2011 (12) TMI 59 - HC - Income Tax

Pray for quashing of the warrant of authorization for conducting search issued under Section 132 of IncomeTax Act 1961 and consequential action thereafter in issuing notices under Section 153A of the Act - satisfaction note running into seven pages - Held that - 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 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. - Decided in favor of assessee.

Summary

Issues Involved:
1. Validity of the warrant of authorization for conducting a search under Section 132 of the Income Tax Act, 1961.
2. Justifiability of the consequential notices issued under Section 153A of the Income Tax Act for the assessment years 2004-05 to 2009-10.

Detailed Analysis:

1. Validity of the Warrant of Authorization for Conducting a Search under Section 132 of the Income Tax Act, 1961:

The petitioners, a company and its directors, challenged the warrant of authorization issued under Section 132 of the Income Tax Act, 1961, claiming the absence of any material warranting such search action. They argued that they were regular in paying income tax, filing returns, and had produced all necessary documents. The petitioners contended that the search was a fishing expedition to find material to justify the company's rapid growth and to deny benefits under Section 80IA and Section 80IB. They emphasized that the department had no new information necessitating the search and that the satisfaction recorded under Section 132(1) was justiciable, requiring judicial review.

The respondents, representing the department, produced the Satisfaction Note file and argued that the search was necessary based on information gathered through discreet inquiries. They claimed that the satisfaction of any one of the authorities mentioned in Section 132 was sufficient to sustain the search. The court examined the satisfaction notes and found that the Assistant Director of Income Tax (Investigation), Nagpur, and other authorities had recorded their satisfaction, but the Director General of Income Tax (Investigation), Pune, who gave the final approval, did not record any personal satisfaction. The court noted that the satisfaction notes were not based on any new material but on existing information, and the entire exercise appeared to be a roving inquiry without a live link between the material and the formation of belief.

2. Justifiability of the Consequential Notices Issued under Section 153A of the Income Tax Act for the Assessment Years 2004-05 to 2009-10:

The petitioners argued that the search and the consequential notices under Section 153A were without jurisdiction as there was no new information justifying such action. They cited various judgments to support their claim that judicial review of the satisfaction recorded under Section 132 was open and that the search operations were illegal. The court examined the affidavits and satisfaction notes and found that the reasons for the search were based on existing information and not on any new material. The court concluded that the search was a roving exercise aimed at finding material to support the department's doubts about the company's rapid growth and high profit margins.

Conclusion:

The court allowed the petition, finding the authorization issued under Section 132 of the Income Tax Act, 1961, to be bad and unsustainable. Consequently, the search conducted from 19th June 2009 to 21st July 2009 was deemed illegal, and the notices issued under Section 153A on 16th February 2010 were also quashed. The court emphasized that the satisfaction note must be based on contemporaneous material and that the entire exercise must be transparent and justifiable. The court ruled that the search was a roving exercise without any new material, making the authorization and subsequent actions invalid. No costs were awarded.