2023 (12) TMI 413 - HC - Income Tax

Petitioner entitled to refund of Rs 30 lakh demonetized notes seized during elections under Section 131 Income Tax Act

The HC held that petitioner was entitled to return of Rs. 30,00,000 in demonetized currency notes seized by Election Officer during Nagar Panchayat ... Holding, transfer or receipt of Specified Bank Notes - law enforcement agency exemption under proviso (d) to Section 5 of the Specified Bank Notes (Cessation of Liabilities) Act, 2017 - seizure under Section 132 of the Income-tax Act to be treated as seizure by a law enforcement authority/court equivalent for purposes of proviso (d) - obligation of the Reserve Bank of India to accept deposit of seized SBNs on production of requisite documents - return/refund of seized currency where amounts are accounted for and tax/interest paidSeizure under Section 132 of the Income-tax Act to be treated as seizure by a law enforcement authority/court equivalent for purposes of proviso (d) - law enforcement agency exemption under proviso (d) to Section 5 of the Specified Bank Notes (Cessation of Liabilities) Act, 2017 - Seizure of SBNs under Chapter XIII of the Income tax Act (including Section 131/132) falls within the scope of the proviso to Section 5 of the Act of 2017 and is actionable as a law enforcement agency seizure for the purpose of permitting possession/transfer by authority. - HELD THAT: - The Court found that the cash was seized by a law enforcement agency under the procedure in Chapter XIII of the Income tax Act, the petitioner declared the amount as additional income for Financial Year 2016 17 and paid tax and interest, and the statutory amendment (proviso (d) to Section 5 of the Specified Bank Notes (Cessation of Liabilities) Act, 2017) exempts holding/transfer/receipt of SBNs when done at the instance of a law enforcement agency on production of documents authorising seizure or confiscation. Having regard to these facts and the statutory proviso, the seizure in the present circumstances is within the exception and is to be treated as made by a law enforcement agency so as to permit subsequent dealings required for refund or deposit by the authorities. [Paras 6, 8, 9]Seizure under the Income tax Act is covered by proviso (d) to Section 5 of the Act of 2017 and qualifies as law enforcement agency seizure for purposes of dealing with SBNs.Obligation of the Reserve Bank of India to accept deposit of seized SBNs on production of requisite documents - return/refund of seized currency where amounts are accounted for and tax/interest paid - Reserve Bank of India must accept deposit of the seized SBNs and permit deposit in the PD account of the Income tax authority, thereby enabling refund to the petitioner, where the seized notes were accounted for and requisite income tax and interest paid. - HELD THAT: - The Court observed that the cash was seized on 17/11/2016 (prior to the appointed day) and thereafter treated as the petitioner's additional income with tax and interest paid; the cash remained in custody of the District Treasury and the Income tax authorities complied with statutory seizure procedure. Given proviso (d) to Section 5 of the Act of 2017 and the settled facts that the notes were seized by a law enforcement agency and requisite formalities were complete, there was no justifiable reason to deny the petitioner refund. Accordingly, the Court directed the RBI to accept the specified bank notes valued at the seized amount and deposit the same in the PD account of the Principal Commissioner of Income Tax (Central), Nagpur, after which the Income tax office would process the refund to the petitioner within six weeks. [Paras 6, 9, 10]RBI directed to accept the seized SBNs and deposit them in the PD account so that the Income tax authorities can refund the amount to the petitioner; refund to be completed within six weeks.Final Conclusion: The petition succeeds: the seized SBNs (seized 17/11/2016) are covered by the law enforcement agency exception in proviso (d) to Section 5 of the Act of 2017; RBI is directed to accept deposit of those SBNs into the PD account of the Principal Commissioner of Income Tax (Central), Nagpur, and the Income tax authorities shall, after completing formalities, refund the amount to the petitioner within six weeks. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether currency notes seized by a Law Enforcement Agency (Income Tax authorities) on 17/11/2016 (post-demonetisation) can be accepted by the Reserve Bank of India (RBI) for deposit/exchange in the absence of a specific court order. 2. Whether seizure under Sections 131/132 of the Income-tax Act, 1961 (Act of 1961) constitutes an 'order of seizure by a Court of law' or otherwise falls within the exemption in proviso (d) to Section 5 of the Specified Bank Notes (Cessation of Liabilities) Act, 2017 (Act of 2017), thereby permitting holding/transfer/receipt by a Law Enforcement Agency. 3. Whether a person who declared SBNs as additional income, paid tax and interest and whose seized notes are in official custody is entitled to return of the equivalent amount (refund) where RBI initially refuses deposit. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: RBI's obligation to accept deposit/exchange of seized SBNs absent a court order Legal framework: Section 5 of the Act of 2017 provides that from the appointed day holding, transfer or receipt of specified bank notes (SBNs) is not permissible; Section 2(1)(a) fixes the appointed day as 31/12/2016. Proviso (d) to Section 5 (inserted 24/8/2018) exempts holding of SBNs by Law Enforcement Agencies on production of documents authorising seizure/confiscation. RBI contends cessation of liability and non-acceptance of SBNs absent a court direction. Precedent treatment: The Tribunal considered a decision of the Madras High Court (R. Sarathkumar), where seized SBNs were directed to be transferred by RBI to the seizing authority and ultimately returned to the claimant after accounting; that decision was treated as persuasive authority supporting equitable relief. Interpretation and reasoning: The Court interprets proviso (d) to Section 5 as permitting holding, transfer or receipt of SBNs by Law Enforcement Agencies upon production of requisite seizure/confiscation documents. Acceptance by RBI of such SBNs for deposit is not categorically barred where the seizure was by a Law Enforcement Agency and requisite statutory formalities were completed prior to the appointed day. The Court finds no justification to require a separate judicial order where statutory procedure under the Income-tax Act has been complied with and the notes are in official custody. Ratio vs. Obiter: Ratio - the proviso (d) to Section 5 allows Law Enforcement Agencies to hold/transfer/receive SBNs on production of authorising documents and, where those conditions are met, RBI should accept deposit to facilitate refund. Obiter - references to broader policy considerations of demonetisation and other High Court/Supreme Court orders are ancillary. Conclusion: RBI's refusal to accept deposit was not sustainable where the SBNs were seized by an Income Tax authority pursuant to statutory powers and requisite documentation existed; RBI was directed to accept the SBNs and deposit them in the PD account of the Principal Commissioner of Income Tax (Central), Nagpur to enable refund. Issue 2: Whether seizure under Sections 131/132 of the Income-tax Act qualifies as an order/possession by a Court or as a Law Enforcement Agency action under proviso (d) Legal framework: Sections 131, 132 and 132B of the Act of 1961 set out powers of Income Tax authorities to summon and seize, and Section 136 deems Income Tax proceedings as judicial proceedings for certain purposes. The argument raised by the Income Tax Department treated seizure under Section 132 as akin to sequestration by a court, invoking applicability of CrPC provisions as per sub-sections (1) and (1A) of Section 132. Precedent treatment: The Court considered departmental communications and previous High Court decisions that construed procedural parity between Income Tax authorities and judicial processes for certain statutory purposes; the Madras High Court decision was again relied upon as analogous where an income-tax investigation resulted in direction for transfer of seized SBNs. Interpretation and reasoning: The Court observed that after seizure on 17/11/2016, Section 131 procedure was followed, the petitioner declared the amount as additional income and tax was paid; the seized cash came into the custody of District Treasury Office and was sought to be requisitioned by Income Tax authorities. The Court treated the seizure as action by a Law Enforcement Agency within the meaning of proviso (d) to Section 5 of the Act of 2017. While the Income Tax authority contended that its orders are equivalent to court seizures, the Court did not require formal equivalence to a judicial order; rather the focus was on whether the statutory conditions for Law Enforcement Agency custody were satisfied. Ratio vs. Obiter: Ratio - seizure by Income Tax authorities under Sections 131/132 followed by statutory formalities places the SBNs within the ambit of proviso (d), obviating the need for an independent court order to permit RBI acceptance where requisite documents authorising seizure/confiscation are produced. Obiter - extended analysis on interpretative comparisons with criminal procedural provisions and penal code references in department affidavits. Conclusion: Seizure under the Income-tax Act, followed by completion of procedural formalities and custody by treasury, constituted possession by a Law Enforcement Agency for purposes of proviso (d) to Section 5 of the Act of 2017; accordingly the SBNs could be accepted by RBI on production of the relevant documents. Issue 3: Entitlement to refund where seized SBNs were declared as additional income and taxed Legal framework: Income declared under the Act of 1961, payment of tax and interest, and accounting in balance sheet/return establish tax liability discharge; the power to refund or release seized property is exercised by the relevant Income Tax authorities once formalities are completed. The Act of 2017's proviso (d) governs the status of SBNs held by Law Enforcement Agencies. Precedent treatment: The Madras High Court's direction facilitating return where amount had been accounted for was cited as supporting equitable relief where statutory formality had been complied with. Interpretation and reasoning: The Court noted undisputed facts: seizure pre-dated appointed day; petitioner declared Rs.30,00,000 as additional income for FY 2016-17, paid tax and interest, and included amount in balance sheet/return; the seized cash thereafter remained in official custody and was not under petitioner's control. Given completion of statutory formalities and the proviso (d) allowance, denying refund would be unjust. The Court emphasized interests of justice, fair play and equity and treated the Income Tax departmental determination of additional income and payment of tax as supporting return of value equivalent to seized notes. Ratio vs. Obiter: Ratio - where seized SBNs were accounted for by the owner through declaration and tax payment and the seizure was by a Law Enforcement Agency which has complied with statutory procedure, the claimant is entitled to refund of the equivalent amount through official channels; RBI must accept the notes and facilitate deposit to allow refund. Obiter - comments on general policy of demonetisation and wider applications to other factual permutations. Conclusion: The petitioner was entitled to return of Rs.30,00,000. The Court directed RBI to accept the seized SBNs and deposit them in the PD account of the Principal Commissioner of Income Tax (Central), Nagpur; upon such deposit the Income Tax authority was directed to effect refund after requisite formalities, to be completed within six weeks. Cross-references and operational directions The Court cross-referenced its statutory interpretation of proviso (d) to Section 5 with the factual matrix under Sections 131/132 of the Act of 1961 and the departmental communications showing treasury custody and requisition attempts; relying on the Madras High Court decision as persuasive support, the Court ordered RBI to accept the SBNs and facilitate deposit to enable refund by Income Tax authorities within a specified timeframe. The directive is remedial and grounded in statutory provisions and equitable considerations (ratio).