2023 (8) TMI 162 - HC - Income Tax

Block assessment u/s 158BC - penalty levied u/s 158BFA - offences allegedly committed under section 276C and 277 r.w.s. 278B - HELD THAT - Since the satisfaction note which formed the very basis for issuance and authorisation of the search warrant u/s 132(1) has not been made available in spite of a specific direction given by the Tribunal way back on 17.06.2002 and repeated by this Hon ble Court on 30.06.2023 an adverse inference needs to be drawn in respect of the same especially having regard to the circumstances set out hereinbefore. Since, the Revenue has failed to produce the satisfaction note we have to and we hereby hold that the search action u/s 132(1) and, consequently, the block assessment order dated 31.12.1999 passed u/s 158BC, the order dated 04.10.2001 levying penalty u/s 158BFA and the Criminal Case filed by the Revenue before the 4th Court of the Additional Chief Metropolitan Magistrate at Esplanade Mumbai, which is now pending as renumbered Criminal Case before 38th Court of Additional Chief Metropolitan Magistrate cannot survive as they are all predicated on the existence of a valid search. The complaint being Criminal Case before 38th Court of Additional Chief Metropolitan Magistrate is quashed. Undoubtedly the contention of the Revenue that, even assuming that the search is to be held invalid the information or material gathered during the course thereof may be relied upon by them for making adjustment to the Assessee s income in an appropriate proceeding has merit. Assessee disputes that no new information or material has been gathered by the Revenue in the present case other than what is already available in its books of account, it is clarified that this order does not preclude the Revenue from taking any such proceedings as they may be so advised and to utilise the information or material in such proceeding against the assessee as is permissible in law.

Summary

Issues involved:
The issues involved in the judgment are related to the validity of a search and seizure action carried out under section 132(1) of the Income-tax Act, 1961, the subsequent block assessment order, penalty levied, and prosecution proceedings initiated based on the block assessment order.

Issue 1: Validity of the search and seizure action

The petitioner objected to the passing of the block assessment order, arguing that the jurisdictional pre-conditions in section 132(1) were not fulfilled. The Tribunal directed the Departmental Representative to produce the records containing the satisfaction recorded before the search was initiated. The Revenue failed to comply with this direction for six years, leading to a writ petition seeking to quash the order. The Court directed the Revenue to file the reasons to believe recorded before the search action was carried out, warning that non-production would invite an adverse inference.

Issue 2: Unavailability of satisfaction note

The Deputy Commissioner of Income tax filed an affidavit stating that most official records were destroyed in a fire incident, including the satisfaction note. The Court emphasized that the search and seizure action must have a valid reason, and the satisfaction note is crucial to justify the invasion of privacy and rights of the taxpayer. The Court highlighted that the existence of information and its relevance to the formation of belief is subject to judicial scrutiny.

Issue 3: Court's Decision

Due to the failure of the Revenue to produce the satisfaction note, the Court held that the search action, block assessment order, penalty, and related criminal case cannot survive as they are based on the existence of a valid search. The Court quashed the criminal case and directed the Tribunal to dispose of the pending appeal within 12 weeks. The Revenue was allowed to rely on information gathered during the search in future proceedings, if deemed necessary.