1981 (1) TMI 24 - HC - Income Tax

Summary

Issues Involved:
1. Legality of the search and seizure under Section 132 of the Income Tax Act, 1961.
2. Validity of the transfer order under Section 127 of the Income Tax Act, 1961.
3. Requirement of recording and communicating reasons for the search and seizure.
4. Assessment of concealed income and imposition of tax and penalty under Section 132(5).
5. Compliance with principles of natural justice and application of mind in the issuance of search warrants.

Detailed Analysis:

1. Legality of the Search and Seizure under Section 132 of the Income Tax Act, 1961:
The petitioner challenged the searches and seizure at his business and residence, arguing that the conditions precedent for the exercise of power under Section 132(1) were not fulfilled. The court examined the authorisation and noted that the reasons recorded were not supplied to the petitioner initially. The reasons provided later indicated that there was "specific information" about unaccounted money and jewellery, but the nature, source, and credibility of the information were not detailed. The court held that the Director of Inspection must have information leading to a reasonable belief, which was not adequately demonstrated in this case. The court found that the authorisation lacked proper application of mind and was thus invalid.

2. Validity of the Transfer Order under Section 127 of the Income Tax Act, 1961:
The petitioner contended that the transfer of his case from one Income Tax Officer (ITO) to another without giving an opportunity of hearing was invalid. The court referred to the proviso to Section 127(1), which allows certain transfers within the same city or locality without a hearing. The court cited various Supreme Court decisions, including Bidi Supply Co. v. Union of India and Pannalal Binjraj v. Union of India, which upheld the validity of such transfers. The court concluded that the transfer order and the corrigendum issued were valid and did not violate the principles of natural justice.

3. Requirement of Recording and Communicating Reasons for the Search and Seizure:
The petitioner argued that the reasons for the search and seizure were not recorded or communicated, violating the mandatory requirement under Section 132. The court agreed, noting that the reasons must be recorded and communicated to ensure transparency and accountability. The court cited the Supreme Court's decision in Ajantha Industries v. CBDT, which emphasized the necessity of recording and communicating reasons. The court found that the failure to do so in this case rendered the search and seizure invalid.

4. Assessment of Concealed Income and Imposition of Tax and Penalty under Section 132(5):
The petitioner challenged the summary assessment under Section 132(5), arguing that the entire value of the seized assets was treated as concealed income without proper explanation. The court noted that even in a best judgment assessment, the officer must apply his judgment and not merely add the amounts on the ground that the petitioner could not explain the source. The court referred to the Supreme Court's observations in State of Kerala v. C. Velukutty and State of Orissa v. Maharaja B. P. Singh Deo, emphasizing the need for a fair assessment. The court set aside the assessment order and directed the ITO to make a fresh assessment after giving the petitioner an opportunity to explain the amounts.

5. Compliance with Principles of Natural Justice and Application of Mind in the Issuance of Search Warrants:
The court observed that the search warrants were issued in a laconic manner without striking out irrelevant portions, indicating non-application of mind. The court cited the Supreme Court's decision in V. S. Kuttan Pillai v. Ramakrishnan, which stressed the need for specific and focused search warrants. The court found that the issuance of stereotyped authorisations without proper consideration violated the principles of natural justice.

Conclusion:
The court set aside the orders under Sections 132(5) and 132(12) and directed the ITO to make a fresh assessment within six months, giving the petitioner a reasonable opportunity to explain the seized amounts. The assets were to be retained for this period, and if the assessment was not completed within six months, the assets were to be returned to the petitioner. The rule was disposed of accordingly, with no order as to costs.