Stockguru Scam: Delhi HC Holds Seized Money as ‘Proceeds of Crime,’ Bars Income Tax Recovery Until PMLA Trial Ends [Read Order]

The Delhi High Court, in the Stockguru scam case, firmly held that money seized from the alleged masterminds constitutes “proceeds of crime” under the Prevention of Money Laundering Act, 2002 (PMLA). The Court has barred the Income Tax Department from appropriating the funds toward tax recovery until the conclusion of the PMLA trial.

Rs. 34.69 crore seized by the Income Tax Department during search operations against Ulhas Prabhakar Khair, Priyanka Saraswat, and their associates, who floated Stockguru India.

The entity lured over two lakh investors into a Ponzi scheme promising exorbitant returns, up to 220% within six months. When the scheme collapsed, thousands of investors were defrauded of nearly ₹500 crore.

The income tax department sought to adjust the seized money against outstanding tax liabilities exceeding ₹345 crore for Stockguru India and its partners. Its argument rested on the premise that once income, whether legal or illegal, is unearthed, it falls within the scope of the Income Tax Act, 1961, and can be taxed. It was directed to the department to convert the seized amount to FDRs, which was done.

While depending on the precedents such as CIT v. Piara Singh, the counsel for the petitioner argued that illegality does not exempt income from taxation, and seizure orders under Section 132B of the Income Tax Act vested proprietary rights with the Department to adjust the funds toward tax arrears. The Department also contended that its seizure predated PMLA proceedings, making it the first claimant.

The Directorate of Enforcement (ED), however, countered that the funds were not taxable income but the “proceeds of crime” generated through deception and fraud. Under Section 71 of PMLA, the Act overrides other laws in case of conflict.

Since PMLA was enacted later with the specific purpose of confiscating laundered money and restoring it to victims, ED argued that it must prevail over revenue claims. It stated that tax cannot be levied on money never legally belonging to the accused, as it was nothing but embezzled funds from unsuspecting investors.

The High Court noted that a fundamental question must first be determined, whether the funds are legitimate income or proceeds of crime. If they constitute crime proceeds, they cannot be treated as taxable income, since the accused never acquired legal ownership.

The Court said that Section 132 of the Income tax Act contemplates seizure of undisclosed income, but here, prima facie, the funds were fraudulently collected and fall within the PMLA framework.

The bench, referring to the cases including Solidaire India Ltd. v. Fair Growth Financial Services Ltd. and Bank of India v. Ketan Parekh, submitted that when two special statutes contain overriding clauses, the later statute’s dominant purpose must guide interpretation. Since PMLA was designed to forfeit crime proceeds and protect victims’ claims, it must override the Income Tax Act in this context.

The Court also distinguished the Piara Singh ruling, clarifying that while profits from illegal business may be taxed, embezzled or entrusted funds cannot be classified as income in the hands of the fraudsters. In its words, “there can be no trade or business in crime.” Consequently, treating the defrauded investors’ money as taxable income would be legally untenable and morally unjustified.

The bench of Justice Neena Bansal Krishna observed that “Considering the objective and purpose of PMLA and Income Tax Act as detailed above and also considering that PMLA is a subsequent Act, it is hereby held that 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, has been rightly rejected and cannot be entertained until the conclusion of the trial in the criminal case, as any premature release would prejudice the ongoing PMLA proceedings.”

According to the court, the premature release of funds to the tax department would prejudice ongoing PMLA proceedings and undermine victims’ rights. Only after the PMLA trial concludes and it is judicially determined whether the seized assets are proceeds of crime can further claims be considered. Until then, the money remains preserved as crime proceeds under judicial custody.

By holding that PMLA prevails over tax recovery where proceeds of crime are involved, the Court has said that criminal law considerations outweigh revenue interests, at least until culpability and ownership are judicially settled.

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