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TMI Blog1970 (7) TMI 17X X X X Extracts X X X X X X X X Extracts X X X X ..... n gold and silver-coated cotton threads as a licensee in this shop. On 22nd August, 1968, the officers of the Central Excise Department raided this shop and, as a result of the search made by them, seized primary gold weighing 40 grammes, one gold bar bearing foreign marks and weighing 10 tolas which was lying beneath a brick under the floor, two British guineas contained in an envelope kept under charcoal, 76 grammes of gold ornaments, Rs. 15,280 in currency notes from the counter of the shop and currency notes of Rs. 3,480 lying in a handkerchief near the table. One Krishnalal Meghraj who is the petitioner in the other petition was present in the shop at the time and on making search of his person, currency notes of Rs. 15,597 were found from him and they were also seized by the Central Excise Officers. Amirbhai Alibhai, the owner of the shop, was not available at the time of the search but on his return his statement was recorded by the Superintendent, Central Excise. He disowned ownership as well as possession of the gold, jewellery and currency notes seized by the Central Excise Officers but admitted that some profit was being given to him in gold and silver business by the pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar as the currency notes were concerned, the Deputy Collector held that there was no conclusive evidence on record to show that the amount of the currency notes represented sale proceeds of smuggled gold or smuggled goods or that the petitioner and Krishnalal Meghraj were in league with Amirbhai Alibhai in dealing in smuggled gold and he accordingly gave the benefit of doubt to the petitioner and Krishnalal Meghraj and ordered release of the currency notes to the owners. Pursuant to this order, the Assistant Collector of Central Excise addressed a letter asking the petitioner, Krishnalal Meghraj and Amirbhai Alibhai to attend his office on 5th January, 1970, for taking delivery of the currency notes which were ordered to be released. This instruction was, however, countermanded by the Assistant Collector by a subsequent letter dated 2nd January, 1970. This countermanding presumably took place because in the meantime information about the seized currency notes was given by the Central Excise authorities to the Commissioner of Income-tax and at the request of the Commissioner of Income-tax, the record of the inquiry held by the Central Excise authorities was made available to him and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Special Civil Application No. 164 of 1970, challenging the validity of the seizure and of the show cause notice on the same grounds on which the petition in Special Civil Application No. 163 of 1970 was founded. The main ground on which the legality of the seizure and the validity of the show cause notice was challenged on behalf of the petitioners was that sub-sections (1)(c)(iii) and (5) of section 132 are violative of articles 14 and 19(1)(f) of the Constitution and are accordingly null and void and no action can be taken under those provisions. This ground was divided under several heads and each bead was pressed as a separate and independent argument: (A) Sub-sections (1)(c)(iii) and (5) of section 132 are violative of article 19(1)(f) of the Constitution since the restrictions they impose on the right of a citizen to hold and enjoy property are unreasonable in the following respects: (1) These provisions are directed against all who are in possession of undisclosed income irrespective of whether they are responsible for evading tax on such income or are in possession of it with knowledge that it represents concealed income. (ii) The power conferred under these provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unfettered and uncanalised: there is nothing to guide or control the exercise of the power; the sub-sections, therefore, render possible arbitrary and unreasonable exercise of power and leave it open to the officers to discriminate unjustly between one possessor of undisclosed income or property and another and they are accordingly violative of articles 14 and 19(1)(g). (C) Section 132, sub-sections (1)(c)(iii) and (5), are violative of article 14 of the Constitution also on the ground that: (i) they make unjust discrimination between evaders of tax who are in possession of undisclosed income or property and evaders of tax who are not in such possession; (ii) they deal with the same class of evaders of tax who are within the ambit of section 147 and impose the drastic procedure on some oat of them leaving the rest to be governed by the less onerous provisions of section 147 and thus discriminate between evaders of tax falling within the same class. The petitioners, also urged in the alternative that even if the challenge to the validity of section 132, sub-sections (1)(c)(iii) and (5), was not sustainable and these sub-sections were valid, the search and seizure effected b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion. The power to authorize search and seizure is hedged in by the requirement of this condition precedent and it is only if this condition is fulfilled that the power can be exercised. Of course, it is for the Director of Inspection or the Commissioner to be satisfied that there is reason to believe and the court cannot sit in appeal over the decision of the Director of Inspection or the Commissioner regarding the existence of the reason to believe nor can the court examine the adequacy of the grounds on which the reason to believe entertained by such officer is based. But there is a limited area within which the reason to believe entertained by the Director of Inspection or the Commissioner, can be scrutinised bv the court. This area now stands clearly demarcated by several decisions of the Supreme Court and its extent and limit are no longer open to doubt or controversy. The Supreme Court, while dealing with the same expression as used in section 34 of the old Income-tax Act, pointed out in S. Narayanappa v. Commissioner of Income-tax: "Again the expression 'reason to believe' in section 34 of the Income-tax Act does not mean a purely subjective satisfaction on the part of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the power would be bad. The court would say in such a case that the reasons for the belief have no rational connection or relevant bearing to the formation of the belief and the belief is, therefore, not truly held but it is merely a pretence. It would, therefore, be seen that though the concept denoted by the words "reason to believe" is a subjective one, there is a limited area of objectivity within which the court can operate. Now, when an authorised officer makes search and seizure pursuant to an authorisation issued by the Director of Inspection or the Commissioner, he would have to comply with certain conditions relating to the procedure for making search and seizure. Sub-section (13) of section 132 provides that the provisions of the Code of Criminal Procedure, 1898, relating to searches and seizure shall apply, so far as may be, to searches and seizure under sub-section (1). This sub-section incorporates by reference the salutary provisions of the Code of Criminal Procedure in regard to searches and seizure. Then sub-sections (2) and (3) give certain power to the authorized officer which he may utilise for the purpose of properly effecting search and seizure. Sub-sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d be to attribute looseness of language to the legislature. The ordinary canon of construction is that when the legislature his used two different expressions in the same section, the legislature must have intended to convey two different meanings. The words "person concerned" in the context in which they occur clearly refer to the person who would be concerned or affected by the making of the order and retention of the seized assets under sub-section (5). Ordinarily, having regard to the nature of the undisclosed income or property, the person found in possession of it would be the owner and in the absence of any information to the contrary, the Income-tax Officer would presume him to be the owner and proceed against him under sub-section (5). Where such is the case, the person in possession would be the "person concerned" for the purpose of sub-section (5). But, if, as a result of examination of the person in possession under sub-section (4) or otherwise, the Income-tax Officer comes to know that someone other than the person in possession is the owner of the undisclosed income or property, he may proceed to take action against such person under sub-section (5) and in that event ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... answer to this question is provided by section 132A which lays down how the assets retained under sub-section (5) are to be dealt with. Section 132, sub-section (5), as we have already seen, provides merely for estimating the undisclosed income in a summary manner and calculation of tax on the income so estimated for the purpose of determining what part of the assets seized should be retained, so that the portion of the assets not likely to be required to satisfy the tax liability may be immediately returned to the person from whose custody they were seized. But a regular assessment or reassessment of the undisclosed income would have to be made in accordance with the provisions of the Act, if tax on it is to be recovered by the revenue. Section 132A, therefore, proceeds on the basis that subsequent to the making of an order under section 132, sub-section (5) "regular assessment or reassessment for all the assessment years relevant to the previous years to which the income relates" would be completed and the amount of tax liability determined according to the procedure prescribed in the Act. It provides that the assets retained under section 132, sub-section (5), may be applied in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the assets. The same machinery for investigation of claims and objections can also be availed of at the time of the sale of the assets since section 132A(1)(iii) in so many terms provides that the sale of the assets shall be in the manner laid down in the Third Schedule. As soon as the tax liability is discharged, section l 32A(3) says that any assets or proceeds thereof which may remain unutilised shall be forthwith made over or paid to the person from whose custody they were seized. The object of this provision clearly is that once the tax liability is discharged, no part of the assets seized should continue to remain with the revenue and whatever is the surplus should immediately be returned to the person from whom it was sezied. Sub-section (4)(a) of section 132A provides that the Central Government shall pay simple interest at the rate of nine per cent. per annum on the surplus amount which may be returned under sub-section (3) and such interest, according to sub-section (4)(b), shall run from the date immediately following the expiry of the period of six months from the date of the order under section 132, sub-section (5), to the date of the regular assessment or reassess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... without it the process of law enforcement might suffer to the detriment of public interest and, therefore, subsequent legislation in England started conferring such power on the police and various other officers from time to time. In India too, the power of search and seizure for prevention and investigation of offences was for the first time conferred under the Code of Criminal Procedure and since search and seizure is a process exceedingly arbitrary in character, stringent statutory conditions were imposed on the exercise of the power. The Supreme Court, while examining the validity of section 96(1) of the Code of Criminal Procedure empowering search and seizure, pointed out that: "a power of search and seizure is in any system of jurisprudence an overriding power of the State for the protection of social security and that power is necessarily regulated by law." Now so far as the income-tax law is concerned, the authorities under the Income-tax Act had originally no power of search or seizure: they had only such powers as are ordinarily possessed by civil courts under the Code of Civil Procedure such as powers of discovery and inspection, enforcing attendance of witnesses, ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as almost impossible to discover that an assessee had made undisclosed profits and to tax him on those profits. But it was apparent that if by some device the revenue could get at the undisclosed profits in specie, it would considerably facilitate the task of bringing such undisclosed profits to tax. The cash, bullion, jewellery or other valuable articles or things representing undisclosed profits would themselves furnish evidence of the making of undisclosed profits and it would be possible to bring them to tax. It was, therefore, found necessary to confer power of search and seizure in regard to undisclosed income or property on the appropriate officers of the income-tax department and Parliament with that end in view, amended the Act and introduced, inter alia, sub-sections (1)(c)(iii) and (5) in section 132 and added section 132A by enacting the Income-tax (Amendment) Act, 1965. With this background let us examine whether the provisions contained in section 132, sub-sections (1)(c)(iii) and (5), can be said to impose reasonable restrictions in the interest of the general public. Now, there can be no doubt that these provisions are enacted in public interest for their object c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reasonable." It is in the light of these observations that we must examine whether the restrictions imposed by section 132, sub-sections (1)(c)(iii) and (5), are reasonable. We must ask ourselves the questions whether the restrictions strike a just balance between the fundamental right of the individual and the social interest of the community in law enforcement and tax collection or whether they excessively invade the fundamental right of the individual beyond what is required by the social interest of the community. Now, under section 132, sub-section (1)(c)(iii), the power to carry out search and seizure is conferred on a Deputy Director of Inspection, Inspecting Assistant Commissioner, Assistant Director of Inspection or Income-tax Officer but the exercise of this power is made dependent on a condition. it cannot be exercised unless there is an athuorization issued by the Director of Inspection or the Commissioner. The power to issue authorization conferred on the Director of Inspection and the Commissioner is also not an absolute unfettered power without any policy or principle to guide or control its exercise. The section does not leave it to the absolute and unguided di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an always in a case where the validity of the authorization is challenged, call upon the Director of Inspection or the Commissioner to produce the reasons recorded by him and scrutinise the reasons for the purpose of satisfying itself that the "reason to believe" entertained by him was based on relevant grounds having rational connection or bearing to the formation of the belief. It may also be noted that the Director of Inspection and the Commissioner on whom the power to issue authorization is conferred are high and senior officers of the income-tax department and abuse of power cannot easily be assumed where the discretion is vested in such high officials. It can reasonably be expected that such high officials will act fairly and honestly and in conformity with the policy and principle laid down in the Act. The search and seizure are carried out by an officer not below the rank of an Income-tax Officer and they are to be conducted in accordance with that provisions of the Code of Criminal Procedure which include section 103. These provisions are salutary provisions which constitute healthy safeguards ensuring that the search and seizure are conducted fairly and honestly and not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to satisfy the amount of tax on the estimated undisclosed income and the amount of existing liability to tax and forthwith release the remaining portion of the assets to the person from whose custody they are taken. The search and seizure being in their nature ex parte, the "person concerned" would have no opportunity at that stage to repel the belief of the officers of the income-tax department. But, subsequently, under sub-section (5), within a short period of property days an opportunity is given to the "person concerned" to contest the view of the revenue that the assets seized represent undisclosed income or property. Of course this inquiry is not an elaborate inquiry for it is not intended to take the place of regular assessment or reassessment. It is an inquiry only for the purpose of enabling the Income-tax Officer to determine prima facie whether the assets or any part thereof represent undisclosed income or property and what portion of the assets would be retained for satisfying the existing and anticipated tax liability of the assessee pending the making of the regular assessment or reassessment. That is why the provision in sub-section (5) for estimating the undisclosed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the undisclosed income and calculating the amount of tax on it. The legislature had, therefore, to strike a balance and prescribe a time limit which would neither be too short nor too long and in the exercise of its legislative discretion the legislature fixed the time limit at ninety days. We do not think it would be right for us to interfere with the legislative judgment in this regard unless we find that the time limit fixed by the legislature is so unduly short that no fair and proper inquiry can possibly be made within such period. But that obviously cannot be said to be the position in the present case. It may be noted and this shows how reasonable is the provision made by the legislature that even the order made under section 132, sub-section (5), which is in the nature of an intermediate order, is not made final by the legislature. The legislature has provided a remedy by way of an objection application to the Central Board of Direct Taxes under section 132, sub-section (11). Moreover, there is also machinery provided in rule 11 of the Second Schedule for investigation of any claim or objection which may be made by a third party in respect of assets retained under section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment is completed after a number of years, for in that event the revenue would be retaining only that amount which was legitimately due to it by way of tax and which should have been paid long ago. If, on the other hand, it is ultimately found as a result of completion of the regular assessment or reassessment that there is a surplus out of the assets retained under section 132, sub-section (5), such surplus has to be returned with simple interest at the rate of nine per cent. per annum from the expiration of a period of six months from the date of the order under section 132, sub-section (5). This provision obviously proceeds on the hypothesis that ordinarily a period of six months would be a reasonable period required by the income-tax authorities to complete the regular assessment or reassessment and there should be no payment of interest for this period. But if the Income-tax Officer for any reason fails to complete the regular assessment or reassessment within the period of six months which the legislature has regarded as reasonable, simple interest at the rate of nine per cent. per annum should be payable by the Central Government on the amount of surplus. A clear indication ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of six months from the date of the order under section 132, sub-section (5). We are, therefore, of the view that the restrictions imposed by the impugned provisions on the right of the citizen to hold and enjoy property under article 19(1)(f) are reasonable restrictions in the interests of the general public and they are saved by article 19(5). The challenge to the validity of the impugned provisions on the ground of infraction of article 19(1)(f) must, therefore, fail. Re. Ground (B): This ground stands completely answered by what we have stated in reference to ground (A). It is clear from the aforesaid discussion that the power conferred under section 132, sub-sections (1)(c)(iii and (5), is not unfettered or uncanalised. It is a power which is headged in by several conditions and safeguards and it is exerciseable only in certain specified circumstances and subject to certain defined conditions and the section clearly indicates the policy or principle which is to guide the exercise of the power. The challenge to the constitutionality of tite impugned provisions on the ground of violation of articles 14 and 19(1)(f) is, therefore, unfounded and cannot be sustained. Re. Groun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egal and invalid inasmuch as there were no grounds before the Commissioner on the basis of which he could have reason to believe that the petitioners were in possession of undisclosed income or property. Now we have already indicated above the limited area of objectivity within which the existence of the reason to believe can be scrutinised by the court. If it can be shown by the petitioner that the grounds on which the belief of the Commissioner was founded were not relevant to the subject-matter of the inquiry or were extraneous to the scope and purpose of the statute or had no rational connection or relevant bearing to the formation of the belief, the authorization issued by the Commissioner on the basis of such belief would be in colourable exercise of power and would be bad. But when we examine the material which was before the Commissioner and which led him to issue the authorizations, it is not possible to say that the reason to believe entertained by him suffers from any of these infirmities. The material before the Commissioner consisted of the evidence regarding the search and seizure of gold, foreign gold bar, jewellery and currency notes by the Central Excise officers. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e or cause to be there produced evidence on which such person may rely for explaining the nature of possession and the source of the acquation of the assets...." This rule provides that the show cause notice shall be issued by the Income-tax Officer to the person in respect of whom inquiry under section 132, sub-section (5) is to be made within fifteen days of the date of seizure. The question is whether this provision is mandatory or directory in character. If it is mandatory, it must be obeyed or fulfilled strictly and in that event the show cause notice issued to the petitioner being admittedly beyond the period of fifteen days from the date of seizure, would be invalid. But if it is directory, it would be sufficient, if it is obeyed or fulfilled substantially in which event it might be possible to say that the show cause notice is valid as being in substantial compliance with the rule. Now the question whether a particular provision of a statute which on the face of it appears mandatory inasmuch as it uses the word "shall", is really mandatory or directory cannot be resolved by laying down any general test. This was plainly stated by Lord Campbell in Liverpool Borough Bank ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to explain the nature of the possession and the source of acquisition of the assets. There are two provisions in regard to time contained in this rule. The first is that the Income-tax Officer shall issue a show cause notice within fifteen days of the seizure and the second is that the show cause notice must specify a date for rendering an explanation which is not earlier than fifteen days from the date of service of the notice. We are concerned with the first provision. What is the purpose for which it is made? To understand the purpose we must go back to section 132, sub-section (5). That sub-section prescribes a period of ninety days from the date of seizure within which an inquiry must be held by the Income-tax Officer and an order made as contemplated in that sub-section. Now it is indisputable, and indeed it must be said in fairness to the learned Advocate-General on behalf of the revenue that he did not dispute it, that this period of ninety days is a mandatory period and it must be strictly complied with by the Income-tax Officer, for, otherwise, the object of fixing the time limit of ninety days would be frustrated. Now within this period of ninety days, which must be stri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hin the four corners of the statute, no action can be taken against him. If rule 112A provides that the show cause notice shall be issued by the Income-tax Officer within fifteen days from the date of seizure, it must be issued within the time limit. It is no doubt true that the effect of our taking this view would be that a case where the Income-tax Officer fails to issue the show cause notice within fifteen days from the date of seizure the further proceedings consequent upon the search and seizure would be frustrated but that is no argument for reading the provision as directory. If the show cause notice is not issued within fifteen days from the date of seizure in any given case, it would be entirely due to the inaction of the Income-tax Officer and there is no reason why the assessee should be subjected to the inquiry by issue of a show cause notice after the expiration of such period. Moreover, we do not see any prejudice to the revenue in taking this view. The revenue can always return the assets to the person from whose custody they were seized and proceed once again under section 132, sub-section (1). We are, therefore, of the view that the show cause notice issued to the ..... 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