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2025 (1) TMI 379 - AT - Income TaxTaxability of Illegal Income - Prosecution initiated by the Income-tax Department u/s 277 - fraudulent claim of refunds by producing forged challans - Having recovered the entire amounts from the assessee, can the same amounts be treated as income of the assessee ? - Income-tax Department taxing @ 30-35% of the fraudulent income earned by the assessee by defrauding the Government Department HELD THAT - While the taxability of the economic benefits derived from such fraudulent income is beyond the current scope, the fact that the assessee leveraged these funds for personal gains adds weight to the case for taxing the income in the year of accrual. This aligns with the established principle that income, once accrued or received, irrespective of its legality, must be taxed under the Income-tax Act, 1961. As an undisputable fact that the assessee has admitted to fraudulently earning income and parking the same in the accounts operated by him. The deliberate act of parking funds in the accounts operated by him do not absolve the assessee of the taxability of such income. The assessee had dominion over the funds and utilized them for economic gains, including investments. This clearly establishes that the income accrued to the assessee, making it taxable in his hands. The leveraging of fraudulently accrued income for economic benefits, such as investments in shares and deposits in the accounts operated by him, further supports its taxability in the hands of the assessee. While the taxation of economic benefits is beyond the current scope, it demonstrates that the assessee exercised full dominion and control over the funds. The fact that the fraudulent income was recovered or repaid in subsequent years does not negate the taxability of the income in the year of accrual. The doctrine of real income requires taxation at the time of accrual, irrespective of later events. In CIT v. Shoorji Vallabhdas Co. 1962 (3) TMI 6 - SUPREME COURT held that income is taxable when it is received or accrued, and subsequent adjustments do not affect its original taxability. Thus, the assessee s claim for deductions in respect of recovery or repayment fails, as it does not satisfy the conditions enumerated in Section 57 of the Act. This provision permits deductions only for expenses incurred wholly and exclusively for the purpose of earning income. Recovery of fraudulent income is not an expense incurred for earning taxable income; rather, it represents restitution of wrongful gains. We also find that the Income-tax Department has initiated prosecution u/s 277 of the Act. This prosecution is primarily launched as per the provisions of the income-tax act for making false statements in verification under the IT Act. The deductions claimed for the recovery or repayment of fraudulent income in subsequent years are disallowed. Recovery of such income does not constitute an expense incurred wholly and exclusively for the purpose of earning income under Section 57 of the Act. Therefore, the order of the ld CIT(A) confirming the addition of the fraudulent income is hereby upheld. The denial of deductions for subsequent recovery is also upheld, as it aligns with statutory provisions of the Act as well as judicial precedents. Taxability arises at the point of accrual or receipt. Even if the income is later restituted or recovered, its taxability remains unaffected for the year of accrual. Subsequent adjustments do not negate the taxability for the original period for the matter generation, recovery and restitution are separate transactions. Thus, the act of restitution or recovery is treated independently for taxation purpose. Taxability remains intact for the year of accrual and recovery does not create a retroactive exemption. Under Section 57 of the Act, only expenses incurred wholly and exclusively for the purpose of earning income or deductible. Restitution does not meet the criterion. Allowing deductions for restitution of fraudulently earned income would undermine public policy by creating an incentive to commit fraud. In this case, the Income-tax Department has to act in dual role of the executor of the income-tax statute and also as an arm of Government. The prosecution launched was limited in its role as the executor of the income-tax statute. The act of perpetuation of a criminality per se have been ignored by the Income-tax Department as a part of Govt. of India. It is well settled principle that tax authorities are not only responsible for enforcing compliance under Income-tax Act but also act as an arm of Government in ensuring that violations of other laws particularly involving public exchequer are addressed through appropriate legal mechanisms. That is the reason inter-departmental organizations such as CEIB/SFIO/FIO have been established. Decided against assessee.
1. ISSUES PRESENTED and CONSIDERED The judgment addresses several core legal questions, including:
2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Taxability of Fraudulently Obtained Amounts
Issue 2: Deductions for Recovery or Repayment of Fraudulent Income
Issue 3: Role of the Income-tax Department in Fraud Cases
3. SIGNIFICANT HOLDINGS
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