2025 (6) TMI 328 - HC - Income Tax

Warrant of authorization and search proceedings u/s 132 - Issuance of notice u/s 131 (1A) subsequent to action u/s 132 - HELD THAT - Section 132 is a provision which invades the rights and liberties of citizens especially the Right to Privacy therefore exercise of power thereunder is hedged by certain conditions so as to ensure avoidance of arbitrary and malafide action and to safeguard citizens from such action. They also balance the demands of the State (Revenue) vis-a-vis the rights and liberties including right to privacy available to the citizens of this country. Therefore the provisions of Section 132 have to be understood and interpreted strictly just as they have to be complied strictly. On a bare reading of the above quoted provision it is evident that in order to initiate any action thereunder first of all there has to be information in possession of the officers referred thereunder. Secondly such officers should have reason to believe as a consequence of such information and based thereon. Thirdly this information and reason to believe should have a relation with any of the three clauses (a) (b) or (c) contained therein otherwise such exercise would be bad in law. When we peruse the Satisfaction Note we do not find any information whatsoever whether under the heading Other Allegations or otherwise elsewhere which could be referable to clause (b) of sub-Section (1) of Section 132 for issuance of warrant of authorization for search. The contention of petitioners that the fact that a notice under Section 131 (1A) of the Act 1961 was issued to one of the petitioners-Sneh Lata Agrawal after the search operations is itself proof of the fact that prior to it there was no reason to believe to undertake an exercise under Section 132 as the requirement of Section 131 is a lesser requirement that is of having reason to suspect whereas the reason to believe stands on a higher footing is not required to be considered in view of the discussion already made. We quash the warrant of authorization impugned herein and also declare the search operation impugned before us as illegal. Consequences shall follow accordingly as per law. The benefit of the order shall not be ipso facto available to others whose names figure in the satisfaction note and their cases if the occasion so arises can be considered independenty. Our order shall also not come in the way if the Revenue has a cause to proceed against the petitioners under any other provisions of the Act 1961. Validity of the notice issued u/s 131 (1A) - We have carefully considered the provisions of sub- Section (1A) of Section 131 and we find that several officers have been authorized to exercise the powers conferred under sub-Section (1) if they have reason to suspect that any income has been concealed or is likely to be concealed by any person or class of persons within his jurisdiction for the purposes of making any inquiry or investigation relating thereto first is the Principal Director General who has not issued the notice second is the Director General who has also not issued the notice the Principal Director or Director or Joint Director or Assistant Director have also not issued the notice. Now in addition to the aforesaid the authorized officer referred to in sub-Section (1) of Section 132 is also empowered to exercise the powers under sub- Section (1) of Section 131 but with a rider that is he can do so before he take action under clauses (i) to (v) of sub-Section (1) of Section 132. Now if we accept the contention of learned A.S.G. that Sri Adarsh Kumar apart from being Authorized Officer aforesaid was also Deputy Director therefore he could issue such notice even after the search operations had been concluded i.e. after the stage contemplated in clauses (i) to (v) of sub-Section (1) of Section 132 had been crossed and this would not invalidate such notice because he had presumably acted as DDIT and not an authorized officer then this would amount to negating the restrictions imposed upon the authorized officer under Section 131(1A) and would amount to reading and understanding the provision in a manner so as make it susceptible to abuse and misuse at the hand of the revenue authorities. Explanation offered in this regard by learned A.S.G. cannot be accepted as it will render the conditions imposed upon the authorized officer under Section 131 (1A) otiose and also leave scope for circumvention of said conditions and its misuse. Sri Adarsh Kumar being the Authorized Officer and he not being the assessing officer of the petitioners nor the assessment proceedings having started he could have issued such notice only prior to action under clauses (i) to (v) of sub-Section (1) of Section 132 having been taken and not after that. The Revenue cannot be given the benefit of the fact that he also happened to be Deputy Director therefore he could have issued the notice. We have gone through the documents on record and there is no dispute about the fact that he was an authorized officers under sub-Section (1) of Section 132 and had issued the impugned notice under Section 131 (1A) therefore he could not have issued the notice under sub-Section (1) of Section 131 after action had been taken under clauses (i) to (v) of sub-Section (1) of Section 132 and having done so the said notice dated 27.01.2025 cannot be sustained. Issuance of notice u/s 131(1A) of the Act post-search would not in any manner render the proceedings under section 132 of the Act invalid if they were otherwise initiated pursuant to a valid authorization issued after recording satisfaction on the basis of the material available on record. We are not expressing any opinion on the issue as to whether issuance of a notice under Section 131(1A) subsequent to exercise under Section 132 would invalidate the latter but are only saying that Sri Adarsh Kumar who was Authorized Officer for exercising power under sub-Section (1) of Section 132 could not have issued the notice under sub-Section (1A) of Section 131 of the Act 1961 post-search operations as has been observed by Jharkhand High Court. The impugned notice dated 27.01.2025 is accordingly quashed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court in these writ petitions are:

• Whether the Warrant of Authorization dated 11.12.2024 and the consequent search proceedings conducted under Section 132 of the Income Tax Act, 1961 (hereinafter "the Act") at the petitioners' premises were valid and lawful.
• Whether the petitioners, having sold shares under an Offer For Sale (O.F.S.) prior to the company's listing, were liable to capital gains tax under Section 45 read with Section 55(2)(ac) of the Act, especially in light of retrospective amendments effective from 01.04.2018.
• Whether the petitioners were precluded from filing updated returns under the second proviso to Section 139(8A) of the Act due to the search operation.
• Whether the issuance of a notice dated 27.01.2025 under Section 131(1A) of the Act to one of the petitioners after the search operation was valid and lawful.
• The scope and limits of judicial review regarding the formation of "reason to believe" under Section 132(1) of the Act and the sufficiency and legality of the satisfaction note authorizing the search.
• Whether the satisfaction note contained adequate and relevant information to justify the search under Section 132(1)(b) of the Act, and whether the search was arbitrary or mala fide.
• Whether post-search information can be used to validate or justify the search authorization issued under Section 132.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of Warrant of Authorization and Search Proceedings under Section 132

Legal Framework and Precedents: Section 132 of the Act authorizes search and seizure operations by income tax authorities if they have "reason to believe" based on information in their possession that a person has omitted to produce documents or is in possession of undisclosed income or property. The power is invasive, affecting privacy rights, and must be exercised strictly and with due application of mind. The satisfaction note recording the reason to believe is crucial and must relate to one of the clauses (a), (b), or (c) of Section 132(1). Judicial precedents such as the Division Bench of Delhi High Court in L.R. Gupta & Ors. v. Union of India & Ors. and the Supreme Court in Principal Director of Income Tax (Investigation) v. Laljibhai Kanjibhai Mandalia emphasize strict construction and limited judicial review of such satisfaction notes. The Court must ensure that the reason to believe is not mala fide or based on irrelevant material but cannot assess the adequacy or sufficiency of reasons.

Court's Interpretation and Reasoning: The Court examined the satisfaction note and found that no information or reason to believe was referable to clause (b) of Section 132(1), which alone was applicable as conceded by the Revenue. The satisfaction note lacked any material indicating that the petitioners would not produce books or documents if summoned. The petitioners had a history of timely filing returns and responding to notices. The Court held that the jurisdictional prerequisites under Section 132 were absent, rendering the search and authorization illegal.

Key Evidence and Findings: The petitioners were promoter shareholders who sold shares under O.F.S. before the company was listed. They had paid advance tax and filed returns regularly. The satisfaction note did not contain any past conduct or information suggesting non-cooperation or concealment by the petitioners. The Revenue did not file a counter affidavit. Supplementary documents submitted by the Revenue were post-search information, which cannot validate the search authorization.

Application of Law to Facts: The absence of information relating to clause (b) meant there was no reasonable basis to believe the petitioners would not produce documents. The retrospective amendment to Section 55(2)(ac) of the Act, effective from 01.04.2018, remedied a lacuna in tax liability for such share transfers, and the petitioners' non-payment of capital gains tax prior to this amendment could not justify a search under Section 132. The Court emphasized that post-search information cannot justify prior authorization.

Treatment of Competing Arguments: The Revenue argued that the scope of judicial review is limited and that the satisfaction note contained sufficient reasons. They also contended that the search was not solely based on the share sale transaction but other allegations. The Court rejected these arguments, finding no nexus of reasons to clause (b) and noting the absence of any prior summons or notices indicating non-cooperation by the petitioners.

Conclusion: The warrant of authorization and search proceedings under Section 132 were quashed as illegal and arbitrary due to absence of jurisdictional facts and reason to believe.

Issue 2: Liability to Capital Gains Tax on Sale of Shares under O.F.S. and Effect of Retrospective Amendment

Legal Framework and Precedents: Section 45 of the Act imposes capital gains tax on transfer of capital assets. Section 55(2)(ac) defines cost of acquisition for shares, and was amended retrospectively on 01.09.2024 to provide a mechanism for fair market value calculation effective from 01.04.2018. Prior to the amendment, the absence of such mechanism made capital gains tax calculation impracticable.

Court's Interpretation and Reasoning: The petitioners initially paid advance tax but, after consultation, claimed that the sale was not liable for capital gains tax due to the absence of a valuation mechanism. They filed returns claiming refund of advance tax. The assessing officer ordered the refund, indicating departmental acceptance of non-liability at that stage. The retrospective amendment was introduced to close this lacuna, but the petitioners could not be penalized or subjected to search for non-payment prior to the amendment.

Application of Law to Facts: The petitioners' conduct was consistent with the law as it stood. The amendment could not be applied retrospectively to justify search and seizure. Moreover, the second proviso to Section 139(8A) barred them from filing updated returns after search, prejudicing their rights.

Conclusion: Petitioners were not liable to capital gains tax at the time of filing returns, and retrospective amendment cannot justify search under Section 132.

Issue 3: Prohibition on Filing Updated Return under Section 139(8A) after Search

Legal Framework: The second proviso to Section 139(8A) prohibits filing of updated returns if a search under Section 132 has been initiated against the person.

Court's Reasoning: The petitioners argued that due to the search, they were statutorily barred from filing updated returns to pay the tax that might have become payable post-amendment. This statutory bar was prejudicial and unfair, especially since the search itself was found illegal.

Conclusion: The statutory prohibition compounded the prejudice caused by illegal search operations.

Issue 4: Validity of Notice under Section 131(1A) Issued Post-Search

Legal Framework and Precedents: Section 131(1A) empowers certain officers to issue notices for inquiry or investigation if they have reason to suspect concealment of income, but only before taking action under clauses (i) to (v) of Section 132(1). Issuance of such notice after search operations is prohibited.

Court's Interpretation and Reasoning: The notice dated 27.01.2025 under Section 131(1A) was issued by an authorized officer under Section 132 after the search was conducted. The Court held that the authorized officer could not issue such notice post-search as it would negate the statutory restriction and allow circumvention and misuse. The Revenue's argument that the officer could issue the notice in his capacity as Deputy Director was rejected as it would render the restriction otiose.

Precedent: The Court relied on a Division Bench judgment of Jharkhand High Court which held that issuance of notice under Section 131(1A) post-search is invalid.

Conclusion: The notice under Section 131(1A) issued post-search was quashed as invalid.

Issue 5: Scope of Judicial Review of Satisfaction Note and Reason to Believe under Section 132

Legal Framework and Precedents: The Supreme Court in Laljibhai Kanjibhai Mandalia clarified that the formation of opinion or reason to believe is an administrative function, not judicial or quasi-judicial. Judicial review is limited to examining whether the reason to believe is bona fide, not mala fide, and based on relevant material. The Court cannot assess the adequacy or sufficiency of reasons but can strike down action taken on mere pretence or extraneous considerations.

Court's Reasoning: The Court applied this principle and examined the satisfaction note for presence of relevant information. It found absence of any information justifying the reason to believe under clause (b) of Section 132(1). The Court emphasized that post-search information cannot be used to validate the authorization.

Conclusion: The satisfaction note lacked relevant information and was a mere pretence; therefore, the authorization and search were illegal.

Issue 6: Use of Post-Search Information to Justify Search Authorization

Legal Framework and Precedents: It is settled law that information and reason to believe must pre-exist the search authorization. Post-search information cannot be used to validate or justify the search warrant. This principle was reiterated by Division Benches of Bombay High Court in H.J. Industries Pvt. Ltd. and Bal Krushna Gopalrao Buty.

Court's Reasoning: The Revenue placed supplementary documents containing post-search information before the Court. The Court held that such material cannot justify the search authorization and does not alter the illegality of the search.

Conclusion: Post-search information is irrelevant to the validity of the search authorization.

3. SIGNIFICANT HOLDINGS

"Section 132 is a provision which invades the rights and liberties of citizens especially the Right to Privacy, therefore, exercise of power thereunder is hedged by certain conditions so as to ensure avoidance of arbitrary and malafide action and to safeguard citizens from such action. They also balance the demands of the State (Revenue) vis-a-vis the rights and liberties including right to privacy available to the citizens of this country. Therefore, the provisions of Section 132 have to be understood and interpreted strictly just as they have to be complied strictly."

"The existence or otherwise of the condition precedent to exercise of power under these provisions is open to judicial scrutiny. The absence of the condition precedent would naturally have the effect of vitiating the authorisation made by the Commissioner in either of the two provisions and the proceedings consequent thereto."

"The expression 'reason to believe' does not mean a purely subjective satisfaction on the part of the Income-tax Officer. The reason must be held in good faith. It cannot be merely a pretence."

"The sufficiency or inadequacy of the reasons to believe recorded cannot be gone into while considering the validity of an act of authorization to conduct search and seizure. The belief recorded alone is justiciable but only while keeping in view the Wednesbury Principle of Reasonableness."

"Information and reason to believe referred in Section 132 of the Act, 1961 have to pre-exist the search operations under Section 132. Such search cannot be justified or validated by relying upon post-search material or information or reason to believe."

"Sri Adarsh Kumar being the Authorized Officer and he not being the assessing officer of the petitioners nor the assessment proceedings having started, he could have issued such notice only prior to action under clauses (i) to (v) of sub-Section (1) of Section 132 having been taken and not after that."

"No prudent person on a reading of the satisfaction note in the light of requirements of law contained in Section 132(1)(b) can arrive at a conclusion that such information and reason to believe formed by the competent authority ... had any relation whatsoever to clause (b) of sub- Section (1) of Section 132 of the Act, 1961 so as to justify a search operation under the said provision in the context of the petitioners."

The Court's final determinations were:

• The warrant of authorization and search operations under Section 132 of the Act were illegal and quashed due to absence of jurisdictional facts and reason to believe.
• The petitioners were not liable to capital gains tax at the time of filing returns, and retrospective amendment cannot justify the search.
• The petitioners were prejudiced by statutory prohibition on filing updated returns post-search.
• The notice issued under Section 131(1A) post-search by the authorized officer was invalid and quashed.
• The Revenue may initiate proceedings under other provisions such as Section 148 if permissible, but the search under Section 132 cannot be sustained.