Taxation, Proceeds of Crime and Money Laundering: The Interface between the Income-tax Act, 1961 and the Prevention of Money Laundering Act, 2002

Question 1: Explain how concealment or evasion of income under the Income-tax Act, 1961 can constitute, or give rise to, a ‘scheduled offence’ attracting the Prevention of Money Laundering Act, 2002. Examine the definition of ‘proceeds of crime’ under Section 2(1) (u) PMLA and the conditions under which the Enforcement Directorate may open a parallel money-laundering investigation into income-tax irregularities, with reference to relevant case law.

The starting point, and the one fact that shapes the entire relationship between the two statutes, is that plain concealment or evasion of income under the Income-tax Act, 1961 (“IT Act”) is not, by itself, a scheduled offence under the Prevention of Money Laundering Act, 2002 (“PMLA”). The Schedule to the PMLA, read with Section 2(1)(y), lists offences drawn from the Indian Penal Code, the Prevention of Corruption Act, 1988, the Narcotic Drugs and Psychotropic Substances Act, 1985, and a number of other special statutes, but it conspicuously omits the ordinary prosecution provisions of the IT Act itself, such as Section 276C (wilful attempt to evade tax). The only tax-specific provision that does appear in the Schedule is Section 51 of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, placed in Part C for cross-border cases. This is not an oversight; it reflects a deliberate legislative choice to keep ordinary domestic tax evasion within the Income-tax Department’s own machinery rather than treating every tax defaulter as a money launderer.

‘Proceeds of crime’ is defined in Section 2(1)(u) of the PMLA in wide terms: any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence, the value of any such property, or property of equivalent value held within the country where the property itself is taken or held outside India. The word “scheduled offence” is doing the load-bearing work in this definition. In Vijay Madanlal Choudhary v. Union of India, 2022 SCC Online SC 929, a three-judge Bench of the Supreme Court upheld this wide definition and confirmed that money laundering is a standalone offence under Section 3, but reiterated that the offence is entirely parasitic on the existence of a scheduled predicate offence: without an extant scheduled offence generating the property in question, there is no ‘proceeds of crime’ and, consequently, no offence of money laundering to investigate.

Because plain tax evasion is not scheduled, the Enforcement Directorate (“ED”) cannot open a parallel investigation merely because an assessee has concealed income or a search under Section 132 of the IT Act has thrown up unaccounted wealth. In practice, the ED’s route into an income-tax matter has typically been to invoke Section 120B of the Indian Penal Code (criminal conspiracy), which does appear in Paragraph 1 of the Schedule, alongside the tax allegations. The Supreme Court closed off the easy version of this route in Pavana Dibbur v. Directorate of Enforcement, 2023 SCC Online SC 1586 (2023 INSC 1029), holding that Section 120B becomes a scheduled offence only where the conspiracy alleged is itself a conspiracy to commit an offence that is separately included in the Schedule; a conspiracy to do something that is not itself scheduled, such as evading tax, cannot be laundered into a scheduled offence merely by dressing it up as a criminal conspiracy.

This principle was applied to facts squarely on point with the present topic in Anjaneya Hanumanthaiah v. Union of India, Writ Petition (Crl.) No. 281 of 2019 and connected matters, decided by the Supreme Court (Surya Kant and K.V. Viswanathan, JJ.) in early 2024. The case arose from an August 2017 Income-tax Department search on premises linked to Karnataka Deputy Chief Minister D.K. Shivakumar; the only offences ultimately alleged against him were violations of the IT Act, which are not scheduled, and Section 120B IPC, which the Court held could not independently sustain a PMLA case in the absence of a genuine scheduled offence. Applying Pavana Dibbur, the Court quashed the PMLA proceedings. The ED’s review petition against Pavana Dibbur was subsequently dismissed on 19 March 2024, leaving this position settled.

The conditions under which a parallel ED investigation genuinely opens, therefore, are narrower than a first reading of the IT Act might suggest. A parallel money-laundering investigation is legitimate only where the same facts also disclose, independently of the tax angle, an actual Schedule offence (most commonly cheating (Section 420 IPC, now Section 318 BNS), forgery, an offence under the Prevention of Corruption Act, 1988, or the Black Money Act’s Section 51 for cross-border concealment) and the property under examination is traceable to that offence rather than being merely undisclosed income as such. Where that additional ingredient is missing, the correct forum for concealed or evaded income remains the IT Act’s own assessment, penalty and prosecution machinery, not the PMLA.

Question 2: Compare the search-and-seizure powers of income-tax authorities under Section 132 of the Income-tax Act, 1961 with those of the Enforcement Directorate under Section 17 of the PMLA. What procedural safeguards apply to each, and to what extent can material or statements gathered in one proceeding be relied upon in the other?

Section 132 of the IT Act authorises a search where the Principal Director General, Director General, Principal Director, Director, Principal Chief Commissioner, Chief Commissioner, Principal Commissioner or Commissioner has “reason to believe”, on the basis of information in his possession, that a person is in possession of undisclosed income or property, or has failed to produce documents summoned. The authorised officer may break open locks, search persons, and seize books of account, documents, money, bullion, jewellery or other valuable articles (subject to certain protections for declared stock-in-trade), and the seized assets may subsequently be retained and appropriated against an estimated tax liability under Section 132B.

The constitutional validity of this power was tested and upheld as far back as Pooran Mal v. Director of Inspection (Investigation), (1974) 93 ITR 505 (SC), where the Supreme Court held that Section 132 and Rule 112A were reasonable restrictions on the rights under Article 19(1)(f) and (g), given the State’s compelling interest in preventing tax evasion. The judgment also settled an important evidentiary point: even where a search is later found to be irregular or not fully compliant with Section 132, the material seized remains usable against the person from whose custody it was taken and Indian law does not apply an exclusionary rule akin to the American ‘fruit of the poisonous tree’ doctrine.

Section 17 of the PMLA is the ED’s analogue, but is structured with an additional layer of formality. An officer not below the rank of Assistant Director, on “reason to believe” recorded in writing on the basis of material in his possession, that a person is in possession of proceeds of crime, has committed an act constituting money laundering, or is in possession of records or property relevant to a PMLA proceeding, may enter and search any building or place, and may search persons found therein. Search action of this kind generally requires the prior approval of the Director, and the officer must, immediately after the search, forward a copy of the reasons recorded and the material relied upon to the Adjudicating Authority in a sealed envelope; continued retention of seized records or property beyond the statutory period requires the Adjudicating Authority’s approval. Vijay Madanlal Choudhary upheld the constitutional validity of these ED powers on essentially the same reasoning as Pooran Mal had applied to Section 132 , that robust search and seizure powers are a proportionate response to serious economic offences, provided procedural safeguards exist.

The key procedural difference is the presence of the Adjudicating Authority as an intermediate check on PMLA searches, a body without a direct equivalent in the ordinary Section 132 process, which remains an entirely internal departmental power subject only to post-facto assessment proceedings and appellate/writ scrutiny. As to cross-use of material, findings and documents from an IT Act search frequently function as the trigger for the ED to examine whether a genuinely scheduled offence coexists with the tax irregularity (per the answer to Question 1); conversely, statements recorded under Section 50 of the PMLA, which the Supreme Court in Vijay Madanlal Choudhary treated as admissible and not barred by Article 20(3) because the ED is not “police”, can in principle feed back into a parallel tax inquiry. This cross-use is not unconstrained, however: subsequent decisions such as Pankaj Bansal v. Union of India, (2024) 7 SCC 576, have tightened how such statements and the underlying grounds of arrest are disclosed and relied upon, reflecting a continuing judicial effort to keep the ED’s wide search, statement-recording and arrest powers within the bounds of Article 21 fair procedure.

Question 3: Discuss the scope of Sections 143, 147, 148 and 149 of the Income-tax Act, 1961 governing assessment and reassessment of escaped income, and the significance of Section 80 in relation to the carry-forward of losses in such proceedings. Can the pendency, outcome, or quashing of assessment/reassessment proceedings affect a parallel investigation or prosecution under the PMLA arising from the same transactions, or vice versa?

Section 143 of the IT Act governs the ordinary assessment cycle: Section 143(1) is a summary intimation processed without scrutiny, while Section 143(3) is a full scrutiny assessment following a notice under Section 143(2), in which the Assessing Officer (“AO”) examines the return and supporting material before determining total income. Section 147 empowers the AO to assess or reassess income that has “escaped assessment”, and Section 148 is the machinery provision for issuing the actual reassessment notice. Since the Finance Act, 2021, a Section 148 notice can only follow the procedure in Section 148A: the AO must conduct any necessary inquiry with the prior approval of a specified authority, issue a show-cause notice, consider the assessee’s reply, and pass a reasoned order under Section 148A(d) before the Section 148 notice itself issues. Section 149 prescribes the limitation period within which this can happen which is ordinarily three years from the end of the relevant assessment year, extendable in cases of larger escaped income subject to appropriate sanction, though the outer limit has been progressively tightened by the Finance Act, 2024.

Even before Section 148A was enacted, the Supreme Court had already built comparable safeguards through case law. In GKN Driveshafts (India) Ltd. v. ITO, (2003) 1 SCC 72, the Court held that once a Section 148 notice is issued, the assessee is entitled to seek and receive the AO’s recorded reasons, is entitled to file objections to those reasons, and the AO is duty-bound to dispose of those objections by a separate, speaking order before proceeding further with the reassessment; failure to do so vitiates the reassessment. In Commissioner of Income-tax v. Kelvinator of India Ltd., (2010) 2 SCC 723, a Constitution Bench went to the substantive heart of Section 147, holding that reassessment cannot be founded on a mere “change of opinion” about facts that were already before the AO and considered in the original assessment; there must be tangible new material justifying the AO’s reason to believe that income has escaped assessment. More recently, in Union of India v. Ashish Agarwal, (2022) SCC Online SC 1298 (decided 4 May 2022), the Court addressed the transitional chaos caused by the 2021 amendment, holding that roughly ninety thousand reassessment notices issued under the old, pre-amendment Section 148 regime after 1 April 2021 would be treated as deemed show-cause notices under the new Section 148A(b), balancing the Revenue’s interest against the hardship the abrupt change would otherwise have caused assessees.

Section 80 bars the carry forward and set-off of business losses (Section 72), speculation losses and similar categories unless the loss-year return was filed within the due date prescribed by Section 139(1) (or, in limited circumstances, Section 139(3)). Its significance in the reassessment and PMLA-adjacent context is easily missed but genuinely important: where reassessment under Sections 147/148 uncovers additional escaped income, an assessee cannot ordinarily reduce this freshly assessed income by setting off  losses carried forward from a return that itself missed the statutory due date. This has a compounding effect precisely in the cases most likely to attract ED attention, where a search or information exchange has revealed undisclosed income, because Section 80’s bar tends to inflate both the ultimate tax and penalty exposure and, indirectly, the quantum of property that may later be characterised as tainted if a genuinely scheduled offence is also made out.

On the interface question itself, the two sets of proceedings generally run on independent, parallel tracks; the Supreme Court’s reasoning in Radheshyam Kejriwal v. State of West Bengal, (2011) 3 SCC 581, that adjudication and criminal prosecution may proceed simultaneously, has been extended by High Courts to the IT Act/PMLA relationship as well. However, the two tracks are not wholly insulated from each other. Where an IT Act prosecution or reassessment is quashed, or where the underlying facts are found never to have disclosed any independently scheduled offence, the reasoning in Pavana Dibbur and Anjaneya Hanumanthaiah (discussed under Question 1) means the PMLA case built on that same tax irregularity collapses as well, since there is then no scheduled offence left to anchor ‘proceeds of crime’. Conversely, where a reassessment is upheld and the escaped income is independently shown to derive from cheating, forgery, corruption or a Black Money Act Section 51 offence rather than pure tax planning, that finding can lend factual support to, though it does not by itself create, the scheduled-offence foundation the ED’s case requires.

Question 4: Examine the law relating to provisional attachment of property under Section 5 of the PMLA and its confirmation on adjudication under Sections 8 and 26. Where the Income-tax Department has independently initiated recovery or attachment proceedings against the same asset, how have courts resolved the resulting overlap, and does simultaneous action under both statutes raise concerns of double jeopardy under Article 20(2) of the Constitution?

Section 5 of the PMLA empowers the Director or an officer not below the rank of Deputy Director, on reasons recorded in writing that a person is in possession of proceeds of crime likely to be concealed, transferred or dealt with in a manner that would frustrate confiscation, to provisionally attach that property for a period not exceeding one hundred and eighty days. Section 8 requires the Adjudicating Authority to issue a show-cause notice, hear the person concerned, and then decide whether to confirm the provisional attachment (or a fresh attachment of its own); a confirmed attachment continues until confiscation or the conclusion of the related proceedings. Section 26 provides a further appeal from the Adjudicating Authority to the Appellate Tribunal, and from there, on a question of law, to the High Court.

Overlap with the Income-tax Department’s own recovery machinery (Sections 220 to 232 and the Second and Third Schedules, under which a Tax Recovery Officer may attach and sell property to recover tax arrears) is a genuine and recurring source of litigation, particularly where the same asset is sought to be attached under both statutes, or where the asset is also mortgaged to a secured creditor. Section 71 of the PMLA gives it overriding effect “notwithstanding anything inconsistent therewith contained in any other law for the time being in force”, which has led tribunals and courts to apply general principles of statutory interpretation, for instance, the rule in Solidaire India Ltd. v. Fairgrowth Financial Services Ltd., (2001) 3 SCC 71, that where two enactments each contain a non-obstante clause, the later enactment will ordinarily prevail to resolve priority disputes, generally in favour of the PMLA attachment over an ordinary tax recovery claim on the same asset, though secured creditors with a prior mortgage have sometimes fared better, as the PMLA Appellate Tribunal held in Punjab National Bank v. Deputy Director, Directorate of Enforcement, Raipur, FPA-PMLA-2633/RP/2018.

On double jeopardy, Article 20(2) of the Constitution bars a person from being prosecuted and punished more than once for the same offence. Since an IT Act offence (for instance, wilful evasion under Section 276C) and the offence of money laundering under Sections 3 and 4 of the PMLA have entirely different ingredients, where one punishes the act of evading tax, the other punishes dealing with proceeds already generated by a scheduled crime and courts have consistently treated them as distinct offences, so that simultaneous IT Act and PMLA proceedings on overlapping facts do not, as a matter of strict constitutional doctrine, offend Article 20(2). It is also worth noting that Article 20(2) requires a prior prosecution and punishment; the mere pendency of two parallel proceedings does not engage the bar at all. That said, the related but analytically distinct principle from Radheshyam Kejriwal remains relevant in practice: where a person is fully exonerated on merits in one proceeding on facts identical to those underlying the other, continuing the second proceeding on the very same facts, while not literally ‘double jeopardy’, has been treated by courts as capable of amounting to an abuse of process.

Question 5: Section 45 of the PMLA imposes ‘twin conditions’ before bail can be granted , reasonable grounds to believe the accused is not guilty, and that he is unlikely to commit any offence while on bail. Critically examine, with reference to Vijay Madanlal Choudhary v. Union of India and subsequent decisions, how courts have applied this threshold in prosecutions arising out of income-tax-related predicate offences, and whether a favourable order for the assessee in the Income-tax Act proceeding has any bearing on bail or on the maintainability of the PMLA prosecution.

Section 45(1) of the PMLA conditions the grant of bail on the Public Prosecutor being given an opportunity to oppose the application and, where the Prosecutor does oppose it, on the court being satisfied that there are reasonable grounds for believing the accused is not guilty of the offence and that the accused is not likely to commit any offence while on bail, the so-called ‘twin conditions’, which effectively reverse the ordinary presumption of innocence at the bail stage. In Nikesh Tarachand Shah v. Union of India, (2018) 11 SCC 1, the Supreme Court struck down Section 45(1) as it then stood, holding the provision manifestly arbitrary and violative of Articles 14 and 21, largely because it tied the applicability of the twin conditions to an unrelated punishment-threshold classification. Parliament responded through the Finance Act, 2018, which removed that classification and re-enacted the twin conditions in a corrected form.

The amended provision was tested again, comprehensively, in Vijay Madanlal Choudhary v. Union of India, 2022 SCC Online SC 929. The three-judge Bench upheld the revived Section 45, holding that it no longer suffered from the arbitrariness identified in Nikesh Tarachand Shah, that the twin conditions apply uniformly to regular and anticipatory bail applications alike, and that the special, stringent bail threshold is a proportionate response to the seriousness of the money laundering offence, independent of how the predicate offence itself is ordinarily bailed. The same judgment upheld several other ED powers examined elsewhere in this memo such as  the wide definition of proceeds of crime, the admissibility of Section 50 statements, and ED’s non-police status, which is why it functions as the master judgment for PMLA jurisprudence generally.

The rigidity of Section 45 has since been meaningfully softened, not by revisiting its constitutionality but by reading it alongside the constitutional guarantee of a speedy trial. In Manish Sisodia v. Directorate of Enforcement, 2024 SCC Online SC 1920, decided 9 August 2024, the Supreme Court (Gavai and Viswanathan, JJ.) granted bail after roughly seventeen months of custody with the trial yet to meaningfully begin, holding that “bail is the rule and jail is the exception” even under Section 45, and that where delay in trial is not attributable to the accused, the right to bail must be read into Section 45 itself as a counterweight to prolonged pre-trial detention. V. Senthil Balaji v. Deputy Director of Enforcement, decided 26 September 2024 (Oka and Masih, JJ.), applied the same reasoning to grant bail after fifteen months of incarceration with no realistic prospect of an early trial, expressly relying on Union of India v. K.A. Najeeb, (2021) 3 SCC 713, for the proposition that constitutional courts retain the power to grant bail on Article 21 grounds even where a special statute’s bail threshold would not otherwise be met.

Applying this to prosecutions arising out of income-tax-related predicate offences specifically, an accused in such a case is not confined to the ordinary Section 45 merits battle at all. Because (per Question 1) a genuinely scheduled offence is a precondition for any PMLA prosecution to exist, and because tax evasion is not itself scheduled, an accused whose PMLA case rests only on IT Act allegations plus an unlinked Section 120B charge has a threshold argument, going to the maintainability of the prosecution itself under Pavana Dibbur and Anjaneya Hanumanthaiah, that is logically prior to, and potentially more powerful than, an ordinary Section 45 bail application. A favourable order in the IT Act proceeding, by itself, does not automatically defeat a PMLA prosecution or entitle the accused to bail, since the two offences remain analytically distinct; but where that favourable order also removes the last remaining scheduled offence the PMLA case depended on, its effect is not merely persuasive on the bail merits rather it removes the foundation of the prosecution altogether, and the matter is more properly resolved through quashing than through a contested Section 45 bail hearing.

Case 1 - Income-tax Act, 1961: Search & Seizure, Assessment / Reassessment

Case 2 - PMLA: Scheduled Offences, ‘Proceeds of Crime’ & Attachment of Property

Case 3 - PMLA: Arrest, Twin Conditions for Bail (Section 45) & Interface with Income-tax Proceedings

Landmark Judgments

Credit: - Yashasvi Maharshi