2024 (5) TMI 709 - HC - Income Tax

Validity of search and seizure u/s 132 - Information and material enough to indicate a reason to believe or not? - Whether reasonable belief founded to initiate search proceedings? - HELD THAT - Authority must have information in his possession on the basis of which a reasonable belief can be founded that the person concerned has omitted or failed to produce the books of accounts or other documents for production of which summons or notice has been issued or such person will not produce such books of accounts or other documents even if summons of notice is issued to him, or such person is in possession of any money, bullion or other valuable articles which represents either wholly or partly income or property which has not been or would not be disclosed, is the foundation to exercise the power under Section 132 of the said Act. The Apex Court in Laljibhai Kanjibhai Mandalia 2022 (7) TMI 639 - SUPREME COURT and in Spacewood Furnishers Pvt Ltd. 2011 (12) TMI 59 - BOMBAY HIGH COURT has specifically held that such reasons may have to be placed before the High Court in the event of a challenge to formation of the belief of the Competent Authority in which event the Court would be entitled to examine the reasons for formation of the belief, though not the sufficiency or adequacy thereof. It is also necessary to note that no notice or summons have been issued to petitioners calling for any information from them at any point of time earlier to the action under Section 132 (1) of the Act to give rise to an apprehension of non-compliance by petitioners justifying action under Section 132 (1) of the Act. Therefore, no reasonable belief can be formed that the person concerned has omitted or failed to produce books of accounts or other documents for production of which summons or notice had been issued, or that such person will not produce such books of accounts or other documents even if summons or notice is issued to him. We agree with the view expressed in Balkrushma Gopalrao Buty 2024 (5) TMI 609 - BOMBAY HIGH COURT that respondents cannot rely upon what has been unearthed pursuant to the search and seizure action as the information giving a reason to believe as contemplated under Section 132 (1) of the said Act must be prior to such seizure. We have read the contents of the file of the department given to us in a sealed envelope by counsel for respondents, it does not disclose any information which would lead the Authorities to have a reason to believe that any of the contingencies as contemplated by Section 132 (1)(a) to (c) of the said Act are satisfied. The reasons recorded, in our view, only indicates a mere pretence. The material considered is irrelevant and unrelated. We are unable to sustain the action of respondents taken u/s 132 (1) of the Act. The same is, therefore, quashed and set aside. As a result, all consequent actions and notices cannot be sustained and accordingly quashed and set aside. Decided in favour of assessee.

Summary

Issues Involved:
1. Legality of the search action u/s 132 of the Income Tax Act.
2. Validity of the authorizations issued for the search.
3. Compliance with procedural safeguards.
4. Disclosure of reasons for the search.

Summary:

1. Legality of the Search Action u/s 132:
The court examined whether the search action initiated under Section 132 of the Income Tax Act was justified. The petitioners argued that the authorizations for the search were unconstitutional, ultra vires, invalid, and without jurisdiction. They contended that the search was conducted without any reliable information or verified preliminary enquiry, rendering the action bad in law. The court found that the respondents failed to establish a reasonable belief that the conditions mentioned in Section 132(1)(a) to (c) were satisfied, making the search and seizure invalid.

2. Validity of the Authorizations Issued for the Search:
Petitioners challenged the authorizations dated 7th July 2008, arguing that they were issued without any reliable information or preliminary enquiry. The court reviewed the contents of the file provided by the respondents and concluded that the material considered was irrelevant and unrelated. The reasons recorded indicated a mere pretence, and the satisfaction note did not demonstrate a process of forming a reasonable belief. Therefore, the authorizations did not fulfill the jurisdictional pre-conditions specified in Section 132 of the Act.

3. Compliance with Procedural Safeguards:
The petitioners argued that the search was conducted without observing the safeguards provided in Section 132, making it illegal. The court agreed, noting that no notice or summons had been issued to the petitioners prior to the search, which could have justified an apprehension of non-compliance. The court emphasized that the information giving rise to a reason to believe must be prior to the seizure, and respondents cannot rely on what was unearthed during the search.

4. Disclosure of Reasons for the Search:
The petitioners requested the disclosure of the satisfaction note and the information leading to the search. The respondents opposed this, citing the decision in Principal Director of Income - tax (Investigation) Vs. Laljibhai Kanjibhai Mandalia and the Explanation inserted in Section 132(1) by the Finance Act 2017, which states that the reasons for the belief shall not be disclosed. The court examined the reasons in a sealed envelope and found them to be general and insufficient to justify the search. The court held that the reasons forming part of the satisfaction note must satisfy judicial conscience, which was not the case here.

Conclusion:
The court quashed and set aside the search action and all consequent actions and notices under Section 132(1) of the Act due to non-compliance with the jurisdictional pre-conditions and lack of a reasonable belief based on relevant information. However, it clarified that the revenue could still use the information or material gathered during the search in appropriate proceedings against the assessee as permissible by law.

Orders:
- The search and seizure action under Section 132(1) was quashed.
- All consequent actions and notices were set aside.
- The bank guarantee provided by the petitioner was to be returned within four weeks.