Kerala H.C : It is aggrieved by Ext. P2 order passed by the first respondent under s. 132(1) of the Act. The legality of the said order is under challenge in this writ petition.

High Court Of Kerala

Alleppey Financial Enterprises vs. Assistant Director Of Income Tax(Investigation) & Anr.

Sections 132(1), 132(4A), 132(5), 132(6), 132B

G. Sivarajan, J.

O.P. No. 1935 of 1997

15th October, 1998

Counsel Appeared

P.G.K. Warriyar & P. Balakrishnan, for the Petitioner : N.R.K. Nair, for the Respondent

JUDGMENT

G. SIVARAJAN, J. :

The matter arises under the IT Act, 1961 (hereinafter referred to as ‘the Act’). The petitioner is a partnership firm engaged in the business of money-lending. It is aggrieved by Ext. P2 order passed by the first respondent under s. 132(1) of the Act. The legality of the said order is under challenge in this writ petition.

The first respondent conducted a search of the business premises of the petitioner under s. 132 of the Act on 6th Jan., 1997, which continued on 7th Jan., 1997, also. Alleging that the petitioner had effected unaccounted loan transactions to the tune of Rs. 39,56,630 on the security of gold pledged by the customers the first respondent seized the said gold ornaments valued at Rs. 47,53,000.

The petitioner by representation dt. 11th Jan., 1997 (Ext. P3) requested the first respondent for return of the seized gold. The petitioner filed another representation on 13th Jan., 1997 (Ext. P4) to the second respondent also for the same relief. Since, according to the petitioner, there was no response from the respondents, the present writ petition is filed.

In the affidavit filed in support of the writ petition, it is stated that even assuming that a sum of Rs. 39,56,630 advanced by way of loan is unaccounted money and, therefore, undisclosed income, the tax payable thereon comes to only Rs. 24,00,000 as mandated by s. 113 r/w s. 158BA(2) of the Act. It is further stated that since it was urgently required to get back the above referred ornaments for meeting the petitioner’s obligations to its customers, it was prepared, without prejudice to its other contentions, to furnish collateral security to the extent of Rs. 24,00,000, as the same will secure the alleged interests of the Revenue. The petitioner has offered to furnish as security 22 cents of land in the Ernakulam City. A copy of the title deed in respect of the said property is produced as Ext. P5. The petitioner also produced a valuation report of the authorised valuer as Ext. P6, an encumbrance certificate as Ext. P7 and tax receipts as Exts. P8 and P9 in respect of the said property. CMP No. 3435 of 1997, which was a petition for interim direction was heard elaborately and an order was passed on 13th Feb., 1997 [reported as Alleppey Financial Enterprises vs. Asstt. Director of Income Tax (Investigation) & Anr. (1998) 144 CTR (Ker) 550]. The Court, prima facie, did not accept the contention of the petitioner that the pledged articles do not belong to it. This was on the basis of the decision of a Division Bench of the Madras High Court in Madras Pawn Brokers Assn. vs. State of Tamil Nadu (1995) 98 STC 457 (Mad). On that basis, it was observed that the action of the Department in seizing the jewels which represented undisclosed investment cannot be held to be illegal. The Court passed a conditional order directing the first respondent to release and hand over the gold ornaments and pledge forms and applications immediately on the petitioner furnishing bank guarantee for a sum of Rs. 47,53,000 to the satisfaction of the 1st respondent. Thereafter a statement was filed on behalf of the respondents. It is stated therein that the interim order passed in CMP 3435/97 was taken in appeal by the petitioner. It further stated as follows: “7. The search and seizure was conducted under the valid authorisation of the Director of Income-tax, Bangalore. The authorisation issued by the Director of Income-tax, Bangalore, who is not a party to the proceedings, being valid and with jurisdiction the execution/implementation of the warrant order by the respondent is equally valid and with jurisdiction. Except making a bald dogmatic assertion in a stereotyped legal jargon that the seizure order is illegal, unwarranted, unauthorised and beyond jurisdiction vested in the respondent (there are two respondents) the petitioner has not chosen to specify or pinpoint the illegality in any manner whatsoever. The allegations is vague and baseless. The issuance of warrant and the proceedings pursuant to the warrant of authorisation are legal and in accordance with law.”

7. Learned counsel appearing for the petitioner submitted that the seizure of the articles admittedly belonging to various customers, who had pledged the same with the petitioner as security for the loan sanctioned by it was wholly unauthorised and without jurisdiction. He further submitted that the power of search and seizure conferred under s. 132 of the Act is an extraordinary power, which must be exercised strictly within the four-corners of the said provision. It is stated that under cl. (c) of sub-s. (1) of s. 132, the authority can seize only jewellery representing either wholly or partly income or property belonging to the person in possession and since the seized gold ornaments admittedly do not belong to the petitioner the seizure of the same is illegal and unauthorised. In order to substantiate the same the counsel referred to the definition of income in s. 2(24) of the Act and submitted that the items which can be included in the said definition must be ejusdem generis to the items already mentioned in the said definition. On that basis he submitted that only amounts received and non-utilisation of the amounts in hand can represent income. The counsel also took me to the meaning of the word ‘represent’ from the Concise Oxford Dictionary. The submission of the counsel is that the officer authorised under s. 132 can seize only articles which belong to the person whose premises are searched by the said officer. He, in support of the said contention, further relied on the provisions of s. 132(4A)(i) of the Act. The counsel also drew my attention to the provisions of s. 132B Schedules II and III of the Act and r. 37 of the Rules. He also took me to the provisions of ss. 173 to 179 of the Indian Contract Act and the decision of the Gujarat High Court in CIT vs. Avkash Nidhi (1986) 51 CTR (Guj) 301 : (1986) 160 ITR 729 (Guj) : TC 23R.1440. He accordingly submitted that the first respondent acted wholly without jurisdiction in seizing the pawned articles from the possession of the petitioner. He further submitted that the respondents failed to consider the aforesaid circumstances in spite of it being brought to their notice in Exts. P3 and P4 petitions. N.R.K. Nair, learned standing counsel appearing for respondents submitted that there is no specific challenge to the search and seizure made by the first respondent and that all the officers concerned are not made parties in the Original Petition. He also submitted that all the arguments advanced by the petitioner had been considered in the order passed in CMP No. 3435/97. He further submitted that the petitioner had right over the gold ornaments to the extent of the loan amount and therefore it cannot be said that the gold jewellery does not represent undisclosed income of the petitioner. The counsel maintained that the presumption available under s. 132(4A) of the Act could be applicable. He further submitted that the petitioner has not pinpointed, having been stated as to how Ext. P2 order of seizure is illegal and unauthorised. He accordingly submitted that there is no merit in this Original Petition and the same is liable to be dismissed.

In order to consider the merits of the rival submissions, it is necessary to consider the relevant provisions of s. 132 of the Act under which Ext. P2 order is issued. The relevant portion of s. 132 (1) reads as follows: “132. Search and seizure—(1) Where the Director General or Director or the Chief CIT or CIT or any such Dy. Director or Dy. CIT as may be empowered in this behalf by the Board, in consequence of information in his possession, has reason to believe that— (a) ***** ***** ***** (b) ***** ***** ***** (c) any person is in possession of any money, bullion, jewellery or other valuable article or thing and such money, bullion, jewellery or other valuable article or thing represents either wholly or partly income or property which has not been, or would not be disclosed for the purposes of the Indian IT Act, 1922 (11 of 1922) or this Act (hereinafter in this section referred to as the undisclosed income or property). then— (A) the Director General or Director or the Chief CIT or CIT, as the case may be, may authorise any Dy. Director, Dy. CIT, Asstt. Director, Asstt. CIT or ITO, or (B) such Dy. Director or Dy. CIT, as the case may be, may authorise any Asstt. Director, Asstt. CIT or ITO, to— (i) ***** ***** ***** (ii) ***** ***** ***** (iia) ***** ***** ***** (iii) seize any such books of account, other documents, money, bullion, jewellery or other valuable article or thing found as a result of such search.”

In order to understand the scope of the above provision, it is also necessary to refer to certain other provisions of the Act. Sec. 132(4A)(i) reads as follows : “(4A) Where any books of account, other documents, money, bullion, jewellery or other valuable article or thing are or is found in the possession or control of any person in the course of a search, it may be presumed— (i) that such books of account, other documents, money, bullion, jewellery or other valuable article or thing belong or belongs to such person;” Sec. 132(5) excluding two provisos reads as follows: “(5) Where any money, bullion, jewellery or other valuable article or thing (hereafter in this section and in ss. 132A and 132B referred to as the assets) is seized under sub-s. (1) or sub-s. (1A), as a result of a search initiated or requisition made before the 1st day of July, 1995 the AO, after affording a reasonable opportunity to the person concerned of being heard and making such enquiry as may be prescribed, shall within one hundred and twenty days of the seizure, make an order, with the previous approval of the Dy. CIT,— (i) estimating the undisclosed income (including the income from the undisclosed property) in a summary manner to the best of his judgment on the basis of such materials as are available with him; (ii) calculating the amount of tax on the income so estimated in accordance with the provisions of the Indian IT Act, 1922 (11 of 1922), or this Act; (iia) determining the amount of interest payable and the amount of penalty imposable in accordance with the provisions of the Indian IT Act, 1922 (11 of 1922), or this Act, as if the order had been the order of regular assessment; (iii) specifying the amount that will be required to satisfy any existing liability under this Act and any one or more of the Acts specified in cl. (a) of sub-s. (1) of s. 230A in respect of which such person is in default or is deemed to be in default, and retain in his custody such assets or part thereof as are in his opinion sufficient to satisfy the aggregate of the amounts referred to in cls. (ii), (iia) and (iii) and forthwith release the remaining portion, if any, of the assets to the person from whose custody they were seized:” Sec. 132(6) reads as follows: “(6) The assets retained under sub-s. (5) may be dealt with in accordance with the provisions of s. 132B.” Sec. 132B, which deals with the disposal of the seized assets, also is relevant. Sec. 132B(1) and (3) reads as follows: “132B. Application of retained assets—(1) The assets retained under sub-s. (5) of s. 132 may be dealt with in the following manner, namely :(i) The amount of the existing liability referred to in cl. (iii) of the said sub-section and the amount of the liability determined on completion of the regular assessment or reassessment for all the assessment years relevant to the previous years to which the income referred to in cl. (i) of that sub-section relates (including any penalty levied or interest payable in connection with such assessment or reassessment) and in respect of which he is in default or is deemed to be in default may be recovered out of such assets. (ii) If the assets consist solely of money, or partly of money and partly of other assets, the AO may apply such money in the discharge of the liabilities referred to in cl. (i) and the assessee shall be discharged of such liability to the extent of the money so applied. (iii) The assets other than money may also be applied for the discharge of any such liability referred to in cl. (i) as remains undischarged and for this purpose such assets shall be deemed to be under distraint as if such distraint was effected by the AO or, as the case may be, TRO under authorisation from the Chief CIT, or CIT under sub-s. (b) of s. 226 and the AO or, as the case may be, TRO may recover the amount of such liabilities by the sale of such assets and such sale shall be effected in the manner laid down in the Third Schedule. (2) …………. (3) Any assets or proceeds thereof which remain after the liabilities referred to in cl. (i) of sub-s. (1) are discharged shall be forthwith made over or paid to the persons from whose custody the assets were seized.”

10. It is seen from cl. (c) of sub-s. (1) of s. 132 of the Act that for seizure of the gold articles under sub-cl. (iii) thereof, the same must be in the possession of the person from whom it is seized and that it must represent either wholly or partly income or property, which has not been or would not be disclosed for the purpose of the Act. There is no dispute that the gold ornaments seized belong to the customers, who had taken loan from the petitioner by offering the same as security. The question then is as to whether the gold ornaments admittedly pledged by the customers as security for the loan amount sanctioned can be treated as representing the income or property either wholly or partly of the petitioner. Since the petitioner had advanced loan to the customers on the security of gold ornaments pledged, it would, prima facie, appear that the gold ornaments in the possession of the petitioner represent income or property in part of the petitioner. However, it is necessary to consider with reference to the provisions of the other sub-sections of s. 132 and the provisions of s. 132B also as to whether the legislative intent by the use of the words ‘possession’ and ‘represents’ is to signify the ownership of the article seized or as to whether it only refers to the extent of the right over the said articles. The meanings of the word ‘represent’ in the Concise Oxford Dictionary of Current English, 7th Edition, edited by Sri. J.B. Sykes inter alia, are “(3) make out to be etc., allege that, describe or depict as, (5) symbolize, act as embodiment of, stand for, corresponding to, be specimen of”. In this context, sub-s. (4A)(i) of s. 132 is relevant which says that where any jewellery is found in the possession or control of any person in the course of a search, it may be presumed that such jewellery belong or belongs to such person. The above provision gives an indication that the jewellery that can be seized under the section must belong to the person in possession of the same. Sub-s. (5) also is relevant in that context. It provides for passing an order within a time frame for the continued retention of the seized assets to the extent it is necessary to satisfy the amount of tax, interest and other liabilities referred to in cls. (i) to (iii) of the said sub-section. Sub-s. (6) also says that the retained assets can be dealt with in accordance with the provisions of s. 132B.

11. The said sub-section provides for application of assets retained under sub-s. (5) of s. 132. Clause (iii) of sub-s. (1) of s. 132B provides that the assets other than money may also be applied for the discharge of the liabilities provided under cl. (i) of the said sub-section and for that purpose such assets shall be deemed to be under distraint as if such distraint was effected by the AO or, as the case may be, TRO under authorisation from the Chief CIT or CIT under sub-s. (5) of s. 226 and the said authorities may recover the amount of such liabilities by the sale of such assets. Sub-s. (3) also provides that if any assets or proceeds thereof which remain after the liabilities referred to in cl. (i) of sub-s. (1) are discharged, the same shall be made over or paid to the persons from whose custody the assets were seized. On a conspectus of the aforesaid provisions of the Act, it would appear that the legislative intent by using the words ‘possession’ and ‘represent’ in s. 132(1) is to denote the ownership of the gold ornaments to be seized. The various provisions which I have already referred to also lend support to the view that the authorities can seize only such of those gold ornaments which belong to the person in possession. It is for that reason the legislature has inserted sub-s. (4A) by the Taxation Laws (Amendment) Act, 1975 w.e.f. 1st Oct., 1975, by which it is presumed that the gold ornaments or other valuable articles or things found in the possession and control of any person in the course of a search belong or belongs to such person. The provisions of s. 132B which I have already referred to which says that the assets in the form of gold ornaments, etc. can be sold for realisation of the dues mentioned in cl. (i) of sub-s. (1) thereof also is indicative of the fact that the legislature assumes that the seized articles belong to the person from whom it is seized. It cannot be assumed or presumed that the legislature had intended to deal with a property which admittedly did not belong to the person from whose possession it was seized, in the manner specified in s. 132(5) and (6) r/w s. 132B or Schedules II and III of the Act. In these circumstances, I am of the view that the officer, who is authorised to conduct search under s. 132 of the Act is empowered to seize only such of those articles which absolutely belong to the person in possession of the same and no property which admittedly does not belong to the said person can be seized under s. 132 of the Act.

In the above background, it is necessary to consider as to what exactly are the rights of the petitioner over the gold ornaments pledged. Sec. 172 of the Indian Contract Act defines a “pledge” as the bailment of goods as security for payment of a debt or performance of a promise. Under s. 148 of the said Act, “bailment” is the delivery of goods by one person to another for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them. Sec. 173 of the said Act entitles a pawnee, the right to retain the goods pledged, not only for a payment of the debt or the performance of the promise, but also for the interest of the debt, and all necessary expenses incurred by him in respect of the possession or for the preservation of the goods pledged. Sec. 176 gives the pawnee a right to bring a suit against the pawner upon the debt or promise, and retain the goods pledged as a collateral security or sell the pledged goods after reasonable notice to the pawner, if the pawner makes default in payment of the debt or performance of the promise, at the stipulated time. Sec. 177 entitles a pawner to redeem the goods until the pawnee has exercised the right to sell the pledged goods. It also provides that if a time is stipulated for the payment of the debt, or performance of the promise, for which the pledge is made, and the pawner makes default in payment of the debt or performance of the promise at the stipulated time, he may redeem the goods pledged at any subsequent time before the actual sale of the same; but he must, in that case, pay, in addition, any expenses which have arisen from his default. From the aforesaid provisions it is clear that in a pledge, there must be a transfer of possession of goods to the pawnee by way of security for the payment of the debt. Regarding the nature of the right of the pawnee over the pledged articles, it will be useful to refer to the statement appearing on p. 218 of Halsbury’s Laws of England, 3rd Edn., Vol. 29, which reads as follows : “The pawnee has a special property or special interest in the thing pledged, while the general property therein continues in the owner. That special property or interest exists so that the pawnee can compel payment of the debt, or can sell the goods when the right to do so arises. This special property or interest is to be distinguished from the mere right of detention which the holder of a lien possesses, in that it is transferable in the sense that a pawnee may assign or pledge his special property or interest in the goods or may, as agent of the pawner, in due course, sell the goods…..” This statement was referred to by the Supreme Court in Bank of Bihar vs. State of Bihar (1971) 41 Comp. Cas. 591 (SC) and the Supreme Court observed that the pawnee has special property and lien which is not of ordinary nature on the goods and so long as his claim is not satisfied, no other creditor of the pawner has any right to take away the goods or its price. It would appear from the above statement that the pawnee has a right to retain possession of the pledged goods until the debt for which the pledge is a security is tendered or paid and that the security is available to the pawnee to satisfy the obligation in the event of the pawnee committing a default in payment of the debt due within the stipulated time. In other words, the pawnee has a special property in the thing pledged, while the general property continued to remain with the owner. This legal position is stated by the Bombay High Court in Percy F. Fisher vs. Ardeshir Hormasji Gazdar AIR 1935 Bom 213. The High Court of Rangoon in Dwarika vs. Bhagwati AIR 1939 Rang 413 had also stated the legal position as follows: “….a pledge confers a special interest in the property pledged, that is to say, a right to sell the property if the loan be not repaid. If the pledge sells, he does so by virtue and to the extent of the pledger’s ownership and not with a new title of his own. He only holds possession for the purpose of securing to himself the advance which he has made. The pledgee has no right of foreclosure since he never had the absolute ownership at law. In a mortgage, the right to the property is transferred to the creditor; in the case of a pledge, the pledge has no property in the pawn, but merely a right to sell.”

The Supreme Court in Lallan Prasad vs. Rahmat Ali AIR 1967 SC 1322 observed that once the debt is satisfied or the engagement extinguishes the pawn, the pawnee on such satisfaction is bound to deliver the property to the pawner and that the pawner has an absolute right to redeem the property pledged upon tender of the amount advanced but that right would be lost if the pawnee has in the meantime lawfully sold the property pledged. The Supreme Court further observed that the pawnee’s right of sale is derived from an implied authority from the pawner and such a sale is for the benefit of both the parties. The Court also observed that there was no difference between the common law of England and the codified law found in ss. 172 to 176 of the Contract Act.

14. A Division Bench of the Gujarat High Court in CIT vs. Avkash Nidhi (supra) had occasion to consider the said question in the context of pledging of certain shares of companies. In that context, His Lordship Justice A.M. Ahmadi (as His Lordship then was) considered the question with reference to the provisions of ss. 172 to 176 of the Contract Act and in the light of the decisions discussed hereinabove and observed as follows: “It will appear from the above discussion of the provisions of law and the decisions referred to that in the case of a pledge, the general property remains with the pawner and he is entitled to dividend, bonus and right issues, that is, to all accretions, since the title to the property does not pass to the pawnee. The pawnee has no property in the pawn. He has merely a right to sell if the debt is not discharged within the stipulated time. The security is one intermediate between a simple loan and a mortgage.”

The decision of the Madras High Court in Madras Pawn Brokers Association vs. State of Tamil Nadu (1995) 98

STC 457 relied in the CMP order also only states that the pledge has a special right over the pledged articles. If this is the legal position in so far as the rights of the pawnee in relation to the pawned articles it is not possible to hold that the IT Department can invoke the provisions of s. 132(6) r/w s. 132B, s. 266 and Schedules 2 and 3 of the IT Act, for as already stated, the said powers can be exercised only in relation to the properties absolutely belonged to the person from whom it is seized.

15. Coming to the facts of the present case, there is no dispute regarding the ownership of the seized gold ornaments. Admittedly the gold ornaments belong to the various customers to whom the petitioner had granted loans and they were pledged with the petitioner by way of security for the loan amount. In view of the fact that the petitioner admittedly is not the owner of the seized gold ornaments, notwithstanding the fact that it in a way represents the alleged unaccounted income of the petitioner, the respondents have no right to seize the said gold ornaments. It is so declared. I accordingly quash Ext. P-2 seizure order. The respondents are directed to return the gold ornaments together with the pledged forms seized under Ext. P-2 order. I make it clear that I have not considered the question as to whether the loans sanctioned by the petitioner to the various customers on the security of the pledged gold ornaments represent unaccounted or undisclosed income of the petitioner or not. If the respondents have a case that the loans so advanced represent undisclosed income, it is for the respondents to deal with the matter in accordance with law. It is also for the respondents to invoke the other provisions of law, if any, for safeguarding the interest of the Revenue.

The original petition is allowed as above.

[Citation: 236 ITR 562]

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