Sanjib Banerjee, J.-In some ways this petition epitomises how resourceful litigants hold the judicial system to ransom and subvert due process if the slightest uncomfortable question is posed as to the manner of their amassing the wealth they flaunt.
The observations herein should be confined to the limited import of the issues raised in the present proceedings and should not spill over to prejudice the petitioners elsewhere; but it cannot be missed that the petitioners have invited the decision and the ramifications thereof on themselves.
The petition seeks a declaration that the search and seizure operation conducted at the residence and the office of the petitioners on August 1, 2013 was illegal. As a consequence, the petitioners seek appropriate writs of mandamus, prohibition and certiorari to arrest the effect of what the petitioners perceive to be an illegal process initiated under Section 132 of the Income Tax Act, 1961.
Ordinarily, the filing of the petition itself would have served the purpose for which the petitioners carried it to court; for the challenge to the propriety of the search and seizure under Section 132 of the Act would require affidavits to be called for and push the matter to hearing. It is now common knowledge that hearing matters are not taken up in a hurry as courts and judges are not afforded the kind of time that is necessary for hearing matters to be taken up after tackling the weight of the motions that are traditionally placed ahead in the cause list. Unfortunately for these petitioners, the hearing was expedited and taken up, whereupon an application has been filed in which notices issued under Section 131 of the Act subsequent to the institution of the petition have been sought to be challenged.
Strictly speaking, the challenge to the notices under Section 131 of the Act may not fall within the limited scope of the petition, which is confined to the propriety of the search and seizure process conducted on August 1, 2013 and August 22, 2013. However, the refusal to entertain the challenge to the subsequent notices may entail multiplicity of proceedings; and, thus, such aspect of the matter is also dealt with.
Section 132 of the Act permits certain high officers of the Income Tax Department to authorise certain specified classes of officers to conduct search and seizure operations as indicated in the Section, upon the high officer, in consequence of information in his possession, having reason to believe that any of the three conditions enumerated in clauses (a), (b) or (c) of sub-section (1) had arisen. The relevant part of Section 132(1) is set out for convenience, without indicating the nature of the search that may be conducted, since such aspect is irrelevant in the present context:
“132. (1) Where the Director General or Director or the Chief Commissioner or Commissioner or Additional Director or Additional Commissioner or Joint Director or Joint Commissioner in consequence of information in his possession, has reason to believe that –
(a) any person to whom a summons under sub-section (1) of section 37 of the Indian Income-tax Act, 1922 (11 of 1922), or under sub-section (1) of section 131 of this Act, or a notice under subsection
(4) of section 22 of the Indian Income-tax Act, 1922, or under sub-section (1) of section 142 of this Act was issued to produce, or cause to be produced, any books of account or other documents has omitted or failed to produce, or cause to be produced, such books of account or other documents as required by such summons or notice, or
(b) any person to whom a summons or notice as aforesaid has been or might be issued will not, or would not, produce or cause to be produced, any books of account or other documents which will be useful for, or relevant to, any proceeding under the Indian Income tax Act, 1922 (11 of 1922), or under this Act, or
(c) any person is in possession of any money, bullion, jewellery or other valuable article or thing and such money, bullion, jewellery or other valuable article or thing represents either wholly or partly income or property which has not been, or would not be, disclosed for the purposes of the Indian Income-tax Act, 1922 (11 of 1922), or this Act (hereinafter in this section referred to as the undisclosed income or property), then,-
(A) the Director General or Director or the Chief Commissioner or Commissioner, as the case may be, may authorise any Additional Director or Additional Commissioner or Joint Director, Joint Commissioner, Assistant Director or Deputy Director, Assistant Commissioner or Deputy Commissioner or Income-tax Officer, or
(B) such Additional Director or Additional Commissioner or Joint Director, or Joint Commissioner, as the case may be, may authorise any Assistant Director or Deputy Director, Assistant Commissioner or Deputy Commissioner or Income-tax Officer. …”
It is evident from the plain language of the provision that there has to be information possessed by such high officer as named in the opening limb of the sub-section; and, that such information in the possession of the relevant officer should be the basis for the officer to believe that any of the three situations as recognised in clauses (a), (b) or (c) of the sub-section had arisen or was likely to arise, before such high officer can authorise one of the named subordinate officers to conduct a search and seizure operation in the manner provided. Clause (a) deals with a person who has failed to produce such material as was required of him pursuant to a summons issued under some specified provisions of the Act. The expression “in consequence of information in his possession, has reason to believe that” governs all three clauses. In respect of clause (a) there must be information that a summons under any of the specified provisions has been dishonoured. However, in respect of clauses (b) and (c) of the sub-section, the expression “in consequence of information in his possession, has reason to believe that” would imply that there is such information available with the high official that would prompt a prudent person to apprehend that there was a likelihood of either situation covered by the last two clauses arising.
The “reason to believe” has to be based on the “information” available with the high official for a reasonable person in the position of the high official to anticipate a breach or apprehend non-compliance of the kind envisaged in clause (b) or clause (c) of the sub-section. The “reason to believe” has, thus, to point towards a likelihood of either situation envisaged in clause (b) or clause (c) of the sub-section and such “reason to believe” must be founded on the information in the possession of the relevant high official before such official can authorise a search and seizure operation to be carried out under the provision. The nexus between the information and the situation envisaged in either clause (b) or clause (c) of the provision is the real test; for, if the nexus is discerned, it may be said that the high official had “reason to believe” based on the “information in his possession” to apprehend the breach or failure as contemplated in sub-section (b) or (c) of the provision. It is the extent of the information that will tell upon the “reason to believe”. Again, in exercise of judicial review, the court will only look at the nexus and not assess it either with any degree of mathematical precision or by placing the court in the position of the authorising official. Only if it appears that the subjective satisfaction of the authorising official as implied by the expression “reason to believe” could not have been arrived at on the basis of the “information in his possession”, that the court would interdict the process or the consequence of the search and seizure operation that may have been carried out.
The petitioners have carried several judgments to bear on the reasonableness of authorising a search and seizure operation under Section 132(1) of the Act. In the earliest of the judgments, reported at 194 ITR 32 (L.R. Gupta v. Union of India), a Division Bench of the Delhi High Court observed that the “information” had to be “something more than a mere rumour or a gossip or a hunch.” It went on to add that when the action of issuance of an authorisation under Section 132 was challenged in court, “it will be open to the petitioner to contend that, on the facts or information disclosed, no reasonable person could have come to the conclusion that action under Section 132 was called for.” The Division Bench emphasised that the “opinion which has to be formed is subjective and, therefore, the jurisdiction of the court to interfere is very limited” as the court will not “act as an appellate authority and examine meticulously the information in order to decide for itself as to whether action under section 132 is called for.”
In the judgments reported at 215 ITR 234 [Janak Raj Sharma v. Director of Inspection (Investigation)] and 242 ITR 302 (Ajit Jain v. Union of India), the “information” was received from the Central Bureau of Investigation which the courts regarded as not being enough material on facts for any “reason to believe” to be founded thereon for initiating action under Section 132(1) of the Act.
It is now necessary to dwell awhile on the affidavit that has been filed by the department to ascertain as to whether the warrant of authorisation issued by the Director of Income Tax (Investigation) could reasonably have been issued on the basis of the information in the possession of such official. The “satisfaction note” has been produced in court and it is evident therefrom that the matters referred to in paragraphs 6 to 25 of the affidavit filed by the department are substantially reflected in the note-sheet on the basis of which the official formed his opinion and authorised the search and seizure operation to be undertaken.
According to the affidavit, in course of the investigation by the revenue authorities into the affairs of a company by the name of EMTA Coal Limited, which is engaged in, inter alia, the development and operation of coal mines allotted to power utilities owned by the State and Central Governments, it was discovered that abnormally high amounts had been shown to have been paid on account of coal raising charges in financial years 2010-11, 2011-12 and 2012-13 to four companies by the names of Bardhaman Excavators Private Limited, Venus Excavators Private Limited, Landmark Excavators Private Limited and Zoom Transport Private Limited. Further enquiries into the business and affairs of such four companies conducted by the department revealed that such companies “were merely paper companies not providing any actual services to EMTA Coal Ltd.”; that each of the four companies “had a small capital base with insignificant investment in plant and machinery”; that their receipts from EMTA ranged between Rs. 25 crore and Rs. 45 crore per year during the relevant years; that there was a common auditor in all four companies; and, such companies were discovered to be non-functioning entities existing only on paper.
The affidavit refers to “accommodation entries” for the EMTA Group being arranged through companies managed by the first petitioner, who appears to be the father of the second petitioner; that the addresses of the residential premises of the persons shown to be the directors of the four companies were traced to a firm by the name of Saraogi Jain and Co., which is controlled by the petitioners; that the directors of the four companies could not be traced out and appeared to be “dummy directors” which led to an inference of the four companies being used for “booking bogus expenses” by EMTA Coal Limited at the behest of the petitioners since the petitioners had acted as authorised representatives of two of the four companies in respect of the assessment records for two of the three financial years. Paragraph 22 of the department’s affidavit says that there was “clear evidence to believe that the … chain for siphoning the income of EMTA Group by showing bogus expenses had been … masterminded by the petitioners” and the investigation has not been completed. Paragraph 23 of the affidavit refers to “fraud on revenue on a massive scale designed, executed and implemented” by the petitioners.
This is the quality of the “information” that the Director of Income Tax (Investigation), Kolkata, had and on which he founded the “reason to believe” that a situation covered by either clause (b) or clause (c) of Section 132(1) of the Act, or both, could arise. In the light of the facts covering the gamut of “information” in the possession of the authorising official in this case, it can scarcely be said that the “reason to believe” could not have been founded thereon to apprehend either a situation under clause (b) or clause (c) of the sub-section. Indeed, the wealth of the information that was available with the authorising official was so overwhelming that no reasonable person could have held any belief to not authorise the search and seizure operation.
And, as they say, the proof of the pudding is in the eating: the petitioners were not available at the time of the search and seizure operation. There is a minor matter of Section 132(4) of the Act that the petitioners may have overlooked. Such provision recognises that the “authorised officer may, during the course of the search or seizure, examine on oath any person who is found to be in possession or control of any books of account, documents, money, bullion, jewellery or other valuable article or thing …” Any statement obtained during such examination may thereafter be used in evidence in any proceedings under the Act. The explanation to the sub-section provides that the examination of any person under the sub-section “may be not merely in respect of any books of account, other documents or assets found as a result of the search, but also in respect of all matters relevant for the purposes of any investigation connected with any proceeding” under the Act. In the petitioners making themselves scarce at the time of the search and seizure operations, the authorised officer was denied the opportunity of exercising his authority under 132(4) of the Act.
It is thus that the subsequent notices issued under Section 131(1A) of the Act now fall for consideration. The notices issued under such provision on October 28, 2013 and November 18, 2013 have been assailed on the ground of lack of jurisdiction; there being no “reason to suspect” as required under the relevant sub-section; and, the notices not disclosing the basis therefor.
The authority of the officer who has issued the two notices has been questioned on the ground that the notices were issued after the search and seizure operation was carried out and that the officer who has issued the notices was also the authorised officer within the meaning of Section 132(1) of the Act. The first limb of the challenge on the count of authority is fashioned on the expression, “before he takes action under clauses (i) to (v) of that sub-section”. It is the petitioners’ submission that such clause governs the exercise of the authority to take any step under Section 131(1A) of the Act irrespective of the designation of the official exercising the authority. The alternative argument – the second limb – is that since the officer who issued the notices under Section 131(1A) of the Act in this case was also the authorised officer under Section 132(1) of the Act, the disability envisaged by the relevant expression attached to such officer to render him incompetent to issue the notice.
Neither limb of submission on such aspect of the matter is of any merit. Grammatically, it would make a mockery of the expression “or the authorised officer referred to in sub-section (1) of Section 132 before he takes action under clauses (i) to (v) of that sub-section”, which has parenthetical commas at either end to suggest such expression being a whole unto itself and an alternative to the cases of the authority under the provision being exercised by the Director General or a Director or a Joint Director or an Assistant Director or a Deputy Director by virtue of the opening lines of the sub-section preceding the relevant clause. In other words, the Director General or the four other designated officers have authority to exercise the powers conferred under Section 131(1) of the Act, provided such officer has “reason to suspect” that any of the situations as envisaged in sub-section 131(1A) has arisen. On the other hand, if it is the authorised officer referred to in Section 132(1) of the Act who exercises the authority under Section 131(1A) of the Act, such officer is competent to exercise such authority only prior to taking action under clauses (i) to (v) of Section 132(1) of the Act. It is elementary on any reading of Section 131(1A) of the Act that the five categories of officers, other than the authorised officer referred to in Section 132(1) of the Act, may exercise the authority under such provision, subject to meeting the other statutory requisites but without being impaired by the search and seizure process having been conducted under Section 132(1) of the Act. With respect, the provision admits of no other construction or interpretation.
The word “he” in the expression “before he takes action under clauses (i) to (v) of that sub-section”, refers only to the authorised officer and not to the other five officers named earlier in the sub-section. The word “he” followed by “takes action under clauses (i) to (v)” identifies the “he” to be such person who can take action under Section 132(1) (i) to (v) of the Act. Since a Director General or a Director cannot be authorised officers under Section 132 (1)(B) of the Act, the word “he” will not govern such officers; and, as a corollary the word “he” will not govern the three other officers indicated by designation in the opening limb of Section 131(1A) of the Act. The only other question that remains is whether a Joint Director or an Assistant Director or a Deputy Director, if such official is also the authorised officer pertaining to a matter under Section 132(1) of the Act, would be subject to the disability envisaged by the expression “before he takes action under clauses (i) to (v) of that sub-section”. The answer to such question lies in the appreciation of the distinction made between superior officers named in the Section by designation and other officers who may be authorised officers within the meaning of Section 132(1) of the Act. Such distinction is apparent from the proviso to sub-section (3) of Section 131 of the Act. Such sub-section authorises the officers referred to in sub-sections (1), (1A) and (2) to impound and retain books of account or other documents produced in course of any proceedings under the Act. The proviso to Section 131(3) of the Act makes a distinction in the procedure to be adopted for impounding such material and the period for which such material may be retained by the authority, based on the designation of the authority.
Two judgments have been placed by the petitioners on Section 131(1A) of the Act. The Division Bench judgment of the Allahabad High Court reported at 266 ITR 597 [Anita Sahai v. Director of Income-Tax (Investigation)] broadly accepted the submission made on behalf of the petitioner in that case that Section 131(1A) of the Act could be invoked prior to action being taken under Section 132(1)(i) to (v) of the Act, though the issue in that matter did not turn on the acceptance of such submission. A Single Bench judgment of the Madhya Pradesh High Court reported at 246 ITR 363 [Arjun Singh v. Assistant Director of Income-Tax (Investigation)] merely held that the power under Section 131(1A) “cannot be said to be an independent power in itself but is the power for the purpose of making enquiry and investigation relating to any income which has been concealed or is likely to be concealed …” Neither decision can bring much cheer to the hopeless cause that the petitioners espouse in the present case.
Since the notices under Section 131(1A) of the Act were issued in this case by a Deputy Director, he had due authority therefor. Given that such officer possessed the treasure trove of information pertaining to the aforesaid four companies connected with the EMTA group and the petitioners’ nexus therewith, he had enough reason to suspect that income had been concealed or was likely to be concealed by the petitioners who were subject to his jurisdiction. There is no requirement, far less any statutory fiat, for the reasons to suspect or the basis for the suspicion to be disclosed in any notice issued under Section 131(1A) of the Act. In any event, the first of such notices that the petitioners assail, the one dated October 28, 2013, refers to a previous notice under Section 131(1A) of the Act that required the petitioners to appear before the Deputy Director on August 2, 2013. The factum of such previous notice having been issued has been ignored by the petitioners. Despite a pointed query in such regard, the petitioners have not been able to demonstrate any averment in the subsequent application filed in court that the petitioners did not receive such notice.
There is no merit in the petition and the petitioners could not have had any reason to believe that this exercise of kite-flying in court could have relieved them in any manner. That brings the discussion to why this petition and the subsequent application may have been instituted. It seems that the petitioners may either have taken a chance or may have instituted the petition for the purpose of temporarily warding off the inevitable by preying on the misplaced deference to the principle of sub judice that government officials betray in their conduct.
Sections 131 and 132 of the Act are but the means to an end and not an end in themselves. It is evident that the petitioners perceived that if the means could be scuttled, the end would not come. The petition and the time taken to prosecute it are not appreciated. WP No. 844 of 2013 and GA No. 3413 of 2013 are dismissed with costs assessed at Rs. 6 lakh to be paid by the petitioners immediately to the department.
It is recorded that the respondents were called upon only for the limited purpose of dealing with the judgments cited by the petitioners, which opportunity the respondents used by placing the “satisfaction note” before court. The respondents were not permitted to cite authorities in support of the view taken by the court in this matter.
Certified website copies of this judgment, if applied for, be urgently made available to the parties, subject to compliance with all requisite formalities.
Later:
The petitioners seek a stay of the operation of this order which is declined.