2025 (9) TMI 725 - HC - Income Tax

Validity of searches under s.132 benami law upheld: satisfaction note showed good-faith belief and lawful seizure

HC upheld validity of searches under s.132 of the Act on benami lockers, finding the satisfaction note showed bona fide reasons to believe undisclosed ... Search conducted u/s 132 on lockers of the petitioners - jewellery/ ornaments/valuables etc. seized during the said search - bona fide “reasons to believe” - HELD THAT:- A perusal of the file including the satisfaction note reveals that a search and seizure u/s 132 of the Act was conducted in respect of a benami Locker at South Delhi Vaults, W-113, GK-2, New Delhi. During the recording of the proceedings, the person in whose name the locker existed revealed that all the documentation procedure and rent of the locker was being paid by a third person, who had kept his belongings in the locker. The person in whose name the said locker existed never kept anything belonging to him in the said locker and the keys of the locker were always kept in possession of the third person. It was also stated by the person in whose name the locker existed that her husband was working in the office of the third person and had left the job. The South Delhi Vaults and Credit Limited owns South Delhi Vaults, situated at the above address. It is a company registered under the Companies Act, 1956 and maintains private lockers for use by private persons at various branches. The file suggested that a discreet enquiry revealed that there is a general tendency observed in private lockers inasmuch as though the lockers would appear to be in the name of a person, but the actual beneficiary or owners would be different. In terms of the discreet enquiry conducted in respect of Locker no.416, it was found that there are many other lockers which are benami in nature and are owned by ‘persons of low means or no means’. It is noted that the rent for these lockers range from ₹50,000/- to ₹3,00,000/- per month depending upon their size. It is also noted that from the file that the petitioners are holding three lockers, which does not fit the financial profiles of petitioners no. 1 & 3 or the financial profile of their company. They do not have any substantial financial assets and the company of the petitioners, also does not have any substantial income or profits before tax. This raised suspicion that the petitioners would potentially have wealth, which is unexplained or unaccounted. This was the basis for the respondent to believe that if summons or notice is issued to the parties including the petitioner nos.1 & 3, they would not produce or cause to produce the books of accounts. The same also was the “reason to believe” that in view of the nature of the activities, it is likely that these persons would be found in possession of money, jewellery or other valuables not commensurate with their known sources of income and as such a need was felt to carry out searches. As noted above, the approval was accorded by the Director General of Income Tax (Investigation), Delhi. The aforesaid forming the basis of the “reasons to believe”, the plea of Mr. Arvind Kumar that no summons or notice was issued to the petitioners to produce documents or books of accounts as a pre condition and as such Section 132(1) (a) of the Act is not appealing. A reference was made to Section 132(1)(a) of the Act to contend that satisfying the three conditions laid out therein is a mandatory requirement. However, we find that the three clauses of Section 132(1) of the Act are mutually exclusive and every clause is followed by the word ‘or’ and therefore, a search can be conducted on fulfillment of any of the three clauses. In any case, it is settled law that formation of opinion and the “reasons to believe” recorded are not a judicial or quasi-judicial function but an administrative function. As such, the sufficiency of the information for forming the reasons to believe is not for this Court to examine in a writ petition. The only scope for judicial review in these matters is to examine if in fact there exists reasons to believe or if such reasons to believe are bona fide and not or based on vague facts. In the absence of any case set up on these grounds, any call for interference by this Court, is not warranted. The reliance placed on the judgment in Seth Brothers & Others [1969 (7) TMI 1 - SUPREME COURT] to contend that action is not bona fide, cannot be accepted. In fact the test laid down by the Court in the above case inasmuch if the action of the officer issuing the authorisation or of the officer designated to make the search is challenged, they must satisfy the Court about the irregularity of the action taken and if the action is maliciously taken or for collateral purposes, it is liable to be struck down, is not satisfied in the case in hand in view of the facts and the record submitted by the respondent. Respondent had “reasons to believe” income chargeable to tax has escaped assessment and as such the research and seizure is lawful, the judgment of Echjay Industries Pvt. Ltd. [2024 (5) TMI 709 - BOMABY HIGH COURT] would also have no applicability. Petition dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether searches and seizures under Section 132 of the Income Tax Act conducted on lockers at a private vault on 11.05.2024 were vitiated for want of 'reason to believe' or otherwise illegal. 2. Whether non-compliance with CBDT Instruction No. 1916 (11.05.1994) regarding non-seizure/exclusion of specified quantities of gold jewellery and ornaments rendered the seizure unlawful. 3. Whether the searches amounted to impermissible 'fishing and roving' enquiries or were otherwise actuated by mala fides/predetermined mind. 4. Whether absence of prior summons/notice under Section 132(1)(a) or lack of authorisation to search residential/business premises invalidated the search of lockers at a vault. 5. Whether the court should call for and examine the reasons to believe recorded by the authorising officer and, if so, the scope of such examination in writ jurisdiction. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of search and seizure under Section 132: Legal framework Section 132 authorises search and seizure where the authorising officer has 'reasons to believe' one or more statutory conditions (clauses (a), (b) or (c) of Section 132(1)) are satisfied; the opinion must be formed in consequence of relevant information in possession of the officer prior to formation of opinion; the formation of opinion is administrative and must be bona fide. Precedent Treatment The Court relied on established principles in Seth Brothers, Pooran Mal, Mandalia/Spacewood and S. Narayanappa regarding the scope of review of 'reasons to believe' and the bona fides requirement; these authorities were followed and applied. Interpretation and reasoning Review of the authorised officer's file and satisfaction note disclosed discreet enquiries into a benami locker and a pattern of benami lockers at the vault; information showed that listed locker-holders were persons of low means while rent patterns and actual beneficiaries suggested third-party beneficial ownership. Petitioners held multiple lockers inconsistent with their declared financial profile and company income, giving rise to a reasonable and bona fide 'reason to believe' that undisclosed valuables existed and that notice/summons would not secure production of documents. Approval of the Director General preceded the searches. Ratio vs. Obiter Ratio: Search was lawful because the authorising officer had relevant information pre-dating the formation of belief; the opinion was bona fide and there was application of mind. Obiter: Errors in assessment or insufficiency of reasons are not reviewable in writ jurisdiction except for mala fides or extraneous considerations. Conclusion The searches and seizures under Section 132 were valid; the Court found no mala fide, collateral purpose or absence of relevant material that would vitiate the authorisation. Issue 2 - Scope of judicial review of 'reasons to believe' Legal framework Formation of opinion is administrative; the court's role is limited to examining whether the reasons to believe exist and are bona fide, not to re-appraise their sufficiency (Wednesbury standard). Reasons may be examined to ensure absence of mala fides, pretence or reliance on extraneous/irrelevant material. Precedent Treatment The Court followed Mandalia/Spacewood, S. Narayanappa and related authorities which restrain the court from substituting its view on adequacy of reasons and allow review only for mala fides or irrationality. Interpretation and reasoning The Court called for and examined the official file and satisfaction note (permitted exercise) and concluded the reasons were rationally connected to the formation of belief - i.e., benami practices in vault lockers, inconsistency of lockers with financial profiles and payment patterns. There was no material to demonstrate mala fide or irrelevant consideration. Ratio vs. Obiter Ratio: Courts may call for and examine the satisfaction note to test bona fides and relevance of material but cannot reassess adequacy of reasons; absence of mala fides is dispositive. Obiter: The sufficiency/weight of reasons is not a justiciable issue in writ petition. Conclusion The Court exercised limited review, found the reasons to believe bona fide and properly supported, and declined to interfere. Issue 3 - Applicability of CBDT Instruction No. 1916 on exclusion of jewellery Legal framework CBDT Instruction No. 1916 (11.05.1994) suggests non-seizure thresholds for gold jewellery per family member and permits discretionary larger exclusions based on status/customs. Precedent Treatment The Court considered the instruction but treated it as guideline to be complied with subject to factual matrix; it did not treat non-compliance as automatically fatal where other circumstances (e.g., large bullion holdings, failure to produce bills) justify seizure. Interpretation and reasoning Respondent's case: seized items included large quantities of bullion (distinct from the small jewellery amounts contemplated by the CBDT instruction), petitioners failed to produce supporting documents during summons/recorded statements, and post-search enquiries did not satisfactorily explain source. Petitioners' case: items were disclosed income or ancestral, or belonged to minors/third parties. Court noted that CBDT Circular deals with small amounts of jewellery and did not absolve petitioners from producing documentary explanation; factual record did not show non-application of mind or manifest unfairness by revenue. Ratio vs. Obiter Ratio: Non-compliance with CBDT instruction is not per se fatal when reasons to believe and factual circumstances (notably significant bullion and lack of documentary proof) justify seizure; invocation of instruction must be considered with overall context. Obiter: The instruction's scope is limited and does not immunise large bullion holdings. Conclusion Court found no ground to set aside seizures for non-compliance with the CBDT instruction on the facts presented. Issue 4 - Allegation of 'fishing and roving' searches and absence of authorisation at residential/business premises Legal framework Search authorisation must specify premises; each premise (including lockers) can be subject to independent warrant where relevant reasons exist; searches must not be arbitrary or for collateral purpose. Precedent Treatment The Court applied the principle from Seth Brothers and subsequent authorities that bona fide exercise of power for statutory purpose is not vitiated by mere errors of judgment, but malicious or collateral use is reviewable. Interpretation and reasoning Record showed separate warrant/authorisation for each locker and specific approval. Vault lockers are independent premises; discrete enquiries revealed prevalence of benami lockers and links between locker-usage and third-party beneficiaries. Petitioners' possession of multiple lockers inconsistent with declared means supported targeted, not random, searches. No material established searches were motivated by mala fide or collateral purpose. Ratio vs. Obiter Ratio: Searches of independent lockers at a vault are lawful where distinct authorisations exist and there are specific reasons to suspect undisclosed valuables; such searches are not ipso facto 'fishing and roving.' Obiter: Presence of multiple contemporaneous searches elsewhere does not demonstrate mala fide absent contrary material. Conclusion The allegation of fishing/roving was rejected; searches were held lawful on the factual record. Issue 5 - Requirement of prior summons/notice and interplay of Section 132(1)(a) Legal framework Section 132(1) provides three alternative bases (clauses (a), (b), (c)) each separated by 'or'; search may be authorised upon satisfaction of any one of the clauses. Clause (a) contemplates failure to comply with summons/notice but is not a mandatory pre-condition if other clauses apply. Precedent Treatment The Court relied on settled interpretation that the three clauses are mutually exclusive alternatives. Interpretation and reasoning Here reasons to believe included possession of undisclosed bullion/jewellery and likelihood of non-production of documents (clause (b)/(c) aspects), and discrete enquiries provided information to justify search without prior summons as pre-condition; further, summons were issued post-search and statements recorded wherein petitioners failed to produce bills. Ratio vs. Obiter Ratio: Failure to issue prior summons under clause (a) does not invalidate a search where other clauses justify authorisation; the clauses are alternatives. Obiter: Post-search summons and failure to produce supporting documents bolster the reasonableness of the search. Conclusion The absence of pre-search summons did not invalidate the authorisation given the alternate bases and the contemporaneous material supporting reasons to believe. Disposition The Court dismissed the petition, holding the searches and seizures lawful: the authorising officer had bona fide reasons to believe based on relevant material, the scope of judicial review was properly exercised, CBDT guidelines did not mandate interference on the facts, and allegations of mala fides/fishing were not established.