TMI Blog2004 (5) TMI 34X X X X Extracts X X X X X X X X Extracts X X X X ..... 1-5-2004 - Judge(s) : D. BISWAS. JUDGMENT D. BISWAS J. - The above mentioned writ petitions have been filed before this court by the writ petitioners disputing the legality and validity of the search and seizure operations carried out by the respondent authorities on different dates. The writ petitions pose common questions of law on identical facts and, therefore, are being disposed of by this common judgment. Mr. S.S. Ray, learned senior counsel appeared for the writ petitioners in W.P. (C) Nos. 1552 of 2000, 137 of 2000, 6965 of 2000, 7008 of 2000, 2889 of 2001, 2890 of 2001, 8647 of 2001 and 8648 of 2001 along with Mr. K.N. Choudhury, learned senior counsel and assisted by Mr. S. Shyam, learned counsel, Mr. P. Upadhaya, learned counsel appeared for the petitioner in W.P. (C). No. 3729 of 2001. The respondent authorities have been represented by Shri R.P. Agarwal, learned senior counsel assisted by Mr. U. Bhuyan, learned counsel. At the very outset, for convenience, the facts in each case and the stand of the Revenue are proposed to be reflected in brief. Facts in W.P. (C) No. 1552 of 2000: The petitioner, M/s. M.S. Associates, is a partnership firm duly registere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gation), New Delhi. It is further averred that the CAG carried out an audit pursuant to a complaint filed by one Mr. Munkala Kishna Rao, a business rival of the petitioner firm. The report of the CAG contains sweeping adverse remarks against the petitioner firm indicating that the firm was involved in some sort of scam with the Directorate of Lotteries. The search and seizure were carried out during the period when the matter was pending before the State Legislature. The respondent authorities also initiated proceedings under section 158BB of the Act. Hence, it has been prayed that the search and seizure conducted in the office premises of the petitioner firm at Tinsukia, Guwahati and other places on June 23,1999, be declared illegal, unconstitutional and void ab initio, and for further directions to the income-tax authorities not to take any action under the provisions of the Act, and to return the documents/valuables seized in pursuance of the illegal search. In the affidavit-in-opposition, the respondent authority pleaded that the search and seizure operations were carried out as a consequence of information in possession of the Department and in full compliance with the provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ioner firm. In the additional affidavit filed, the respondent authority reiterating the above submissions further averred that a prima facie case of tax evasion was made out of the information received and the report of the CAG only substantiated the above information. The petitioner firm in their rejoinder affidavit denied the averments made in the affidavit-in-opposition and reiterated the contention of the writ petitioner already highlighted above. According to them, the petitioner has a branch office at Silpukhuri, Guwahati and M/s. Guwahati Agencies are only agents of the petitioner who sell lottery tickets on behalf of the petitioner in the State of Assam, and income derived from such sales has been duly reflected in the books of account. Facts in W.P. (C) No. 137 of 2000: Shri Ajoy Kumar Subba has filed this writ petition challenging the search and seizure conducted by the Income-tax Department under section 132 of the Act of 1961 in the residence of the petitioner at Tinsukia. He claimed to be an employee of M/s. Jyoti and Company, an agent of lotteries organised by the State Governments. According to him, in addition to his service, he has a business of selling of ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pondent No. 4 in purported exercise of powers under section 158BC of the Act. Cash, jewellery, investment certificates, fixed deposit certificates and other documents were seized by the income-tax authorities during the search. In addition, the authorities also conducted a search in the office premises of M/s. M.S. Associates situated at Guwahati and Tinsukia, and various documents of account relating to M/s. M.S. Associates were seized. The warrants of authorisation were issued in the name of Mr. M.K. Subba, Mr. A.K. Subba, Mr. S.R. Subba and the petitioner. But in fact the search and seizures were effected against the firm and not the individuals named above. The search has been conducted in violation of the provisions of section 132 of the Act without any information in possession as is required under the law. In brief, the search and seizure have been challenged on identical grounds as in the aforementioned writ petitions which need no repetition. According to the answering respondents, no illegality has been committed by the authority in issuing the warrants of authorisation. It is further submitted that the writ petitioner is a partner having 51 per cent, share in M/s. M.S. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and void, quashing the notices dated November 13, 2000 and October 19, 2000, and for direction for return of the seized documents/valuables. In addition the affidavit filed by petitioner No. 2, mention has been made of W.P. (C) No. 508 of 1998. The affidavit-in-opposition filed by the respondent authority is also based on identical grounds as in the aforementioned writ petitions. According to the answering respondents, no illegality has been committed by the authority in issuing the warrants of authorisation. It is further submitted that the wife of the writ petitioner No. 2 is a partner having 51 per cent, share in M/s. M.S. Associates with effect from April 1, 1994, which has been appointed by the State of Nagaland as its sole distributor of lottery tickets. The firm, M/s. M.S. Associates, did not deposit the sale proceeds with the State Government. The search was conducted in pursuance of the information in possession of the Department that documents and valuables representing income were not disclosed for assessment. In para. 19 of the affidavit, it has been submitted that the authority was justified in taking consequential action under sections 158BC and 158BD of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s liable to be quashed. According to the respondents, no illegality has been committed by respondent No. 4 in issuing the impugned notice dated February 20, 2001, under section 158BC of the Act on the basis of the materials seized during the search. The maintainability of the writ petition has been challenged on the ground that the petitioner firm is incorporated in the State of Sikkim where it is assessed to tax and that the concerned income-tax authorities are all stationed outside the territorial limits of this court. It is further stated that the petitioner company did not file its return of income for the assessment year 1999-2000 in response to the notice issued on July 27, 2000. Even for earlier years, no return of income were filed by the petitioner. It is further averred that the Director of Income-tax (Investigation) after going through the complete details of the case was satisfied that M/s. M.S. Associates and persons/ concerns connected or associated with it are involved in tax evasion and, hence, issued the warrants of authorisation. Facts in W.P. (C). No. 2890 of 2001: In this petition, the petitioners, M/s. Sikkim Subba Associates, have prayed for quashing the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... osition denied the averments made in the writ petition and submitted that there is no illegality in issuing the warrants of authorisation of search and seizure by respondent No. 4. According to them, the cause of action, if any, has arisen outside the territorial jurisdiction of this court and, therefore, the writ petition is not maintainable. The firm is incorporated in the State of Sikkim and all the concerned income-tax authorities are situated outside the territorial limit of this court. According to them, the petitioner firm did not submit its return of income for earlier years and, as such, this case has been centralised by the Commissioner of Income-tax in its capacity as a new assessee. It is further submitted that the warrants for search and seizure were issued after being satisfied that M/s. M.S. Associates and other persons/concerns connected or associated with it are involved in tax evasion. The notice issued under section 158BC is nothing but initiation of an assessment proceeding in connection with a search which may or may not eventually result in the assessment of any undisclosed income. Therefore, the impugned notice issued in compliance with the provisions of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C and 158BD for block assessment cannot be initiated. The grounds of objection raised in the affidavit-in-opposition by the respondent authority are similar to the grounds taken in other writ petitions. According to them, the search and seizure in the premises of the writ petitioner were conducted in consequence of the information in possession of the Department that the documents and valuables representing income were not disclosed for assessment. It is also reiterated that the proceedings for block assessment initiated by the Deputy Commissioner became indispensable in view of non-disclosure of documents/valuables unearthed during the search. The respondent authority also challenged the jurisdiction of this court in entertaining the writ petition as, according to them, the cause of action arose outside the territorial jurisdiction of this court. Facts in W.P. (C.) No. 8647 of 2001: This writ petition has been filed by M/s. M.S. Associates challenging the notices dated March 15, 2001 (annexure IV), and November 6, 2001 (annexure IX), issued by respondent No. 5 and the special audit report dated September 7, 2001. The notice dated March 15, 2001, has been issued under section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ground that the authority (respondent No. 4) failed to issue directions as prayed for under section 144A of the Act. The conditions precedent for direction for special audit under section 142(2A) were also absent in the instant case. The present writ petition has been filed as there is no remedy by way of an appeal against an order passed under section 142(2A). The writ petition has been filed for the reliefs indicated hereinbefore. The respondent authority in their affidavit-in-opposition submitted that at the time of search of the premises of Mr. Moni Kumar Subba at Silpukhuri, Guwahati, the office of M/s. Guwahati Agency was found to be functioning in the said premises and no office of M/s. M.S. Associates was found in the specified place at Guwahati. The income earned by M/s. M.S. Associates is neither reflected in the regular books of account nor in the income-tax returns of M/s. M.S. Associates. Though Smt. Jyoti Limbu and Smt. Tilmaya Chong are partners of M/s. M.S. Associates, they have no knowledge of the lottery business which is absolutely under the control of Mr. Moni Kumar Subba and his brother, Mr. S.R. Subba. The proceeds of lottery tickets were not deposited wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted M/s. B. Goel and Associates, chartered accountants, to audit the accounts of the petitioner under section 142(2A) of the Income-tax Act, 1961, and the audit report dated September 7, 2001, submitted by the said firm. In addition, the petitioner also challenged the notice dated November 6, 2001, whereby the income-tax authorities directed the petitioner to show cause as to why the penalty under section 271B for the assessment year 1998-99 should not be imposed for failure to get the accounts audited as per the provisions of section 44AB of the Act. The petitioner is a partner of M/s. M.S. Associates and has been filing income- tax returns regularly, and assessments were made after due scrutiny of the books of account including assessment under section 143(3) for the assessment years 1993-94 to 1996-97. The warrants of authorisation were executed in the month of June, 1999, and a large amount of cash, jewellery, investment certificates, fixed deposit receipts and other documents were seized. The petitioner has also challenged the legality and validity of the warrants of authorisation. The petitioner's books of account, other records and various materials, relevant for the assessm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of the petitioner in W.P. (C.) No. 3729 of 2001. The factual details made available in brief hereinbefore relate to legality and validity of the search and seizure, status of the draft report of CAG, objection relating to maintainability of the writ petitions and availability of alternative remedy. The prime questions, answer to which will settle the above issues are formulated as follows: (1) Whether the writ petition is maintainable for adjudication in this court on the face of the respondents' contention that no cause of action arose within the territorial limit of this court? (2) Whether the draft report of the CAG taken into consideration by the respondent authorities for the purpose of determining the existence of circumstances under section 132(1) of the Act is legally permissible before the report was disposed of by the State Legislature? (3) Whether the respondent authorities had, in addition to the draft report of the CAG, any other information in their possession to form reasons to believe as is required under section 132(1) of the Act? The issues framed above will also govern the other writ petitions on all material points. At the very beginning, I will like ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Nav Bharat Enterprises Pvt. Ltd. [1996] 3 SCC 443 and State of Maharashtra v. State of Arunachal Pradesh (Writ Appeals Nos. 400 of 2001 and 401 of 2001). I have considered the ratio available in the above three cases. Simultaneously, I have also considered the ratio available in the judgments of the hon'ble Supreme Court relied upon by Shri R.P. Agarwal, learned senior counsel for the respondents, namely-State of Bihar v. Barakar Engineering and Foundary Works Ltd. [1972] 29 STC 294 (SC); [1972] 4 SCC 468; Kajaria Exports Ltd. v. a Union of India, AIR 1985 Cal 70; Oil and Natural Gas Commission v. Utpal Kumar Basu [1994] 4 SCC 711 and Subodh Kumar Gupta v. Shrikant Gupta [1993] 4 SCC 1. The ratio available lay down the principles which have to be applied on the factual background of a given case. Shri R.P. Agarwal, learned senior counsel, argued that there was no search against the petitioner firm and it was only during the course of search in the premises of others, evidence of undisclosed property/income was unearthed. The office file containing the notes of satisfaction and warrants of authorisation from the Guwahati office also show that no warrant of authorisation for search ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me of Mr. M.K. Subba, the bank accounts belonging to the petitioner and his wife were seized. The action of seizure in so far as it affects the writ petitioners is consequential. As stated by the respondent authority, the petitioners are assessees to tax at New Delhi and, therefore, the documents/valuables belonging to the petitioner and his wife seized during the course of execution of warrants of authorisation issued against Mr. M.K. Subba are accountable to the respondent authorities at New Delhi. The documents/ bank accounts seized are apparently part of undisclosed income and have to be explained before the authority at New Delhi only. The petitioner's claim that his right to property has been invaded during the course of search at Tinsukia will be of no avail since he is an assessee at New Delhi and he has approached this court after receipt of notice dated November 19, 1999, issued by the authorities from Delhi. Since, no action has been taken as yet by the respondent authority at Guwahati, the petitioner cannot claim that the cause of action wholly or in part has arisen within the jurisdiction of this court. Therefore, this writ petition is also not maintainable for lack of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ners at Guwahati and Tinsukia and other places within the North East were searched. Therefore, the cause of action has arisen, in the instant case, within the territorial limits of this court. Hence, this petition is maintainable. In Writ Petition (C) No. 2889 of 2001, the warrants of authorisation for search and seizure were issued by the DIT (Investigation), Calcutta, on June 18, 1999, against the petitioner firm. The places indicated for search in the aforesaid warrants of authorisation are at Gangtok, outside the territorial jurisdiction of this court. In this petition, the petitioner has not challenged the search and seizure carried out under section 132 of the Act of 1961. Only the notice dated February 20, 2001, issued under section 158BC has been challenged. This notice has been issued by the authorities in New Delhi where the petitioner is assessed to tax. The DIT (Investigation), Calcutta, has also not been impleaded in this petition as respondent. No cause of action appears to have arisen either wholly or in part at any place within the jurisdiction of this court. Hence, this petition is also not maintainable. Writ Petition (C) No. 2890 of 2001 has been filed by M/s. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... petitioner's claim that it has a branch office at GNB Road, Silpukhuri, Guwahati, has been disputed by the respondents in paragraph 3 of their affidavit-in-opposition. No certificate under section 61 of the Partnership Act has also been placed on record. The said two notices and the audit report are not relatable to any action or any place within the jurisdiction of this court. The question whether the petitioner has a branch office at Guwahati is a matter of fact and cannot be addressed by this court without roving enquiry. This court apparently has no jurisdiction to decide the issues raised in this petition as no cause of action arose within the territorial limits of this court. Writ Petition (C) No. 8648 of 2001 has been filed by Smt. Jyoti Limbu, proprietor of M/s. Jyoti and Company, Guwahati. The impugned notices dated March 15, 2001 and November 6, 2001, were issued by the authorities at New Delhi. The audit report was also prepared at New Delhi. The petitioner is an assessee at New Delhi. There is nothing on record to show that the DIT (Investigation), Guwahati, is in any way connected with the aforesaid notices and the audit report. The existence of registered office at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te: Provided that a suit to obtain relief respecting, or compensation for wrong to, immovable property held by or on behalf of the defendant may, where the relief sought can be entirely obtained through his personal obedience, be instituted either in the court within the local limits of whose jurisdiction the property is situate, or in the court within the local limits of whose jurisdiction the defendant actually and voluntarily resides, or carries on business, or personally works for gain." Clause (f) of section 16 provides that a suit for recovery of movable property under distraint (seizure) will lie only in the court within whose local limits the movables are situate. The writ petitions have been filed for direction for return of the property/documents seized. Prayer for return (recovery) of the movable property in distraint has to be made before the court where the movable are situate. The seized properties/documents are in the custody of the authorities at Delhi and Calcutta. The authorities at Delhi and Calcutta have initiated follow-up action. No suit for recovery of the seized materials could, therefore, be filed in any civil court subordinate to this court. Suit for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Board, 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 sub-section (4) of section 22 of the Indian Income-tax Act, 1922 (11 of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rumour or surmises. In so far as the draft report of the CAG is concerned, there cannot be any dispute that it continues to be the property of the concerned State Legislature, and no action can be initiated thereon by any authority except in accordance with the manner in which it is disposed of by the State Legislature. The Nagaland State Legislature referred the report of the CAG to the Public Accounts Committee which in turn submitted its recommendations to the effect that the report of the CAG calls for no action. The State Legislature accepted the report. The question, therefore, arises as to whether this report of the CAG in draft form could be treated as a legal information within the meaning of subsection (1) of section 132 and whether consideration of the report had vitiated the decision making process. Mr. Ray, learned senior counsel, with reference to the decisions in ITO v. Seth Bros. [1969] 74 ITR 836 (SC); AIR 1970 SC 292, and Dr. Nand Lal Tahiliani v. CIT [1988] 170 ITR 592 (All) submitted that section 132 of the Act does not confer any arbitrary authority upon the Revenue Officers to issue authorisation for search and seizure which otherwise amounts to invasion o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tial proceedings. The CAG report, till disposed of by the concerned Legislature, cannot provide factual or legal material for forming the requisite belief to the fact that an assessee has not disclosed any income or property in his return. The report of the CAG cannot be said to be "in the possession of the concerned authority" till it is disposed of by the concerned Legislature and, therefore, this cannot form the basis on which belief can be formed. In support of this argument, reference may be made to the decisions in Ajit Jain v. Union of India [2000] 242 ITR 302 (Delhi); Coca-Cola Export Corporation v. ITO [1998] 231 ITR 200 (SC); Vindhya Metal Corporation v. CIT [1985] 156 ITR 233 (All) and Anand Swaroop v. CIT [1976] 103 ITR 575 (P H). The report of the Comptroller and Auditor General relating to the accounts of a State is required to be submitted before the Governor, who shall cause it to be laid before the Legislature of the concerned State, here the State of Nagaland (reference article 151(2)). The State Legislature is required to refer it to the Public Accounts Committee for examination and recommendations. The recommendations of the Public Accounts Committee have to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... turally entails the question as to whether use of any inadmissible material/information along with other admissible materials/information would vitiate the decision making process. Here, we may refer to the decisions of the Supreme Court in Dhirajlal Girdharilal v. CIT [1954] 26 ITR 736; AIR 1955 SC 271 and in Ram Manohar Lohia v. State of Bihar, AIR 1966 SC 740. In Dhirajlal [1954] 26 ITR 736, the Supreme Court observed: "It is well established that when a court of fact acts on material, partly relevant and partly irrelevant, it is impossible to say to what extent the mind of the court was affected by the irrelevant material used by it in arriving at its finding. Such a finding is vitiated because of the use of inadmissible material and thereby an issue of law arises". In para. 15 of the judgment in Ram Manohar Lohia v. State of Bihar, AIR 1966 SC 740, the Supreme Court held as follows: "15. For these reasons, in my view, the detention order if it had been based only on the ground of prevention of acts prejudicial to the maintenance of law and order, it would not have been in terms of rule 30(1)(b) and would not have justified the detention. As I have earlier pointed out, howeve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed at on consideration of all the information in possession will not stand vitiated if other lawful and valid information is independent, severable and capable of leading to the formation of belief as required under section 132. Shri Agarwalla, further submitted that the decision in Ram Manohar Lohia v. State of Bihar, AIR 1966 SC 740, was rendered in a case under detention laws and the concerned Act has been amended providing for segregation of valid and invalid grounds. We may refer to the decisions relied upon by Shri Agarwalla, learned senior counsel, in order to determine as to whether segregation of valid and invalid grounds is permissible on the factual background of the case at hand. The decision in Dhirajlal [1954] 26 ITR 736 (SC), is relatable to the framing of questions of law for the purpose of adjudication of an application under section 66(2) of the Indian Income-tax Act, 1922. The hon'ble Supreme Court by the aforesaid observation in para. 5 of the judgment in Dhirajlal [1954] 26 ITR 736 (SC) apparently did not lay down any law in perpetuity for all cases based on divergent factual background. The decision of the hon'ble Supreme Court in S. Narayanappa v. CIT [19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 taxpayer, 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Subir Roy v. S.K. Chattopadhyay [1986] 158 ITR 472. In Dr. Partap Singh [1985] 155 ITR 166, the hon'ble Supreme Court held that illegality of a search does not vitiate the evidence collected during such illegal search. Though the decision was rendered in a case under the Foreign Exchange Regulation Act, 1973, yet the ratio available therein has its importance in the case at hand as well. In Pooran Mal [1974] 93 ITR 505, the Supreme Court was of the view that even if the search and seizure were in contravention of the provisions of section 132 of the Income-tax Act, the materials seized were liable to be used subject to law before the income-tax authorities and, therefore, no writ of prohibition could be granted. In Subir Roy [1986] 158 ITR 472, it was held by the Calcutta High Court that there is no necessity to state reasons for invoking powers under section 132 in the search warrant and that it is also not necessary to specify the documents or books of account, etc., which would be the subject matter of search and seizure. The judgments make it clear that a warrant of authorisation cannot be challenged on the ground that the documents or books of account, etc., which are the sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he "reason to believe" as is required under section 132. The satisfaction note does not indicate that the "reason to believe" was founded on the report of the CAG alone. The file relating to the Kolkata office also contains a separate note of satisfaction based on various information obtained from the Delhi Directorate and discreet inquiries. The allegations of tax evasion are relatable to five specific instances. Discreet field inquiries also revealed voluminous information relatable to tax evasion. The report of the CAG was also one of the sources of information which was in addition to the aforesaid information collected from various sources. The note of satisfaction further shows that the authority was satisfied that the concerned group have not disclosed their true income to tax and, as such, even if a notice under section 131 is issued, the said group will c not disclose the true income before the income-tax authorities. The note of satisfaction does not indicate that the report of the CAG was given supremacy in forming the required "belief". Similar is the situation with regard to the note of satisfaction of the authorities at Guwahati. The note of satisfaction at Guwaha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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