2024 (8) TMI 503 - HC - Income Tax

Validity of search action u/s. 132 carried out at the residential premises as well as the office premises of the Petitioner - as alleged search being conducted in an unreasonable manner -respondents right to analyse the data of third party - Scope of protection as per the Explanation to Section 126 of the Evidence Act - As submitted that the respondent authorities cannot assume at the stage of seizure of the documents that all the information possessed by the petitioner in form of digital data and physical documents are incriminating in nature so as to conduct the search and seize all the data and thereafter intend to search and raid all the entities who are clients of the petitioner though they are third parties and not the targeted group contrary to the provisions of Section 126 of the Evidence Act and the doctrine of attorney-client privilege prevailing since ages - whether the satisfaction recorded by the respondent authority for initiation of the search proceedings are justified or not? HELD THAT - As on of the search by the competent authority in a sealed cover to this Court. Learned Additional Solicitor General has also provided copies of other seized materials and documents during the course of hearing to demonstrate that what is recorded in the satisfaction note prior to the search was actually found to be true during the course of search. We are, therefore, of the opinion that on perusal of the satisfaction recorded by the respondent authority for initiation of the search, it does not require any interference by this Court and this Court is satisfied for the satisfaction recorded by the respondent authority for initiation of the search against the petitioner and therefore, challenge by the petitioner to the search initiated under Section 132 of the Act would fail. Therefore, without going into the further details with regard to the submissions made by both the sides on pre-search action of the respondent authorities, we are of the opinion that the petition would fail so far as challenge to the search operation qua petitioner is concerned. Whether the respondents are entitled to use the seized materials in physical and digital form which, according to the respondent authorities, would be incriminating materials against any third party found during the course of search from the office and residential of the petitioner or not? - As in order to apply the provision of Section 126 of the Evidence Act read with keeping in mind the doctrine of attorney- client privilege, the respondent authorities can consider the documents which are incriminating which falls under Illustrations (b) and (c) of Section 126 of the Evidence Act. However, the documents which are found to be incriminating which would be covered by the Illustration (a) of provision of Section 126 cannot be utilised or no action can be taken upon such documents which are found to be incriminating which covered by Illustration (a). Meaning thereby that where the petitioner is found to be in possession of any document of his clients which, according to the respondents are incriminating prior to the employment of the petitioner in his legal capacity, then no action can be taken against such documents. Approach of the respondent authorities which is clarified on oath by respondent No.3 who is a Principal Director of Income Tax (Investigation), Ahmedabad, being a responsible officer for conducting search under the provisions of Section 132 of the Act, we are of the opinion that judicious discretion shall be exercised by the respondent authorities while arriving at the conclusion with regard to the incriminating documents falling under two categories viz. as per Illustration (a) of Section 126 and Illustrations (b) and (c) of Section 126 read with the Proviso to the said Section and thereafter abide by the aforesaid averments in the affidavit placed on record. It is true that initially this Court has shown apprehension as to who will decide the incriminating documents, if any, found during the course of search from the office and residential premises of the petitioner and suggestion was made to the respondents as to appointment of any independent agency as agreed before the Apex Court in the case of S.R. Batliboi 2009 (8) TMI 1293 - SUPREME COURT by the respondent Department. Additional Solicitor General objected to such suggestion of the Court and upon the instructions submitted that such practice would set a wrong precedence for unearthing the evasion of tax in the country and to curb the generation of black money in the economy and every assessee would take recourse to such precedence and therefore, the respondent authorities are not agreeable to such suggestion, as in the facts of the case of S.R. Batliboi 2009 (8) TMI 1293 - SUPREME COURT the documents and the papers were found during the course of search at the place of search of a third person and not at the place of search of a Chartered Accountant, whereas in the facts of the case, petitioner who is though a practicing advocate, but has been searched by valid initiation by invoking provision of Section 132 of the Act and this Court having been satisfied with regard to the initiation of the search in case of the petitioner, the discretion is vested in the respondent authorities who are the highest authority of the Income Tax Department to conduct the search for taking or not taking action upon the incriminating documents and if such discretion is exercised judiciously, we hope that no further litigation would arise in the case of third parties whose documents were found during the course of the search. However, it will be open for such third parties to raise all the contentions available under the law and observations made by this Court in the facts of the present case would not come in way if any action is taken by the respondent authorities against such third parties. Petition is disposed of. Rule is discharged.

Summary

Issues Involved:
1. Legality of the search initiated under Section 132 of the Income Tax Act.
2. Entitlement of the respondents to use the seized physical and digital data pertaining to third parties.
3. Applicability of attorney-client privilege under Section 126 of the Evidence Act.
4. Conduct of the search operation by the respondents.
5. Return and destruction of seized materials.

Detailed Analysis:

1. Legality of the Search Initiated Under Section 132 of the Income Tax Act:
The court upheld the initiation of the search under Section 132 of the Income Tax Act, 1961, as valid. The satisfaction note provided by the respondents, which was reviewed by the court, justified the initiation of the search. The court referred to the decision in Pooran Mal v. The Director of Inspection (Investigation), New Delhi (1974) 1 SCC 345, which established that search and seizure under Section 132, if accompanied by adequate safeguards, are constitutional. The court concluded that the respondents had "reason to believe" that the conditions stipulated under Section 132(1)(a), (b), and (c) were met, thus validating the search operation.

2. Entitlement of the Respondents to Use the Seized Physical and Digital Data Pertaining to Third Parties:
The court addressed whether the respondents could use the materials seized from the petitioner, an advocate, which pertained to third parties. The court referred to S.R. Batliboi & Co. v. Department of Income Tax (Investigation) (2009) 17 SCC 767, where it was held that the Income Tax Department cannot make a fishing or roving inquiry into third-party documents found during a search. The court emphasized that the doctrine of attorney-client privilege under Section 126 of the Evidence Act protects confidential communications between a client and an attorney. However, the court noted that this privilege does not extend to communications made in furtherance of any illegal purpose or fraud, as per the proviso to Section 126.

3. Applicability of Attorney-Client Privilege Under Section 126 of the Evidence Act:
The court held that while Section 126 of the Evidence Act provides for attorney-client privilege, this privilege is not absolute. The court distinguished between communications made in furtherance of an illegal purpose or fraud, which are not protected by privilege, and other confidential communications, which are protected. The court directed the respondents to judiciously separate incriminating documents falling under the proviso to Section 126 from those protected by attorney-client privilege. The court also referred to the decision in District Registrar and Collector, Hyderabad v. Canara Bank (2005) 1 SCC 496, which emphasized the confidentiality of documents and the right to privacy.

4. Conduct of the Search Operation by the Respondents:
The court found several instances of misconduct in the conduct of the search operation. The court criticized the high-handed actions of the respondents, particularly the coercion of Ms. Hima Patel, a lady advocate, and the inhumane treatment of the petitioner and his family members. The court noted that the respondents acted contrary to the guidelines and instructions for conducting searches, including the absence of a lady constable during the service of summons and the prolonged detention of the petitioner and his family members without just cause. The court deprecated these actions and directed the respondents to send an apology letter to Ms. Hima Patel.

5. Return and Destruction of Seized Materials:
The court addressed the petitioner's request for the return and destruction of the seized materials. The court directed the respondents to separate the incriminating data from the non-incriminating data and to seal the non-incriminating data in the presence of the petitioner. The court emphasized that the respondents must exercise judicious discretion in determining which documents are incriminating and fall under the proviso to Section 126 of the Evidence Act. The court also noted that the petitioner and his clients would have the opportunity to challenge any action taken by the respondents based on the seized documents.

Conclusion:
The court upheld the legality of the search but criticized the conduct of the search operation. The court directed the respondents to judiciously separate incriminating documents from those protected by attorney-client privilege and to return and seal the non-incriminating data. The court emphasized the need for the respondents to follow the guidelines and instructions for conducting searches and to respect the rights of individuals during search operations.