REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO.4394 OF 2015
(Arising out of S.L.P.(C) No. 38611 of 2012)
Director General of Income Tax
(Investigation) Pune & Ors. . .. Appellants
Versus
M/s. Spacewood Furnishers Pvt. Ltd. & Ors. ... Respondents
J U D G M E N T
RANJAN GOGOI, J.
Leave granted.
The block assessment of the respondent-assessee for the assessment years
2004-05 to 2009-10 was sought to be initiated by notices issued under
Section 153A of the Income Tax Act, 1961 (hereinafter referred to as the
‘Act’) following a search made under the provisions of the Act. The same
has been interdicted by the High Court of Delhi by interfering with the
warrant of authorization for the search issued under Section 132 of the Act
and the consequential search made between 19th June, 2009 to 21st July,
2009. Aggrieved, the Revenue has filed this appeal by special leave under
Article 136 of the Constitution.
We have heard Shri Guru Krishna Kumar, learned senior counsel for the
appellants and Shri Krishnan Venugopal, learned senior counsel appearing
for the respondents.
The issues that arise in the present appeal lie within a short
circumference. As the warrant of authorization under Section 132, which is
required to be founded on a reasonable belief of the authorized official
regarding the existence of the conditions precedent to the exercise of the
power to issue the same, has been interdicted under Article 226 of the
Constitution, the ambit of the power of the High Court to do so may be
noticed at the outset.
The “classical” notion of the extent of power that the High Court would
have in the exercise of its writ jurisdiction to cause such interference is
formulated in ITO vs. Seth Brothers[1] and Pooran Mal vs. Director of
Inspection (Investigation), Income Tax[2]. The parameters of permissible
interference as laid down in the aforesaid two decisions have stood the
test of time and continue to hold the field even today. We may, therefore,
advert to ITO vs. Seth Brothers (supra) in the first instance.
Considering the scope of Section 132 of the Act in ITO vs. Seth Brothers
(supra), this Court at page 843 held that :-
“The section does not confer any arbitrary authority upon the Revenue
Officers. The Commissioner or the Director of Inspection must have, in
consequence of information, reason to believe that the statutory conditions
for the exercise of the power to order search exist. He must record reasons
for the belief and he must issue an authorisation in favour of a designated
officer to search the premises and exercise the powers set out therein. The
condition for entry into and making search of any building or place is the
reason to believe that any books of account or other documents which will
be useful for, or relevant to, any proceeding under the Act may be found.
If the Officer has reason to believe that any books of account or other
documents would be useful for, or relevant to, any proceedings under the
Act, he is authorised by law to seize those books of account or other
documents, and to place marks of identification therein, to make extracts
or copies therefrom and also to make a note or an inventory of any articles
or other things found in the course of the search. Since by the exercise of
the power a serious invasion is made upon the rights, privacy and freedom
of the tax-payer, the power must be exercised strictly in accordance with
the law and only for the purposes for which the law authorizes it to be
exercised. If the action of the officer issuing the authorization, or of
the designated officer is challenged the officer concerned must satisfy the
Court about the regularity of his action. If the action is maliciously
taken or power under the section is exercised for a collateral purpose, it
is liable to be struck down by the Court. If the conditions for exercise of
the power are not satisfied the proceeding is liable to be quashed. But
where power is exercised bona fide, and in furtherance of the statutory
duties of the tax officers any error of judgment on the part of the
Officers will not vitiate the exercise of the power. Where the Commissioner
entertains the requisite belief and for reasons recorded by him authorises
a designated officer to enter and search premises for books of account and
documents relevant to or useful for any proceeding under the Act, the Court
in a petition by an aggrieved person cannot be asked to substitute its own
opinion whether an order authorising search should have been issued. Again,
any irregularity in the course of entry, search and seizure committed by
the officer acting in pursuance of the authorisation will not be sufficient
to vitiate the action taken, provided the officer has in executing the
authorisation acted bona fide.
The Act and the Rules do not require that the warrant of authorisation
should specify the particulars of documents and books of accounts a general
[pic]authorisation to search for and seize documents and books of account
relevant to or useful for any proceeding complies with the requirements of
the Act and the Rules. It is for the officer making the search to exercise
his judgment and seize or not to seize any documents or books of account.
An error committed by the Officer in seizing documents which may ultimately
be found not to be useful for or relevant to the proceeding under the Act
will not by itself vitiate the search, nor will it entitle the aggrieved
person to an omnibus order releasing all documents seized.”
7. In Pooran Mal vs. Director of Inspection (supra) the constitutional
validity of Section 132 was under challenge. While negating the said
challenge, this Court at page 515 of its report had held that:
“Dealing first with the challenge under Article 19(1)(f) and (g) of the
Constitution it is to be noted that the impugned provisions are evidently
directed against persons who are believed on good grounds to have illegally
evaded the payment of tax on their income and property. Therefore, drastic
measures to get at such income and property with a view to recover the
government dues would stand justified in themselves. When one has to
consider the reasonableness of the restrictions or curbs placed on the
freedoms mentioned in Article 19(1)(f) and (g), one cannot possibly ignore
how such evasions eat into the vitals of the economic life of the
community. It is a well-known fact of our economic life that huge sums of
unaccounted money are in circulation endangering its very fabric. In a
country which has adopted high rates of taxation a major [pic]portion of
the unaccounted money should normally fill the Government coffers. Instead
of doing so it distorts the economy. Therefore, in the interest of the
community it is only right that the fiscal authorities should have
sufficient powers to prevent tax evasion.”
8. What is significant and, therefore, must be noticed is that in both
the aforesaid two decisions while this Court has emphasized the necessity
of recording of reasons in support of the ‘reasonable belief’ contemplated
by Section 132, nowhere, in either of the decisions any view had been
expressed that the reasons recorded prior to authorizing the search needs
to be disclosed or communicated to the person against whom the warrant of
authorization is issued. The same is the view expressed by this Court in
Dr. Pratap Singh vs. Director of Enforcement[3] while considering a pari
material provision in the Foreign Exchange Regulation Act.
“The material on which the officer has reasons to believe that any
documents will be useful for or relevant to any investigation need not be
disclosed in the search warrant; such material may be secret, may have been
obtained through intelligence, or even conveyed orally by informants. In
the said case, the petitioner contended that, if the court is going to look
into the file produced on behalf of the officer who authorized the search,
it must be disclosed to the petitioner so that the petitioner “can
controvert any false or wholly unreasonable material set out in the file”,
but the Supreme Court did not accept this submission. The Supreme Court
also referred to an earlier decision in S. Narayanappa v. CIT [1967] 63 ITR
219 (SC), to hold that whether grounds for ordering search were sufficient
or not is not a matter for the court to investigate. However, the court may
examine the question whether the reasons for the belief have a rational
connection or a relevant bearing to the formation of the belief and are not
extraneous or irrelevant for the purpose of the section.”
9. The principles that can be deduced from the aforesaid decisions of
this Court which continue to hold the field without any departure may be
summarized as follows :
The authority must have information in its possession on the basis of which
a reasonable belief can be founded that-
the concerned person has omitted or failed to produce books of account or
other documents for production of which summons or notice had been issued
OR
such person will not produce such books of account or other documents even
if summons or notice is issued to him.
OR
(b) such person is in possession of any money, bullion, jewellery
or other valuable article which represents either wholly or partly income
or property which has not been or would not be disclosed.
(ii) Such information must be in possession of the authorized official
before the opinion is formed.
(iii) There must be application of mind to the material and the
formation of opinion must be honest and bonafide. Consideration of any
extraneous or irrelevant material will vitiate the belief/satisfaction.
(iv) Though Rule 112(2) of the Income Tax Rules which specifically
prescribed the necessity of recording of reasons before issuing a warrant
of authorization had been repealed on and from 1st October, 1975 the
reasons for the belief found should be recorded.
(v) The reasons, however, need not be communicated to the person against
whom the warrant is issued at that stage.
(vi) Such reasons, however, may have to be placed before the Court in the
event of a challenge to formation of the belief of the authorized official
in which event the court (exercising jurisdiction under Article 226) would
be entitled to examine the relevance of the reasons for the formation of
the belief though not the sufficiency or adequacy thereof.
10. Before proceeding further it will be necessary to take note of
certain other facts that may have a bearing to the issues at hand.
By Notification No.354 of 2001 dated 3.12.2001 in exercise of the powers
conferred by Section 120(1) & (2) of the Act, the Central Board of Direct
Taxes had directed the Directors of Income Tax (Investigation) specified in
Column (2) of the Schedule to the said Notification to exercise the power
vested in them under Section 132 of the Act in relation to the territorial
areas specified in Column (3) of the Schedule. By virtue of the said
notification the Director of Income Tax (Investigation), Nagpur i.e.
Appellant No.2 was authorized to exercise the power under Section 132 of
the Act in respect of the territorial areas falling within the jurisdiction
of the CCIT Nagpur and CCIT Nasik in the State of Maharashtra.
11. Notice must also be had of certain provisions contained in the Search
and Seizure Manual published by the Directorate of Income Tax with regard
to the preparation of satisfaction note and issuing of warrant of
authorization under Section 132 of the Act. Para 2.38 of the aforesaid
Manual being relevant may be usefully extracted :
“2.38 The “satisfaction note” should ordinarily be initiated by the ADIT
(Investigation)/DDIT (Investigation). It should be put up to the DIT
(Investigation) through the Joint/Additional DIT (Investigation), along
with the detailed comments of the latter. The note must be recorded in the
secret file, already prepared for this purpose, containing material like,
the secret information collected from various sources, statement(s), if any
of the informant(s), reference to tax evasion petition(s), if any,
surveillance reports and information relating to assessment(s), returns of
income, wealth, etc, where available.”
12. It will also be required to be noticed that by Notification dated
7.3.2001 administrative approval of the Director General of Income Tax
(investigation) was made mandatory before an authorization for search is
issued. The said requirement appears to have been brought in order to
obviate a malafide search and to avoid undue harassment of the taxpayers.
13. In the present case the satisfaction note(s) leading to the issuing
of the warrant of authorization against the respondent-assessee were placed
before the High Court. As it would appear from the impugned order the
contents thereof were exhaustively reproduced by the High Court. The said
satisfaction note(s) have also been placed before us. A perusal of the file
containing the satisfaction note(s) indicate that on 8.6.2009 the Assistant
Director of Income Tax (Investigation), Nagpur had prepared an elaborate
note containing several reasons as to why he had considered it reasonable
to believe that if summons or notice were issued to the respondent to
produce the necessary books of account and documents, the same would not be
produced. The Assistant Director also recorded detailed reasons why he
entertains reasons to believe that the promoters of the respondent-assessee
company would be found to be in possession of money, bullion, jewellery
etc. which represents partly or wholly income which has not been disclosed
for the purposes of the Act
14. The said note was put up for consideration before the Additional
Director (Investigation) who on perusal of the same once again proceeded to
record elaborate reasons for his belief that the conditions precedent for
issuing warrant of authorization under Section 132 does exist in the
present case. Accordingly, the file was put up before the Director of
Income Tax (Investigation), Nagpur for issuing of warrant of authorization
for search of the residential as well as business premises of the assessee
and its Directors, if the Director of Income Tax (Investigation), Nagpur is
so satisfied. The aforesaid note of the Additional Director (Investigation)
is dated 8.6.2009.
15. The notes of the two officers i.e. Assistant Director (Investigation)
and Additional Director (Investigation) were perused and considered by the
Director (Investigation). The matter was also discussed. Thereafter the
Director (Investigation) recorded the relevant facts of the case and came
to the following conclusion:
“On an overall appreciation of the facts of the case I am satisfied that
M/s. Spacewood Furnishers P Ltd is suppressing its income substantially. I
am also satisfied that the company is not likely to produce the details of
such unaccounted income and the books of accounts and documents containing
details of such unaccounted incomes and assets if notices were to be issued
to it u/131 or u/s.142(1) of the I T Act. It is also reliably learnt that
the Directors S/Shri. Kirit Joshi and Vivek Deshpande and associated
concerns M/S. i3Space Systems (India) P Ltd., Spacewood Exports P ltd.,
Spacewood Hongkong P Ltd., i3space Hongkong Ltd. and Spacewood Nest P Ltd
are also in possession of undisclosed income / assets and books, documents
containing details of such unaccounted incomes. It appears that a
substantial portion of such unaccounted money is being held in cash also.
The Directors are maintaining luxurious life styles out of such unaccounted
income. I am also satisfied that these companies and the directors are not
likely to furnish the details of such unaccounted incomes and assets if
notices were to be issued to them u/s.131 or 142(1) of the I.T. Act. I am
therefore satisfied that this is a fit case for exercise of powers vested
u/s.132 of the Act to search the persons (M/S. Spacewood Furnishers P Ltd,
its associated concerns and Directors mentioned above) and the premises
mentioned in the note of the ADIT to seize unaccounted assets and documents
and evidences relating undisclosed income.”
The Director of Income Tax (Investigation), Nagpur thereafter
put his signature dated 9.6.2009 on the said note.
16. There is an endorsement to the following effect at the bottom of the
said note again under the signature of the Director (Investigation) –
“DGIT (Inv) Pune may kindly peruse the above satisfaction note and
grant administrative approval for the search and seizure action.”
17. On 11.6.2009 the matter was considered by the Director General of
Income Tax (Investigation) Pune who recorded the following view :
“I have gone through the notes of ADIT (Inv), Nagpur and Addl.DIT (Inv.),
Nagpur. The satisfaction note of DIT (Inv.) Nagpur has also been perused. I
find that DIT (Inv.) Nagpur has got adequate information to arrive at his
satisfaction that search and seizure action is required to be undertaken in
the case of M/s. Spacewood Furnishers P. Ltd. promoted by Shri Kirit Joshi
and Vivek Deshpande. Accordingly, the proposal of the DIT (Inv.) Nagpur to
take action u/s 132(1) of the Act is approved.”
18. The High Court by the impugned order dated 9.12.2011 has taken the
view that in the present case there are four satisfaction notes of four
different authorities. One of the said authority i.e. Assistant Director is
not the competent authority under Section 132 of the Act. The Additional
Director and the Director who are competent authorities to issue the
warrant of authorization, though had recorded their satisfaction, have not
taken the final decision to issue the authorization and each such authority
had passed on the file to his immediate superior, namely, the Additional
Director to the Director and the Director to the Director General. The High
Court further held that it is eventually the Director General who took the
decision to issue the search warrant but the said decision was not on the
basis of its own satisfaction but on the basis of the satisfaction recorded
by the Director of Income Tax (Investigation). Consequently, the High Court
held that the satisfaction mandated by Section 132 of the Act was not that
of the authority who has issued the search warrant, thereby vitiating the
authorization issued.
19. The High Court further held that each of the satisfaction notes was
in loose sheets of paper and not a part of a single file maintained in
proper sequence and order with due pagination. Therefore, according to the
High Court, it is possible that the file containing the satisfaction
note(s) was manipulated and thus is of doubtful credibility.
20. The High Court also held that the materials indicated by the
department in the counter affidavit and the additional affidavit filed
before it were at variance with what was revealed by the satisfaction
note(s) placed before the Court. Even if the satisfaction notes alone are
to be gone by, the essential details with regard to source of information;
the persons who were interrogated and with whom discreet enquiries were
made are not disclosed. The necessary information revealed by such
interrogation and discreet enquiries with regard to over invoicing, market
information etc. are not indicated. Materials like high growth, high
profit margins, doubts about international brand and details thereof etc.
as mentioned in the satisfaction note(s) are admitted and known facts and
therefore could not have induced the requisite belief. The above
constitutes the broad basis on which the High Court thought it proper to
cause inference with the measures undertaken by the Revenue against the
assessee.
21. Before we advert to the specific reasoning of the High Court, one
specific aspect of the opinion expressed by the High Court needs to be
taken note of inasmuch as the precise position in law in this regard needs
to be clarified. The above aspect is highlighted by the following
observations of the High Court expressed in paragraph 6 of the impugned
order:-
“We, however, express that when the satisfaction recorded is justiciable,
the documents pertaining to such satisfaction may not be immune and if
appropriate prayer is made, the inspection of such documents may be
required to be allowed.”
22. In the light of the views expressed by this Court in ITO vs. Seth
Brothers (supra) and Pooran Mal (supra), the above opinion expressed by the
High Court is plainly incorrect. The necessity of recording of reasons,
despite the amendment of Rule 112 (2) with effect from 1st October, 1975,
has been repeatedly stressed upon by this Court so as to ensure
accountability and responsibility in the decision making process. The
necessity of recording of reasons also acts as a cushion in the event of a
legal challenge being made to the satisfaction reached. Reasons enable a
proper judicial assessment of the decision taken by the Revenue. However,
the above, by itself, would not confer in the assessee a right of
inspection of the documents or to a communication of the reasons for the
belief at the stage of issuing of the authorization. Any such view would be
counter productive of the entire exercise contemplated by Section 132 of
the Act. It is only at the stage of commencement of the assessment
proceedings after completion of the search and seizure, if any, that the
requisite material may have to be disclosed to the assessee.
23. At this stage we would like to say that the High Court had committed
a serious error in reproducing in great details the contents of the
satisfaction note (s) containing the reasons for the satisfaction arrived
at by the authorities under the Act. We have already indicated the time and
stage at which the reasons recorded may be required to be brought to the
notice of the assessee. In the light of the above, we cannot approve of the
aforesaid part of the exercise undertaken by the High Court which we will
understand to be highly premature; having the potential of conferring an
undue advantage to the assessee thereby frustrating the endeavor of the
revenue, even if the High Court is eventually not to intervene in favour of
the assessee.
24. Having clarified the above issue in the manner indicated, we may turn
to the reasons assigned by the High Court for its decision. The view
expressed by the High Court with regard to the satisfaction note(s); the
alleged absence of a final decision to issue the authorization at the level
of the Additional Director and the Director; the absence of any
satisfaction of the Director General who, according to the High Court took
the decision to issue the authorization are all seriously flawed. The
different steps in the decision making process is lucidly laid down in the
instructions contained in the search and seizure manual published by the
department, relevant part of which has been extracted above. The steps
delineated have been scrupulously followed. Besides we may take note of the
fact that the Additional Director was not one of the competent authorities
under Section 132 on 8.6.2009 (date of his note) inasmuch as it is by the
Finance Act, 2009 effective from 19th August, 2009 that the Additional
Director came to be included amongst the authorized officials though with
retrospective effect from 1.10.1998. The reading of the relevant part of
the satisfaction note of the Director goes to show that on the basis of
materials produced satisfaction was duly recorded by him that authorization
for search should be issued. The file was put up before the Director
General (Investigation) for accord of administrative approval as required
by Notification dated 7.3.2001. In fact, the requirement to obtain
administrative approval is prompted by the need to provide an additional
safeguard to the tax payer. A careful reading of the order of the Director
General would go to show that all that he did was to record the view
that the satisfaction of the Director, Income Tax (Investigation) was
reasonable and therefore administrative approval should be accorded. The
view taken by the High Court, therefore, cannot be sustained.
25. The possibility of manipulation of the records as found by the High
Court also does not commend to us for acceptance. There is no basis,
whatsoever, for coming to any such conclusion. Suspicion ought not to be
the basis of any judicial order and this is where the High Court seems to
have erred.
26. The remaining findings of the High Court with regard to the
satisfaction recorded by the authorities appear to be in the nature of an
appellate exercise touching upon the sufficiency and adequacy of the
reasons and the authenticity and acceptability of the information on which
satisfaction had been reached by the authorities. Such an exercise is alien
to the jurisdiction under Article 226 of the Constitution.
27. In view of the foregoing discussions and for the reasons alluded to,
the order of the High Court dated 9.12.2011passed in W.P. No. 2150 of 2010
is set aside. The proceedings against the respondent-assessee will now
commence from the stage at which the same was interdicted by the High Court
by its impugned order. Consequently, the appeal filed by the Revenue is
allowed.
……………………………J.
[Ranjan Gogoi]
…………………..…………J.
[Pinaki Chandra Ghose]
New Delhi;
May 13, 2015.
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[1] 1969 (74) ITR 836 (SC)
[2] (1974) 93 ITR 505 (SC)
[3] (1985 (155) ITR 166 (SC)