2025 (5) TMI 366 - HC - Income Tax

Income Tax Department entitlement to requisition and retain muddamal cash seized during a criminal investigation u/s 132A - HELD THAT - Department is entitled to retain the cash till final conclusion of the proceedings under the provision of the Income Tax Act but subsequently it was modified and ordered that the department shall be free to undertake all actions permitted under the law and shall deposit the entire in the P.D. Account in accordance with the provisions and Rules of the Income Tax. Respondent no.2 herein who is the first informant has lodged an FIR before the police station for the theft committed by the accused in his house for the golden and silver ornaments worth of Rs. 90, 000/- however subsequently the respondent no.2 informed about the theft of his passport and cash worth of Rs. 1, 40, 00, 000/- and accordingly the investigation was carried out and during the investigation the police has recovered Rs. 60, 29, 000/- and Swift Car worth of Rs. 1, 75, 000/- purchased from the stolen rupees out of total Rs. 1, 40, 00, 000/- as also golden and silver ornaments to which interrogation of the respondent no.2 was done wherein he gave satisfactory reply to the police authority however when the interrogation by the petitioner department was made the respondent no.2 has failed to give satisfactory explanation for an amount of Rs. 35, 28, 000/- which is the disputed amount in the present case. Therefore the petitioner issued warrant of authorization under Section 132A(1)(c) of the Income Tax Act to the Police Inspector Pranjit Police Station for requisition of seized cash which was not accepted as the matter is pending before the learned Magistrate therefore the petitioner appeared before the court of learned Magistrate and upon request being made by the department the learned Magistrate passed an order on 18.10.2022 holding that the Income Tax Department is free to take all actions permissible under the law including to make fixed deposit of Rs. 35, 28, 000/- in the name of the complainant i.e. the respondent no.2 herein with any Nationalize Bank initially for a period of two years renewable from time to time however the said order was challenged before Sessions Court inter alia praying for permission to allow them to deposit the aforesaid amount in a fixed deposit in the name of the Income Tax Department however the said request has been rejected by impugned order. As found out that the case of the petitioner department is squarely covered by the decision of the Coordinate Bench of this Court whereby the petitioner department is allowed to deposit the entire amount in the PD Account in accordance with the law. Therefore the present application deserves to be allowed. Present petition is allowed. The order dated 10.08.2023 passed by the learned Additional Chief Judicial Magistrate Sabarkantha at Pranjit and the order dated 18.10.2022 passed by the learned Principal Senior Civil Judge Chief Judicial Magistrate Sabarkantha at Pranjit are hereby quashed and set aside. Accordingly the petitioner department is free to undertake all actions permitted under the law however he shall deposit the entire amount of Rs. 35, 28, 000/- in the P.D. Account in accordance with the provisions and Rules of the Income Tax Act within a period of four weeks from the date of the receipt of this order.

Summary

The core legal questions considered by the Court in this matter include:

1. Whether the Income Tax Department is entitled to requisition and retain muddamal cash seized during a criminal investigation under Section 132A of the Income Tax Act, despite the pendency of criminal proceedings before the Magistrate.

2. The scope and interplay between the provisions of Sections 451 and 457 of the Code of Criminal Procedure (CrPC) concerning custody and disposal of seized property, and the powers conferred under Sections 132 and 132A of the Income Tax Act regarding requisition and custody of assets suspected to be unaccounted income.

3. The legality and validity of the Magistrate's order permitting the Income Tax Department to take all lawful actions including making a fixed deposit of the seized amount in the complainant's name, and the subsequent rejection of the Department's application to deposit the amount in the name of the Income Tax Department.

4. Whether the petitioner Department's remedy lies in invoking the supervisory jurisdiction of the High Court under Articles 226 and 227 of the Constitution or in availing alternate remedies such as revision before the Sessions Court.

5. The proper procedure for custody, preservation, and disposal of muddamal currency notes during pendency of trial and investigation, including the role of videography, panchnama, and bank fixed deposits or P.D. Accounts.

Issue-wise Detailed Analysis

Issue 1: Entitlement of Income Tax Department to Requisition and Custody of Muddamal Cash under Section 132A of the Income Tax Act

The legal framework governing this issue is primarily Section 132A of the Income Tax Act, which empowers the Director General or Director or Chief Commissioner or Commissioner, upon having reason to believe that certain assets represent income or property not disclosed for income tax purposes, to authorize requisitioning officers to require delivery of such assets from officers or authorities holding them under other laws.

The Court relied extensively on precedents, including the Coordinate Bench decision in Vipul Chavda, which interpreted Section 132A as mandating that once a warrant of authorization is issued, the seized assets must be delivered to the Income Tax Department. The Court also referenced the Supreme Court decision in Parasnath, which held that criminal courts have no authority to order handing over of seized property to claimants when Income Tax proceedings are pending, and that disposal must await completion of assessment.

The Court noted that the police's refusal to hand over the seized cash to the Income Tax Department, citing the pendency of trial, was inconsistent with the statutory scheme. The Income Tax Department's failure to obtain custody of the cash hampers its ability to initiate and complete assessments or reassessments under Sections 153 and 153A of the Income Tax Act.

The Court found that the Department had complied with procedural requirements by issuing a warrant of authorization under Section 132A(1)(c), and that the Department's reason to believe regarding the unexplained cash was supported by the failure of the respondent to satisfactorily explain the source of Rs. 35,28,000/- during interrogation.

The Court concluded that the Department was entitled to custody of the muddamal cash for the purpose of conducting further proceedings under the Income Tax Act, and that the police and criminal courts lacked authority to withhold or release such cash contrary to the statutory provisions.

Issue 2: Interplay between Sections 451 and 457 of the CrPC and Sections 132 and 132A of the Income Tax Act

Sections 451 and 457 of the CrPC empower criminal courts and police to take custody and dispose of property pending trial or investigation. Section 451 allows courts to order custody or disposal of property produced before them, while Section 457 outlines police procedure upon seizure of muddamal.

The Court emphasized that these provisions confer limited powers and are primarily concerned with custody pending trial, whereas Sections 132 and 132A of the Income Tax Act provide a specific and overriding mechanism for requisition and custody of assets suspected to be unaccounted income.

Reliance was placed on the decision in Deputy Director of Income-tax v. State of Gujarat, where the Court held that the inquiry under Section 451 CrPC and under Section 132A Income Tax Act are distinct, and that police have no power to withhold currency notes once Income Tax requisition is made. The Court further held that the trial court's direction to hand over currency notes to the complainant was erroneous when Income Tax proceedings were pending.

The Court also referred to the Apex Court's ruling in Sunderbhai Ambalal Desai, which prescribed procedures for custody of valuable articles and currency notes during trial, including panchnama, photography, security bonds, and bank lockers, emphasizing that prolonged police custody is undesirable.

Thus, the Court held that while the CrPC provisions govern custody pending trial, they do not override the Income Tax Act's provisions which permit the Department to take custody of assets for tax assessment purposes.

Issue 3: Validity of the Magistrate's Order Allowing Fixed Deposit in the Complainant's Name and Rejection of the Department's Application to Deposit in Its Name

The Magistrate's order dated 18.10.2022 permitted the Income Tax Department to take all lawful actions including making a fixed deposit of the disputed amount in the complainant's name. The Department's subsequent application to deposit the amount in its own name was rejected by the Magistrate on 10.08.2023.

The Court found this approach inconsistent with the legal position and prior Coordinate Bench rulings, which clarified that the Department is entitled to retain the muddamal cash and undertake all actions permitted under the Income Tax Act, including depositing the amount in a P.D. Account in its own name.

The Court observed that depositing the amount in the complainant's name was practically impossible and contrary to the statutory scheme, as the Department must hold the assets pending completion of tax proceedings.

Accordingly, the Court quashed both impugned orders and directed the Department to deposit the entire amount in a P.D. Account in accordance with the Income Tax Act within four weeks, thereby aligning with established legal principles and prior judicial pronouncements.

Issue 4: Maintainability of the Petition under Articles 226 and 227 and Availability of Alternate Remedies

The respondent argued that the petitioner Department had alternate remedies such as revision before the Sessions Court and thus the present petition was not maintainable.

The Court rejected this contention, relying on the Coordinate Bench decision in Vipul Chavda which held that the High Court's supervisory jurisdiction under Article 227 is available to examine the legality and validity of orders passed by Magistrates, even if revision is available.

The Court held that it is not bound to direct the Department to pursue alternate remedies and may examine the matter on merits to prevent miscarriage of justice or violation of statutory provisions.

Issue 5: Proper Procedure for Custody and Preservation of Muddamal Currency Notes

The Court reiterated the necessity of following procedural safeguards such as preparing detailed panchnama, videography of currency notes, recording serial numbers, and furnishing copies of such records to the parties and the court.

The Court emphasized that the Investigating Officer must ensure these steps prior to handing over the muddamal cash to the Income Tax Department to safeguard the evidence and maintain transparency.

Significant Holdings

"Once the warrant of authorization is issued against any person, then the seized amount is required to be retained by the Income Tax Authority and without taking over of the said amount, no further proceedings can be started against any person, from whose custody the amount was recovered."

"The Criminal Court had no authority to order handing over of property, i.e. jewellery or cash to persons claiming it."

"The inquiry under section 451 of the Code of Criminal Procedure and one under section 132A of the Act are quite different. There are limited powers under section 451 of the Code of Criminal Procedure, whereas under section 132A of the Act, a specific provision is made for such purpose."

"The police authority has no power to retain the cash nor does it have any power to hand over such cash to the complainant. It is incumbent upon the police to hand over the cash to the Department for completion of proceedings initiated by the Department."

"The Department is entitled to retain the cash till the final conclusion of the proceedings under the Income Tax Act."

"The applicant department shall be free to undertake all actions permitted under the law, however, he shall deposit the entire amount ... in the P.D. Account in accordance with the provisions and Rules of the Income Tax Act."

In conclusion, the Court held that the Income Tax Department is legally entitled to take custody of the seized cash under Section 132A of the Income Tax Act and to undertake all lawful actions including depositing the amount in a P.D. Account in its own name pending completion of tax proceedings. The impugned orders directing deposit in the complainant's name and rejecting the Department's application were quashed. The police and criminal courts have no authority to withhold or release the muddamal cash contrary to the statutory provisions. The Investigating Officer was directed to hand over the cash to the Department after following due procedure including panchnama and videography. The supervisory jurisdiction of the High Court was rightly invoked, and alternate remedies were not held to be a bar to such exercise. The decision reaffirms the primacy of the Income Tax Act's provisions in matters involving unaccounted income and muddamal currency notes seized during criminal investigations.