Court Upholds Tax Search: Justified by Undisclosed Income Evidence

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Case Name:

Rich Udyog Network Ltd. Vs. Chief Commissioner of Income Tax (High Court of Allahabad)

Civil Misc. Writ Petition (Tax) No.458 of 2015

Date: 7th July 2015

Key Takeaways:

• The court emphasized the necessity of having concrete evidence before conducting a search under Section 132 (of Income Tax Act, 1961).
• The decision highlights the importance of the “reason to believe” standard, which requires more than mere suspicion or rumor.
• The ruling reinforces the procedural requirements for tax authorities to convert a survey into a search operation.

Issue

Was the conversion of a survey into a search operation under Section 132 (of Income Tax Act, 1961) justified by the evidence of undisclosed income?

Facts

Rich Udyog Network Ltd. was subject to a survey under Section 133A (of Income Tax Act, 1961). During the survey, authorities found a significant amount of cash and documents indicating undisclosed income. The survey was then converted into a search operation under Section 132 (of Income Tax Act, 1961), which the company contested, arguing that the conversion was illegal and lacked proper authorization.

Arguments

• Petitioner (Rich Udyog Network Ltd.): Argued that the conversion from a survey to a search was illegal, as there was no proper authorization or sufficient evidence to justify such an action. They claimed that the cash found could be addressed in assessment proceedings rather than through a search.
• Respondent (Income Tax Department): Contended that the search was justified based on definite information and material evidence of undisclosed income. They argued that the conversion was necessary to secure evidence that would not be disclosed otherwise.

Key Legal Precedents

• The court referred to the necessity of having “reason to believe” as outlined in Section 132(1) (of Income Tax Act, 1961). This requires the authorizing officer to have concrete information, not just rumors or suspicions.
• The decision also referenced past cases like Harbhajan Singh Chadha vs. Director of Income Tax and others, emphasizing the need for proper authorization and evidence before conducting a search.

Judgement

The court ruled in favor of the Income Tax Department, stating that the conversion of the survey into a search was justified. The court found that the authorities had sufficient evidence and followed the necessary procedures, including obtaining administrative approval. The petition by Rich Udyog Network Ltd. was dismissed.

FAQs

Q1: What does “reason to believe” mean in this context?

A1: It means that the tax authorities must have concrete information or evidence, not just suspicions, to justify a search under Section 132 (of Income Tax Act, 1961).

Q2: Why was the survey converted into a search?

A2: The conversion was based on the discovery of significant cash and documents indicating undisclosed income, which required further investigation through a search.

Q3: What was the outcome for Rich Udyog Network Ltd.?

A3: The court dismissed their petition, upholding the actions of the tax authorities as justified and procedurally correct.

The petitioner is a company incorporated under the Indian Companies Act and contends that it has been filing its income tax return regularly. For the financial year 2013-14, the petitioner declared a turnover of Rs.62,08,20,868/-. The present writ petition has been filed praying for the quashing of the search made by the income tax authorities on 28th April, 2015 under Section 132 (of Income Tax Act, 1961) at premises no.7/125, C-2,

Swarup Nagar, Kanpur and HDFC Bank, Civil Lines, Kanpur with a further prayer to return the records so seized under the search.

The petitioner contends that the respondents arrived at their registered office at around 12.00 noon on 28th April, 2015 for the purpose of conducting a survey under Section 133A (of Income Tax Act, 1961) and during

the course of survey seized cash amounting to Rs.64,56,970/- and also impounded the books of account in the absence of any Panchas. The petitioner's contended that the respondents deposited the cash in the petitioner's bank account on 28th April, 2015 at 5.00 pm and thereafter, got a demand draft made in their names. It is alleged that initially a survey was conducted under Section 133A (of Income Tax Act, 1961) but the same was converted into a search under Section 132 (of Income Tax Act, 1961) without there being any warrant or authorisation to search the premises under Section 132 (of Income Tax Act, 1961). It was

further alleged that the search started on 28th April, 2015 and concluded on 29th April, 2015 at 7.00 am and that the Panchanama was issued on 29th April, 2015.

In the light of the aforesaid factual position, we

have heard Sri Shubham Agarwal, the learned counsel

for the petitioner and Sri Ashok Kumar, the learned

counsel for the income tax department at length. By an

earlier order of the Court, the income tax department

was directed to produce the original records relating to

the recording of the satisfaction for the purpose of

conducting a search under Section 132 (of Income Tax Act, 1961). The said record

was produced, which the Court has perused.

The contention of the petitioner is, that the action of

the respondents in converting the survey under Section

133A of the Act into a search under Section 132 (of Income Tax Act, 1961) of the

Act was wholly illegal and without jurisdiction. According

to the petitioner, the condition precedent for initiating

action under Section 132 (of Income Tax Act, 1961) was lacking. The

petitioner contended that there was no information in the

possession of the authority, which could lead to have a

reason to believe that the petitioner was in possession of

any money, bullion or jewellery or other articles, which

represented undisclosed income. The learned counsel

contended that the conditions mentioned in Section 132 (of Income Tax Act, 1961)

of the Act must exist and is a mandatory requirement for

a valid search. The learned counsel further submitted

that merely because some cash was found would not

entitle the authorities to convert the survey into a search

operation. The learned counsel submitted that the cash

so found, at best, could be utilized in the assessment

proceedings but could not become a ground to convert

the survey into a search operation. In support of his

submission, the learned counsel for the petitioner has

placed reliance upon the following decisions, namely,

Harbhajan Singh Chadha and others Vs. Director of

Income Tax and others in Writ Tax No.451 of 2012

decided on 27th March, 2015, Vindhya Metal

Corporation and others Vs. Commissioner of

Income Tax and others, 156 ITR 233, Ganga Prasad

Maheshwari and others Vs. Commissioner of

Income Tax, 139 ITR 1043, Dr. Nand Lal Tahiliani Vs.

Commissioner of Income Tax and others, 170 ITR

592 and Director General of Income Tax

(Investigation), Pune and others Vs. Spacewood

Furnishers Pvt. Ltd. and others, 2015 ISI B-716 (SC).

Sri Ashok Kumar, the learned counsel for the

department submitted and admitted that initially a survey

was conducted under Section 133A (of Income Tax Act, 1961), which

was subsequently converted into a search under Section

132 after recording the satisfaction of the competent

authority and after obtaining administrative approval

from the Director General of Income Tax (Investigation)

and that the search conducted was based not only on

definite information but also upon relevant material,

which led the authority to form an opinion that he has

reasons to believe that the action under Section 132 (of Income Tax Act, 1961) of

the Act was not only imminent but was also justifiable.

The learned counsel submitted that in the facts and

circumstances it became necessary that the survey was

required to be converted into a search in order to secure

the evidence, which was not likely to be made available

by issue of summons and, therefore, the tax authorities

had to resort to search and seizure in order to secure

the evidence of undisclosed income, which would not

have been disclosed in ordinary course. The learned

counsel consequently, justified the action of the

department in conducting the survey at the premises in

question.

In the light of the aforesaid, the Court directed the

department to produce the original records in order to

find out as to whether there was information available on

the file and satisfaction was recorded for taking action

under Section 132 (of Income Tax Act, 1961). For this purpose, we have

perused the original file produced by the department.

Upon perusal of the file, we find that the Director of

Income Tax (Investigation), Kanpur had given

information regarding huge amount of cash being

deposited in the petitioner's bank account no.6636 and

approval was sought for getting a survey operation

conducted under Section 133A (of Income Tax Act, 1961) at the

business premises. The survey action under Section

133A was approved by the Competent Authority.

Accordingly, the survey team consisting of Income Tax

Officers and other authorised officers reached the

premises and commenced the survey action under

Section 133A (of Income Tax Act, 1961) at around 12.00 noon on 28th

April, 2015 after showing the authorisation under Section

133A of the Act, which was duly acknowledged by the

petitioner's Director.

During the course of the survey, a sum of

Rs.64,56,970/- was found from the premises along with

incriminating documents showing huge cash

transactions. The statement of the Director of the

petitioner Gaya Prasad Gupta was recorded under

Section 131(IA) (of Income Tax Act, 1961), who was asked to explain the

source of cash. The statement indicates that he failed to

explain the source of cash. The statement of Sri Gupta

further indicates that he was asked to furnish the books

of accounts of all the companies allegedly doing

business from the premises in question, which he failed

to produce. Sri Gupta was also asked to explain various

entries in the documents where the assessee was taking

cash from various parties and returning the money by

cheque to the same parties. There were also entries,

which showed that assessee was taking payment in

cheque and returning the money after taking his

commission in cash. These facts were confronted to Sri

Gupta and he failed to provide any explanation and only

stated that Sri Shaswat Agarwal, Managing Director of

the Company would be in a position to explain as he is

the main person.

The cash that was found and the documents that

were inspected prima facie, proved that huge cash

transaction was taking place and indicated that the

petitioner was engaged in the activity of providing bogus

entries to various parties, whereby the petitioner was

accepting undisclosed cash and issued cheques or vice-

versa. The dubious entries in the documents found at

the premises and the unexplained cash was taking

cognizance of and, accordingly, a satisfaction note was

prepared to convert the survey into a search. This

satisfaction note was put up before the Director of

Income Tax (Investigation), who after obtaining

administrative approval from the Director General of

Income Tax (Investigation), Lucknow issued a warrant of

authorisation under Section 132(1) (of Income Tax Act, 1961) to seize

the unaccounted cash and documents from the

premises of the petitioner and other companies.

We find from the record that the administrative

approval was obtained from the Director General of

Income Tax (Investigation), Lucknow by fax at 4.17 pm

on 28th April, 2015 and, thereafter, the warrant of search

under Section 132 (of Income Tax Act, 1961) was prepared and was

shown to Gaya Prasad Gupta, who acknowledged it by

putting his signatures on the warrant at 5.00 pm on 28th

April, 2015. Therefore, the cash was deposited in the

Bank at 5.15 pm and a bank draft was obtained.

According to the Panchanama, a copy of which has

been annexed to the writ petition, before commencing

the search, two independent witnesses were called to

become witnesses.

Having heard the learned counsel for the parties,

we find that a search is required under the Act in order

to secure evidence, which is not likely to be made

available by issuance of a summon. The tax authorities

have to resort to search and seizure when there is

evidence of undisclosed documents or assets, which

have not been and would not be disclosed in ordinary

course. Section 132 (of Income Tax Act, 1961) read with Rule 112 (of Income Tax Rules, 1962) of the

Income Tax Rules is intended to achieve this purpose,

namely, to get hold of evidence and to get hold of assets

representing income believed to be undisclosed income.

Section 132(1) (of Income Tax Act, 1961) has to be strictly

construed and the formation of the opinion or reason to

believe by the Authorising Officer must be apparent from

the note recorded by him. The opinion so recorded must

clearly show whether the belief falls under clause (a), (b)

or (c) of Section 132(1) (of Income Tax Act, 1961). No search can be

ordered except for any of the reasons contained in

clause (a), (b) or (c). The satisfaction note should itself

show the application of mind and the formation of the

opinion by the officer ordering the search. If the reasons,

which are recorded, do not fall under clause (a), (b) or

(c), in that event, the authorisation issued under Section

132(1) will become illegal and will have to be quashed

as held in L.R. Gupta and others Vs. Union of India

and others, 194 ITR 32.

In order to attract clause (c) of Section 132(1) (of Income Tax Act, 1961) of

the Act, there must be “information” with the authorising

authority relating to two matters, namely, that any

person is in possession of money, etc. and secondly,

that such money, etc. represents either wholly or partly

income or property, which has not been or would not be

disclosed for the purposes of the Act. The search would

be valid if the authorising authority had reasonable

ground for believing that a search was necessary and

that he further believes that the required object cannot

otherwise be obtained without undue delay. In our

opinion, clause (a), (b) and (c) of Section 132(1) (of Income Tax Act, 1961) of the

Act spells out the circumstances under which authorising

authority may issue a warrant of authorisation. Such

authorisation is possible only if the authorising authority

in consequence of information in his possession has

reason to believe the existence of the circumstances

enumerated in clause (a), (b) and (c) of Section 132(1) (of Income Tax Act, 1961)

of the Act.

In order to justify the action under Section 132 (of Income Tax Act, 1961), it is

incumbent upon the authority to collect relevant material

on the basis of which, the authority can form an opinion

that he has reasons to believe that an action under

Section 132 (of Income Tax Act, 1961) would be justifiable. The

expression “information” must be something more than a

mere rumour, gossip or hunch. There must be some

material, which can be regarded as “information”, which

must exist on the file, on the basis of which the

authorising officer can have “reason to believe” that an

action under Section 132 (of Income Tax Act, 1961) is called for any of

the reasons mentioned in clause (a), (b) and (c).

The words “has reasons to believe” as provided in

Section 132(1) (of Income Tax Act, 1961) postulates a belief and

existence of reasons for that belief. The belief must be

held in good faith: it cannot be a mere pretence. Such

belief should not be based on mere suspicion but must

be based on information which is in the possession of

the authorising authority. The formation of the belief

within the meaning of Section 132(1) (of Income Tax Act, 1961) is a condition

precedent to the authorisation of search and seizure. It

is basically a subjective step essentially to make up

one's mind as to whether on the basis of information

available he had or had not formed the reasons to

believe. This belief, cannot be a mere pretence nor can

it be a mere doubt or suspicion but has to be something

more than that.

From perusal of the record, we find that the warrant

of authorisation was issued after according approval

from the competent authority. The contention of the

petitioner that the search was conducted without

recording satisfaction since it was only a survey

conducted under Section 133A (of Income Tax Act, 1961) appeared to

be attractive in the first blush but upon perusal of the

record, we find that the department had definite

information about the clandestine activity of the

petitioner and upon recording a satisfactory note

permission was accorded from the competent authority

for a survey under Section 133A (of Income Tax Act, 1961). Based on

this permission, a survey was made and incriminating

evidence was found. The statement of one of the

Directors' were recorded in which the said Director failed

to provide any explanation with regard to the cash found

at the premises in question and also failed to explain

various entries in the documents, which indicated that

the petitioner was taking cash from various parties and

returning the money via cheque to the same parties.

This unexplained cash and dubious entries in the

documents fortified the belief and gave reasons to

believe that there was undisclosed income, which would

not have been disclosed in ordinary course and

accordingly, a satisfactory note was prepared upon an

application of mind and requesting a search to be

conducted. We also find that the competent authority,

after considering the matter, recorded its satisfaction

and issued authorization for conducting a search under

Section 132 (of Income Tax Act, 1961).

The contention of the petitioner that merely

because the Director failed to explain the possession of

the cash was not fatal and could not invite authorization

for conducting a search under Section 132 (of Income Tax Act, 1961) is

totally misplaced. Reliance upon the decision in

Vindhya Metal Corporation (supra) is distinguishable

and not applicable, inasmuch as in the instant case, a

survey action under Section 133A (of Income Tax Act, 1961) undertaken

on previous information that the petitioner was indulging

in huge cash transaction, which were being transferred

to subsidiary companies and, therefore, the petitioner

and its companies were doing money laundering in the

form of unaccounted cash, which fact was proved to be

true when the search was conducted.

Further, reliance by the learned counsel for the

petitioner in the case of Ganga Prasad Maheshwari

(supra) that possession of cash does not form an

opinion that it represented an undisclosed income is

erroneous. We find that the condition precedent for

exercise of the action under Section 132 (of Income Tax Act, 1961),

namely, that there was sufficient information in

possession of the authority in consequence of which the

authority had reasons to believe that the petitioner was

in possession of money, bullion, jewellery, etc., which

represented undisclosed income was existing and was

also proved during the course of search.

Similarly, reliance upon the decision in Dr. Nand

Lal Tahiliani (supra) that the satisfaction was not

arrived at on the basis of material is patently erroneous.

We have perused the record and we find that the

information was based on certain valid information and

that the satisfaction recorded was based upon

consideration of the material placed before it. We also

find from the original record that administrative approval

was taken from the Director General of Income Tax

(Investigation), Lucknow and, therefore, the contention

that no such approval was taken is patently erroneous.

The contention that the mere fact that cash was

found could have been utilized in assessment

proceedings and that the same cannot be a ground to

convert the survey into a search operation under Section

132 of the Act cannot be accepted. We find that the

petitioner's had not brought on record the statement of

the Director, who was examined during the course of

search but upon perusal of the original record, we find

that the Director was repeatedly asked to explain the

source of the cash and entries. Since no plausible reply

came forward and the Director was unable to explain the

entries, which showed that the petitioner was taking

cash from various parties and returning the money via

cheque to the same parties and vice-versa, the

authorities had reasons to believe that the petitioner's

would not produce or cause it to produce the books of

accounts or documents evidencing true state of affairs,

even if summons under Section 131 (of Income Tax Act, 1961) or notice under

Section 142 (of Income Tax Act, 1961) was issued.

In this regard, we find that the Central Board of

Direct Taxes has issued Instructions dated 30th

September, 2014 indicating that where cash amounting

to more than Rs.10 lacs is found at the premises during

the survey under Section 133A (of Income Tax Act, 1961), the Director of

Income Tax (Investigation) having territorial jurisdiction

over the survey should be intimated to examine the facts

for taking recourse to Section 132(1) (of Income Tax Act, 1961).

In the light of this instruction, we have no hesitation

in holding that pursuant to the survey and the

undisclosed cash and unexplained entries found, steps

to convert the survey into a search was rightly taken.

We are consequently, of the opinion that in the

facts and circumstances of the case, the authorities had

information based upon material which led to a valid

survey being conducted under Section 133A (of Income Tax Act, 1961).

Based on further incriminating evidence that came

forward during the course of survey, a satisfactory note

was placed before the competent authority, who after

considering the material recorded his satisfaction. Such

satisfaction recorded was in accordance with the

provision of Section 132 (of Income Tax Act, 1961).

For the reasons stated aforesaid, we do not find

any manifest error in the search conducted by the

respondents.

The writ petition is dismissed.

Date:7.7.2015

Bhaskar

(Surya Prakash Kesarwani, J.) (Tarun Agarwala, J.)