FACTS OF THE CASE
The Order of the learned Special Judge (PC Act), CBI-05, New Delhi, of 05.02.2018 refusing the Petitioner permission to proceed in the Application under Section 226(4) of the Income Tax Act, 1961 (IT Act) was subject to challenge by the Petitioner, the Asst. Commissioner of Income Tax (ACIT). The application was to give directions in respect of the release of all the Fixed Deposit Receipts (FDRs) in order to recover the pending Tax Demand in respect of Assessment Years (AY) 2010-2011 and 2011-2012 against Respondent Nos. 3 to 6 (including Ulhas Prbhakar Khair and Priyanka Saraswat) and from M/s Stockguru India, Partnership Firm, Respondent Nos 3 and 4.
Search and Seizure: On 18.01.2011, the under the provisions of the IT Act as stipulated in Section 132, a search and seizure operation was carried out by the Income Tax Department at the workplace of the Respondents. Rs. 34,69,00,000/- cash was seized and a Seizure Order had been issued on their bank accounts.
Assessment and Demand: Block Assessment processes were started, and Attachment Order according to Section 281B of the IT Act was granted on 09.01.2013. The Assessment Order of M/s Stockguru India showed a tax payable of Rs. 345,97,46,885/- on the concerned AYs and the Notices of Demand were issued on 06.11.2013.
The Prior Ruling of the learned CMM (West): The learned CMM permitted the objections of the ACIT by the Order of 27.03.2015 and it was held that the Court could not hinder the recovery process initiated by the Income Tax Department and gave freedom to the IT Department to use the money seized (Rs. 34.69 Crore) according to the IT Act.
Involvement of PMLA: The Respondent No. 2/Directorate of Enforcement (ED) had filed a Complaint under Section 44 of the Prevention of Money laundering Act, 2002 (PMLA) on 26.09.2016. The ED claimed that the currency that was captured was the proceeds of crime that were acquired in the course of criminal offences as scheduled offences. It was filed before the Special Judge on 30.12.2013 by the PMLA Complaint.
Impugned Order: The learned Special Judge refused to grant the FDRs on Petition of the Petitioner under Section 226(4) of the IT Act, on 05.02.2018.
ISSUES
- The question to be decided on whether the proceeds of crime would be established by determining whether the tax liability of the Respondent would be subordinated to the trial under PMLA in ascertaining the amounts that are traced in the different accounts.
- The dispute is based on the clashing interests between the Income Tax Department (to correct the amounts to reflect tax liability) and the PMLA authorities (to consider the amounts as proceeds of crime, which would benefit defrauded investors).
LEGAL PROVISIONS INVOLVED
Income Tax Act, 1961 (IT Act):
- Section 226(4): Clause which the Petitioner/ACIT applied on in the application where the recovery of outstanding tax demand was sought.
- Section 132: This is concerned with search and seizure operations.
- Section 132B: stipulates the process of application of money which is seized after search cases are assessed in terms of income.
- Section 281B: Attachment Orders Provisions.
- Section 136: States that any proceedings by Income Tax Authorities are proceedings before the Court and the Authority is considered a Civil Court.
- Section 293: Prohibits the jurisdiction of the Civil Courts to intervene in the proceedings under the IT Act.
Money laundering prevention act, 2002(PMLA):
- Section 71: Clause claiming the pre-eminence of PMLA over other laws.
- Section 44: Provision that caused the Directorate of Enforcement to issue a Complaint.
- Section 5(1): Provision of Provisional Attachment Orders.
- Section 8(3) (a): It concerns the retention of attached properties by the Adjudicating Authority when the case is pending.
- Section 8(8): It gives a way to grant back the property to Claimants who have a legitimate interest when the property is confiscated to the Central Government.
Cr.P.C. 1973: Code of Criminal Procedure, 1973:
- Section 482: Application filed by ACIT to appeal against the lower court order. Notice received by the Investigating Officer of the ACIT.
ARGUMENTS OF BOTH THE PARTIES
PETITIONER (Asst. Commissioner of Income Tax – ACIT).
- The ACIT claimed that the Order of the Special Judge was against the settled law and precedents.
- Preminence of IT Seizure: It was the Investigation Wing of the income tax department which had on 18.01.2011 seized the amounts, and the Seizure Orders were still in operation. No action in PMLA was in fact taken against the Respondent No. 3 until 30.12.2013, much after the seizure and tax demand notices.
- IT Act Supremacy: IT Act is a Special statute, and its jurisdiction is not allowed to be interfered by Civil Courts (Section 293).
- Prior Order of the CMM: The prior objections of the ACIT were already enforced by CMM who ruled that the Court was not supposed to hinder the recovery actions of the IT Department on 27.03.2015.
- Taxable Income: The business will be unlawful, however, the profit obtained will remain taxable under the IT Act which implies that the tax liability can be regarded legally recoverable.
RESPONDENT ARGUMENTS
- PMLA Over-Riding Effect: PMLA is the latter Special Law since it is the assent of the President set on a later date and thus Section 71 of PMLA has an overriding effect on the provisions of the IT Act.
- Proceeds of crime: The money (in the form of bad cheque or money order) recovered by the accused persons due to criminal acts (scheduled offences) and it is proceeds of crime under further investigation.
- Dominant Purpose Rule: Where there is overriding in two enactments, the overriding purpose on which the special enactment was enacted should be the determinant of precedence.
COURT ANALYSIS
Conflict of Objectives: The IT act is designed to charge, collect and control income tax (revenue generation). The PMLA aims at forfeiture of the proceed of crime and restoration of property to the legitimate claimants (victims).
Nature of funds is Paramount: It is a basic decision, whether the funds are lawful income of the accused (taxable) or the proceeds of a crime (liable to be forfeited or restored).
Fraudulent Act: The accused (R3, R4, and M/s Stockguru India) operated a Ponzi scheme in a fraudulent manner that was offering staggering returns (220% in six months), and took the money of some 2,05, 062 investors.
No Income from Crime: Prima facie, the money was gained as a mistake and through ill will and cannot qualify to be the revenue of the Accused, particularly when the trial on PMLA is ongoing. The money gained through fraud and deceit cannot be regarded as income as a result of a trade or a business upon which it is taxed according to the principle that there can be no trade or business in crime.
Precedent on Illegality: The Court differed with the precedent quoted by the ACIT (Piara Singh, concerning business loss deduction in smuggling), where the court said that recent decisions are that any loss or expenditure incurred as a result of illegality or offence can not be deductible in the business.
Premature Appropriation: It would be wrong to regard the amounts seized as subject to taxation as recoverable by the IT Department before the trial on the PMLA had ended.
JUDGMENT
The High Court made it clear that the Application of the Income tax department seeking release of the FDR integrated assets to the alleged taxation liability of the blamed persons was properly dismissed by the learned Special Judge.
The Court did not consider the Petition to have any merit (CRL.M.C. 2198/2018), and dismissed it.
CONCLUSION
The Court decided that the amounts that are seized and under investigation under PMLA are prima facie proceeds of crime, but not lawful income. Given that both Acts and PMLA are aimed at the same goal, the latter Act is superior. Any premature payment of the FDR moneys to the Income Tax Department would be considered a prejudice to the pending PMLA case and the payment of the appropriation towards tax liability cannot be considered until the end of the trial in the criminal case.
“PRIME LEGAL is a full-service law firm that has won a National Award and has more than 20 years of experience in an array of sectors and practice areas. Prime legal falls into the category of best law firm, best lawyer, best family lawyer, best divorce lawyer, best divorce law firm, best criminal lawyer, best criminal law firm, best consumer lawyer, best civil lawyer.”
WRITTEN BY Manisha Kunwar
For reading more please click here: ASST. COMMISSIONER OF INCOME TAX v. STATE & ORS
