Authorized Officer issuing warrant of authorization of search u/s 132(1) can not issue notice u/s 131(1A) post-search operation.
In a recent judgment, the Allahabad High Court has held that the Authorized Officer who issued warrant of authorization of search u/s 132(1) can not issue notice u/s 131(1A) post-search operation.
ABCAUS Case Law Citation:
4596 (2025) (06) abcaus.in HC
In the instant case, two Writ Petitions were filed challenging, Warrant of Authorization under Section 132 of the Income Tax Act, 1961 (the Act) and the validity of search proceedings conducted at the premise of the petitioners and notice issued under section 131(1A).
In both the case Petitioners were eighty years old doctor, residing together who have been filing their income tax returns for the last more than eighteen years. The Petitioners had sold equity shares in a company (which was not a listed company at the relevant time) . It was listed on recognized stock exchange on 05.07.2021. The proceeds from the sale of shares were received in the bank account of the petitioners. They paid advance tax on the income arising out of sale of O.F.S. share in I.P.O. but before filing their income tax returns.
On the basis of consultations and opinion received from various tax consultants they came to the conclusion that consideration received by them on sale/ transfer of shares to public through O.F.S. was not liable to capital gains tax under Section 45 of the Act. For this reason, they did not offer any tax on the said transaction in their returns filed for relevant Assessment Year and claimed refund of the advance tax already paid.
However, a search operation was conducted at the premise of the Petitioners for not offering tax on such capital gains by virtue of section 55(2)(ac) of the Act.
Before the Hon’ble High Court, the Petitioner submitted that because of the launa in the section 55 many persons were claiming advantage of not being liable to tax in respect of such transactions, therefore, realizing the lacunae, an amendment was brought in Section 55 of the Act making such transactions liable to capital gain tax by providing a mechanism for calculating their fair market value. The absence of any such mechanism in the unamended provision made it impossible for any willing person to pay the tax. The amendment was made effective from 01.04.2018. It is on account of the aforesaid that petitioners were illegally subjected to search operations under Section 132 of the Act.
It was submitted by petitioners that in view of this retrospective amendment, the petitioners were liable to pay the tax on the transaction but on account of the search operation conducted by the Income Tax Department. However, in view of the second proviso to Section 139 (8A) of the Act which prohibits updated return where a search has been initiated, they were statutorily prohibited from doing so.
The Hon’ble High Court noted that the Satisfaction Note, did not contain any information whatsoever whether under the heading ‘Other Allegations’ or otherwise, elsewhere, which could be referable to clause (b) of sub-Section (1) of Section 132 for issuance of warrant of authorization for search. The only reference was made in the context of sale of shares under O.F.S. and the amendments in Section 55 (2)(ac) of the Act.
The Hon’ble High Court observed that amendment of Section 55(2) (ac) of the Act, 1961 on the relevant time itself demonstrated that because of absence of any mechanism for calculation of Fair market Value in respect of sale of share of an unlisted company, capital gain tax could not be calculated on sale/ transfer of shares by the promoter shareholders under O.F.S. This could not be an information for search under Section 132(1)(b), as the Revenue had failed to demonstrate that such sale/ transfer was liable to capital gain tax as on the date of filing of Return by the petitioner for relevant Assessment Year.
The Hon’ble High Court opined that a bare reading of the satisfaction note and Section 132, showed that the jurisdictional prerequisites for exercise of power under Section 132 are / were absent in this case and consequently, the entire search operations based on such satisfaction note and warrant of authorization were illegal.
Accordingly, the Hon’ble High Court quashed the warrant of authorization and also declared the search operation as illegal.
The Petitioner had also contended that the fact that a notice under Section 131(1A) of the Act was issued to one of the petitioners after the search operations is itself proof of the fact that prior to it there was no reason to believe to undertake an exercise under Section 132 as the requirement of Section 131 is a lesser requirement that is of having reason to suspect whereas the reason to believe stands on a higher footing, is not required to be considered in view of the discussion already made.
It was the argument that authorized officer under Section 132 of the Act, who had issued the notice under Section 131(1A) could not have done so as the action envisaged under clauses (i) to (v) of sub-Section (1) of Section 132 had already been taken prior to issuance of this notice and sub-Section (1A) of Section 131 prohibited any action by him after the stage of clauses (i) to (v) of sub-Section (1) of Section 132 had been crossed.
It was argued that the Authorized Officer under Section 132 was not the assessing officer of the petitioners nor had assessment proceedings started, therefore, he could not have issued such notice under Section 131 of the Act, 1961.
The Revenue only submitted that the Authorized Officer also happened to the Deputy Director of investigation as under sub-Section (1A) and as Deputy Director (Investigation) he was competent to issue such notice under Section 131, therefore, there was no illegality.
The Hon’ble High Court observed that under the Act several officers have been authorized to exercise the powers conferred under sub-Section (1) if they have ‘reason to suspect’ that any income has been concealed, or is likely to be concealed by any person or class of persons within his jurisdiction for the purposes of making any inquiry or investigation relating thereto, first is the Principal Director General, who has not issued the notice, second is the Director General who has also not issued the notice, the Principal Director or Director or Joint Director or Assistant Director have also not issued the notice. Now, in addition to the aforesaid, the authorized officer referred to in sub-Section (1) of Section 132 is also empowered to exercise the powers under subSection (1) of Section 131 but with a rider that is he can do so before he take action under clauses (i) to (v) of sub-Section (1) of Section 132.
The Hon’ble High Court opined that if the contention of the Revenue is accepted, that Authorised Officer apart from being Authorized Officer aforesaid was also Deputy Director, therefore, he could issue such notice even after the search operations had been concluded i.e. after the stage contemplated in clauses (i) to (v) of sub-Section (1) of Section 132 had been crossed, and this would not invalidate such notice because he had presumably acted as DDIT and not an authorized officer, then this would amount to negating the restrictions imposed upon the authorized officer under Section 131(1A) and would amount to reading and understanding the provision in a manner so as make it susceptible to abuse and misuse at the hand of the revenue authorities.
The Hon’ble High Court rejected the contention of the Revenue observing that it will render the conditions imposed upon the authorized officer under Section 131 (1A) otiose and also leave scope for circumvention of said conditions and its misuse. The Authorized Officer not being the assessing officer of the petitioners nor the assessment proceedings having started, he could have issued such notice only prior to action under clauses (i) to (v) of sub-Section (1) of Section 132 having been taken and not after that. The Revenue cannot be given the benefit of the fact that he also happened to be Deputy Director, therefore, he could have issued the notice.
The Hon’ble High Court observed that the Hon’ble Jharkhand High Court has held that the authorised officer does not have any power to issue notices under section 131(1A) of the Act post search, as such, at best issuance of such notice would render the notice invalid. But issuance of notice under s. 131(1A) of the Act post-search would not in any manner render the proceedings under section 132 of the Act invalid, if they were otherwise initiated pursuant to a valid authorization issued after recording satisfaction on the basis of the material available on record.
in view of the above, THE Hon’ble High court held that the Authorized Officer for exercising power under sub-Section (1) of Section 132 could not have issued the notice under sub-Section (1A) of Section 131 of the Act post-search operations.
The impugned notice was accordingly quashed.
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