1973 (9) TMI 1 - HC - Income Tax

Validity of order - We hold that the order passed by the respondent in the inquiry under section 132(5) was illegal and void as it was passed in violation of the mandatory requirements of rule 112A(4) and in violation of the principles of natural justice. We therefore allow this special civil application and quash and set aside the order passed by the respondent as the same was illegal. As a consequence of quashing and setting aside the it will follow that the amount of Rs. 1, 70, 000 and 23 guineas which were seized by the respondent from the locker in the Surat People s Co-operative Bank must be returned to the petitioner. It will however be open to the respondent to adopt such proceedings as he can in law adopt as regards these two items. The respondent must pay the costs of this special civil application to the petitioner. Rule is made absolute accordingly. Mr. Kaji for the respondent applies that the operation of this order may be stayed for two weeks so that in the meanwhile an application for leave to appeal to the Supreme Court may be preferred. Operation of this order is stayed accordingly for a period of two weeks from to-day

Issues Involved:

1. Ownership of Rs. 1,70,000.
2. Validity of inquiry under Rule 112A of the Income-tax Rules, 1962.
3. Compliance with principles of natural justice.
4. Constitutionality of Section 132 of the Income-tax Act, 1961.
5. Validity of the order passed under Section 132(5) of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Ownership of Rs. 1,70,000:

The petitioner claimed that Rs. 1,70,000 seized during the raid belonged to Ratilal Desai, who had withdrawn Rs. 2,00,000 from the State Bank of Hyderabad and given Rs. 1,70,000 to the petitioner for investment in a partnership business. The petitioner produced a receipt mentioning the serial numbers of ten currency notes of Rs. 10,000 each. The respondent, however, concluded that the amount belonged to the petitioner, not Ratilal Desai, based on the examination of the petitioner's and Ratilal's books of accounts and a statement allegedly made by Ratilal Desai before the Commissioner of Income-tax, Gujarat II.

2. Validity of Inquiry under Rule 112A of the Income-tax Rules, 1962:

The petitioner contended that the inquiry conducted by the respondent was contrary to Rule 112A. Specifically, Rule 112A(4) was not complied with, as the respondent did not give notice of the material to be used against the petitioner nor a chance to cross-examine those whose statements were used against him. The court emphasized that compliance with Rule 112A(4) is mandatory, as it ensures adherence to principles of natural justice by providing the concerned person an opportunity to explain the material gathered against them.

3. Compliance with Principles of Natural Justice:

The court found that the respondent relied on statements made by Ratilal Desai before the Commissioner of Income-tax, Gujarat II, without disclosing these statements to the petitioner or giving him an opportunity to cross-examine Ratilal Desai. Additionally, the respondent used information gathered from searches of prize competition organizers without giving the petitioner a reasonable notice to show cause why this material should not be used against him. This failure to disclose material and provide an opportunity to explain constituted a violation of the principles of natural justice.

4. Constitutionality of Section 132 of the Income-tax Act, 1961:

The petitioner initially challenged the constitutionality of Section 132 but did not pursue this argument during the hearing. The court referenced a previous judgment in Ramjibhai Kalidas v. I G. Desai, which upheld the constitutionality of Section 132, stating that the provisions relating to search and seizure were reasonable restrictions in the interests of the general public and were not violative of Articles 14 and 19(1)(f) of the Constitution.

5. Validity of the Order Passed under Section 132(5) of the Income-tax Act, 1961:

The court held that the order passed by the respondent under Section 132(5) was illegal and void due to non-compliance with Rule 112A(4) and the principles of natural justice. The court emphasized that the inquiry prescribed under Rule 112A is a condition precedent to passing a valid order under Section 132(5). Since the mandatory requirements of Rule 112A were not satisfied, the order could not be sustained.

Conclusion:

The court quashed and set aside the order passed by the respondent on October 9, 1969, as it was illegal and void due to violations of Rule 112A(4) and the principles of natural justice. Consequently, the amount of Rs. 1,70,000 and 23 guineas seized from the petitioner's locker must be returned to the petitioner. The court allowed the respondent to adopt such proceedings as legally permissible regarding these items and ordered the respondent to pay the costs of the special civil application to the petitioner. The operation of this order was stayed for two weeks to allow the respondent to apply for leave to appeal to the Supreme Court.

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