2009 (5) TMI 8 - HC - Income Tax

Petitioner No.2 (NRI) is the Chairman and Managing Director of the petitioner No.1 company - provisional attachment u/s 281B - tax fraud - shares held by the petitioner No.2 in demat account are not trading assets but are investments made out of funds brought to India which prima facie appears to be the amounts remitted by the petitioner No.1 as marketing and advertisement expenses to Cyprus / UK based companies therefore, attachment of the shares of the petitioner No.2 in demat account on the ground that they represent undisclosed income of the petitioner No.2, cannot be faulted - search and seizure u/s 132(1) is in accordance with law

Summary

Issues Involved:
1. Legality of the search and seizure action under Section 132(1) of the Income Tax Act, 1961.
2. Validity of the provisional attachment order under Section 281B of the Income Tax Act, 1961.

Detailed Analysis:

1. Legality of the Search and Seizure Action under Section 132(1) of the Income Tax Act, 1961

Contention of the Assessee:
- The search and seizure action was initiated without the existence of any of the conditions set out in clauses (a), (b), and (c) of Section 132(1) of the Act.
- The belief that the assessee would not produce the required documents was baseless, as the assessee had always complied with summons in the past.
- The income earned by the petitioner No.2, an NRI, outside India is not taxable in India, making the search and seizure action unjustified.

Court's Analysis:
- The revenue produced confidential information and a satisfaction note recorded by the designated authority before issuing the warrant of authorization.
- The information received on 16/4/2008 indicated tax evasion by the petitioner No.1 through deductions claimed for business expenditures paid to Cyprus/UK based companies, which were allegedly credited to the private bank account of petitioner No.2.
- The designated authority formed a reasonable belief based on this information and recorded reasons on 13/5/2008, justifying the issuance of the warrant on 14/15-5-2008.
- The court found that the conditions set out in clauses (b) and (c) of Section 132(1) were satisfied, as the information indicated that the assessee would not disclose the actual modus operandi of tax evasion and that the investments made represented undisclosed income.
- The court distinguished the present case from the cited cases of Dr. D.C. Srivastava and Ajit Jain, noting that the reasonable belief was formed before the issuance of the warrant and was based on specific information regarding tax evasion.

2. Validity of the Provisional Attachment Order under Section 281B of the Income Tax Act, 1961

Contention of the Assessee:
- The provisional attachment under Section 281B was unjustified as there were enough assets to protect the revenue's interests.
- The attachment should not be based on mere presumptions about the disallowance of marketing and advertisement expenses.
- The investments made by petitioner No.2 and his family members were from funds transferred through proper banking channels and loans from local banks.

Court's Analysis:
- The incriminating documents seized during the search revealed that the payments made for marketing and advertisement expenses were credited to the private bank account of petitioner No.2 in Cyprus.
- The petitioner No.2 failed to explain the seized materials and left for the UK, leading to non-cooperation in the investigation.
- The court found that the provisional attachment was necessary to protect the revenue's interests, as there was a reasonable belief that the assessee might thwart the revenue's efforts in collecting the ultimate demand.
- The court noted that the petitioner No.2 had invested significantly in immovable properties and shares, disproportionate to the declared income, and the seized documents suggested that the funds brought into India were from tax avoidance transactions.
- The court justified the attachment of shares in the demat account, noting that the shares were not trading assets but investments made from funds that appeared to be undisclosed income.
- The court dismissed the petition, stating that the provisional attachment was reasonable and necessary given the circumstances.

Conclusion:
The court dismissed the petition, upholding the legality of the search and seizure action under Section 132(1) and the validity of the provisional attachment order under Section 281B of the Income Tax Act, 1961. The court found that the designated authority had formed a reasonable belief based on specific information regarding tax evasion, and the provisional attachment was necessary to protect the revenue's interests.