[Opinion] Potential Areas of Conflict of PMLA and Income Tax Act

Prashant Kr Jha & Piyush Baid – [2024] 161 taxmann.com 733 (Article)

The Prevention of Money Laundering Act (“PMLA”) and the Income Tax Act (“ITA”), both statutes codified under the legislative framework of the Republic of India, serve as essential instruments in the national effort to combat the pernicious threat of black money and its associated financial crimes. While these statutes share the overarching objective of curbing illegal financial activities, their distinct operational mechanisms create the potential for conflicts during implementation.

The PMLA specifically targets the criminal act of money laundering, irrespective of the nature of the underlying predicate offense that generated the illicit funds. The Act criminalizes the various stages of money laundering, encompassing placement, layering, and integration. By disrupting these well-established processes for cleansing illicit funds, the PMLA effectively undermines the financial underpinnings of criminal enterprises and impedes their ability to utilize ill-gotten gains for further criminal activities or personal enrichment.

Conversely, the ITA focuses on the source of income, imposing a legal obligation upon all taxable persons to report and pay taxes on their legitimate earnings. The ITA incorporates a comprehensive framework of mechanisms for the identification and punishment of tax evasion, including the failure to disclose income or wealth. Through the rigorous enforcement of tax compliance measures, the ITA directly counteracts the financial incentives that motivate the generation of black money in the first instance.

This article aims to summarise the distinctions between the two acts with case illustrations under the following domains:

1. Double Jeopardy

The well-established doctrine of double jeopardy, under Article 20(2) of the Constitution of India , serves as a vital safeguard against the impermissible imposition of multiple punishments for a singular offense. This principle presents a potential point of contention within the context of the Prevention of Money Laundering Act (“PMLA”) and the Income Tax Act (“ITA”), both of which appear, on the surface, to target the generation and utilization of black money. Although, courts have over and all ruled in favour of the PMLA not constituting double jeopardy, however in the opinion of the author, a critical distinction exists in the operative focus of each statute, which can be further examined by the courts.

The PMLA adopts a broader approach, criminalizing the act of laundering illicit or tainted funds itself (u/s 4), irrespective of the nature of the underlying predicate offense that gave rise to those funds. The Act meticulously outlines the various stages of money laundering (u/s 3), encompassing placement (the initial introduction of illicit funds into the financial system), layering (a series of complex financial transactions specifically designed to obscure the origin of the funds, although not explicitly used in section 3, but on the intent of it), and integration (the final stage, where the laundered money is disguised as legitimate income).

In stark contrast, the ITA maintains a narrower focus, primarily concerned with the source of income(u/s 68,69, capital gains, deemed income, excessive expenditure, cessation of liability, and other special provisions to tackle special requirements) and ensuring compliance with tax obligations on legitimate earnings. While black money may be a common element in both PMLA and ITA investigations, the ITA’s primary concern revolves around whether taxes were duly paid on such income, not necessarily the methods employed to acquire it.

This distinction is paramount in ensuring compliance with the principle of double jeopardy and avoiding the imposition of duplicative punishments for the same underlying conduct.

Case Illustration:

Smt. Janata Jha v. Assistant Director: The petitioners contended that the PMLA proceedings constituted a violation of their protection against double jeopardy (enshrined in Article 20(2) of the Constitution). This argument rested on the premise that the income in question had already been the subject of scrutiny and potential penalties under the Income Tax Act, rendering the PMLA action duplicative and potentially punitive for the same underlying conduct. The Orissa High Court, upheld the principle of Generalia specialibus non derogant and opined in para 12

“12. Considering the facts of the present case and the provisions of the PMLA (as amended), this Court is of the view that the PMLA, being a Special Statute, it has overriding effect on the Income Tax Act and further considering the huge amounts of money, which are lying in the bank in the accounts of the petitioners as well as the nature of proceeding under the PMLA, more specifically, section 24 thereof, which provides with regard to burden of proof that when a person is accused of having committed offence under section 3, the burden of proving that the proceeds of crime are untainted property shall be on the accused, this Court is of the view that even if the petitioner no. 2 has been acquitted of the charges framed against him in the sessions trial, a proceeding under the PMLA 2002 cannot amount to double jeopardy, where the procedure and nature of proof are totally different from a criminal proceeding under the Indian Penal Code.”

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