1969 (7) TMI 1 - SC - Income Tax

Supreme Court overturns finding of mala fide search and seizure under section 132, remands case for proper evidence

SC set aside HC's finding that search and seizure under section 132 was mala fide. SC held that HC erred in determining serious allegations of improper ... Legality of the search and seizure u/s 132 - Whether the search was mala fide? - decision of the High Court [1964 (3) TMI 2 - ALLAHABAD HIGH COURT] that the action of the Commissioner of Income-tax, U.P., and the Income-tax Officers who purported to act in pursuance of the letters of authorisation was mala fide - HELD THAT:- In appropriate cases a writ petition may lie challenging the validity of the action on the ground of absence of power or on a plea that proceedings were taken maliciously or for a collateral purpose. But, normally, the High Court in such a case does not proceed to determine merely on affidavits important issues of fact especially where serious allegations of improper conduct are made against public servants. The Income-tax Officers who conducted the search asserted that they acted in good faith in discharge of official duties and not for any collateral purpose. Commissioner of Income-tax also denied that he acted at the direction of the Deputy Director of Inspection and that case was supported by the Deputy Director of Inspection. If the learned judges of the High Court were of the view that the question was one in respect of which an investigation should be made in a petition for the issue of a writ, they should have directed evidence to be taken viva voce. High Court could not, on the assertions by the partners of the firm which were denied by the Income-tax Officer, infer that the premises of M/s. Seth Brothers were searched and documents were seized for a collateral purpose, merely from the fact that many documents were seized or that in some of the documents seized marks of identification were not put or that the documents belonging to the ' sister concerns ' of the Imperial Flour Mills ' were seized. In our view, the decision of the High Court that the action of the Commissioner of Income-tax, U.P., and the Income-tax Officers who purported to act in pursuance of the letters of authorisation was mala fide, cannot be accepted as correct. We do not entertain this request since we propose to remand the case to the High Court to decide questions which have not been decided. The applicants, if so advised, may move the High Court for leave to lead evidence. It is for the High Court to decide whether at this stage after nearly six years leave to examine witnesses should be granted. The order passed by the High Court is set aside and the proceeding is remanded to the High Court. The High Court will deal with and dispose of the proceeding according to law. We may observe that counsel for the Income-tax Officer did not invite us to decide the question of the vires of section 132 of the Income-tax Act on which the High Court has expressed no opinion. M/s. Seth Brothers and the other petitioners in the High Court will pay the costs of these appeals in this court. There will be one hearing fee. Costs in the High Court will be costs in the petitions. The core legal questions considered by the Court include:(a) Whether the Income-tax authorities had 'reason to believe' within the meaning of Section 132 of the Income-tax Act, 1961, to authorize and conduct the search and seizure at the premises of the assessee;(b) Whether the authorization for search was issued by the Commissioner of Income-tax on his own satisfaction or at the behest of the Directorate of Inspection, thereby raising questions of mala fide or abuse of power;(c) Whether the scope and manner of the search and seizure, including the seizure of documents relating to allied concerns and the alleged failure to place identification marks on certain documents, were lawful and within the statutory limits;(d) Whether the use of police force during the search was excessive and unlawful;(e) Whether the provisions of Section 132 and the rules framed thereunder violate fundamental rights guaranteed under Articles 14, 19(1)(f) & (g), and 31 of the Constitution;(f) The extent to which the Court can scrutinize the subjective satisfaction of the Commissioner or the Income-tax Officer in issuing authorization and conducting the search;(g) The procedural safeguards and remedies available to the assessee against improper or mala fide searches and seizures under the Income-tax Act.Issue-wise detailed analysis:(a) Existence of 'reason to believe' and issuance of authorization under Section 132The legal framework under Section 132 of the Income-tax Act, as amended by the Income-tax (Amendment) Act, 1965, empowers the Director of Inspection or Commissioner to authorize searches where there is reason to believe that certain conditions exist, such as non-production or suppression of books of account or documents relevant to proceedings under the Act. The authorization must be based on recorded reasons and the officer must have formed a bona fide belief.Precedents emphasize that the issuance of a search warrant by the Commissioner is not a judicial or quasi-judicial act subject to detailed court scrutiny; rather, the Court will not substitute its opinion for that of the Commissioner if the statutory conditions are met. The Court reiterated that the subjective satisfaction of the Commissioner or Income-tax Officer is paramount and errors in judgment do not vitiate the exercise of power if bona fide.In this case, the Commissioner of Income-tax denied acting at the behest of the Directorate of Inspection and affirmed that the authorization was issued after considering information and reports from Income-tax Officers. Affidavits from officers involved corroborated this position, denying any mala fide or collateral purpose. The Court found no sufficient evidence to support the High Court's conclusion that the authorization was issued under external direction or without application of mind.(b) Legality and scope of the search and seizureThe Act and rules do not require the authorization warrant to specify each document; a general authorization to search and seize documents relevant or useful to proceedings suffices. The officer conducting the search exercises discretion in seizing documents.The seizure of documents related to allied concerns and other businesses carried on by the partners was held to be lawful, as such documents could be relevant to the assessment of the firm's income and possible tax evasion. The Court rejected the contention that only documents strictly relating to the named firm could be seized.Regarding the alleged failure to place identification marks on certain documents, the Court held that such irregularity, absent evidence of tampering or replacement, does not render the search mala fide or illegal.The Court also rejected the High Court's finding that the large number of seized documents indicated mala fide conduct. The quantity of seized documents alone is not determinative of improper motive.(c) Use of police force during the searchThe statutory scheme under Section 132(2) authorizes requisition of police assistance during searches. The Court held that the presence of police officers to protect the officers and records, especially in the premises of influential businessmen, does not amount to excessive force. The High Court's finding on excessive police force was not supported by the evidence.(d) Fundamental rights challenge to Section 132 and rulesThe Court noted that the challenge to the constitutionality of Section 132 and the rules framed thereunder was not pressed before it, and the High Court had expressed no opinion on this point. Therefore, the Court did not decide on the vires of the provisions.(e) Scrutiny of the subjective satisfaction and mala fide allegationsThe Court emphasized that the power to authorize searches under Section 132 is discretionary but must be exercised bona fide and for the purposes intended by the statute. Malicious or collateral use of the power is impermissible and subject to judicial review.However, the Court held that the High Court erred in concluding mala fide exercise merely on the basis of the number of documents seized or minor procedural irregularities. The affidavits of the Income-tax Officers affirming bona fide exercise of power were not adequately considered by the High Court.The Court further observed that where serious allegations of mala fide or improper conduct are made against public servants, the High Court should not decide such issues merely on affidavits but ought to direct viva voce evidence to be recorded. The absence of such a procedure in this case led to an erroneous conclusion by the High Court.(f) Remedies and procedural safeguardsThe Court acknowledged that the assessee has a remedy to move the Court for release of documents seized if they are shown not to be relevant or useful to proceedings under the Act. The burden lies on the Income-tax Officer to prove the relevance of the documents.The Court remanded the matter to the High Court for disposal according to law and permitted the assessee to seek leave to lead evidence to establish mala fide conduct or collateral purpose, leaving it to the High Court's discretion whether to allow such evidence after the lapse of nearly six years.Significant holdings and core principles:'The section does not confer any arbitrary authority upon the Revenue Officer. The Commissioner or the Director of Inspection must have, in consequence of information, reason to believe that the statutory conditions for the exercise of the power to order search exist. He must record reasons for the belief and he must issue an authorization in favour of a designated officer to search the premises and exercise the powers set out therein.''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.''The mere fact that it may ultimately be found that some document seized was not directly relevant to any proceeding under the Act or that another officer with more information at his disposal may have come to a different conclusion will not be a ground for setting aside the order and the proceeding for search and seizure.''The books of account and other documents in respect of other businesses carried on by the partners of the firm of the assessees would certainly be relevant because they would tend to show interrelation between the dealings and supply materials having a bearing on the case of evasion of income-tax by the firm.''If the learned Judges of the High Court were of the view that the question was one in respect of which an investigation should be made in a petition for the issue of a writ, they should have directed evidence to be taken viva voce.''The High Court could not, on the assertions by the partners of the firm which were denied by the Income-tax Officer, infer that the premises of M/s. Seth Brothers were searched and documents were seized for a collateral purpose, merely from the fact that many documents were seized or that on some of the documents seized marks of identification were not put or that the documents belonging to the 'sister concerns' of the 'Imperial Flour Mills' were seized.'Final determinations:The Court set aside the High Court's order quashing the search and seizure proceedings and remanded the matter for fresh consideration according to law. It held that the authorization for search was lawfully issued based on bona fide satisfaction of the Commissioner. The search and seizure were within the scope of Section 132 and not mala fide. Procedural irregularities alleged did not vitiate the proceedings. The Court left open the possibility for the assessee to seek leave to lead evidence of mala fide conduct before the High Court, which was to decide the matter afresh.