the same is not maintainable as the PMLA, 2002 is the later Special Law which would prevail over the Income Tax Act.
Against the said order of the Special Judge, PMLA, the Income Tax Department approached Hon’ble High Court praying for release of the entire amounts recovered from the various accounts of the accused persons and the firm, towards the Income Tax liabilities of all the accused persons.
The Hon’ble High Court observed that in the instant case, more than about 2,00,000 investors had invested a whopping amount of nearly 500 crores in the ponzi scheme floated by the firm and during the investigations, Complaints were received from 15,000 investors.
The Hon’ble High Court opined that it was a significant question whether it was the legitimate income of the accused persons on which the liability to pay the income tax exists or it is a proceed of crime which is liable to be confiscated and returned to the rightful persons. This determination was crucial because if the funds constituted proceeds of crime rather than legitimate income, no tax liability can arise on money that never legally belonged to the accused persons and which is liable to be confiscated or restored to its legitimate claimants.
The Hon’ble High Court opined that it was not the money which was relatable to the Income of the Accused. Prima facie, it was evident that the money which had been fraudulently obtained by the accused persons by floating fraudulent schemes under the name of various Companies. Whereas Section 2(24) of the Income Tax Act, 1961 would apply to an Income of an individual.
The Hon’ble High Court opined that proceeds of crime as in the present case, can in no way be termed as the income of the Accused at this stage, as trial in PMLA case was yet to be concluded. As contended by EOW, the money never belonged to the Accused persons as it was only the entrusted money which was sought to be returned with higher returns. The accused persons had only got possession of money of the investors by deception and malice, which can never be termed as their income.
The Hon’ble High Court observed that it cannot be said at this stage that the Accused persons had entered into trade or business in terms of section 2(13) of IT Act and the income generated therefrom, can be termed as an income on which tax liability arises because of concealment. It is evident from the definition of the “trade‟ that the modus operandi of the functioning of the Accused Company cannot be termed as an activity of trade and business. It is a money which was accumulated by fraud and deception and in fact, prima facie comes within the definition of proceeds of crime.
The Hon’ble High Court also noted that recently, the Supreme Court held that 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. This principle is also fortified by the statutory prohibition introduced to ensure no allowances are granted against violations of law.
The Hon’ble High Court opined that the seized amounts in the present case subject to investigation under PMLA were prima facie proceeds of crime, and not lawful income from trade or business. Therefore, till such time the trial is concluded under PMLA and it is established that the income/money recovered from the various Bank accounts which had been put in FDRs was indeed the income of the accused persons, the Income Tax Department cannot appropriate for tax liability by holding it as the income of the Company/Directors.
The Hon’ble High Court held that considering the objective and purpose of PMLA and Income Tax Act and also considering that PMLA is a subsequent Act, the Application of the Income Tax Department for release of the FDR amounts to be appropriated towards the alleged tax liability of the accused persons, had been rightly rejected and cannot be entertained until the conclusion of the trial.
Accordingly, the Petition of the Income Tax Department was dismissed.
Download Full Judgment Click Here >>
- Fraud & deception not trade and business and money accumulated is proceeds of crime
- ICAI extends last date to submit MEF for FY 2025-26 to 10th October, 2025
- ICAI defers Guidance Note on Financial Statements of Non-Corporate entities/LLPs
- Delhi Govt. to help persons with benchmark disabilities with high support need
- Placing Genset in steel container fitted with additional parts amounts to manufacture
