Supreme Court sets aside High Court order quashing search and seizure under Income Tax Act, remands matter for fresh adjudication.

Case Name:

Union of India & Ors. vs Agarwal Iron Industries

Civil Appeal No. 7499 of 2004

Key Takeaways:

- The Supreme Court upheld the validity of search and seizure provisions under Section 132 (of Income Tax Act, 1961).

- The Court emphasized that the High Court should have examined the reasons recorded by the competent authority for forming the belief to conduct the search, instead of quashing it based on the principles of non-traverse.

- The Court reiterated the legal principles governing search and seizure operations under the Income Tax Act, as laid down in previous judgments like Pooran Mal vs. Director of Inspection (Investigation) and District Registrar and Collector, Hyderabad vs. Canara Bank.

Issue:

Can the High Court quash a search and seizure operation conducted under Section 132 (of Income Tax Act, 1961), without examining the reasons recorded by the competent authority for forming the belief to conduct the search?

Facts:

The Income Tax authorities conducted a search and seizure operation at the premises of Agarwal Iron Industries on 16.02.2000 under Section 132 (of Income Tax Act, 1961). Agarwal Iron Industries challenged the search and seizure before the Allahabad High Court. The High Court, by an order dated 03.09.2003, quashed the search and seizure operation. The High Court appointed an Advocate Commissioner to prepare an inventory of the goods in respect of which the restraint order was passed. The High Court relied on the principles of non-traverse and held that since the Revenue did not specifically deny the allegations made by Agarwal Iron Industries in the counter-affidavit, it could be concluded that no reasons were ascribed for the search and seizure.

Arguments:

- Agarwal Iron Industries argued that the warrant of authorization for search and seizure was issued mechanically, arbitrarily, and without application of mind, and without forming the opinion about the existence of undisclosed assets, as contemplated by Section 132(1) (of Income Tax Act, 1961).

- The Revenue denied the allegations and argued that the warrant of authorization was not issued mechanically, arbitrarily, and without application of mind.

Key Legal Precedents:

- Commissioner of Income-Tax, Madras vs. S. Chenniappa Mudaliar :

This Supreme Court case dealt with similar provisions under the Income Tax Act, 1922, and held that the Tribunal must dispose of the appeal on merits and cannot dismiss it for default of appearance.

- Pooran Mal vs. The Director of Inspection (Investigation), New Delhi and others:

This Constitution Bench judgment upheld the constitutional validity of Section 132 (of Income Tax Act, 1961), and laid down the legal principles governing search and seizure operations under the Act.

- District Registrar and Collector, Hyderabad and Another vs. Canara Bank and Others:

This case reiterated the safeguards and principles governing search and seizure operations under the Income Tax Act, 1961.

Judgement:

The Supreme Court allowed the appeal filed by the Union of India and set aside the orders of the High Court and the Tribunal. The Court held that the High Court erred in quashing the search and seizure operation without examining the reasons recorded by the competent authority for forming the belief to conduct the search. The Court remanded the matter to the High Court for fresh adjudication, directing the Revenue to produce the relevant file before the High Court. The High Court was directed to examine the reasons recorded by the competent authority and decide whether the search and seizure operation was valid under the law.

FAQs:

Q1: What is the legal basis for search and seizure operations under the Income Tax Act, 1961?

A1: Section 132(1) (of Income Tax Act, 1961) enables the competent authority to direct a search and seizure operation based on the formation of an opinion that there are reasons to believe that certain conditions exist, such as the existence of undisclosed assets or income.

Q2: What are the safeguards and principles governing search and seizure operations under the Income Tax Act, 1961?

A2: The Supreme Court, in cases like Pooran Mal vs. The Director of Inspection (Investigation), New Delhi and others and District Registrar and Collector, Hyderabad and Another vs. Canara Bank and Others, has laid down various safeguards and principles, such as the requirement of recording reasons by the highest officers of the department, the temporary nature of seizure for the purpose of investigation, and the need for the competent authority to form a reasonable belief based on acceptable material.

Q3: Can the High Court quash a search and seizure operation without examining the reasons recorded by the competent authority?

A3: No, the Supreme Court held that the High Court cannot quash a search and seizure operation without examining the reasons recorded by the competent authority for forming the belief to conduct the search. The High Court must scrutinize the file and determine whether the reasons meet the legal requirements.

Q4: What is the significance of the Supreme Court's decision in this case?

A4: The Supreme Court's decision reaffirms the legal principles governing search and seizure operations under the Income Tax Act, 1961, and emphasizes the need for the courts to examine the reasons recorded by the competent authority before quashing such operations. It also clarifies that the principles of non-traverse cannot be used to quash search and seizure operations without examining the reasons recorded by the competent authority.

Q5: What is the role of the High Court in such cases?

A5: The High Court exercises an advisory jurisdiction and can be approached on questions of law arising out of the Tribunal's order passed under Section 35C of the Central Excise Act, 1944 (which is similar to the provisions of the Income Tax Act, 1961). The High Court has no appellate or revisional powers over the Tribunal's orders on questions of fact.

1. In these appeals the assail is to the legal tenability of the order

dated 3.9.2003 passed by the Division Bench of the High Court of Judicature at Allahabad in Civil Writ Petition No. 275 of 2000 whereby the High Court has quashed the search and seizure conducted on 16.2.2000 in the factory premises of the 1st respondent.

2. Filtering the unnecessary details, the facts that constitute the

filament of the controversy is that the 1st respondent is engaged in the

manufacture of C.I. pipes, fittings and manholes and has obtained the

licence under the Central Excise Act. The factory in question has

been filing income-tax returns under the Income Tax Act, 1961 (for

brevity ‘the Act’). On 16.2.2000 when the sole proprietor of the

factory Shri Om Prakash Agarwal was absent, the officer of the

Income Tax Department conducted a search both at the residential as

well as the business premises. During the search of the residential

premises, son of the sole proprietor was informed by the Income Tax

Officer that the search operations were also being conducted at the

factory premises. Despite such information he was not allowed to

leave the house. Assailing the search and the seizure, the 1st

respondent preferred a writ petition before the High Court and

contended therein that there was no information in possession of the

officer which could have persuaded any reasonable person to form an

opinion about the existence of undisclosed assets of the writ-petitioner. It is further urged that the warrant of authorization was issued mechanically, arbitrarily and there was total non-application of mind and moreover there was no formation of opinion about the existence of undisclosed assets as contemplated under Section 132(1) (of Income Tax Act, 1961). On this foundation, the search and seizure were sought to be quashed.

3. A counter affidavit was filed by the revenue asseverating that

there was no illegality in the initiation of the seizure and it had been

conducted in accordance with law and the revenue had enough

material against the 1st respondent herein for the assessee had

suppressed the vital information pertaining to production and sale

and the same was also evidenced during the search operation. It was

contended that the productions declared by the 1st respondent in the

official record was not even 1/5th of the actual production revealed by

the seized documents.

4. It is interesting to note that the High Court by its order dated

29.3.2000 appointed an Advocate Commissioner to prepare an

inventory of the goods in question in respect of which the restraint

order was passed. The said Advocate Commissioner had submitted a

report which was taken on record. The High Court placed reliance on

decisions in Commissioner of Income-Tax v. Vindhya Metal Corporation, Dr. N.L. Tahiliani v. Commissioner of Income Tax, L.R. Gupta v. Union of India v. Union of India3 and Ajit Jain v. Union of India4 and extensively quoting from Dr. Tahiliani’s case came to hold as follows:-

“At this stage it is relevant to refer to Para 40 of the writ petition, which is quoted below:

“40. That in the facts and circumstances the Petitioner bonafidely believes that there was no information in possession of the officer issuing the warrant of authorization for search which could lead any reasonable person to form an opinion about existence of undisclosed assets with the Petitioner. The warrant of authorization, even if assumed that there was any, was issued mechanically arbitrarily and without application of mind and without forming the opinion about existence of undisclosed assets, as contemplated by Sub-Section (1) of Section 132 (of Income Tax Act, 1961).”

The reply of the said paragraph has been given by the Respondents in Para 33 of the counter affidavit, whichreads as under:

“33. That in reply to Paragraph 40 of the writ petition, it is denied that the warrant of authorization was issued mechanically, arbitrarily and without application of mind.”

From the aforesaid reply it is clear that there is no specific denial of the averments made in Para 40 of the writ petition. Order 8 Rule 5 of the Code of Civil Procedure provides that every allegation of fact in the plaint if not denied specifically or by necessary implication or stated to be not admitted in the pleading of the defendant shall be taken to be admitted except against the person under disability. In view of this provision in absence of a specific denial in the counter affidavit to the assertions made in the writ petition, it can safely be concluded that there is no denial of the facts stated in the writ petition. We are aware that the explanation to Section 141 of the Code of Civil Procedure provides that the provisions of Code of Civil Procedure shall not be applicable to the writ petition. However, the principles as stated in the Code of Civil Procedure are also applicable to the writ proceedings.”

5. We have no hesitation in opining that the reasons ascribed in the aforesaid paragraphs, leaves us absolutely unimpressed. We really cannot comprehend how an Advocate Commissioner was appointed to take inventory of the goods in respect of which the restraint order was passed by the revenue under the Act. That apart, it is difficult to appreciate how the denial in the counter affidavit filed by the revenue could be treated as an admission by implication to come to a conclusion that no reason was ascribed for search and seizure and, therefore, action taken under Section 132 (of Income Tax Act, 1961) was illegal. The relevant confidential file, if required and necessary could

have been called for and examined. Revenue in the counter affidavit was not required to elucidate and reproduce the information and details that formed the foundation.

6. In this context, we may profitably refer to the decision in Pooran Mal V. The Director of Inspection (Investigation), New Delhi and others, wherein the Constitution Bench, while upholding the constitutional validity of Section 132 (of Income Tax Act, 1961) opined thus:

“Search and seizure are not a new weapon in the armoury of those whose duty it is to maintain social security in its broadest sense. The process is widely recognized in all civilized countries. Our own Criminal Law accepted its necessity and usefulness in Sections 96 to 103 and Section 165 of the Criminal Procedure Code. In M.P. Sharma v. Satish Chandra the challenge

to the power of issuing a search warrant under Section 96(1) (of Income Tax Act, 1961) as violative of Article 19(1)(f) was repelled on the ground 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. As pointed out in that case a search by itself is not a restriction on theright to hold and enjoy property though a seizure is a

restriction on the right of possession and enjoyment of the property seized. That, however, is only temporary and for the limited purpose of investigation”.

Thereafter, proceeding with the ratiocination, the Court ruled that the provision has inbuilt spheres. Proceeding to enumerate the spheres and other consequent facets, the Court ruled:

“In the first place, it must be noted that the power to order search and seizure is vested in the highest officers of the department. Secondly, the exercise of this power can only follow a reasonable belief entertained by such officer that any of the three conditions mentioned in Section 132(1)(a) (of Income Tax Act, 1961),(b) and (c) exists. In this connection it may be further pointed out

that under sub-rule (2) of Rule 112 (of Income Tax Rules, 1962), the Director of Inspection or the Commissioner, as the case may be, has to record his reasons before the authorisation is issued to the officers mentioned in sub-section (1).

Thirdly, the authorisation for the search cannot be in favour of any officer below the rank of an Income Tax Officer. Fourthly, the authorisation is for specific purposes enumerated in (i) to (v) in sub-section (1) all of which are strictly limited to the object of the search. Fifthly when money, bullion, etc. is seized the Income Tax Officer is to make a summary enquiry with a view to determine how much of what is seized will be retained by him to cover the estimated tax liability and how much will have to be returned forthwith. The object of the enquiry under sub-section (5) is to reduce the inconvenience to the assessee as much as possible so that within a reasonable time what is estimated due to the Government may be retained and what should be returned to the assessee may be immediately returned to him. Even with regard to the books of account and documents seized, their return is guaranteed after a reasonable time. In the meantime the person from whose custody they are seized is permitted to make copies and take extracts. Sixthly, where money, bullion, etc. is seized, it can also be immediately returned to the person concerned after he makes appropriate provision for the payment of the estimated tax dues under sub-section (5) and lastly,

and this is most important, the provisions of the Criminal Procedure Code relating to search and seizure apply, as far as they may be, to all searches and seizures under Section 132 (of Income Tax Act, 1961). Rule 112 (of Income Tax Rules, 1962) provides for the actual search and seizure being made after observing normal decencies of behaviour. The person in charge of the premises searched is immediately given a copy of the list of articles seized. One copy is forwarded to the authorising officer. Provision for the safe custody of the articles after seizure is also made in Rule 112 (of Income Tax Rules, 1962). In our opinion, the safeguards are adequate to render the provisions of search and seizure as less onerous and restrictive as is possible under the circumstances.

7. In District Registrar and Collector, Hyderabad and Another V. Canara Bank and Others , while referring to Section 132 (of Income Tax Act, 1961), it has been ruled that:

“There are safeguards. Section 132 (of Income Tax Act, 1961) uses the words “in consequence of information in his possession, has reason to believe”. (emphasis supplied) Section 132 (of Income Tax Act, 1961)(1-A) uses the words “in consequence of information in his possession, has reason to suspect”. Section 132(13) (of Income Tax Act, 1961) says that the provisions of the Code of Criminal Procedure, relating to searches and seizure shall apply, so far as may be, to searches and seizures under Sections 132(1) (of Income Tax Act, 1961) and 132(1-A). There are also Rules made under Section 132(14) (of Income Tax Act, 1961). Likewise Section

132-A(1) uses the words “in consequence of information in his possession, has reason to believe”. (emphasis supplied) Section 133 (of Income Tax Act, 1961) which deals with the

power to call for information from banks and others uses the words “for the purposes of this Act” and Section 133(6) (of Income Tax Act, 1961) permits a requisition to be sent to a bank or its officer”.

8. The provision contained in Section 132(1) (of Income Tax Act, 1961) enables the competent authority to direct for issue of search and seizure on the basis of formation of an opinion which a reasonable and prudent man would form for arriving at a conclusion to issue a warrant. It is done by way of an interim measure. The search and seizure is not confiscation. The articles that are seized are the subject of enquiry by the competent authority after affording an opportunity of being heard to the person whose custody it has been seized. The terms used are ‘reason to believe’. Whether the competent authority had formed the opinion on the basis of any acceptable material or not, as is clear as crystal, the High Court has not even remotely tried to see the reasons. Reasons, needless to say, can be recorded on the file and the Court can scrutinize the file and find out whether the authority has

appropriately recorded the reasons for forming of an opinion that there are reasons to believe to conduct search and seizure. As is evincible, the High Court has totally misdirected itself in quashing the search and seizure on the basis of the principles of non-traverse.

9. In our considered opinion, the High Court would have been well advised to peruse the file to see whether reasons have been recorded or not and whether the same meet the requirement of law.

10. In view of our foregoing analysis, we allow the appeals, set aside the impugned order passed by the High Court and remand the matter to the High Court for fresh disposal in accordance with law. The revenue shall produce the file before the High Court, whereafter the High Court shall proceed to adjudicate the lis. There shall be no order as to costs.

[Dipak Misra]

[Uday Umesh Lalit]

New Delhi;

November 12, 2014