2013 (2) TMI 120 - HC - Income Tax

Search and seizure - challenge the operations & seeking release of gold ornaments, being stock in trade - assessee also challenged the territorial jurisdiction of the Court - Held that - On the basis of the record and the reasons noted by the authority, it was not possible to come to the conclusion that the petitioners had not or would not have disclosed the jewelery for the purpose of the Act. Recall that for authorization of search operations under section 132(1)(c) it is required that the competent authority in consequence of the information in his possession has reason to believe that the jewelery, bullion, etc. which represents either wholly or partly income or property has not been or would not be disclosed for the purpose of the Act. Perusing to documents it is found that the entries of gold distributed to various goldsmiths matched perfectly with the entries of gold ornaments received from such persons after adding alloys for conversion of gold from 24 carat to 22 carat. The so called discrepancies pointed out by the Revenue in such documents really do not exist. Respondents fail to notice that the gold ornaments would weight marginally more than the weight of gold from which they are made due to addition of alloys. They also failed to see that such increase in weight was uniform in all cases. Accounts were also maintained regarding labour charges to be paid to different agencies. It can therefore not be stated that there was sufficient information in possession of the Director of Income Tax to have reason to believe that such jewelery had not been or would not be disclosed for the purpose of the Act. There were some discrepancies highlighted by the Department particularly with respect to the agreement dated 14th June 2012. It was argued that such agreement was found in possession of the petitioners and not in possession of the lessee & that the co-relation between the gold actually used in preparation of the ornaments and the one which was available with MG-HUF could not be established but to our mind, these factors would not be sufficient to clothe the authorities with the power to issue search authorization under section 132(1)(c). The Department s doubt about the source of gold of MG-HUF, even if it is genuine, cannot cast any shadow on the question whether the petitioners would or would not have disclosed the same for the purpose of the Act. Further, the contention that the identity of the gold could not be established also is not a sufficient factor as once the gold was, as claimed by the petitioners, received from MG-HUF and the same was distributed among different goldsmiths for preparation of ornaments, failure to see how the exact identity of the gold or co-relation thereof could be maintained or established. When it was pointed out that the petitioners had maintained voluminous records right from the beginning and when such record was found from the premises of petitioner No.1 Company, immediately upon the survey operation being conducted, unable to find as how the competent authority could form a reasonable belief that such gold jewelery had not been or would not be disclosed for the purpose of the Act. On the basis of the various decisions L. R. Gupta And Others 1991 (11) TMI 51 - DELHI HIGH COURT & VINDHYA METAL CORPORATION 1997 (3) TMI 3 - SUPREME COURT it emerges that mere possession of money, bullion, jewelery or such valuable article or thing per-se would not be sufficient to enable the competent officer to form a belief that the same had not been or would not be disclosed for the purpose of the Act. What is required is some concrete material to enable a reasonable person to form such a belief - Thus the petition is allowed. Search and seizure operation is declared illegal and it is hereby quashed. Consequently, seizure of the gold ornaments under panchnama dated 26th July 2012 is also quashed.

Issues Involved:
1. Validity of search and seizure operations.
2. Jurisdiction of the Gujarat High Court.
3. Legitimacy of the lease agreement and the gold's source.
4. Compliance with Section 132 of the Income Tax Act.
5. Whether the seized gold ornaments were stock in trade.

Detailed Analysis:

1. Validity of Search and Seizure Operations:
The petitioners challenged the search and seizure operations initiated by the respondents against petitioner No. 1 Company, contending that the requirements of Section 132(1) of the Income Tax Act were not satisfied. The petitioners argued that the entire stock was duly reflected in the company's books, and detailed vouchers were prepared evidencing the handing over and receipt of gold for ornament preparation. The Department's case was based on the claim that the petitioners were carrying gold jewelry without proper documents and highlighted discrepancies in the lease agreement and stock statements.

2. Jurisdiction of the Gujarat High Court:
The Department argued that the Gujarat High Court lacked territorial jurisdiction as the gold was seized in Chennai, and all related actions were taken there. However, the court held that part of the cause of action arose within its jurisdiction since inquiries were conducted at the business premises of petitioner No. 1 in Ahmedabad, and the survey report was prepared and submitted to the Chennai Income Tax Authorities. The court referenced the Supreme Court's decision in Rajendran Chingaravelu v. R.K. Mishra, which supported the view that even a fraction of the cause of action arising within the court's jurisdiction is sufficient.

3. Legitimacy of the Lease Agreement and the Gold's Source:
The petitioners contended that the gold was leased from MG-HUF, which possessed a large quantity of gold, as established by a previous judgment of the Rajasthan High Court. The Department questioned the lease agreement's validity, pointing out that it was undated, lacked witness signatures, and the rate of return was extremely low. The court found that these factors alone were insufficient to justify the search and seizure operations.

4. Compliance with Section 132 of the Income Tax Act:
The court focused on whether the competent authority had sufficient reason to believe that the jewelry represented income that had not been or would not be disclosed for tax purposes. The satisfaction note by the Deputy Director of Income Tax highlighted several discrepancies but did not conclusively establish that the jewelry would not be disclosed. The court noted that the petitioners maintained detailed records, and the goldsmiths' statements supported their version. The court concluded that the belief required under Section 132(1)(c) was not adequately formed based on the material available.

5. Whether the Seized Gold Ornaments Were Stock in Trade:
The petitioners argued that the gold ornaments were stock in trade, which, under the proviso to Section 132, could not be seized. The court did not delve deeply into this issue, as it had already found the search and seizure operations invalid. However, it noted that the petitioners had provided sufficient documentation to support their claim that the ornaments were stock in trade.

Conclusion:
The court declared the search and seizure operation illegal and quashed the seizure of gold ornaments. It emphasized that the competent authority did not have sufficient reason to believe that the jewelry would not be disclosed for tax purposes. The court ordered the release of the seized jewelry and refused the Department's request to stay the judgment.

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