2024 (10) TMI 660 - HC - Income Tax

Section 132 search and seizure operation quashed due to inadequate satisfaction note lacking reasonable belief

M/s. R.S. Agro Tech and others. Versus Union of India and others.

The Telangana HC set aside a search and seizure operation conducted under Section 132 of the Income Tax Act, finding the satisfaction note inadequate. The ... Validity of the search and seizure u/s 132 - scope of Revenue's ample power to undertake search and seizure - 'reasons to believe' V/S “reasons to believe” for conducting search and seizure - HELD THAT:- The ‘satisfaction note’ talks about discrete enquiry, but no such material relating to discrete enquiry and information gathered thereupon became part of the ‘satisfaction note’. Thus, nature and character of information cannot be gathered from perusal of the ‘satisfaction note’ which ultimately became reason for recording “satisfaction”. In both the judgments of Spacewood Furnishers (P) Ltd. [2015 (5) TMI 483 - SUPREME COURT] and Laljibhai Kanjibhai Mandalia [2022 (7) TMI 639 - SUPREME COURT] it was held that the authority must have information in its possession on the basis of which a reasonable belief can be formed. The ‘satisfaction note’ nowhere reflects the basis to derive a satisfaction that the petitioners who were in possession of money will not disclose the same in due course. The petitioners, as noticed, received appreciation certificates for their prompt payment of the taxes. The ‘satisfaction’ cannot be recorded merely because the authority is of the opinion that the true financial affairs will never be revealed unless search seizure operation is carried out. Apex Court opined that “reasons to believe” cannot be equated with “reasons to suspect”. Thus, the competent authority must be equipped with some cogent incriminating material prior to the seizure on the strength of which a satisfaction can be recorded. The said satisfaction neither can be tested on suspicion nor can be justified on the basis of unexplained possession of amount. In the instant case, we are constrained to observe that satisfaction note is based on suspicion and is not pregnant with any cogent incriminating material which can form basis for an action u/s 132 of the Act - See INDIAN OIL CORPORATION [1986 (5) TMI 1 - SUPREME COURT] and M/S. PASARI CASTING AND ROLLING MILLS PRIVATE LTD [2024 (2) TMI 280 - JHARKHAND HIGH COURT] The impugned action of the respondents in seizing and withholding cannot be countenanced. Resultantly, the impugned search and seizure is set aside. The said amount be returned to the petitioners forthwith. However, it is made clear that this order will not come in the way of the respondents to proceed against the petitioners in accordance with law. WP allowed. Issues Involved:1. Legality and validity of the search and seizure under Section 132 of the Income Tax Act, 1961.2. Requirement of 'reasons to believe' for conducting search and seizure.3. Return of the seized cash to the petitioners.Detailed Analysis:1. Legality and Validity of the Search and Seizure:The petitioners challenged the legality and validity of the search and seizure conducted by the respondents under Section 132 of the Income Tax Act, 1961. They contended that the search and seizure were illegal and contrary to the prescribed manner and method under the Act. The petitioners argued that the seizure of cash disrupted their business operations as they were unable to utilize the cash for purchasing cotton and running their business smoothly. They emphasized that there was no incriminating material or information available to the respondents prior to the search and seizure exercise, indicating non-application of mind by the authorities. The court examined the statutory requirements under Section 132, which necessitate the possession of information leading to a 'reason to believe' that the conditions for search and seizure exist. The court found that the satisfaction note provided by the respondents lacked any cogent incriminating material, rendering the search and seizure based on mere suspicion rather than reasonable belief.2. Requirement of 'Reasons to Believe':The petitioners argued that the respondents failed to demonstrate 'reasons to believe' that the cash amounts were unaccounted for or that the petitioners would not deposit tax in due course. They relied on various judicial pronouncements to emphasize that 'reasons to believe' must be based on concrete information and not mere suspicion. The court referred to several judgments, including those of the Supreme Court, which laid down principles for the validity of search and seizure actions. It reiterated that the authority must possess information leading to a reasonable belief that the person concerned is in possession of undisclosed income or property. The court found that the satisfaction note did not provide any basis for the belief that the petitioners would not disclose the cash amounts, thereby failing the 'litmus test' for 'reasons to believe.'3. Return of the Seized Cash:The petitioners requested the return of the seized cash, arguing that the respondents failed to complete their exercise within the statutory time limit. They expressed willingness to furnish a bank guarantee to protect the interest of the Revenue while allowing them to continue their business operations. The court, after finding the search and seizure action unjustified, ordered the return of the seized amount to the petitioners. It clarified that this order would not prevent the respondents from proceeding against the petitioners in accordance with the law.In conclusion, the court set aside the impugned search and seizure actions due to the absence of valid 'reasons to believe' and ordered the return of the seized cash to the petitioners. The writ petition was allowed to the extent indicated, with no order as to costs.