2011 (8) TMI 678 - HC - Income Tax

Prohibitory order under 132(3) - Order issued for the purpose of finding out whether any transaction made in bank accounts represents undisclosed income of the assessees - AO called for relevant record - Held That - Revenue has not recorded any reason to conclude that any deposit/transaction in the bank accounts in question has not been passed through regular books of account and/or undisclosed income of the petitioners (wholly or partly) has been parked in the said accounts. - In view of Om Parkash Jindal v. Union of India (1975 -TMI - 39333 - Punjab AND Haryana High Court) and Sriram Jaiswal v. Union of India (1988 - TMI - 24516 - ALLAHABAD High Court), prohibitory order under section 132(3) of the Act issued in respect of bank accounts without forming any belief or without any material on record to conclude that the amount deposited in such bank accounts is either wholly or partly undisclosed income of the petitioner is not sustainable in law. - decided in favour of assessee.

Summary

Issues Involved:

1. Validity of the prohibitory order issued under section 132(3) of the Income-tax Act, 1961.
2. Whether the Assessing Officer formed a prima facie opinion that the money deposited in various bank accounts represents undisclosed income of the assessee-petitioners.

Detailed Analysis:

Issue 1: Validity of the Prohibitory Order Issued Under Section 132(3) of the Income-tax Act, 1961

The petitioners challenged the prohibitory order dated July 6, 2011, issued under section 132(3) of the Income-tax Act, 1961, which restrained them from operating their bank accounts. The petitioners argued that the prohibitory order was illegal and issued without jurisdiction. They contended that the accounts were regular business accounts disclosed in their income-tax returns and that there was no undisclosed income in these accounts. The petitioners faced severe business disruptions due to the prohibitory order, including the inability to pay employees and statutory dues.

The court examined the provisions of section 132(3) of the Act, which allows the authorized officer to issue a prohibitory order when it is not practicable to seize certain assets during a search. The court emphasized that the authorized officer must have a reason to believe that the assets represent undisclosed income. The court referred to its previous judgment in Visa Comtrade Ltd. v. Union of India, highlighting that the seizure of a bank account should not be done without proper application of mind and recording of reasons that the money in the account represents undisclosed income.

The court found that the Income-tax Department did not provide any material or recorded reasons to show that the deposits in the petitioners' bank accounts were undisclosed income. The court concluded that the prohibitory order issued under section 132(3) was not valid as it was issued without forming a belief that the money in the accounts was undisclosed income. The court quashed the prohibitory order in respect of the bank accounts but directed the authorized officer to take a final decision regarding lockers and safe deposit articles after giving the petitioners an opportunity to be heard.

Issue 2: Whether the Assessing Officer Formed a Prima Facie Opinion that the Money Deposited in Various Bank Accounts Represents Undisclosed Income of the Assessee-Petitioners

The court examined whether the Assessing Officer had formed any prima facie opinion based on the materials on record that the money deposited in the petitioners' bank accounts represented undisclosed income. The court noted that the Income-tax Department's stand was that the prohibitory order was issued to verify whether the transactions in the accounts represented undisclosed income. The court found that the Department had not recorded any reason or formed any belief that the deposits in the bank accounts were undisclosed income before issuing the prohibitory order.

The court referred to the judgment of the Supreme Court in the case of Seth Brothers, which held that the power under section 132 must be exercised strictly in accordance with the law and only for the purposes authorized by the law. The court concluded that the prohibitory order issued without forming a belief or recording reasons that the money in the bank accounts was undisclosed income was not sustainable in law.

Conclusion:

The court quashed the prohibitory order dated July 6, 2011, issued under section 132(3) of the Income-tax Act in respect of the petitioners' bank accounts. The court directed the authorized officer to take a final decision regarding lockers and safe deposit articles after giving the petitioners an opportunity to be heard. The court clarified that its observations were confined to the prohibitory order under section 132(3) and did not express any opinion on the validity of the search and seizure operation conducted by the Income-tax Department. The court allowed the writ petitions to the extent indicated and made no order as to costs.