Challenge to Validity of Search Action

[Bharat Agarwal]

Introduction:

A search and seizure action u/s 132 of the Income Tax Act, 1961 is often riddled with controversies. In recent times the instances where the courts have quashed search and seizure actions have increased. This has encouraged the person searched to challenge the validity of action of the department with increased frequency. The courts have intervened in many cases where the action has been taken de hors the safeguards provided by the statute. Though irregularity in the process of search has been ignored by the courts, yet the genesis of “reason to believe” or satisfaction and issuance of warrant on half baked information has been frowned upon.

Issue:

A question raised often is whether challenge to action u/s 132 of the Act can be made while challenging the search assessment before the appellate authorities i.e. CIT(A) and / or ITAT or whether it can be challenged only before the High Courts in a writ jurisdiction under Article 226 of the Constitution. The courts have broadly differed in their approach which are being discussed hereunder.

Judicial Cleavage:

Currently, there is no decision of apex court available in the matter. The High Courts have differed in their views. This has encouraged forum shopping within the person searched. In some instances the person searched has filed writ in the high court and have also agitated the issue through  grounds in their appeal memo before the appellate courts. The high court of Punjab and Haryana, Allahbad and Delhi have held that validity of search action cannot be adjudicated by the appellate courts. However, the High Court of Karnataka and Rajasthan have taken a view which is opposite and have held that the appellate courts are within their rights to adjudicate and check the existence of conditions for issuance of warrant. According to Karnataka and Rajasthan High Courts the search assessments are as a result of search action and therefore the validity of search can be adjudicated for effective and complete adjudication of search assessment. Some writ petitions against the search action have been dismissed by the courts holding that there is adequate remedy before appellate authority and hence no writ lies in the matter.  The Punjab and Haryana High Court had in a writ refused to interfere in the search action holding that the assessee can approach the appellate forums, thereby creating a situation in the mind of assessee that the search can be challenged under normal appellate mechanism.

The earliest decision on the controversy is of the special bench of ITAT in the case of Promain Ltd vs. DCIT   2005 (6) TMI 224 - ITAT DELHI wherein the special bench held that there cannot be any challenge to search action before the ITAT. It held that no specific right of appeal is conferred on a party under the Income Tax Act and hence only writ can be filed before the High Court. A person cannot claim the right of appeal as a statutory right and only if it is provided under the statute that the said appeal can be entertained. It further held that the search action is an administrative act which does not require any prior opportunity of hearing. It is an action guided by public policy. On the other hand the search assessment is an act of assessing officer. The statute has accordingly provided an appeal against the act of the assessing officer which is a quasi judicial act and not against the search action which is an administrative action. It is pari materia to the action u/s 148 of the Act where past assessments are reopened. There too the statute has provided the remedy against the action of assessing officer who initiates the reassessment as well as passes assessment order. Therefore, the act of reopening of assessment by assessing officer is challengeable before the ITAT. The Special Bench however held that since ITAT is the final fact finding authority it has the duty to check whether any warrant of authorisation actually existed in the name of the appellant. Beyond that the appellate authority cannot try and determine whether the reasons existed for issuance of such warrant.

Prior to the decision of special bench by Delhi ITAT, the Delhi High Court in the case of M.B Lal vs. CIT 2005 (9) TMI 64 - DELHI High Court referred to the decision of the appellate tribunal in the case of Bangalore ITAT in the case of C. Ramaiah Reddy 2003 (7) TMI 260 - ITAT BANGALORE and held that the search action cannot be challenged before appellate authority. It held that since incriminating documents and cash was found  it meant that the satisfaction recorded by the Director of income tax prior to issuance of warrant was proper.

Incidentally, the decision of the Bangalore ITAT was subsequently set aside by the Karnataka High Court in the case of C. Ramaiah Reddy vs. ACIT 2010 (9) TMI 862 - Karnataka High Court . While setting aside the decision of the Bangalore ITAT the high court held that the validity of search can be challenged before the ITAT. It agreed that right to appeal was conferred by statute and could not be claimed as a fundamental right. However it further held that wherever such right has been provided in statute it has to be exercised in a reasonable, practical and liberal manner. The court held that since appeal is provided against the assessment order which is passed in pursuance to search, such power to appeal would even cover the challenge to search. It held that the ITAT is the final fact finding authority and hence it is within its right to check whether the basic conditions as provided u/s 132(1) are satisfied or not besides checking the existence of the warrant.

The Punjab and Haryana High Court in CIT vs.Paras Rice Mills 2008 (9) TMI 290 - PUNJAB AND HARYANA HIGH COURT adjudicated the departmental appeal against the ITAT order quashing the assessment order on the ground that the search action was not validly conducted. It set aside the decision of the ITAT holding that the ITAT had exceeded the jurisdiction by adjudicating on the validity of search warrant.

At around the same time the Rajasthan High Court in the case of CIT vs. Chitra Devi Soni 2007 (11) TMI 296 - RAJASTHAN HIGH COURT upheld the action of the ITAT in quashing the assessment order on the basis that the department could not produce the satisfaction note before the ITAT to verify the existence of conditions as provided u/s 132(1) of the Act before issuance of warrant of authorisation.

The above stated decision in case of Chitra Devi (Supra) was recently cited before the Allahbad High Court in CIT vs. A.K. Bansal 2013 (4) TMI 366 - ALLAHABAD HIGH COURT. However the court preferred to rely upon the decision of the Delhi High Court and Pujnab and Haryana High Court instead of Rajasthan High Court to hold that ITAT could not have adjudicated on the validity of the warrant of authorisation.

Recently once again the Rajasthan High Court in Badri Ram Choudhary’s case 2013 (10) TMI 932 - RAJASTHAN HIGH COURT has followed its own decision in the case of Chitra Devi (supra) while holding that the ITAT was within its jurisdiction to adjudicate the validity of search action while hearing appeal against the search assessment order.

From the analyses of the above differing decisions of the court the following broad contentions emerge. 

Revenue’s Contention:

The  arguments of the Revenue are that a search and seizure action is an administrative action and hence, the said action is not appealable in the appeal court. If any person is aggrieved by such administrative action then he can approach the court only under Article 226 of Constitution in a writ remedy. For the stated reason the statute has not provided any appellate remedy against the action u/s 132 of the Act either under section 246A of the Act or under section 253 of the Act. The revenue further argues that the warrant of authorisation is issued by an officer of the rank of the Director of Income Tax (Inv.) and that too after intimation to the DGIT(Inv.). Therefore, the validity of the said warrant of authorisation cannot be challenged before assessing officer who is lower in command than a Director of Income Tax (Inv.). Even Commissioner of Income Tax (Appeals) cannot be the forum for agitating the validity of search action. The Revenue also contends that the sufficiency of satisfaction note which is the basis of issuance of search warrant is a very subjective concept. Courts cannot go into that. Therefore, issuance of such warrant of authorisation and consequently search action cannot be challenged at all in a judicial forum.

The revenue further contends that even if the facts recorded in the satisfaction note is erroneous then too no prejudice is caused to the person searched since the assessment in pursuance to search would not lead to any additional tax liability. Even if wrongful additions are made to the income returned then too the person searched has the remedy of challenging such additions in appellate forums. Therefore, no prejudice is caused to the person searched in either ways so as to entitle him to challenge the search on the basis of satisfaction note prepared prior to search action. It further contends that the search action if leads to discovery of incriminating material then the search action cannot be challenged as ultimately the proof of pudding is in its eating. Moreover, such incriminating material can also be used in collateral proceedings.

Revenue also distinguishes the provisions of section 148 (reopening of income escaping assessment) and section 132 on the ground that there is specific appeal provided u/s 246A against order passed u/s 148. Hence the validity of reasons recorded which led to issuance of notice u/s 148 can be challenged in appellate forums which is not the case under section 132. It further states that the reasons u/s 148 are recorded by the same AO who also passes the order and hence the entire action of AO is rightly challengeable before appellate forums unlike section 132 under which the satisfaction is recorded by an officer other than the officer who carries out assessment of the search cases.

Assessee’s Contention:

The above contentions of the revenue merits rebuttal. It has been held by the highest court of law that any administrative action which adversely affects a person becomes a judicial act the moment it is executed. Therefore, such an action can be scrutinised by the Courts. If the contention of the revenue is accepted then it would result in anarchy if the actions of the administrative action go unquestioned.

The next contention of the Revenue that action u/s 132 of the Act is not challengeable in appeal under section 246 or section 253 of the Act is also not in line with the controversy. An assessee challenges the validity of search action when he challenges the order for assessment passed in pursuance to the search action. Presently, the assessment of search case takes place u/s 153A of the Income Tax Act, 1961. As per the scheme of search assessment a period of 6 assessment years prior to the year in which search was conducted is mandatorily assessed. An appeal u/s 246 of the Act is provided under the Income Tax Act, 1961 against the order passed u/s 153A for each of these years. It is this order which is challenged in appeal proceedings. In such appeal a ground can be taken that the very initiation of proceedings u/s 153A is void ab initio. One of the reasons for such a ground can be  that the search action under section 132 of the Act is illegal and invalid. Since the assessment under section 153A of the Act is initiated only on the basis of the search action, any challenge to validity of the initiation of the assessment proceedings would entail challenge to the genesis of such assessment proceedings. Therefore, if the warrant of authorisation itself is illegally issued then the entire edifice of the assessment proceedings is demolished.

Another argument of the Revenue that sufficiency of the satisfaction of the search cannot be adjudged by the courts is an acceptable proposition. However, such a proposition cannot be stretched to a limit where even patently illegal issuance of warrant cannot be brought before courts for judicial intervention. Sometimes a warrant of authorisation may have been issued on erroneous facts or mistaken identity. Such warrants can and rather must be challenged. A search action is a serious invasion on the privacy of a person and such action cannot be taken without proper inquiry. Since, such search actions automatically and mandatorily lead to assessment under section 153A of the Act, it is imperative that such authorisation must be challenged while challenging the very assumption of jurisdiction of making an assessment under section 153A of the Act.

A parallel can be drawn between section 132 of the Act and section 148 and section 263 of the Act . Both these sections allow the revenue to reopen the past assessments. In both these sections the essential safeguard is in the form of proper belief leading to satisfaction of the notice issuing authority that some income has escaped assessment or that the order passed was erroneous and prejudicial to the interest of the revenue. The orders passed under both these sections can be challenged before the appellate authorities on the ground that satisfaction of the authority was invalid or erroneous and consequently the reassessment order is invalid. Section 132 of the Act also postulates a similar situation. The warrant issuing authority has to be satisfied that some undisclosed income / asset is hidden by a person which needs to be unearthed. Hence, a warrant is issued for search of the premises. Such issuance of warrant mandatorily postulates the issuance of notice for assessments of past years u/s 153A of the Act . Therefore, when the provisions of section 148 and section 263 can be challenged before appellate authority there can be no reason why warrant under section 132 of the Act cannot be challenged while challenging the assessment under section 153A of the Act .

The revenue usually distinguish between the provisions of section 132 and section 148/263 on the basis that there is express provision in section 246 of the Act whereby the order passed u/s 148 can be challenged and similarly u/s 252 for challenging order u/s 263 before the ITAT. However, there is no such provision in the statute for challenging the action u/s 132 of the Act . This contention of the department is not tenable in authors opinion because what is challenged in appeal is an “order” which determines the tax liability of the assessee. In case of section 148 the initiation process and the assessment is provided under the same section. Therefore there is no requirement to invoke a different provision while contending that the reopening of assessment is void ab initio. In case of search assessment the initiation process is provided u/s 132 of the Act and assessment order is passed under section 153A. The statute has therefore provided appeal against the order   u/s 153A of the Act . However, it does not mean that the challenge to initiation process as provided u/s 132 of the Act is excluded before appellate authorities. The intention of legislature is loud and clear. It has provided appellate remedy against initiation of reassessment and therefore search action as provided in section 132 can be challenged.

Conclusion

On an analyses of the conspectus of decisions as discussed above the following position emerge:

Stage of Proceedings	What courts have held
Whether warrant of authorisation exist in the name of the appellant	The courts have unanimously held that ITAT being the final fact finding authority, it is duty bound to check the existence of warrant in the name of appellant if disputed in appellate proceedings.
Whether where the warrant exist in the name of appellant, the existence of conditions for issuance of such warrant as provided u/s 132(1) of the Act can be adjudicated by the appellate court	The courts are divided here as discussed herein above. The author is of the opinion that the appellate proceedings against a search assessment shall remain incomplete if the conditions for invocation of search cannot be objectively adjudicated upon by checking the correctness thereof and the appellant has to run parallel remedy in a writ.
Whether where the conditions as mentioned in section 132(1) of the Act are shown to exist the appellate court can adjudicate on sufficiency of such reasons.	The courts are unanimous that the sufficiency of reasons is a subjective opinion and hence the courts cannot sit in judgment on the opinion formed by the warrant issuing authority whether in a writ jurisdiction or in an appellate jurisdiction.

The controversy needs to be settled with clarity through administrative circular for a better administration of tax laws and clarity for the tax payers.

Discussions to this article

[RAJESH SANGHVI]

A strange contention was raised before Mumbai ITAT in a case wherein the controversy of the exact name on the search warrant was raised. The name on the warrant was the name of a proprietory firm and not of the proprietor. The issue was that per se Proprietory firm is not entity and it is the proprietor who has name has to come on the warrant albeit with or without the firm name. Sec 132 also speaks of Person and a proprietory firm in itself is no person. But Mum ITAT held that name of the proprietory firm does not make any difference and it meant effectively the proprietor.

Food for thought. Search is after all person specific and & wrong name can nullify the entire search.