Gujarat H.C : Issuance of notices under section 131(1A) post-search would not, in any manner, render proceedings under section 132 invalid, if they were otherwise initiated pursuant to a valid authorization issued after recording satisfaction on basis of material available on record

High Court Of Gujarat

Neesa Leisure Ltd. Vs. Union Of India

Section : 132, 131

Ms. Harsha Devani And H.B. Antani, JJ.

Special Civil Application No. 13498 Of 2010

March 4, 2011

JUDGMENT

Ms. Harsha Devani J. – By this petition under article 226 of the Constitution of India, the petitioners seek the following substantive reliefs :

“(17) The petitioners pray that this hon’ble court be pleased to issue an appropriate writ, order or direction and be pleased :

(A) to quash and set aside the warrant of authorization issued under section 132(1) of the Income-tax Act, 1961, and the subsequent action of search and seizure taken by the respondent authorities and to return all the seized material back to the petitioners ;

(B) to direct the respondents and the income-tax authorities to restrict their action to the legitimate purview of powers available to them under the provisions of the Income-tax Act and for the legitimate purposes of the Income-tax Act and to restrain them from carrying out any roving or fishing inquiry and further to quash and set aside notices issued under section 133(6) by the respondents to various banks, financial institutions and others ;

(C) to restrain the income-tax authorities from issuing the notices under section 153A(1) to the other group companies of Neesa group for furnishing return of income-tax for last six assessment years, mechanically and without application of mind.”

2. The facts of the case as stated in the petition are that petitioner No. 1 is a company. Petitioner No. 2 is a civil engineer from IIT, Roorkee, holding a diploma in business finance from ICFAI, who joined the Indian Administrative Service in the year 1985 and played a key role by implementing various policy initiatives in the Tourism, Industry, Energy and Infrastructure Sector in Gujarat, and held different positions in the Government of Gujarat during his 17 years’ tenure. He resigned in 2002 to join the private sector as a senior executive. Subsequently, he set up his own ventures in various sectors. Under his leadership, Neesa group has converted itself into a well-diversified group involved in hospitality services ; agro-biotechnology, steel castings and I. T. services through innovative business planning and professional management. Neesa Leisure Ltd., petitioner No. 1 herein, is mainly into hospitality business and petitioner No. 2 is the chairman of the said company.

A search action came to be conducted under section 132 of the Income-tax Act, 1961 (the Act), on September 8, 2010, September 9, 2010, and September 11, 2010, on various companies of the Neesa group. The proceedings covered around 20 locations/units of various group companies and statements at different locations of officials/directors came to be recorded. Back up of computers had been taken from twelve different locations. Seized materials mainly consisted of loose papers, files, documents, agreements, bills, etc. Cash on hand of Rs. 3.80 lakhs and approximately 1100 grams jewellery belonging to the wife of petitioner No. 2 came to be seized from their residence.

Subsequent to the search and survey, the respondent-authorities issued summons to the group companies asking them to file information/ documents for the period since April 1, 2004, till date – bank book, unsecured loans, ledger accounts of capital assets, land acquisitions details, documents, equity capital received and loans and advances given. After the search, the Assistant Director of Income-tax, in charge of the search operations, issued several notices under section 131(1A) of the Act to the persons searched, for production of books of account and other information, and also directed the bank not to allow operations of the accounts of the persons stated in the notice. The petitioner wrote several letters to respondent No. 4, Deputy Director (Investigations) as well as other officials in respect of the action taken by the income-tax authorities alleging that the action is taken with ulterior motive to harm the business interest of the petitioners.

Respondent No. 4 had written a letter dated September 23, 2010, to Axis Private Equity Ltd. under the provisions of section 133(6) of the Act calling for the information mentioned therein. According to the petitioners, the information called for is irrelevant for the purposes of the Income-tax Act and appears to be intended to damage the business interest of the petitioners. It is averred in the petition that the petitioners through their advocate had informed Axis Private Equity Ltd. not to supply the information for the reasons stated therein.

It is the case of the petitioners, that the petitioners have been filing income-tax returns year after year and have been paying income-tax year after and that they have also been attending all the assessment related proceedings of the Department and submitting information/data, etc., required by the Department from time to time. There has been no occasion of non-appearance or non-furnishing of information or details. Further, all the assets, loans either short-term or long-term, have been disclosed by the petitioners from year after year and as such, it was incumbent upon the respondents to first verify the information, which might have formed the basis for invoking section 132 of the Act with the concerned Assessing Officers.

It is further averred in the petition that the notices issued under section 133(6) of the Act to various banks, financial institutions and others are illegal and the same have been issued for collateral purposes and not for achieving any legitimate purposes of the Act. That the petitioners apprehend that no prior approval of the Director or the Commissioner is obtained as required and if at all the said approval is obtained, the same is bad in law. It is also the case of the petitioners that the provisions of section 133 of the Act are not available to the respondents at the stage of post-search operations under section 132 of the Act. Various other facts have been mentioned for the purpose of contending that the exercise of powers is vindictive and mala fide in nature.

In paragraph 12.2 of the petition, it is averred that petitioner No. 2 has reason to believe that old papers in the nature of anonymous complaints and tit-bits relating to his days in service in Government as civil servant may also have been relied upon at the behest of some officials who are harbouring ill-will, personal animosity and jealousy. If that be the case, it vitiates the subjective satisfaction as information of that time (year 2000-01 circa) cannot be used today. It is also averred that the post-search conduct of the respondents to some how justify the search itself is indicative of a cover up operation.

In short, it is the case of the petitioners that the conditions precedent for exercise of powers under section 132 of the Act have not been satisfied and that the subsequent inquiry under section 131(1A) of the Act is bad in law as the said powers are required to be exercised prior to the search and not subsequent thereto.

Petitioner No. 2 has also filed an affidavit stating that the court may in its wisdom examine not only the satisfaction note, but also the underlying material based on which the satisfaction note has been prepared. It is further stated that the satisfaction note is based on the belief of the concerned officials, but such belief has to be necessarily derived from the reasons as mentioned in section 132 of the Act, meaning thereby, the material available and collected by the Income-tax Department. It is further averred that the post-search inquiry by the Investigation Wing is in the nature of a cover up operation to justify the search and that the intention to search was not to unearth unaccounted money, jewellery, benami assets, etc., but to hit the business interest of the petitioners.

3. In response to the petition, respondent No. 2, Director (Investigation) has filed an affidavit-in-reply, denying the averments made in the petition. It is asserted that the action under section 132 of the Act has been carried out after complying with the requirements of section 132(1) of the Act. That pursuant to the information gathered, a specific satisfaction was recorded as required under the said section. It is further averred that the original file containing the satisfaction note had been produced before the court for the perusal of the court and that from the satisfaction note, it can be seen that the pre-search inquiries clearly indicated that the assessee group was in possession of documents which would not be produced by issuance of summons or other notice in terms of the provisions of section 132(1)(b) of the Act as also the assets as contemplated under clause (c) of section 132(1) of the Act. It is further stated that pre-search inquiries and satisfaction recorded for taking action under section 132(1) of the Act have been vindicated even from the findings in the search. It is also averred in the affidavit that the petitioner had shown a huge unsecured loans to the extent of Rs. 6,25,26,010 as on March 31, 2007, from his father Shri Raghunathprasad Gupta, who, however, had categorically denied any such transaction in the statement recorded during the course of search proceedings. As regards notices issued under section 133(6) of the Act, it has been stated that the notices have been issued mainly to banking companies so as to scrutinize the financial transactions and to co-relate the same with the seized documents. The very fact that petitioner No. 2 has attempted to prevent such verification itself demonstrably would go to show that in-depth verification of all these financial transactions is necessary. In paragraph 6.3 of the affidavit, the averments made in paragraph 3 of the petition have been dealt with and various facts regarding the material found during the course of search have been stated. As regards the assertion on the part of the petitioner that he has been co-operating in the proceedings, it has been contended that the record before the court clearly reveals that the petitioner has attempted to prevent Axis P. Equity Ltd. from furnishing the information requisitioned under section 133(6) of the Act. It is, accordingly, submitted that petitioner No. 2 has been making various attempts to thwart further investigation, in respect of the financial transactions. It is stated that in another similar instance, petitioner No. 2 also requested the Additional Director of Income-tax/Deputy Director of Income-tax (Investigation) not to take statement of Shri Bharat Shah (main person of Manu Enterprises and Kala Sales) as in his opinion, the said person would give certain details which would be prejudicial to the interests of the searched parties, with regard to various financial irregularities on their part. It is stated that the notices issued under section 133(6) have been issued with a view to have a co-ordinated view of various financial irregularities committed by the searched parties. Reiterating that the search was based on satisfaction emanating from inquiries conducted prior to search, it is submitted that the information having been specifically gathered and satisfaction note having been properly recorded the impugned action is legal and valid.

4. Petitioner No. 2 has filed a rejoinder to the affidavit-in-reply filed by the respondents.

5. Mr. S. N. Soparkar, senior advocate, learned counsel appearing on behalf of the petitioners, has made two-fold submissions, firstly, that there was no reason to believe for initiating action under section 132 of the Act, and, secondly, that the very fact that the respondents have issued notices under section 131(1A) of the Act after the search and seizure operation was over, is indicative of the fact that the action taken by the respondents is premature. The learned counsel invited the attention of the court to various decisions of the Supreme Court, this High Court and other High Courts to indicate the considerations which should weigh with the court while considering the challenge to the validity of the authorization issued under section 132 of the Act. The same shall be referred to hereinafter at an appropriate stage.

Referring to the provisions of section 132 of the Act it was submitted that action under the said provision can be taken “in consequence of information”, such information should be concrete material based on which the concerned officer should have reason to believe. In other words, the information should be credible information as opposed to suspicion, gossip, or a hunch. It was submitted that in the present case the petitioners have been regularly filing their income-tax returns and have always been co-operative with the Income-tax Department and as such there could be no reason for the respondents to form a belief that the petitioners would refuse to supply any information which may be sought for by the Income-tax Department. It was submitted that the petitioners do not have any undisclosed income or assets and that the authorization has been issued by the concerned official without any justifiable information and without application of mind with regard to the formation of reason to believe. In short, the submission was that no material existed on the basis of which the respondents could have recorded satisfaction under the provisions of section 132 of the Act.

The next submission advanced by the learned counsel was that the fact that there was no reason to believe for initiating action under section 132(1) of the Act is evident from the fact that after the search and seizure operation was over, the respondents in exercise of powers under section 131(1A) of the Act issued summons on the petitioners. It was urged that the respondents are trying to justify the seizure on the basis of the post-search material. According to the learned advocate, the reason to believe must exist and must be taken into consideration by the concerned officer at the time of issuance of warrant of authorization. If the reason to believe comes into existence later on, that is, after issuance of warrant of authorization, then the warrant of authorization and the entire search and seizure will be illegal even if the material on the basis of which the Director formed his opinion that there was a reason to believe existed prior to the issuance of warrant of authorization. It was submitted that issuance of notices under section 131(1A), in all seven in number, after the search, is itself fatal to the whole process. Even if there was a belief, if material was gathered to sustain such a belief, the warrant of authorization is illegal. It was submitted that if the search is bad, everything is required to be quashed.

Inviting attention to the provisions of section 131(1A) of the Act, the learned counsel submitted that action under sub-section (1A) of section 132 of the Act has to be taken before taking any action under clauses (i) to (v) of section 132(1A) of the Act and as such, the exercise of such powers after search has been carried out under section 132 of the Act is not permissible in law. Reliance was placed upon a decision of the Allahabad High Court in the case of Dr. Mrs. Anita Sahai v. DIT[2004] 266 ITR 597/ 136 Taxman 247 for the proposition that a notice under section 131(1A) of the Act can be issued thereunder only before the authorized officer takes action under section 132(1) of the Act. It was held that the very fact that the respondents issued notices under section 131(1A) of the Act after the search and seizure operation under section 132 of the Act goes to show that there was neither reason to believe, nor material before the authorized officer on the basis of which he could issue a warrant under section 132 of the Act.

As regards the challenge to issuance of notices under section 133(6) of the Act, the learned counsel for the petitioners submitted that after the search the respondents have issued notices under section 133(6) of the Act to Axis P. Equity Ltd,. calling for information which is irrelevant for the purposes of the Income-tax Act. It was submitted that such notice should have nexus to the proceedings or inquiry under the Act and cannot be a fishing inquiry. Referring to the notice dated September 23, 2010, it was submitted that from the very nature of information called for by the respondents it is apparent that it has no nexus with the inquiry and that the sole object is to throttle the petitioners’ business. It was emphasized that the issuance of notice under section 133(6) is a patent abuse of power, which does not advance the cause of income-tax proceedings and as such the same is without authority of law ; has no bearing on the assessment, and has been issued with the collateral purpose of scaring away the investors. It was, accordingly, submitted that the impugned notices issued under section 133(6) of the Act having been issued for the purpose of a roving inquiry and not for a legitimate purpose, are required to be quashed and set aside.

6. Resisting the petition, Mr. M. R. Bhatt, senior advocate, learned counsel appearing on behalf of the respondents, submitted that there was sufficient material on record on the basis of which, the Director could come to the conclusion that an authorization under section 132(1) of the Act could be issued. It was submitted that for the purpose of invoking section 132(1) of the Act, there has to be existence of information ; there should be recording of satisfaction ; information should have nexus and should not be vague, and that the court would only see the existence of circumstances. Even if there is an error of judgment, the same would not be a ground for interference. It was urged that during the course of pre-search inquiries, it was found that there was a lot of manipulation and that Shri Sanjay Gupta had been introducing unaccounted money by way of share application money. It was also found that the company had close connections with the hawala transaction providers and that the statements recorded indicate complete modus operandi as to how petitioner No. 2 was issuing the cheques and the money travelled back to him. It was submitted by the learned counsel that though several allegations have been made in the petition alleging mala fide action on the part of the respondent authorities, no personal prejudice of any particular officer is brought on record and that the entire affidavit is presumptuous. Inviting attention to the communication dated October 4, 2010, addressed by the learned advocate for the petitioner to Axis P. Equity Ltd. it was submitted that the petitioners have taken the law in their own hands by informing Axis P. Equity Ltd. not to divulge information sought for by the Department under section 133(6) of the Act.

Dealing with the contention that the notices issued under section 131(1A) of the Act indicate that action under section 132 is premature, Mr. Bhatt submitted that section 131(1A) of the Act in so far as the same provides for taking action under clauses (i) to (v) relates only to the authorized officer referred to in sub-section (1) of section 132. In so far as the Director General or the Director or the Joint Director or the Assistant Director or the Deputy Director are concerned, they can take action under section 131(1A) of the Act if they have reason to suspect that any income has been concealed as envisaged thereunder. Reliance was placed upon a decision of this High Court in the case of Arti Gases v. DIT (Inv.)[2001] 248 ITR 55 /[2000] 113 Taxman 68 (Guj.), wherein the court had held that the notices under section 131(1A) of the Act can also be issued after completion of the search undertaken under the provisions of section 132 of the Act.

As regards the challenge to the notices under section 133(6) of the Act is concerned, the learned counsel vehemently submitted that at the time of issuance of notice, vide order dated October 11, 2010, the court had issued notice only for the purpose of examining the aspect as to whether before initiating search proceedings against the petitioners and other group concerns, conditions precedent laid down under section 132 have been satisfied, which indicates that the court has not entertained the challenge to the notices under section 133(6) of the Act. Hence, the challenge to the said notices cannot be considered. On the merits, it was submitted that the notices issued under section 133(6) of the Act are legal and have been issued with a view to have a co-ordinated view of various financial irregularities committed by the searched parties. In conclusion, it was submitted that the petition is devoid of any merit and deserves to be dismissed.

7. This court has considered the submissions advanced by the learned counsel for the respective parties and has perused the authorities cited at the Bar as well as the record containing the satisfaction note recorded under section 132 of the Act. Before adverting to the merits of the case, it may be germane to refer to the certain decisions cited by the learned counsel for the respective parties as regards the principles which are required to be kept in mind while considering the validity of an authorization issued under section 132 of the Act.

In the case of ITO v. Seth Brothers[1969] 74 ITR 836 (SC), the Supreme Court has held that section 132 of the Act does not confer any arbitrary authority upon the Revenue officers. The Commissioner or the Director must have, in consequence of information, reason to believe that the statutory conditions for the exercise of the power to order search exist. Since by the exercise of the power a serious invasion is made upon the rights, privacy and freedom of the taxpayer, the power must be exercised strictly in accordance with the law and only for the purposes for which the law authorizes it to be exercised. If the action of the officer issuing the authorization or of the designated officer is challenged, the officer concerned must satisfy the court about the regularity of his action. If the action is maliciously taken or power under the section is exercised for a collateral purpose, it is liable to be struck down by the court. If the conditions for exercise of the power are not satisfied, the proceeding is liable to be quashed. But where power is exercised bona fide, and in furtherance of the statutory duties of the tax officers any error of judgment on the part of the officers will not vitiate the exercise of the power. Where the Commissioner entertains the requisite belief and for reasons recorded by him authorizes a designated officer to enter and search premises for books of account and documents relevant to or useful for any proceeding under the Act, the court in a petition by an aggrieved person cannot be asked to substitute its own opinion whether an order authorizing search should have been issued. Again, any irregularity in the course of entry, search and seizure committed by the officer acting in pursuance of the authorization will not be sufficient to vitiate the action taken, provided the officer has in executing the authorization acted bona fide.

In the case of Ramjibhai Kalidas v. I. G. Desai, ITO[1971] 80 ITR 721 (Guj.), this High Court has held that the condition precedent for the exercise of the power to issue authorization for search and seizure is that the Director of Inspection or the Commissioner must have the requisite reason to believe in consequence of information in his possession. The power to authorize search and seizure is hedged in by the requirement of this condition precedent and it is only if this condition is fulfilled that the power can be exercised. Of course, it is for the Director of Inspection or the Commissioner to be satisfied that there is reason to believe and the court cannot sit in appeal over the decision of the Director of Inspection or the Commissioner regarding the existence of the reason to believe nor can the court examine the adequacy of the grounds on which the reason to believe entertained by such officer is based. After considering various decisions of the Supreme Court, the court held that if the grounds on which “reason to believe” is founded are not relevant to the subject-matter of the inquiry or are extraneous to the scope and purpose of the statute or are such as no rational human being can consider connected with the facts in respect of which the belief is to be entertained so that no reasonable person can come to such a belief, the exercise of the power would be bad. The court would say in such a case that the reasons for the belief have no rational connection or relevant bearing to the formation of the belief and the belief is, therefore, not truly held but it is merely a pretence.

In the case of L. R. Gupta v. Union of India[1992] 194 ITR 32 /[1991] 59 Taxman 305 , the Delhi High Court has held thus (page 45) :

“The expression ‘information’ must be something more than a mere rumour or a gossip or a hunch. There must be some material which can be regarded as information which must exist on the file on the basis of which the authorising officer can have reason to believe that action under section 132 is called for any of the reasons mentioned in clause (a), (b) or (c). When the action of issuance of an authorization under section 132 is challenged in a court, it will be open to the petitioner to contend that, on the facts or information disclosed, no reasonable person could have come to the conclusion that action under section 132 was called for. The opinion which has to be formed is subjective and, therefore, the jurisdiction of the court to interfere is very limited. A court will not act as an appellate authority and examine meticulously the information in order to decide for itself as to whether action under section 132 is called for. But the court would be acting within its jurisdiction in seeing whether the act of issuance of an authorization under section 132 is arbitrary or mala fide or whether the satisfaction which is recorded is such which shows lack of application of mind of the appropriate authority. The reason to believe must be tangible in law and if the information or the reason has no nexus with the belief or there is no material or tangible information for the formation of the belief, then, in such a case, action taken under section 132 would be regarded as bad in law.”

8. It was further held that in the light of the provisions of sub-clause (b) of section 132(1) of the Act, the belief of the authority must be that the only way in which the Income-tax Department would be in a position to obtain books of account and documents from a person is by conducting a search and consequent seizure of the documents thereof. In the opinion of the court, some facts or circumstances must exist on the basis of which such a belief can be formed. It was further held that an authorization under section 132(1) can be issued if there is a reasonable belief that the assessee does not want the Income-tax Department to know about the existence of such income or asset in an effort to escape assessment. That apart, there must be material on which the mind has to be applied and opinion formed that the person concerned will not produce the documents if asked to do so.

The learned counsel for the petitioners had also placed reliance on the following decisions :

(a) The decision of the Allahabad High Court in the case of Vindhya Metal Corpn. v. CIT[1985] 156 ITR 233 (All.) ;

(b) The decision of the Supreme Court in the case of CIT v. Vindhya Metal Corpn.[1997] 224 ITR 614/ 91 Taxman 192 (SC) ;

(c) The decision of the Delhi High Court in the case of Dr. Nalini Mahajan v. DIT[2001] 252 ITR 123/[2002] 122 Taxman 897 (Delhi);

(d) The decision of the Punjab and Haryana High Court in the case of H. L. Sibal v. CIT[1975] 101 ITR 112 (Punj. & Har.) ;

(e) The decision of the Supreme Court in the case of Rajendran Chingaravelu v. R. K. Mishra, Addl. CIT[2010] 320 ITR 1 / 186 Taxman 305 (SC) ;

(f) The decision of the Allahabad High Court in the case of Dr. Nand Lal Tahiliani v. CIT[1988] 170 ITR 592/ 39 Taxman 127 (All.) ;

(g) The decision of the Calcutta High Court in the case of Mahesh Kumar Agarwal v. Dy. DIT[2003] 260 ITR 67/ 133 Taxman 520 (Cal.) ;

(h) The decision of the Sikkim High Court in the case of Sikkim Subba Associates v. Union of India[2005] 276 ITR 456 / 147 Taxman 250 (Sikkim) ;

(i) The decision of the Delhi High Court in the case of Ajit Jain v. Union of India[2000] 242 ITR 302/[2011] 117 Taxman 295 (Delhi) ; and

(j) The decision of the Supreme Court in the case of Union of India v. Ajit Jain[2003] 260 ITR 80/129 Taxman 74 (SC) ;

9. Whereas the learned counsel for the respondents had placed reliance on the following decisions :

(a) The decision of the Bombay High Court in the case of Genom Biotech (P.) Ltd. v. DIT[2009] 180 Taxman 395 (Bom.) ;

(b) The decision of the Supreme Court in the case of Pooran Mal v. Director of Inspection[1974] 93 ITR 505 (SC) ;

(c) The decision of the Supreme Court in the case of Rajendran Chingaravelu (supra) ;

(d) The decision of the Madras High Court in the case of Rugmini Ram Raghav Spinners (P.) Ltd. v. Union of India[1992] 196 ITR 674/[1990] 53 Taxman 237 (Mad.) ;

(e) The decision of the Karnataka High Court in the case of Southern Herbels Ltd. v. DIT (Investigation) [1994] 207 ITR 55 (Karn.) ;

(f) The decision of the Calcutta High Court in the case of Dy. DIT v. Mahesh Kumar Agarwal[2003] 262 ITR 338/ 130 Taxman 674 (Cal.) ; and

(g) The decision of the Allahabad High Court in the case of Doctors X-ray & Pathology Institute (P.) Ltd. v. DIT[2009] 318 ITR 125/[2010] 186 Taxman 480 (All.).

10. Since similar principles have been enunciated in the aforesaid decisions, with a view to avoid prolix, the same are not referred to in detail.

The aforesaid pronouncements have exhaustively settled the guidelines with reference to scrutiny by the court while examining the legality, propriety or otherwise of the issuance of search warrants under section 132(1) of the Act. From the principles enunciated in the above referred to decisions, it is apparent that for the purpose of exercise of powers under section 132 of the Act two conditions precedent are required to be satisfied. The first condition is that the concerned officer must have some information in his possession, and the second condition is that, in consequence of such information he must have reason to believe that the statutory conditions for exercise of the power to order search exist. The basis for exercise of power must be some material which can be regarded as information which must exist on the file on the basis of which the authorising officer can have reason to believe that action under section 132 is called for. Such information should be fairly reliable and should not be a mere rumour or an unverified piece of gossip or a hunch. The court, therefore, while examining the validity of the authorization issued under section 132 of the Act would, firstly, be required to examine as to whether there exists any information of the nature referred to hereinabove in the possession of the concerned officer, on the basis of which he could have formed a reason to believe. The next requirement which would be required to be satisfied is as to whether before issuance of the authorization, the concerned official has recorded the reasons for his belief. If reasons have been recorded, the opinion which has to be formed being subjective, the jurisdiction of the court to interfere is very limited. The court will not act as an appellate authority and examine meticulously the information in order to decide for itself as to whether the action under section 132 is called for. But the court would be acting within its jurisdiction in seeing whether the act of issuance of authorization under section 132 is arbitrary or mala fide or whether the satisfaction recorded is such which shows lack of application of mind on the part of the appropriate authority. The reason to believe must be tangible in law and if the information or reason has no nexus with the belief or there is no material or tangible information for the formation of the belief, action taken under section 132 would be bad in law. If reasons have been recorded and the concerned officer is satisfied that there is reason to believe, the court cannot sit in appeal over the decision of the said officer regarding the existence of the reason to believe nor can the court examine the adequacy of the grounds on which the reason to believe entertained by such officer is based. But there is a limited area within which such reason to believe entertained by the officer can be scrutinised by the court. If the grounds on which “reason to believe” is founded are not relevant to the subject-matter of inquiry or are extraneous to the scope and purpose of the statute or are such as no rational human being can consider connected with the fact in respect of which the belief is to be entertained so that no reasonable man can come to such a belief, the exercise of the power would be bad. In appropriate cases a writ petition may lie challenging the validity of the action on the ground of absence of power or on a plea that proceedings were taken maliciously or for a collateral purpose.

Examining the facts of the present case in the aforesaid legal backdrop, it has been contended on behalf of the petitioners that the authorizations issued by respondent No. 2-Director General of Income-tax are illegal and invalid inasmuch as there were no grounds before him on the basis of which he could have reason to believe that the petitioners were in possession of undisclosed income or property. For this purpose, the respondent-authorities had produced the file containing the satisfaction note as well as the material based on which the satisfaction had been recorded, for the perusal of the court. On scrutiny of the record produced before the court, it has been noticed that a detailed proposal/satisfaction note has been prepared by the Additional Director of Income-tax (Investigation) based on the information collected during the course of pre-search inquiries, which has been duly considered by the Additional Director of Income-tax (Investigation), who in turn has recorded satisfaction that this is a fit case for action under section 132(1) of the Act. The Director of Income-tax (Investigation) upon considering the proposal as well as the material on record, has discussed the case with the concerned officers and has recorded satisfaction that if summons under section 131 of the Act and notice under section 142(1) is issued, the persons referred to in the satisfaction note would not be produced or cause to be produced, the books of account or other documents which will be useful or relevant to any proceedings under the Income-tax Act within the meaning of section 132(1)(b) of the Act. Respondent No. 2, Director General of Income-tax (Investigation), has also perused various notes recorded by the Additional Director of Income-tax Investigation, the Additional Director of Income-tax (Investigation) as well as the Director of Income-tax (Investigation) as well as the material on record and has discussed the same with concerned officials. While recording satisfaction, respondent No. 2 has discussed the relevant facts on record and has recorded satisfaction that this is a fit case for issue of warrant of authorization under section 132(1) of the Act. In the affidavit-in-reply filed by respondent No. 2, it has been asserted that the satisfaction note produced for the perusal of the court shows that pre-search inquiries clearly indicated that the assessee group was in possession of documents which would not be produced by issuance of summons or other notice in terms of the provisions of section 132(1)(b) of the Act as also assets as contemplated under clause (c) of section 132(1). It has been categorically averred that the pre-search inquiries formed reason for believing the aspect enumerated in clauses (b) and (c) of section 132(1) and that the satisfaction recorded has been vindicated even from the findings in the search. The record indicates that exhaustive inquiries have been made and it is on the basis of the material collected during the course of such inquiries, that the satisfaction has been recorded. On a perusal of the material, based on which satisfaction has been recorded by respondent No. 2 before issuance of authorization under section 132 of the Act, it cannot be said that based on such material no reasonable person could have formed the opinion that reasons for exercise of powers under section 132 exist. In the opinion, of this court, the record of the case clearly indicates that there was sufficient and relevant material before respondent No. 2 to form the requisite opinion as contemplated under section 132(1) of the Act. As noted hereinabove, at the stage of considering the validity of authorization to search and seize under section 132(1) of the Act, the consideration is as to whether there is some relevant material so as to warrant proceedings under section 132 of the Act and the question of sufficiency cannot be gone into.

The next contention raised on behalf of the petitioners is that issuance of notice under section 131(1A) of the Act, after the search is fatal to the whole process and that even if there was a belief, if material was gathered to sustain such belief, the warrant of authorization is illegal. In this regard it may pertinent to refer to the provisions of section 131 of the Act, which in so far as the same are relevant for the present purpose read thus :

“131. Power regarding discovery, production of evidence, etc.—(1)The Assessing Officer, Deputy Commissioner (Appeals), Joint Commissioner, Commissioner (Appeals) and Chief Commissioner or Commissioner shall, for the purposes of this Act, have the same powers as are vested in a court under the Code of Civil Procedure, 1908 (5 of 1908), when trying a suit in respect of the following matters, namely :-

(a) discovery and inspection ;

(b) enforcing the attendance of any person, including any officer of a banking company and examining him on oath ;

(c) compelling the production of books of account and other documents ; and

(d) issuing commissions.

(1A) If the Director-General or Director or Joint Director or Assistant Director or Deputy Director, or the authorised officer referred to in sub-section (1) of section 132 before he takes action under clauses (i) to (v) of that sub-section, has reason to suspect that any income has been concealed, or is likely to be concealed, by any person or class of persons, within his jurisdiction, then, for the purposes of making any enquiry or investigation relating thereto, it shall be competent for him to exercise the powers conferred under sub-section (1) on the income-tax authorities referred to in that sub-section, notwithstanding that no proceedings with respect to such person or class of persons are pending before him or any other income-tax authority.”

11. The learned counsel for the petitioner contended that section 131(1A) of the Act contemplates taking action by the officers mentioned therein, before such officer takes action under clauses (i) to (v) of sub-section (1) of section 132 of the Act. In the circumstances, the very fact that after the search and seizure operation the respondents have exercised powers under section 131(1A) of the Act is indicative of the fact that there was no reason to believe for initiating action under section 132 of the Act. It is also contended that even if there was a belief, if material was gathered to sustain such a belief, the warrant of authorization is illegal. Reliance has been placed upon the decision of the Allahabad High Court in the case of Dr. Mrs. Anita Sahai (supra) wherein the court has held thus (page 604) :

“We are of the opinion that the submission of learned counsel for the petitioner is correct. The respondents in their counter affidavit have stated that it was respondent No. 4 who had sent the material to respondent No. 1 on the basis of which respondent No. 1 had recorded his satisfaction under section 132(1). It is respondent No. 4 himself who had issued summons under section 131(1A) of the Act after the search. As such there could not possibly be any material, which can be the basis of having reason to believe in respondent No. 1. The very fact that the respondents issued notices under section 131(1A) after the search and seizure operation under section 132 of the Act goes to show that there was neither reason to believe nor material before the authorising officer on the basis of which he could issue a warrant under section 132 of the Act.”

12. On the other hand on behalf of the respondents, reliance has been placed on a decision of this High Court in the case of Arti Gases (supra), wherein the court has held that the notices under section 131(1A) of the Act can also be issued after completion of the search undertaken under the provisions of section 132 of the Act.

In this regard, it may be pertinent to note that in the concluding sub-paragraph of paragraph 3.0 of the petition, it has been averred that after search, the Assistant Director of Income-tax, in charge of search operations has issued several notices under section 131(1A) to the persons searched for production of books of account and other information, which is already with him in the seized books of account and documents. In paragraph 7.0 of the petition is has been averred thus :

“The income-tax authorities have issued several notices under section 132(1A) (sic) calling upon the petitioners and its officers to produce books of accounts and documents which are in fact in his own possession seized during the course of search. These notices are illegal inasmuch as the notice under section 131(1A) can be issued only before action under section 132(1) is taken. Such notices issued after conducting the search are illegal.”

13. Copies of some of the notices under section 131(1A) of the Act have been placed on record along with the affidavit dated October 16, 2010, made by petitioner No. 2. A perusal of the prayer clause indicates that there is no challenge to the said notices. In the circumstances, there is no question of going into the validity of the said notices. Moreover, the said issue already stands concluded in favour of the Revenue by the decision of this High Court in the case of Arti Gases (supra), wherein the court has held thus (page 63) :

“In our opinion, it would be absolutely logical to call for information so as to have better particulars or to have a complete idea about the material seized during the search. If some material is seized at the time of the search and the authorised officer wants to have some details so as to understand the nature of the documents, he may issue notice under section 131(1A) of the Act. In our opinion, in a given case such a notice cannot only help the Department but can also help the assessee. If the assessee is in a position to give more explanation so as to satisfy the authorised officer that the documents seized by him do not reveal any undisclosed income, but the income or transactions referred to in the documents had been duly shown by him in his books of account or if the assessee gives any information to the effect that the first impression of the authorised officer with regard to the nature of the documents was not correct, we are sure that such a notice would help the assessee himself. If the assessee is called upon to give some information or to explain certain documents or writings seized during the process of search, in our opinion, no harm can be caused to the assessee and as stated hereinabove, such particulars can be helpful not only to the Department but to the assessee also. We, therefore, do not agree with the submissions made by the learned advocate, Shri Puj that such a notice can be issued only before initiation of proceedings under section 132 of the Act. Moreover, even under the provisions of section 133 of the Act, the Assessing Officer or the officers referred to in the said section are having power to call for information. So issuance of such a notice during or after the search cannot be said to be bad in law.”

14. The main plank of the submissions advanced by the learned counsel for the petitioners was that issuance of notices under section 131(1A) of the Act subsequent to the search proceedings was fatal and would render the search proceedings invalid even if the requisite satisfaction had been recorded prior to issuance of authorization under section 132(1) of the Act. This court does not find any merit in the said contention, inasmuch as if there is sufficient and tangible material available on record, prior to the search, based on which the concerned officer has formed the requisite belief under section 132(1) of the Act, merely because certain other information has been sought for by the authorised officer or any of the officers mentioned in section 131(1A) of the Act, the same would not render the search proceedings invalid. Even if the contention raised on behalf of the petitioners were to be accepted, viz., the authorised officer does not have any power to issue notices under section 131(1A) of the Act post-search, the same at best would render the notices invalid. But issuance of notices under section 131(1A) of the Act post-search would not in any manner render the proceedings under section 132 of the Act invalid, if they were otherwise initiated pursuant to a valid authorization issued after recording satisfaction on the basis of the material available on record. It is difficult to fathom as to how the satisfaction recorded by the Director General of Income-tax (Investigation) on the basis of the material on record, would be rendered invalid merely because the Assistant Director of Income-tax has subsequently issued notices under section 131(1A) of the Act. As noted hereinabove, the notices under section 131(1A) of the Act are not subject-matter of challenge in the present petition, hence, it is not necessary to examine the validity of such notices.

15. As regards the challenge to the notices under section 133(6) of the Act issued to various parties calling for information in relation to the petitioner by the respondents, on behalf of the learned counsel for the respondents it has been contended that the court at the time of issuance of notice having limited the same to the authorization under section 132 of the Act, which has become final as the petitioners have not challenged the same, the petitioners cannot now be permitted to agitate any other issue before the court. The said contention does not merit acceptance, inasmuch as since the principal challenge in the petition is to the authorization under section 132 of the Act, notice had initially been issued for the purpose to examining as to whether the conditions precedent for exercise of powers under section 132(1) of the Act had been satisfied. However, by the order dated October 11, 2010 whereby notice was issued on the petition, the challenge to the notices under section 133(6) of the Act has not been repelled by the court. Besides, one of the members of this Bench was a party to the said order and it was never the intention of the court to limit the challenge in the petition to the validity of the search proceedings alone. In the circumstances, the petitioners are not prohibited from pursuing their challenge to the said notices.

16. Examining the issue on the merits, it has been vehemently submitted on behalf of the petitioners that the information called for under the impugned notices is irrelevant for the purposes of the Income-tax Act and that the information called for reveals that the same is in the nature of a fishing or roving inquiry which has no nexus with the inquiry and that the sole object is to throttle the petitioner’s business. That the issuance of notice under section 133(6) is a patent abuse of power, which does not advance the cause of income-tax proceedings and as such the same is without authority of law ; has no bearing on the assessment, and has been issued with the collateral purpose of scaring away the investors. In so far as the allegations that the notices have been issued with a view to throttle the petitioner’s business or with the collateral purpose of scaring away the investors are concerned, except for such bald averments there is no material or other averments to substantiate such allegations. As has been rightly contended on behalf of the respondents, no personal prejudice of any particular officer is brought on record. On reading the memorandum of the petition in its entirety, it is apparent that the petitioners have not named any officer who according to them has the mala fide intention of throttling the petitioners business, nor are any supporting averments made as to why the respondents would possess such collateral intentions of scaring away the petitioners’ investors. The Supreme Court in the case of Jasbir Singh Chhabra v. State of Punjab [2010] 4 SCC 192 has held that, while exercising the power of judicial review, the superior courts should not readily accept the charge of malus animus laid against the State and its functionaries. The burden to prove the charge of mala fides is always on the person who moves the court for invalidation of the action of the State and/or its agencies and the instrumentalities on the ground that the same is vitiated due to mala fides and the courts should resist the temptation of drawing dubious inferences of mala fides or bad faith on the basis of vague and bald allegations or inchoate pleadings. In the present case, except for general allegations, as stated hereinabove, no specific allegations of mala fides have been levelled against any particular officer to substantiate the said allegations. In the circumstances, the notices would not be rendered invalid on the ground of mala fides on the part of the Department. As regards the notices having been issued for the purpose of a roving inquiry, upon considering the nature of the information called for, vide the impugned notices, the court is of the view that the information called for cannot be stated to be irrelevant for the purpose of the inquiry which is required to be made by the concerned officer. Besides, considering the nature of the material collected during the course of search proceedings, it appears that there is sufficient reason for the concerned officer to call for the information, as stated in the notices under section 133(6) of the Act. The court has refrained from expressly stating the reasons for holding that the information sought for is relevant to the inquiry, as any comment in respect thereof may act to the prejudice of the petitioners. In the above circumstances, the challenge to the said notices must also fail.

17. In the light of the aforesaid discussion, the petition fails on both the counts. The court is of the view that the condition precedent for the exercise of powers under section 132(1) has been duly satisfied prior to issuance of authorization under section 132 of the Act ; and that there is sufficient reason for the concerned officer to call for the information as stated in notices under section 133(6) of the Act. The petitioners, therefore, are not entitled to the reliefs claimed in the petition. The petition is, therefore, dismissed with no order as to costs. Rule is discharged.

[Citation : 338 ITR 460]

Leave a Reply

Your email address will not be published. Required fields are marked *