Introduction: The Emerging Jurisdictional Collision
India’s parallel enforcement frameworks — fiscal under the Income-tax Act, 1961 and penal under the Prevention of Money Laundering Act, 2002 (PMLA) — are increasingly intersecting in real estate frauds, financial scams, and corporate offences.
In many such cases, both the Income-tax Department and the Enforcement Directorate (ED) claim rights over the same property — one treating it as undisclosed income, the other as proceeds of crime.
The Delhi High Court in Asstt. CIT v. State [[2025] 178 taxmann.com 607 (Delhi)] has now drawn a decisive line between revenue recovery and criminal restitution, holding that:
PMLA’s claim over proceeds of crime overrides the Income-tax Department’s recovery rights, even if the property was seized in an income-tax search.
This ruling carries far-reaching lessons for ongoing and future disputes involving overlapping seizures under tax and PMLA proceedings.
Factual Matrix
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₹34.69 crore was seized from M/s Stockguru India during an Income-tax search under Section 132.
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Simultaneously, the ED attached the same funds under PMLA Sections 5 & 8, alleging they were fraudulently collected from investors.
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The Income-tax Department attempted to adjust the amount towards ₹345 crore in tax arrears under Sections 132B and 226(4).
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The PMLA Special Court rejected the Department’s plea, which led to the High Court appeal.
The Core Question
When funds are attached under PMLA as proceeds of crime, can the Income-tax Department still appropriate them for tax recovery?
The Delhi High Court’s Verdict
The Court ruled against the Income-tax Department, holding that:
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The seized funds were not “lawful income” but tainted proceeds, outside the scope of taxable income.
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Restitution of victims under PMLA takes precedence over revenue recovery.
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The PMLA, being a later and more specific statute with an overriding clause (Section 71), prevails over the Income-tax Act.
“Until the criminal court determines the lawful ownership, fiscal recovery must wait.”
Judicial Logic and Statutory Matrix
| Parameter | Income-tax Act, 1961 | PMLA, 2002 | Court’s Interpretation |
|---|---|---|---|
| Nature of jurisdiction | Civil – fiscal recovery | Penal – proceeds of crime | Penal jurisdiction prevails |
| Statutory objective | Revenue collection | Crime deterrence & restitution | Restitution has higher public purpose |
| Overriding clause | Sec. 226(4), 281B | Sec. 71 | Later and special statute prevails |
| Character of money | Undisclosed income | Proceeds of crime | Not taxable till criminal legitimacy proven |
Legal Reasoning and Doctrines Affirmed
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Illegality cannot generate tax liability:
Funds obtained by deception are not “income” within Section 2(24); taxation cannot legitimise illegality. -
Doctrine of precedence of penal law:
Where two special statutes overlap, the later statute with a superior purpose — here, criminal restitution — prevails (Solidaire India Ltd. v. Fairgrowth Financial Services Ltd., SC). -
Restitution first, revenue later:
The PMLA framework is founded on victim protection and systemic restitution, not fiscal augmentation. -
No equity in illegality:
The State cannot claim tax over property that must first be restored to its rightful victims.
Principle Evolved
“Fiscal enforcement cannot override criminal restitution.
The right to tax ends where the duty to restore begins.”
Key Learnings for Ongoing & Future Cases
| Scenario | Guidance Emerging from the Ruling |
|---|---|
| 1. Parallel proceedings under PMLA and IT Act | Coordinate with ED before issuing recovery orders; jurisdictional priority lies with PMLA. |
| 2. Search/seizure overlap | Tax authorities cannot adjust assets under Section 132B if PMLA attachment exists. |
| 3. Pending assessments on suspected fraud income | Assess only after establishing that funds are lawfully earned income; otherwise, risk of annulment. |
| 4. Asset disposal or refund under PMLA | Any disposal by ITD before PMLA adjudication may be void. |
| 5. Inter-agency communication | Stronger coordination protocols needed between ED, CBDT, and CBI to avoid conflicting orders. |
Policy and Compliance Perspective
This ruling underlines a jurisdictional discipline for enforcement agencies — ensuring that the State’s role as a restorative agent of justice precedes its role as a collector of revenue.
It calls for harmonised frameworks, possibly through inter-departmental MoUs or CBDT–ED coordination circulars, to avoid double attachments and conflicting recoveries in economic offences.
The Delhi High Court’s ruling crystallises a vital principle for modern enforcement in financial crimes:
Tax authorities cannot step into the shoes of victims to recover dues from criminal proceeds.
Fiscal sovereignty bows before criminal justice.
Citation:
Asstt. CIT v. State — [2025] 178 taxmann.com 607 (Delhi)
Bench: Justice Anup Jairam Bhambhani & Justice Purushaindra Kumar Kaurav
Date: 15 September 2025
