2009 (5) TMI 36 - HC - Income Tax

While audit of EMAAR, laptops were seized Petitioner on request of Deputy Director, Income Tax (DDIT) provided the electronic data relating to three companies of the EMAAR Group together with the print copies of the data. Nevertheless, the DDIT insisted on securing total and unrestricted access to the laptops obviously in order to gain information and data of all the other clients of the Petitioner held that Revenue is not empowered to make use of material stumbled in a Search against a third party - impugned summons are set aside, and Respondents are directed to return the laptops to Petitioner

Summary

Issues Involved:
1. Legality of seizure of laptops by the Income Tax Department.
2. Petitioner's obligation to provide passwords under Section 275B of the Income Tax Act.
3. Confidentiality and professional ethics concerning data of other clients.
4. Scope of Section 153C of the Income Tax Act regarding third-party information.
5. Validity of the search and seizure operation under Section 132 of the Income Tax Act.
6. Indiscriminate seizure and its implications on personal liberty and privacy.

Issue-wise Detailed Analysis:

1. Legality of Seizure of Laptops by the Income Tax Department:
The Petitioner, S.R. Batliboi & Co., contested the seizure of two laptops by the Deputy Director of Income Tax (DDIT) during a search and seizure operation against EMAAR. The laptops contained data of multiple clients, and the Petitioner argued that the seizure was illegal as it included data unrelated to EMAAR. The court noted that the DDIT had issued summons under Section 131 of the Income Tax Act, but there was no indication that the necessary notice under Section 132 had been served upon the Petitioner, making the seizure questionable.

2. Petitioner's Obligation to Provide Passwords under Section 275B of the Income Tax Act:
The Respondents argued that the Petitioner was obligated to provide the passwords for the laptops under Section 275B, which mandates providing necessary facilities for inspection. The court, however, clarified that Section 275B only contemplates access to, not seizure of, the books or materials. Since the notice under Section 132 was not served, the application of Section 275B was deemed otiose.

3. Confidentiality and Professional Ethics Concerning Data of Other Clients:
The Petitioner contended that providing unrestricted access to the laptops would breach the confidentiality of their other clients, violating the code of ethics under the Chartered Accountants Act, 1949. The court acknowledged that granting absolute access to all data, including that of unrelated clients, would constitute professional misconduct and breach confidentiality principles.

4. Scope of Section 153C of the Income Tax Act Regarding Third-Party Information:
The Respondents argued that under Section 153C, the IT Department could seize data belonging to third parties if found during a search. The court disagreed, stating that Section 153C applies only to assessments of income of persons connected with the Assessee. It emphasized that the provision does not empower the seizure of data unrelated to the Assessee, as it would violate fundamental rights under Articles 14 and 19.

5. Validity of the Search and Seizure Operation under Section 132 of the Income Tax Act:
The court reiterated that the powers of search and seizure under Section 132 are extensive but must be exercised with safeguards. The authorized officer must have reasons to believe the necessity of the search, and the operation should not be arbitrary or for ulterior motives. The court cited precedents, emphasizing that the search must not be a roving or fishing exercise and must be based on specific information.

6. Indiscriminate Seizure and Its Implications on Personal Liberty and Privacy:
The court highlighted that indiscriminate seizure violates personal liberty and privacy, which can be challenged under Article 226 of the Constitution. It referred to precedents where indiscriminate seizures were deemed beyond the scope of authorization and emphasized that the seizure must be relevant to the proceedings in question. The court concluded that the seizure of laptops containing data of unrelated clients was indiscriminate and violated the Petitioner's rights.

Conclusion:
The court set aside the impugned summons and directed the Respondents to return the laptops to the Petitioner. The Petition was allowed, emphasizing the need for specific and justified search and seizure operations, respecting professional confidentiality and personal privacy.