2020 (1) TMI 1114 - HC - Income Tax

Unlawful Search & Seizure under Income Tax Act: Return of Jewellery Ordered

The court found the search and seizure conducted under Section 132 of the Income Tax Act to be unlawful due to the absence of a valid 'reason to believe' ... Search and seizure under Section 132 of the Income Tax Act - reason to believe - formation of satisfaction / application of mind before authorization - ex post facto satisfaction note - proviso excluding seizure of stock in trade - release of seized assets under Section 132B and 120 days limitSearch and seizure under Section 132 of the Income Tax Act - reason to believe - formation of satisfaction / application of mind before authorization - Validity of the search and seizure authorization under Section 132 in light of requirement to have pre existing 'reason to believe' formed on relevant material before conducting the search. - HELD THAT: - The court held that authorization under Section 132 requires a recorded 'reason to believe' based on relevant material existing prior to the exercise of power and that the opinion must reflect honest application of mind. The satisfaction note produced showed only post facto recording after the petitioner was intercepted and jewellery found; there was no cogent material demonstrating that a reasonable belief existed before interception. The court found that the record disclosed formation of belief after the seizure (ex post facto), equating to mere suspicion and conjecture rather than tangible reasons to believe that the jewellery represented undisclosed income. Consequently the action was arbitrary, lacked the mandatory pre authorization satisfaction and was vitiated and unlawful. [Paras 13, 17, 18, 19, 27]The search authorization under Section 132 is quashed as the reason to believe was not formed on relevant material prior to the search and was recorded ex post facto.Proviso excluding seizure of stock in trade - search and seizure under Section 132 of the Income Tax Act - Whether the jewellery seized was immune from seizure as stock in trade under the proviso to Section 132(1)(iii) and related provisos. - HELD THAT: - The court noted the proviso to Section 132(1)(iii) (and the related proviso to clause (v)) prohibits seizure of bullion, jewellery or other valuable articles being stock in trade, requiring only inventorying. The record showed the petitioner asserted the items were stock in trade and produced books and vouchers; the officers proceeded to seize despite knowledge of claimed stock in trade and without applying the statutory protection. The court found the seizure ignored the statutory mandate and the officer misdirected himself by treating mere possession as establishing undisclosed income without material to displace the stock in trade claim. [Paras 20, 21, 26]The seizure was impermissible in respect of articles claimed as stock in trade and the statutory proviso against seizure was not complied with.Release of seized assets under Section 132B and 120 days limit - Whether the respondents were entitled to retain the seized jewellery beyond the period and procedure prescribed under Section 132B(1) including the 120 day outer limit for release. - HELD THAT: - The court examined Section 132B(1) which permits release of seized assets if the assessee applies within the prescribed time and explains nature and source to the AO's satisfaction, and prescribes release within 120 days from execution of authorisation. The petitioner repeatedly applied and furnished documents correlating seized articles with books of account; respondents failed to proffer a plausible refutation and asserted only that bulk purchase invoices could not be matched to individual items. Given the respondents' failure to justify continued retention and the expiry of the 120 day period, the court held there was no authority to retain the jewellery beyond the statutory limit. [Paras 23, 24, 25, 26]Respondents were not entitled to retain the seized jewellery beyond the statutory procedure and 120 day period under Section 132B; continued retention was unlawful.Search and seizure under Section 132 of the Income Tax Act - Relief to be granted consequent to invalid search and seizure and imposition of costs. - HELD THAT: - Having found the search authorization and consequent actions illegal and arbitrary, the court declared all actions pursuant to the search and seizure illegal, ordered immediate return of the seized jewellery to the petitioner and awarded costs against the respondents to discourage unwarranted search actions. Costs were quantified and directed to be paid to the Delhi Legal Services Authority within a specified period. [Paras 29]Warrant of authorization and all actions pursuant thereto quashed; seized jewellery to be returned forthwith; respondents directed to pay costs.Final Conclusion: Writ petition allowed: the search and seizure under Section 132 was quashed as unauthorized and arbitrary (reason to believe recorded ex post facto), the statutory protection for stock in trade and the release regime under Section 132B (including the 120 day limit) were not observed; seized jewellery is to be returned forthwith and respondents ordered to pay costs to the Delhi Legal Services Authority. Issues Involved:1. Legality of the search and seizure under Section 132 of the Income Tax Act.2. Validity of the 'reason to believe' for initiating the search.3. Compliance with procedural requirements for search and seizure.4. Entitlement to the release of seized stock-in-trade.5. Assessment of costs and damages due to unlawful actions by the Respondents.Detailed Analysis:1. Legality of the Search and Seizure under Section 132 of the Income Tax Act:The Petitioner challenged the search and seizure conducted under Section 132 of the Income Tax Act, arguing that the preconditions laid down in Clauses (a) to (c) of Section 132(1) were not met. The Petitioner contended that the jewellery seized was his stock-in-trade and that the seizure was unlawful and hampered his business operations.2. Validity of the 'Reason to Believe' for Initiating the Search:The court examined whether the Respondents had a valid 'reason to believe' before authorizing the search. The court referred to the satisfaction note and found that the note was prepared after the search was conducted, indicating an ex-post facto formation of the 'reason to believe.' The court emphasized that the 'reason to believe' must be based on tangible information and not mere suspicion or conjecture. The court cited the Supreme Court's decision in *Director General of Income Tax (Investigation), Pune vs. Spacewood Furnishers Private Limited and Ors.*, which laid down the principles for authorizing search and seizure under Section 132.3. Compliance with Procedural Requirements for Search and Seizure:The court noted that the search and seizure were conducted without prior recording of the 'reason to believe,' which is a mandatory requirement under Section 132. The court highlighted that the search action was initiated on 10.09.2018, but the satisfaction note and search authorization were dated 11.09.2018, indicating a lack of compliance with procedural requirements. The court also pointed out that the jewellery was seized despite being stock-in-trade, which is prohibited under the proviso to Section 132(1)(iii).4. Entitlement to the Release of Seized Stock-in-Trade:The court observed that the Petitioner had repeatedly requested the release of the seized jewellery, providing necessary documents to substantiate that the jewellery was his stock-in-trade. The Respondents failed to provide a plausible explanation for retaining the jewellery beyond the statutory period of 120 days as provided under Section 132B. The court emphasized that the Respondents had no authority to retain the seized jewellery beyond the said period, and the Petitioner was entitled to its release.5. Assessment of Costs and Damages Due to Unlawful Actions by the Respondents:The court found the actions of the Respondents to be grossly arbitrary and unlawful. The court noted that the Respondents' actions were in contravention of the law and caused undue hardship and harassment to the Petitioner. Consequently, the court quashed the search and seizure action and ordered the Respondents to return the seized jewellery to the Petitioner. Additionally, the court imposed costs of Rs. 50,000 on the Respondents, payable to the Delhi Legal Service Authority, to discourage unwarranted actions of search and seizure.Conclusion:The court concluded that the search and seizure conducted by the Respondents were unlawful due to the lack of a valid 'reason to believe' and non-compliance with procedural requirements. The court ordered the immediate return of the seized jewellery to the Petitioner and imposed costs on the Respondents for their arbitrary actions.