[Opinion] Interplay of Section 226(4) of Income Tax Act and Sections 5, 45 and 71 of PML Act

D.C. Agrawal – [2025] 179 taxmann.com 334 (Article)

1. Introduction

The interplay between Section 226(4) of the Income-tax Act, 1961 and Sections 5, 45, and 71 of the Prevention of Money Laundering Act, 2002 (PMLA) raises a complex question of jurisdictional precedence between two special enactments—one fiscal, the other penal. The Delhi High Court’s judgment in Asstt. CIT v. State [2025] 178 taxmann.com 607 (Delhi) serves as a landmark ruling on this conflict, where the Income Tax Department sought to appropriate Rs. 34.69 crores seized during a search under Section 132, while the Enforcement Directorate claimed it as “proceeds of crime” under PMLA. The Court had to decide whether the Department could adjust these funds towards tax dues when criminal proceedings under PMLA were pending. In this article we analyse the judgement of Hon’ble Delhi High Court in the above case and examine the intersecting objectives of revenue collection and criminal restitution, testing the limits of statutory overriding clauses and the principle that fiscal claims must yield to the sovereign duty of restoring defrauded assets to victims.

2. The Issue Decided by the Court

Whether the Income Tax Department could appropriate the seized funds (Rs. 34.69 crores) — converted into FDRs after search under Section 132 of the Income-tax Act — towards tax liability of the assessee and its partners, when the same funds were also subject to proceedings under the Prevention of Money Laundering Act, 2002 (PMLA), alleging that the money represented “proceeds of crime.”

3. Facts of the Case

A search under Section 132 was conducted at the premises of M/s Stockguru India and its partners, where Rs. 34.69 crore in cash was seized. Simultaneously, FIRs were lodged under IPC and the Prize Chits and Money Circulation Schemes (Banning) Act, 1978, alleging a fraudulent Ponzi scheme that defrauded over two lakh investors. The seized amount was placed in FDRs by court order. Subsequently, the Directorate of Enforcement filed a complaint under Section 45 of PMLA against the accused, while the Income Tax Department sought release of the FDRs under Section 226(4) of the Income-tax Act to adjust against assessed tax liabilities exceeding Rs. 345 crore. The Special Judge rejected the Department’s request, leading to this appeal.

4. Arguments of Income Tax Department

The seized funds were recovered under Section 132 prior to initiation of PMLA proceedings; thus, they lawfully belonged to the Department. Under Sections 132B and 226(4) of the Income-tax Act, the Department had priority for recovery of tax dues, which constitute a legally enforceable debt. The PMLA could not override the IT Act since both are special laws; the earlier seizure order gave the Department precedence. Reliance was placed on CIT v. Piara Singh [1980] 3 Taxman 67/124 ITR 40 (SC) (profits from illegal business taxable) and Imperial Chit Funds (P.) Ltd. v. ITO [1996] 85 Taxman 513/219 ITR 498 (SC) and it was argued that Income Tax Department is a secured creditor.

5. Arguments of Enforcement Department

The seized money was not income of the assessee but “proceeds of crime” derived from defrauding investors. Section 71 of PMLA contains an overriding clause and prevails over other enactments including the IT Act. The property attached under PMLA is subject to confiscation and restitution to victims under Section 8(8) of PMLA. Reliance was placed on Solidaire India Ltd. v. Fairgrowth Financial Services Ltd. [2001] 30 SCL 59 (SC), Bank of India v. Ketan Parekh [2009] 92 SCL 309 (SC), and Dyani Antony Paul v. Union of India [2020] 122 taxmann.com 181 (Karnataka), affirming PMLA’s overriding purpose.

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