AUTHORISATION FOR SEARCH UNDER SECTION 132 OF INCOME TAX ACT, 1961

[Mr. M. GOVINDARAJAN]

Search and seizure

Section 132 of the Income Tax Act, 1961 (‘Act’ for short) provides that where the Principal Director General or Director General or Principal Director or Director or the Principal Chief Commissioner or Chief Commissioner or  Principal Commissioner or Commissioner or Additional Director or Additional Commissioner or Joint Director or Joint Commissioner, in consequence of information in his possession, has reason to believe that-

• any person to whom a summons under section 37 (1) of the Act, or section 131(1) of this Act, or a notice under section 22(4) of the Act, or under section 142(1) of this Act was issued to produce, or cause to be produced, any books of account or other documents has omitted or failed to produce, or cause to be produced, such books of account or other documents as required by such summons or notice, or
• any person to whom a summons or notice as aforesaid has been or might be issued will not, or would not, produce or cause to be produced, any books of account or other documents which will be useful for, or relevant to, any proceeding under the Act, or under this Act, or
• any person is in possession of any money, bullion, jewellery or other valuable article or thing and such money, bullion, jewellery or other valuable article or thing represents either wholly or partly income or property which has not been, or would not be, disclosed for the purposes of the Act

then the officer so authorized may-

• enter and search any building, place, vessel, vehicle or aircraft where he has reason to suspect that such books of account, other documents, money, bullion, jewellery or other valuable article or thing are kept;
• break open the lock of any door, box, locker, safe, almirah or other receptacle for exercising the powers where the keys thereof are not available;
• search any person who has got out of, or is about to get into, or is in, the building, place, vessel, vehicle or aircraft, if the authorized officer has reason to suspect that such person has secreted about his person any such books of account, other documents, money, bullion, jewellery or other valuable article or thing;
•  require any person who is found to be in possession or control of any books of account or other documents maintained in the form of electronic record as defined in section 2(1)(t) of the Information Technology Act, 2000 to afford the authorized officer the necessary facility to inspect such books of account or other documents;
• seize any such books of account, other documents, money, bullion, jewellery or other valuable article or thing found as a result of such search;
• place marks of identification on any books of account or other documents or make or cause to be made extracts or copies there from;
• make a note or an inventory of any such money, bullion, jewellery or other valuable article or thing.

The explanation to this section declared that the reason to believe, as recorded by the income-tax authority under this sub-section, shall not be disclosed to any person or any authority or the Appellate Tribunal.

Authorization

Section 132 makes it clear that the competent Income tax officer can cause search and investigation only on the authorization of the competent officer after recording the reasons for authorizing the search and seizure.  The reasons arrived at by the competent officers are not required to disclose to the assessee who is subjected to search and investigation or to any person or any authority or the Appellate Tribunal.

The Supreme Court confirmed the above in  PRINCIPAL DIRECTOR OF INCOME TAX (INVESTIGATION) & ORS. VERSUS LALJIBHAI KANJIBHAI MANDALIA - 2022 (7) TMI 639 - SUPREME COURT

In this case the assessee, respondent in this appeal, transferred a sum of Rs.10 crores on two occasions to Goan Recreation Clubs Private Limited during the year 2016.  The assessee became the director of the said company and his tenure ended very shortly.  The said Rs.10 crores has been repaid on different dates along with the interest.  The assessee filed income tax return showing Rs.42.54 lakhs as income and paid the tax.  The assessment was finalized on 02.03.2021.

Search was conducted in the residential premises of the assessee by the proper officers after getting proper authorization under section 132 on 10.08.2018 which continued till 03.00 am of 11.08.2018.   The satisfaction note was not supplied to the assessee.  The assessee filed a writ petition against this search before the High Court.  The assessee submitted the following before the High Court-

• It is a fishing enquiry and the conditions precedent as specified in Section 132 of the Act is not satisfied. 
• He was looking for an avenue to invest some money.
• Goan Recreation Clubs Private Limited was in need of finance for setting up of its business and hence consequently approached the assessee herein for a loan. 
• As a security, the borrower company offered that another company would give its property to the assessee. 

The Revenue submitted the following before the High Court-

• Goan Recreation Clubs Private Limited appeared in the credible information on high value cash deposits/ data of suspicious cash deposits post demonetization period disseminated by the DGIT(Inv.), wherein it was found that the said company had deposited cash to the tune of Rs.13,79,10,500/- into its two bank accounts maintained with ICICI Bank and HDFC Bank, North Goa.
•  It is noticed that the company raised huge unsecured loans within two years of its incorporation from various individuals and companies.
• The search and seizure operation in the premises of the petitioner was contemplated and carried out on the basis of the information gathered 
• The chain of events raises credible doubt on the transactions entered into by the petitioner with the company in question as it is the familiar modus operandi being practiced by the entry operators.
• It was concluded that the department initiated the search and seizure operation in the premises of the petitioner after conforming to all the criteria mentioned in the Section 132 sub-section 1 clause (s), (b) and (c) of the Income Tax Act, 1961.
• The search and seizure action was initiated after detailed analysis of information, duly recording of reasons in the satisfaction note prepared by DDIT (Investigation), Unit-1, Jalpaiguri was approved by Additional Director of Income Tax (Investigation) Unit- 5, Kolkata and further approved by DGIT (Investigation), Kolkata on 07.08.2018. 
• The apparent investment made by the petitioner is found to be not a judicious investment choice from the point of view of a prudent business man as the company to which the petitioner provided loan, had no established business, no goodwill in the market, nor was it enlisted in any of the stock exchanges, nor did the petitioner have had any financial dealings with the company previously. 
• The quick repayment of the loan shows that the investment was not meant to earn steady interest income.
• All this goes on to suggest that the investment and nature of transaction entered into by the petitioner was akin to the familiar modus operandi being employed by the entry operators to provide an accommodation entry to bring the unaccounted black money to books for brief period to run the business till sufficient fund is generated by running the business or some fund from any other unaccounted source came later on. 

The High Court observed that there is nothing on record to indicate that any belief has been formed by the competent authority to the effect that the petitioner has in his possession any money, bullion, jewellery or other valuable article or thing which would not have been disclosed by him for the purposes of the Act. On the contrary, in the facts of the present case, from the record of the case as produced by the respondents as well as by the petitioner, it is evident that the loan transaction whereby the petitioner had advanced Rs.10,00,00,000/- to the borrower company has been duly reflected in the books of account of the petitioner. In his return of income, the petitioner has duly shown the interest income from such transaction. The tax deducted at source in respect of such interest income, has been credited to the account of the petitioner by the concerned authority. Therefore, the entire transaction has been disclosed by the petitioner. There is no other material on record on the basis the respondents could have formed the belief as contemplated under section 132(1)(c) of the Act. Evidently, therefore the circumstance envisaged under section 132(1)(c) of the Act also does not exist in the present case. Therefore the High Court quashed the search and consequently, all actions taken pursuant to such warrant of authorization were ordered to be rendered invalid.

The Revenue challenged the order of High Court before the Supreme Court.  The Revenue contended the following before the Supreme Court-

• The chain of events raised credible doubt on the transaction entered into by the petitioner (assessee) with the company in question as it is the familiar modus operandi being practiced by the entry operators.
• The assessee was not expected to comply with the notice of the Revenue as the assessee would have brought the alibi of jurisdiction to evade or not comply with the notice.
•  It was in the interest of revenue that it was not expected to disclose to any outside agency/body or to any of the members directly or indirectly involved in the cob-web of financial transactions with the core groups,
• The apparent investment made by the assessee was found to be not a judicious investment choice from the point of view of a prudent businessman as the company to which loan was provided by the assessee had no established business, no goodwill in the market, nor was it enlisted in any of the stock exchanges, nor did the assessee had any financial dealings with the company previously. 
• The investment and nature of transaction entered into by the assessee was akin to the familiar modus operandi employed by the entry operators to provide an accommodation entry to bring the unaccounted black money to books for brief period to run the business till sufficient fund is generated by running the business or some fund from any other unaccounted source comes later on.
• The High Court has completely misdirected itself in quashing the authorization as the jurisdiction of the High Court while exercising judicial review is very limited.
• Though it is open to the Court to examine the question whether ‘reasons to believe’ have any rational connection or a relevant bearing to the formation of the belief and that such reasons are not extraneous or irrelevant as the officer has to produce relevant evidence to sustain his belief in case the reasons to believe are questioned in court, however, the jurisdiction of the High Court is only to examine the existence of reasons not the legality of the same.

The respondent assessee submitted the following before the Supreme Court-

• The High Court has rightly held that none of the pre-requisite conditions for search and seizure under Section 132 of the Act are satisfied.
• Since the view of the High Court is based upon established principles of law, no case for interference is made out in the present appeal under Article 136 of the Constitution of India. 

The Supreme Court considered the submissions made by the parties to the present appeal.  The Supreme Court observed that the detailed satisfaction note shows multiple entries in the account books of Sarju Sharma and others. The manner of Sarju Sharma who was either in Siliguri (West Bengal) or in Goa contacting the assessee in Ahmedabad for a loan of Rs.10 crores does not appear to be a normal transaction. Subsequent repayment of mortgage and the interest income reflected in the relevant assessment year appears to be the steps taken by the assessee to give a color of genuineness but the stand of the Revenue that such entry was an accommodation entry is required to be found out and also the cobweb of entries required to be unraveled including the trail of the money paid by the assessee.

The Supreme Court further observed that the reasons to believe are not the final conclusions which the revenue would arrive at while framing block assessment in terms of Chapter XIV-B of the Act. The test to consider the justiciability of belief is whether such reasons are totally irrelevant or whimsical. The reply in the counter affidavit shows that the intention of the Revenue was to un-layer the layering of money which is suspected to be done by the assessee. The Revenue has asserted that the accommodation entry is a common modus operandi to bring the unaccounted black money to books for a brief period. The investment of Rs.10 crores for a short period was not for earning interest income as the same was repaid in the same assessment year. The Revenue intends to investigate the fund trail of the money paid by the assessee. Such belief is not out of hat or whimsical. The assessee’s stand is that it is fishing enquiry and not a mala fide action of the Revenue. The Revenue is specific so as to find out the genuineness of the transaction believing that it was a mere accommodation entry.

It is not unreasonable for the Revenue to apprehend that the assessee would not respond to the summons before the Assessing Officer in the State of West Bengal. It was also alleged that such summons would lead to disclosure of information collected by the Revenue against Sarju Sharma and his group. Therefore, it was a reasonable belief drawn by the Revenue that the assessee shall not produce or cause to be produced any books of accounts or other documents which would be useful or relevant to the proceedings under the Act. Such believe was not based upon conjectures but on a bona-fide opinion framed in the ordinary conduct of the affairs by the assessee generally. The notice to the assessee to appear before the Income Tax authorities in the State of West Bengal would have been sufficient notice of the material against the Company and its group, to defeat the entire attempt to unearth the cobweb of the accounts by the Company and its associates.

 The assessee was in possession of Rs.10 crores which was advanced as loan to the Company. The Revenue wishes to find out as to whether such amount is an undisclosed income which would include the sources from which such amount of Rs.10 crores was advanced as loan to a totally stranger person, unconnected with either the affairs of assessee or any other link, to justify as to how a person in Ahmadabad has advanced Rs.10 crores to the Company situated at Kolkata in West Bengal for the purpose of investment in Goa. The Revenue may fail or succeed but that would not be a reason to interfere with the search and seizure operations at the threshold, denying an opportunity to the Revenue to unravel the mystery surrounding the investment made by the assessee.

The Supreme Court elaborated the principles in exercising the writ jurisdiction in the matter of search and seizure under Section 132 of the Act as follows-

• The formation of opinion and the reasons to believe recorded is not a judicial or quasi-judicial function but administrative in character.
• The information must be in possession of the authorized official on the basis of the material and that the formation of opinion must be honest and bona fide. It cannot be merely pretence. Consideration of any extraneous or irrelevant material would vitiate the belief/satisfaction.
• The authority must have information in its possession on the basis of which a reasonable belief can be founded 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 such person will not produce such books of accounts or other documents even if summons or notice is issued to him. or
• Such person is in possession of any money, bullion, jewellery or other valuable article which represents either wholly or partly income or property which has not been or would not be disclosed.
• 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 the formation of the belief, though not the sufficiency or adequacy thereof. In other words, the Court will examine whether the reasons recorded are actuated by mala fides or on a mere pretence and that no extraneous or irrelevant material has been considered.
• Such reasons forming part of the satisfaction note are to satisfy the judicial consciousness of the Court and any part of such satisfaction note is not to be made part of the order.
• The question as to whether such reasons are adequate or not are not a matter for the Court to review in a writ petition. The sufficiency of the grounds which induced the competent authority to act is not a justifiable issue.
• The relevance of the reasons for the formation of the belief is to be tested by the judicial restraint as in administrative action as the Court does not sit as a Court of appeal but merely reviews the manner in which the decision was made. The Court shall not examine the sufficiency or adequacy thereof.
• In terms of the explanation inserted by the Finance Act, 2017 with retrospective effect from 1.4.1962, such reasons to believe as recorded by income tax authorities are not required to be disclosed to any person or any authority or the Appellate Tribunal.

The Supreme Court held that the High Court was not justified in setting aside the authorization of search dated 07.08.2018.   Therefore the appeal was allowed and the order passed by the High Court is set aside. As a consequence thereof, the Revenue would be at liberty to proceed against the assessee in accordance with law.