High Court Of Bombay
Spacewood Furnishers (P.) Ltd. vs. Director General of Income-tax
(Investigation), Pune
Section : 132
B.P. Dharmadhikari And A.P. Bhangale, JJ.
Writ Petition No. 2150 Of 2010
December 9, 2011
JUDGMENT
B.P. Dharmadhikari, J – By this petition filed under Article 226 of Constitution of India, petitioner No. 1 – A Company under Companies Act, 1956, and petitioner Nos. 2 & 3, who are its Directors, have prayed for quashing of the warrant of authorization for conducting search, issued under Section 132 of Income-Tax Act, 1961, (hereinafter referred to as the Act) and consequential action thereafter in issuing notices under Section 153-A of the Act, thereafter for the assessment years 2004-05 to 2009-10. The search operations have been carried out from 19th June 2009 to 21st July 2009. The matter was directed to be listed for final hearing by orders of this Court dated 22nd July 2011, in the week commencing from 22nd August 2011. The short contention is about absence of any material, warranting such search action.
2. Accordingly, we have heard Shri Thakkar with Shri Bhattad, learned counsel for the petitioners and Shri Parchure, learned counsel for the respondents.
3. Shri Thakkar, learned counsel has urged that the petitioners are regular in paying income-tax, in filing return and have produced books of accounts and supplied all information as and when demanded. In this situation, there was no reason or occasion to proceed under Section 132 of the Act against them. He has contended that the only purpose of search was to fish out some material to find out why petitioner No. 1 – Company has registered phenomenal growth over short period. The purpose is collateral and hence action of search on its basis is unsustainable. He states that the benefit under Section 80-IA has been properly claimed and allowed and it appears that purpose was to withdraw it anyhow. Even in relation to Keyman Insurance Policies, he explains that the material is on record and policies have been transferred by Company to such Keyman and necessary facts are all within the knowledge of the department. He has urged that therefore, real purpose behind this roving exercise was to deny Section 80-IB benefit to the petitioners. He has invited attention to pleadings which have come on record in this respect to argue how there is nothing on record to show any new information in possession of the respondents necessitating such action. Attention is invited to the directions dated 17.09.2010 by this Court pointing out that the same were oral but department was directed to produce the material on the basis of which satisfaction under Section 132(1) was recorded by the competent authority. He contends that the satisfaction as recorded is justiciable and, therefore, the petitioners needed to be given an opportunity to go through that file. But according to him, the affidavits filed by the respondents on the strength of material contained in that file do not show that ingredients of Section 132(1) are satisfied. He has also invited our attention to additional affidavits and rejoinders filed by both sides thereafter from time to time. The judgment of Calcutta High Court in the case of Smt. Uma Devi Jhawar v. ITO [1996] 218 ITR 573 /[1995] 78 Taxman 532 is relied upon to show the entitlement of the petitioners to inspect said file.
4. The judgments reported in the case of ITO v. Lakhmani Mewal Das [1976] 103 ITR 437 (SC), L.R. Gupta v. Union of India [1992] 194 ITR 32 /[1991] 59 Taxman 305 (Delhi), Vindhya Metal Corpn. v. CIT [1985] 156 ITR 233 (All.), CIT v. Vindhya Metal Corpn. [1997] 224 ITR 614 / 91 Taxman 192 (SC) and the judgment of Division Bench of this Court in Cartini India Ltd. v. Addl. CIT [2009] 314 ITR 275 / 179 Taxman 157 , are pressed into service by him to show how judicial review of that satisfaction is open. According to him, if this law is applied, the search operations and consequential steps under Section 153-A of the Act are entirely without jurisdiction.
5. Shri Parchure, learned counsel appearing for the department has produced the Satisfaction Note file and pointed out how the Assistant Director of Income Tax (Investigation), Nagpur, Additional Director of Income Tax (Investigation), Nagpur, Director of Income Tax (Investigation), Pune, have found such search necessary after considering the facts as disclosed in those satisfaction notes. He has pointed out that these authorities are independently given power by S. 132 and satisfaction of any one such authority is sufficient to sustain the exercise. The replies as filed on record from time to time are relied upon to justify the entire action. The learned counsel states that after discreet enquiries, the action has been taken and as there is material on record which supports it and its relevance is already looked into, the petition is without any merit and liable to be dismissed.
6. The perusal of Division Bench judgment of Calcutta High Court in the case of Smt. Uma Devi Jhawar (supra) reveals that the Court found that when Court allows Income Tax Officer to produce such records and the Court examines the same to find out whether there are valid reasons, the Court has to allow inspection of such records to the assessee. The recorded reasons or material or letter of proposal sent by Income Tax Officer to Commissioner of Income Tax, was in the light of provisions of Section 148 of the Act and High Court has found that it is not a show cause notice and notice thereunder can be issued only if the conditions precedent for assumption of jurisdiction under Section 147(a) of the Act, are satisfied. Though Shri Parchure, learned counsel had opposed arguments of Shri Thakkar, learned counsel, no precedent taking a view to the contrary has been pointed out. However, as the petitioners have not made any express prayer seeking inspection of satisfaction note file, we do not find it necessary to conclude this aspect. We, however, express that when the satisfaction recorded is justiciable, the documents pertaining to such satisfaction may not be immune and if appropriate prayer is made, the inspection of such documents may be required to be allowed.
7. Section 132 of the Act deals with search and seizure. It contemplates & springs to life when the various officers mentioned therein have, because of information in their possession, “a reason to believe” that steps as prescribed in its clauses (a), (b) and (c) thereof are necessary. Thus, this “reason to believe” is required to be of the Director General or Director or the Chief Commissioner or the Commissioner or Additional Director or Additional Commissioner or Joint Director or Joint Commissioner. This provision has been considered in various judgments and hence we find it appropriate to find out how the ingredients therein have been construed.
8. In the case of Lakhmani Mewal Das (supra), the Hon’ble Apex Court has considered reassessment under Section 147(a) of the Act. Section 147 contemplates an opinion by Assessing Officer that any income chargeable to tax has escaped assessment and it also employs the phrase “has reasons to believe”. The Hon’ble Apex Court has held that the reasons to believe must have material bearing on the question of escapement of income of assessee and it does not mean a purely subjective satisfaction on the part of the Income Tax Officer. The existence of belief can be challenged by assessee but he cannot challenge the sufficiency of reasons for said belief. In facts before the Hon’ble Apex Court, two grounds were mentioned in his report by Income Tax Officer for reopening of assessment. One was that one Mohansingh Kanayalal, one of the creditors of the assessee had confessed that he was doing only name-lending. The other ground was other creditors disclosed by the assessee were known name-lenders. The Hon’ble Apex Court in para 10, noted that there was nothing to show that confession by Mohansingh related to a loan to assessee and not to someone else and it was difficult to infer the period to which that loan related. The Hon’ble Apex Court has then noted that the reasons for the formation of belief must have rational connection with or relevant bearing on the formation of the belief, a direct nexus or live link between the material coming to the notice of the Income Tax Officer and the formation of this belief is found essential. The Hon’ble Apex Court has noted that the words were not “reason to suspect”.
9. In the case of L.R. Gupta (supra), the Hon’ble Division Bench of Delhi High Court has considered the provisions of Section 132(1) of the Act. In para 3, Division Bench has noticed that search was authorized because of information allegedly gathered about receipt of approximately Rs. 30 crores by assessee from land acquisition department. Discreet enquiries were made and it was revealed to the department that house property at Anand Lok was under demolition and an apartment building was to be constructed there. For those apartments, secret bookings were alleged to have been made and money was received by family members of the petitioners. The note of Respondents No. 2 & 3 there stated that the petitioners did not disclose receipt of compensation in income tax returns. The High Court noticed that the receipt of money by the petitioners was known to department and failure to return income because of the belief of the petitioner that it was not taxable, could not have been a ground for issuing an authorization under Section 132(1) of the Act. It is noticed that non filing of return may give right or jurisdiction to the respondents to invoke provisions of Section 147 and 148 but it was not a case where money was received surreptitiously or the department did not have knowledge. The other ground about failure to disclose immovable properties in the return has been found equally misconceived as it was not the case of the department that the properties were purchased from the funds which were not known to the department.
In para 22, Delhi High Court has relied upon the judgment of Punjab & Haryana High Court in the case of H.L. Sibal v. CIT [1975] 101 ITR 112 . In that judgment, the Punjab & Haryana High Court has made the following observations:
“The applicability of S. 165, Cr. P.C, to the searches made under S. 132(1) gives an indication that this section is intended to apply in limited circumstances to persons of a particular bent of mind, who are either not expected to co-operate with the authorities for the production of the relevant books or who are in possession of undisclosed money, bullion and jewellery, etc. Take for instance, a particular assessee who has utilized his undisclosed income in constructing a spacious building. His premises cannot be subjected to a search under this section on this score alone. A search would be authorised only if information is given to the CIT that such a person is keeping money, bullion, jewellery, etc., in this building or elsewhere. Further, if an assessee has been regularly producing his books of account before the assessing authorities who have been accepting these books as having maintained in the proper course of business, it would be some-what unjustified use of power on the part of the CIT to issue a search warrant for the production of these books of account unless of course there is information to the effect that he has been keeping some secret account books also. He has to arrive at a decision in the back-ground of the mental make up of an individual of individuals jointly interested in a transaction or a venture. A blanket condemnation of persons of diverse activities unconnected with each other on the odd chance that if their premises are searched from incriminating material might be found is wholly outside the scope of S. 165, Cr. P.C. This power has to be exercised in an honest manner and search warrants cannot be indiscriminately issued purely as a matter of policy.”
In para 15 of this judgment, the Delhi High Court has also found that in his satisfaction note, the Director of Investigation had recorded only one reason and it was that the petitioners were not disclosing true income and wealth. This reason was found not in addition to reasons contained in note of recommendation put up by other respondents and Delhi High Court has found that satisfaction of said authority only was relevant and needed to be examined.
10. In the case of Vindhya Metal Corpn. (supra), the Division Bench of Allahabad High Court has found that mere possession of an amount and not having any document of ownership could not have been treated by the Commissioner of Income Tax as circumstance relevant to support a conclusion that it represented income which the person would not have disclosed. The consequent authorization made by the Commissioner of Income Tax under Section 132A of the Act and proceedings in consequence thereof were quashed.
11. In the case of Vindhya Metal Corpn. (supra), the Hon’ble Apex Court has found that mere unexplained possession of an amount without anything more could not be said to constitute information which can be treated as sufficient by reasonable person to reach an inference that it was income which would not have been disclosed by such person. The above mentioned Allahabad view has been affirmed by the Hon’ble Apex Court.
12. The Division Bench of this Court in the case of Cartini India Ltd. (supra), has found that reopening of assessment based on material already considered and adjudicated would amount to reviewing the assessment order by re-appreciating the material on record and is not contemplated under Section 147 of the Act. Shri Thakkar, learned counsel has pressed into service this judgment to urge that in the absence of any new information in possession of the respondents, such reassessment by drawing certain inferences on the strength of material already in its possession, is illegal.
13. The pleadings of parties in present petition show assertion by the petitioners of due discharge of all statutory obligations and no violation or breach of any provisions of Income Tax Act. This has not been denied or pointed out to be incorrect by the respondents. The petitioners have contended that there is no material in possession of respondents which could have led to a “reason to believe” to take action of search under Section 132(1) of the Act. The respondents have denied it. The first affidavit in this respect filed by the respondents on 30th June 2010 is not disclosing any such information gathered later by the department. It only contains an assertion that proper procedure has been followed and a positive satisfaction has been recorded by the Director of Income Tax (Investigation). There are some contentions revolving around Section 80IB or Keyman Insurance policy but then it is not the case of the respondents that said position was not within their knowledge earlier. It is urged that survey under Section 133A of the Act of a Labour Contractor to whom majority of labour payments were made revealed that he had inflated expenses in his book probably to cover inflated bills raised by him on the petitioners – company. It is claimed that said labour contractor declared additional income of Rs. 1.3 crores. The petitioners have then filed reply to these submissions and pointed out the names of contractors, regular payment to those contractors. It is contended that those contractors have been working with other employers also. The reason pleaded in affidavit reply is, therefore, stated to be frivolous. The respondents have then filed additional affidavit on 22.09.2010 and in it, it is mentioned that satisfaction note was initially recorded by the Assistant Director of Income Tax on the basis of necessary information on record. The said Assistant Director is alleged to have personally conducted discreet enquiries on various occasions before recording the satisfaction note. It is claimed that he interacted with employees and managers of the petitioners in a disguise. The said Assistant Director thereafter prepared note regarding satisfaction in consultation with the Additional Director of Income Tax which was approved by the Director of Income Tax. This Director of Income Tax recorded his personal satisfaction which culminated into search and seizure warrants. It is also pointed out that this satisfaction note was also accorded administrative approval by the Director General of Income Tax. This affidavit discloses that satisfaction note was submitted to this Court on 17.09.2010 for its perusal. The material discovered during search i.e. some agreements of sale are disclosed in para 7 of this affidavit. The petitioners have then filed their affidavit in reply to it on 12.10.2010. This affidavit of the petitioners again contains very same assertions with stand that “the reason now forwarded by the department are really bogy to reverse the view of assessing authority, which is outside the provisions of income-tax”. It is further stated that agreements and sale deed mentioned in para 7 by the respondents were pertaining to the year 2001 and hence beyond purview of search. Similarly, company opposed use of search material as the same were not relevant and the source was already fully explained. The petitioners have claimed that, therefore, there was no new material. The Additional Director of Income Tax (Investigation) has filed the additional affidavit on behalf of the respondents on 15.11.2010. Though in said affidavit reply, allegations made in para 3 & 4 of the above mentioned affidavit of the petitioners have been denied, the assertions in para 2 thereafter have not been dealt with. In this reply, the petitioners claimed that Director of Income Tax (Investigation) had taken note of discreet enquiries. Thereafter all facts were verified and assesses case records were sealed and then a satisfaction note was prepared. In affidavit it is disclosed that discreet enquiries conducted by Assistant Director of Income Tax revealed that assessee has been suppressing substantial portion of income by inflating purchases and other expenses. The assessee was catering to the high end customers and enjoying very high margins. The company was availing loans against third party NRI deposits whose identity and genuineness was doubtful. The substantial unreconciled amounts were found in the bank account of assessee company. The petitioners have thereafter filed their reply to this affidavit on 23.11.2010 which is nothing but reiteration of their earlier stand. Thereafter the petitioners have filed CAW No. 2587 of 2010 for admission of Additional documents already filed by them with rejoinder on 20th July 2010. Thereafter they filed CAW No. 2788 of 2010 for grant of early hearing.
14. The provisions of Section 132(1) of the Act contemplate a satisfaction of a particular authority and here as claimed by the respondents, the satisfaction note of Additional Director of Income Tax approved by Director of Income Tax (Investigation) has culminated in issuance of search and seizure warrant. This position is disclosed in para 4 of the additional affidavit dated 22.09.2010. In affidavit dated 15.11.2010, in para 6, it is stated that the Director of Income Tax (Investigation) has recorded his personal satisfaction before issuing the warrant of authorization under Section 132. The material looked into by said authority is also disclosed in para 6. Thus, the respondents claimed that a note was prepared by the Assistant Director in consultation with the Additional Director. It is claimed that both these authorities prepared their notice after recording satisfaction and it was approved by the Director of Income Tax (Investigation), after recording his personal satisfaction note. This satisfaction note was accorded administrative approval by the Director General of Income Tax (Investigation). During arguments, a question about hypothetical situation in which such Director General would have refused administrative approval was put and the learned counsel stated that had administrative approval been not accorded by the Director General of Income Tax (Investigation) Pune, the search could not have taken place. The authorities to whom powers are available are already noted by us above. The Assistant Director is not mentioned therein. Here, the authority which does not have that power is claimed to have conducted discreet enquiries and prepared a satisfaction note. That note styled as satisfaction note dated 08.06.2009 is contained in Satisfaction Note file. It is signed by the Assistant Director of Income Tax (Investigation), Nagpur. Next document is satisfaction note which is submitted by the Additional Director of Income Tax (Investigation), Nagpur, on 08.06.2009 to the Director of Income Tax (Investigation). This note is also dated 08.06.2009. The said note along with note of Assistant Director then appears to have been looked into by the Director of Income Tax (Investigation) and there is a separate note running into two pages signed by said authority on 09.06.2009 at the end of second page. Next page after this note, in fact an independent page, is containing a sentence requesting the Director General of Income Tax (Investigation), Pune, to peruse satisfaction note (earlier two pages) and grant administrative approval for search and seizure action. Below it is signature of Director of Income Tax (Investigation), Nagpur and thereafter a hand written note of Director General of Income Tax, Pune, approving the same. It is, therefore, obvious that last and final note in this respect is by the Director General of Income Tax (Investigation), Pune, on 11.06.2009. Had this authority refused to grant approval, the matter could not have proceeded further. Hence, this hand written note dated 11.06.2009 appears to be the only relevant document. But then the affidavit reply filed on 22.09.2010 by the respondents show preparation of separate notes by the Additional Director of Income Tax and by the Assistant Director of Income Tax after recording satisfaction and its approval by the Director of Income Tax, again a separate note. It is claimed that the Director of Income Tax also recorded his personal satisfaction and it culminated in issuance of search and seizure warrants. This is reiterated by the respondents in para 6 of their additional affidavit dated 15.11.2010.
15. It is, therefore, obvious hat the authority which has given its final nod and in absence of which the action under Section 132(1) was not possible, is not claimed to have recorded personal satisfaction in this respect. Its handwritten note does not record any such satisfaction. Thus “reason to believe” being pressed into service is not of that authority. This is final authority who has stated that it has gone through the note and it has also perused the satisfaction note of Director of Income Tax (Investigation). It has recorded that the “Director of Income Tax (Investigation), Nagpur, has got adequate information to arrive at his satisfaction that search and seizure action is required to be undertaken”. Accordingly, the proposal of the Director of Income Tax (Investigation), Nagpur, to take action under Section 132(1) is approved by the Director General of Income Tax (Investigation), Pune. Thus, hand written note of Director General of Income Tax dated 11.06.2009 appears as last unnumbered page. The note of Director of Income Tax (Investigation) dated 09.06.2009 runs into two pages and if it is perused, there is nothing to show that the same was a proposal to be submitted to the Director General of Income Tax, Pune. The last page i.e. after page 2 which contains a sentence already noted above, again bears signature of the Director of Income Tax, Nagpur and then it is marked to the Director General of Income Tax (Investigation), Pune. Thus, in the absence of this last page also, note of Director of Income Tax (Investigation), Nagpur, appears to be a complete document. But then it does not itself recommend any action. This note also does not contain any page numbers.
16. The Satisfaction note file produced before us contains a note running into seven pages by the Assistant Director of Income Tax, a note running into three pages prepared by the Additional Director (Investigation), Nagpur, addressed to the Director of Income Tax (Investigation), Nagpur and then the last note mentioned above by the Director of Income Tax, Nagpur, dated 09.06.2009. The hand written portion below endorsement by the Director of Income Tax, Nagpur, put by the Director General of Income Tax (Investigation), Pune on 11.06.2009 can be stated to be fourth note by the Director General of Income Tax. The note dated 08.06.2009 by the Assistant Director of Income Tax is stated to be satisfaction note. Similarly, the document dated 08.06.2009 prepared by the Additional Director (Investigation), Nagpur, has also got heading satisfaction note. The other two documents do not show any such specific heading. All these four documents are independent and page number upon it has been put in hand. The documents, therefore, are not from a file after perusal of which one can easily gather that particular note cold not have been prepared on some other date because of chronology and number of running pages in it. Here, all four documents are independent of each other and can be easily substituted.
17. The discreet enquiries are claimed to have been undertaken by the Assistant Director of Income Tax (Investigation), Nagpur. The note running into seven pages prepared by the said officer prepared in consultation with the Additional Director (Investigation), Nagpur, does not show any date, time or place of any such discreet enquiry or even does not name the person with whom it was made. This satisfaction note mentions high margins up to 40% gross profit and less profit margins. It is noted that gross profit ratio for the financial year 2005-06 was 33%, for 2006-07 it was 25% and for the year 2007-08 it was 27%. It is also noted that books show steep fall in gross profit even though turn over of the company increased by leaps and bound. The next sentence is “it is learnt that substantial portion of gross sales of the company is not recorded in the books of company. It is also gathered that the company is over invoicing its purchases in order to lower its taxable profits”. There is also reference to liberal tax structure of Hong Kong and to over invoicing of imports which is easily possible there. Huge deductions from the taxable profits from Section 80IB, dubious nature of international transactions and in balance sheet of the company, huge amounts under bank reconciliation account are also mentioned. It is stated that claim of manufacturing for an international brand appears to be false as there is no such international company or brand. It is also stated that the enquiry with the Director General (International Taxation) also confirmed that there was no such foreign company filing return in respect of its transactions/operations in India. It is stated that therefore it was crucial to uncover this disguised nexus between petitioner No. 1 – Company and its associated company registered at Hong Kong. Thereafter reference is to lavish life style. Lastly, language of Section 132(1) is inserted by this Assistant Director. It is at once clear that dubious nature of transactions and other material noted above has not been pressed into service in reply affidavit filed before this Court. The department has not permitted the petitioners to inspect this satisfaction note, however, this note does not disclose any enquiry with any Labour contractor or any specific instance of over invoicing. The entire material already available on record, therefore, has been used to draw inferences by said Assistant Director of Income Tax. This authority has also not filed any reply affidavit before this Court.
18. The next satisfaction note also dated 08.06.2009 is by the Additional Director (Investigation), Nagpur. It is not in dispute that he has necessary authority under Section 132(1) of the Act to form his belief thereunder. However, this officer instead of honouring that statutory obligation, has prepared the satisfaction note and placed it before the Director of Income Tax (Investigation), Nagpur. This officer has mentioned that it is suo motu exercise without the aid of informant and by collecting marketing information, conducing discreet enquiries in the group. No market information finds mention anywhere and no discreet enquiries conducted in the group are also disclosed. On the contrary, this authority requests the Director of Income Tax (Investigation) to peruse the note of the Assistant Director (Investigation) “in the pre-pages”. The consideration of this note of the Director of Income Tax (Investigation), Nagpur, is on independent two pages. This consideration mentions that assessee was suppressing the substantial portion of income. However, as already noted, no such secret enquiries or outcome thereof is apparent from any of the earlier notes. This officer has again mentioned “notes on pre-pages have been perused”. This note also does not contain any reference to any labour contractor.
19. The mode and manner in which all these notes are prepared, therefore, show the absence of any relevant material with authorities which would have enabled them to have “a reason to believe” that action under Section 132(1) of the Act was essential. No new material as such has been disclosed anywhere. No document or report of alleged discreet inquiry forms part of these notes. It is apparent that the entire exercise has been undertaken only because of the high growth noted by the respondents. The material like high growth, high profit margins, the contention in respect of or doubt about international brand and details thereof is available with the authorities. It is not their case that they had obtained any other information which was suppressed by the petitioners from them. The effort, therefore, was to find out some material to support the doubt entertained by the department. Whether such doubt entertained can be said to be bonafide is itself a moot question. The fact that authorities competent under Section 132(1) of the Act have avoided to shoulder the responsibility of taking decision, have unnecessarily placed the note before the higher authorities, clearly show that the exercise has not been undertaken as required by Section 132(1) of the Act in transparent mode. The satisfaction note contemplated therein must be based upon contemporaneous material, information becoming available to the competent authorities prescribed in that Section. Its availability and nature as also time factor must also be ascertainable from relevant records containing such satisfaction note. Loose satisfaction notes as produced before us, placed by authorities before each other cannot meet these requirements & said provision. The necessary live link and availability of relevant material for considering it, has not been brought before this Court. We, therefore, find substance in the contention of the petitioners that it was a roving exercise.
20. In view of this discussion, the petition is allowed. The authorization issued under Section 132(1) of the Income Tax Act, 1961, is found bad and unsustainable. Consequently, exercise of search undertaken in pursuance thereof from 19.06.2009 to 21.07.2009 is illegal. Notice action under Section 153A of the Act, issued on 16.02.2010 is also, therefore, bad in law. The same are accordingly stand quashed and set aside. Rule is made absolutely accordingly. However, in the facts and circumstances of the case, there shall be no order as to costs.
[Citation : 340 ITR 393]
