Court Orders Release of Seized Cash: AO Can't Retain Third-Party Funds During Pending Assessment

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Case Name:

BIPIN VIMALCHAND JAIN VS ASSISTANT DIRECTOR OF INCOME TAX (INVESTIGATION) & ORS

(High Court of Bombay)

Date:17 October 2007

Key Takeaways:

1. The Assessing Officer (AO) must release seized assets belonging to third parties if the explanation for their source is satisfactory, even if an assessment is pending.

2. The AO cannot retain seized cash merely because an assessment under section 153A (of Income Tax Act, 1961) is pending, without evidence that it represents undisclosed income.

3. The court emphasized the importance of verifying the nature and source of seized assets within the statutory timeframe.

Issue:

Can the Income Tax Department retain seized cash belonging to a third party when the explanation for its source has been verified and found satisfactory, solely on the grounds that an assessment under section 153A (of Income Tax Act, 1961) is pending?

Facts:

1. On December 29, 2006, a survey was conducted at the business premises of the petitioner, M/s. Bipinson Jewellers. 

2. Cash amounting to Rs. 1,28,34,090 was found, of which Rs. 1.14 crores belonged to Bipin Vimalchand Jain, HUF (doing business as M/s. Vimalson Jewellers). 

3. A subsequent search at M/s. Vimalson Jewellers' premises corroborated this claim. 

4. Despite verification, the search party seized Rs. 1,20,00,000 from Bipinson Jewellers. 

5. On January 29, 2007, the petitioner filed an application under section 132B(1)(i) (of Income Tax Act, 1961), seeking release of Rs. 1.14 crores. 

6. The application was rejected by the Assistant Director of Income Tax on September 3, 2007. 

Arguments:

Petitioner's Arguments:

1. The explanation for the source of Rs. 1.14 crores was verified and found correct.

2. The presumption under section 292C (of Income Tax Act, 1961) is rebuttable and has been rebutted in this case.

3. In the absence of any existing liability, the respondent cannot retain the seized cash.

Revenue's Arguments:

1. Under section 132B(1)(i) (of Income Tax Act, 1961), seized cash should be applied to satisfy liabilities upon completion of assessment under section 153A (of Income Tax Act, 1961).

2. The assessment under section 153A (of Income Tax Act, 1961) was still pending, justifying the retention of the seized cash.

Key Legal Precedents:

1. The judgment cites the case of Biaoro Constructions (P) Ltd. V/s. Director of Income Tax reported in 281 I.T.R. 247 (of Income Tax Rules, 1962) (M.P.), although the specific application of this precedent is not detailed in the provided text. 

2. The court extensively refers to and interprets Section 132B(1)(i) (of Income Tax Act, 1961), particularly the first proviso. 

Judgement:

1. The court quashed and set aside the impugned order dated September 3, 2007. 

2. The respondent (Assistant Director of Income Tax) was directed to release the seized cash of Rs. 1.14 crores to the petitioner. 

3. Interest at the rate of 6% per annum from the date of seizure till payment was also ordered to be paid. 

The court reasoned that:

1. The explanation for the source of the seized cash was verified and found correct. 

2. In the absence of evidence suggesting the cash represented undisclosed income, it couldn't be retained merely because an assessment under section 153A (of Income Tax Act, 1961) was pending. 

3. The application under section 132B(1)(i) (of Income Tax Act, 1961) could only be rejected if there was reason to believe the seized cash represented undisclosed income. 

FAQs:

1. Q: What is the significance of section 132B(1)(i) (of Income Tax Act, 1961) in this case?

  A: This section allows for the release of seized assets if the owner provides a satisfactory explanation of their nature and source within 30 days of seizure.

2. Q: Can the Income Tax Department retain seized cash indefinitely if an assessment is pending?

  A: No, they cannot retain it solely on the grounds of a pending assessment. There must be reason to believe it represents undisclosed income.

3. Q: What are the implications of this judgment for future cases?

  A: This judgment emphasizes that tax authorities must promptly verify explanations for seized assets and cannot retain third-party assets without justification, even during pending assessments.

4. Q: Does this judgment mean all seized assets will be released if explained satisfactorily?

  A: Not necessarily. The judgment allows for retention if there's reason to believe the assets represent undisclosed income, but requires more than just a pending assessment to justify retention.

5. Q: Why did the court order interest payment on the seized amount?

  A: The interest payment compensates the rightful owner for the time their money was held by the tax authorities without proper justification.

1. Heard. Rule. Rule made returnable forthwith. By consent of the parties, the petition is taken up for final hearing.

2. The petitioner is carrying business in the name and style of M/s.Bipinson Jewellers. On 29/12/2006 there was a survey action carried out at the business premises of the petitioner. During the course of the search cash amounting Rs.1,28,34,090 was found at the business premises of the petitioner. The petitioner explained that out of the said amount, a sum of Rs.1.14 crores belonged to Bipin Vimalchand Jain, HUF carrying on business in the name of M/s.Vimalson Jewellers. Thereupon, search was carried out at the business premises of M/s.Vimalson Jewellers at 1.10 a.m. on 30/12/2006. On verification of the books of accounts maintained by M/s.Vimalson Jewellers, it was noticed that in the books there was cash balance of Rs.1,22,41,740/- but the cash actually found was Rs.8,38,980/-. The search party found a chit recording transfer of Rs.1.14 crores from the shop premises of Vimalson Jewellers to the shop premises of Bipinson Jewellers. The same was also corroborated in the statement of Ladharam Chaudhary. The search party found that the sales of the day matched with the cash and stock including the cash sent to the shop premises of M/s.Bipinson Jewellers. In spite of the above, the search party seized Rs.1,20,00,000/- from the shop premises of Bipinson Jewellers.

3. On 29th January, 2007 an application was made by the petitioner under section 132B(1)(i) (of Income Tax Act, 1961), 1961 (‘Act’ for short) inter alia seeking release of the cash amounting to Rs.1.14 crores seized from the petitioner, as the said amount belonged to M/s.Vimalson Jewellers. As no action was taken, the petitioner filed Writ Petition No.1289 of 2007. Similarly, M/s.Vimalson Jewellers had also filed a Writ Petition No.1288 of 2007 to claim the amount of Rs.1.14 crores. This Court disposed of the Writ Petition No.1289 of 2007 filed by the petitioner on 28/8/2007 by directing the respondent No.2 to dispose of the application filed by the petitioner in accordance with law. Thereupon, the petitioner appeared before the respondent No.2 and filed their written submissions.

4. By the impugned order dated 3rd September, 2007 the respondent No.2 rejected the application of the petitioner for release of the cash amounting to Rs.1.14 crores seized on 29th December, 2006. Challenging the said order, present petition is filed.

5. Mr.Inamdar, learned counsel appearing on behalf of the petitioner submitted that once the explanation given by the petitioner that out of the seized cash a sum of Rs.1.14 crores belongs to M/s.Vimalson Jewellers and the same is verified and found to be correct, the respondent No.2 could not have retained that amount. The presumption under section 292C (of Income Tax Act, 1961) that the amount found during the course of search belongs to that person is rebuttable presumption and the same has been rebutted in the present case. In the absence of any existing liability the respondent No.2 could not have rejected the application of the petitioner. Mr.Inamdar further submitted that in the present case the condition precedent for retaining the seized cash are not fulfilled and hence the impugned order is liable to be quashed and set aside. In this connection Mr.Inamdar relied upon a Judgment of the M.P. High Court in the case of Biaoro Constructions (P) Ltd. V/s. Director of Income Tax reported in 281 I.T.R. 247 (of Income Tax Rules, 1962) (M.P.).

6. Mr.Chatterji learned counsel appearing on behalf of the revenue, on the other hand supported the order of the respondent No.2 and submitted that under section 132B(1)(i) (of Income Tax Act, 1961) the seized cash is required to be applied for satisfying the liabilities on completion of assessment under section 153A (of Income Tax Act, 1961) as also the penalty that may be levied. In the present case, the assessment is still to be completed under section 153A (of Income Tax Act, 1961) and, therefore, the order passed by the respondent No.2 cannot be faulted.

7. We have carefully considered the rival submissions.

8. Section 132B(1) (of Income Tax Act, 1961)Ii) of the Act reads as under:-

"Application of seized or requisitioned assets." 132B. (1) The assets seized under section 132 (of Income Tax Act, 1961) or requisitioned under section 132A (of Income Tax Act, 1961) may be dealt with in the following manner, namely:-

(i) the amount of any existing liability under this Act, the Wealth-tax Act, 1957 (27 of 1957), the Expenditure-tax Act, 1987 (35 of 1987), the Gift-tax Act, 1958 (18 of 1958) and the Interest-tax Act, 1974 (45 of 1974), and the amount of the liability determined on completion of the assessment [under section 153A (of Income Tax Act, 1961) and the assessment of the year relevant to the previous year in which search is initiated or requisition is made, or the amount of liability determined on completion of the assessment under Chapter XIV-B for the block period, as the case may be] (including any penalty levied or interest payable in connection with such assessment) and in respect of which such person is in default or is deemed to be in default, may be recovered out of such assets. [Provided that where the person concerned makes an application to the Assessing Officer within thirty days from the end of the month in which the asset was seized, for release of asset and the nature and source of acquisition of any such asset is explained] to the satisfaction of the Assessing Officer, the amount of any existing liability referred to in this clause may be recovered out of such asset and the remaining portion, if any, of the asset may be released, with the prior approval of the Chief Commissioner or Commissioner, to the person from whose custody of the assets were seized;

Provided further that such asset or any portion thereof as is referred to in the first proviso shall be released within a period of one hundred and twenty days from the date on which the last of the authorisations for search under section 132 (of Income Tax Act, 1961) or for requisition under section 132A (of Income Tax Act, 1961), as the case may be, was executed;"

Thus, under the first proviso to section 132B(1)(i) (of Income Tax Act, 1961) on an application made for release of the seized asset, within thirty days from the end of the month in which the asset was seized, the assessing officer on being satisfied regarding the nature and source of acquisition of such asset is empowered to recover the existing liability out of such asset and release the remaining portion of the asset.

9. In the present case, it is not in dispute that the application seeking release of the seized cash to the extent of Rs.1.14 crores is made within 30 days of the seizure. In the impugned order the explanation given by the petitioner regarding the nature and source of acquisition of the sum of Rs.1.14 crores has not been doubted or found to be unsatisfactory. Even in the affidavit filed in reply to the petition, the revenue has not disputed the averment made in the petition to the effect that the search party had verified the books of M/s.Vimalson Jewellers and found that the explanation given by the petitioner was correct. Once the explanation given by the petitioner regarding the nature and source of acquisition of the seized cash is on verification found to be correct, then the amount of Rs.1.14 crores which belongs to M/s.Vimalson Jewellers, could not be retained by the respondent No.2 by rejecting the application filed by the petitioner.

10. Only reason given in the impugned order for rejecting the application is that the assessment under section 153A (of Income Tax Act, 1961) is yet to be finalised. In the absence of any material on record to suggest that the seized cash represents the undisclosed income of the assessee, the respondent No.2 could not have rejected the application made under section 132B(1)(i) (of Income Tax Act, 1961) merely on the ground that the assessment under section 153A (of Income Tax Act, 1961) was pending. In other words, application under section 132B(1)(i) (of Income Tax Act, 1961) could be rejected only if the respondent No.2 had reason to believe that the seized cash represented the undisclosed income of the assessee liable to be assessed in the year in which the search took place. In the impugned order, it is not even remotely suggested that the seized cash represents the undisclosed income of the assessee.

11. In these circumstances, we have no option but to quash and set aside the impugned order dated 3/9/2007 and direct the respondent No.2 to release the seized cash amounting to Rs.1.14 crores to the petitioner along with interest at the rate of 6% per annum from the date of seizure till payment.

12. Rule is made absolute in the above terms with no order as to costs.

(F.I.REBELL0, J.)

(J.P.DEVADHAR, J.)