High Court explains mandate of “reasons to suspect” and “reasons to believe” in Income Tax search

High Court explains mandate of “reasons to suspect” and “reasons to believe” in income tax search, quashed  warrants of authorization for search and seizure of lockers

ABCAUS Case Law Citation:
ABCAUS 2659 (2018) (12) HC

Important Case Laws Cited/relied upon:
Pooran Mal Vs. the Director of Inspection (Investigation), New Delhi and Ors. (1974) 1 SCC 345
Motilal and Ors. Vs. Preventive Intelligence Officer, Central Excise and Customs, Agra & Ors. (1971) 80 ITR 418 (All),
Strategic Credit Capital Pvt. Ltd. & Ors. Vs. Ratnakar Bank Ltd. & Anr. (2017) 395 ITR 391 (Del)
Commissioners of Income Tax Haryana, Himachal Pradesh and Delhi & Ors. Vs. Tarsem Kumar and Anr. (1986) 161 ITR 505 (SC).
Ameeta Mehra Vs. Additional Director of Income-tax (Inv)-Unit (2017) 395 ITR 185 (Delhi)
Lajpat Rai v. Commissioner of Income Tax (1995) 215 ITR 608 (All)

The instant judgment was pronounced in a batch of writ petitions challenging notices under Section 153A of the Income Tax Act, 1961 ( the Act ). The warrant of authorization was also challenged under Section 132 of the Act for search of three lockers in the joint names as illegal, bad in law and without jurisdiction.

A search and seizure operations u/s 132 of the Act was carried out at the residential and business premises of the owner (searched person) of a business group. 10th The said searched person was the first cousin (Bua‟s son) of one of the petitioner.

During the course of search, key of locker in the joint names of the petitioners family was found and seized. Later, a search team visited the Safe Deposit Company and on inquiry learnt about two more lockers in the joint names of the Petitioner’s family. Subsequently,  a restraint order under Section 132 (3) in respect of all the three lockers was passed based upon search warrants under Section 132(1) of the Act in the case of the searched person.

The petitioners were not mentioned and their involvement were not alluded to and alleged. The petitioners stated that they did not have any commercial, business or financial relation with searched person/group or business entities managed by them. This factual position is not denied by the Revenue in the counter affidavit. The Revenue , however, relied on seizure of the key of one locker from the residential premises of searched person which locker was in the names of joint name of the petitioners family.

The primary contention and submission of the Department was that on discovery of key of locker consequential search warrants were issued under Section 132 (1A) for search of the three lockers. These consequential warrants of authorization under sub-section (1A) to Section 132 were issued against the searched person and not the petitioners.

The Department argued that validity of these search warrants should meet the parameter and the test of “reasons to suspect” and not on the legal requirement of “reason to believe”. A lower test and requirement of “reason to suspect” is sufficient with reference to Section 132 (1A) of the Act.

However, later the Department stated that the warrants of authorization were issued under clause (i) to sub-section (1) to Section 132 in respect of the place i.e. locker, on the basis of “reasons to suspect” as key of one locker was discovered and seized during the course of search under Section 132(1).

It was submitted that “Reasons to believe” with reference to sub-sections (a) (b) and (c) to Section 132(1) was against or qua the person, whereas warrant of authorization qua place or location under clause (i) to Section 132 (1) do not require recording of “reasons to believe”. Warrants of authorization qua the place/location i.e. the lockers, was issued on the basis of “reasons to suspect”.

The Hon’ble High Court observed that the statutory mandate to record “reasons to believe” and their nexus with the three pre-conditions in clauses (a), (b) and (c) to Section 132 had veen emphasized and elucidated by the Supreme Court in various decisions.

The Court while examining the said reasons would not adjudge or test adequacy and sufficiency of the grounds, but could go into the question and examine rational connection between the information or material recorded and formation of the belief as to satisfaction of conditions specified in clauses (a), (b) and (c) to Section 132 (1) of the Act. The “reasons to believe” as recorded should have relevant bearing on formation of the belief, for the search warrants cannot be issued for making a fishing and roving inquiry. The test and parameters of reasonable man is applied.

The Hon’ble High Court noted that when the reasons recorded to justify the search had stated that there was a close relationship between the widow of the ex-Director and the group and it was likely that accounts relating to undisclosed income, sales etc. would be kept at her premises, the Hon’ble Supreme Court held the search to be illegal and violating Section 132 (1), as the provisions permit and authorize search on the basis of credible information and not mere suspicion. “Likelihood and predisposition” in the “reasons to believe” for authorizing search were held to be in nature of surmise and conjecture.

The Hon’ble High Court observed that the satisfaction note recorded on the basis of which warrants of authorization had been issued, did not refer to any “information” in the form of material and evidence. The note proceeded to imprudently and on pretence record “In my opinion, the lockers may contain valuables such as cash, jewellery, FDRs and other important documents, etc, which represent either wholly or partly income or property not disclosed for the purpose of Income Tax Act, 1961, even if, summons u/s 131 of the I.T. Act, are issued to them.”

The Hon’ble High Court opined that the satisfaction note woefully formed the negative conclusion and finding without referring to material and evidence that had led and prompted the author to reach the denouncement. Use of the word “may” to presume presence of undisclosed assets in the locker, given the absence of reference to even a single shred of evidence and material to justify the inference, reflected and established supine indifference to the statute and constitutional guarantee that “right to privacy” should not be impinged and violated on mere posturing and pretentiousness.

The Hon’ble High Court observed that the satisfaction note was precipitously silent on any business connection, link and association between the petitioners and the searched Group/Person. Lockers were not subjected to search to unearth undisclosed and concealed assets of searched Group/Person.

Accordingly, the Hon’ble High Court held that three “consequential” warrants of authorization issued in the name of persons and lockers for search/seizure, did not meet the mandate and requirement of clauses (a), (b) and (c) of Section 132 of the Act.

The Hon’ble High Court referred to various judgments relating to search and seizure operations in case of lockers as under:

Allahabad High Court

Locker key was found in residence of petitioner no. 1 therein during search and seizure operation. Request for issue of consequential warrant of authorization for search of locker was made 25 days after the earlier search. The Court observed that the authorities had sufficient opportunity to peruse the material already seized from the residential premises and inspite of time and opportunity, the report did not contain any material or reason to justify search of the locker. Consequently, the authorization was based on irrelevant consideration and was quashed. This verdict highlights need to protect citizens from unnecessary and unsubstantiated assertion resulting in breach and violation of right to privacy.

Delhi High Court

A locker key was found in the residential and business premises of the person searched. Consequential search warrant was issued after recording the satisfaction note. Consequential search was struck down observing that the satisfaction note must contain credible information to trigger search action. Mere recovery of a locker‟s key by itself would not be sufficient justification for such search unless the person searched had some link in the business or otherwise connected activities of the person searched. Secondly, the opinion recorded in the satisfaction note must show nexus to the formation of the belief that the owner of the locker key was in possession of money, jewellery or valuables representing his/her income which had not been disclosed. The decision upholds that the courts in a limited way can examine whether the belief formed was devoid of any basis and irrational in the extreme sense to fall foul of the Clapham Omnibus test.

Allahabad High Court

During the course of search, keys of three lockers were found and seized. Thereafter, search warrants were issued simply on the ground that the keys of the lockers have been found during the course of search. The warrants of authorization were struck down observing that the respondent authorities had failed to disclose the material and information on the basis of which they had entertained the belief recorded that the lockers contained money, jewellery, valuables and other articles representing disclosed income. Formation of belief by the authorities justifying the search must be based upon relevant information or material to satisfy the mandate of Section 132 (1) of the Act. This decision clearly holds that the law requires existence of “reasons to believe” and not “reasons to suspect”. This was despite use of the expression “reasons to suspect” in clause (i) to Section 132 (1) of the Act.

The Hon’ble High Court noted that notwithstanding use of the expression “reason to suspect” in clause (i) to Section 132 (1) of the Act, the Supreme Court has consciously emended to the effect that satisfaction in the form of “reasons to believe” is required and mandated by law. Even the Division Bench of the High Court had rejected a similar argument that “reasons to suspect” and not “reason to believe” are sufficient.

The Hon’ble High Court opined that there could be a good ground and reason why the legislature has used expression “reasons to suspect” in clause (i) or even for that matter in subsection (1A) to Section 132 of the Act, while the expression “reasons to believe” is used in sub-section (1) to Section 132 of the Act.

The Hon’ble High Court observed that clause (i) to Section 132 (1) refers to search of any building, place, vessel, vehicle or aircraft where it is suspected that “such‟ books of account, other documents, money, bullion, jewellery or other valuable articles or things are kept The word “such‟ is with reference to books of account, documents, money, bullion, jewellery or other valuable articles or things etc. referred to in clauses (a), (b) and (c) to Section 132 (1) of the Act.

The Hon’ble High Court opined that the legislature felt it appropriate to state and clarify that the same quality or material and information was not required to justify when consequential search of a building, place, vessel, vehicle or aircraft under clause (i) of the Section 132 (1) of the Act is undertaken, for search would be in continuation of the authorized search recording the “reasons to believe”. Consequential warrants would be justified in cases where the exact location of the offending articles, books of accounts etc. for which search had been initiated by recording reasons to believe is unknown or had been shifted and relocated to avoid detection and seizure. In such circumstances, the “reasons to believe” must meet the requirements of clauses (a), (b) or (c) of Section 132(1) of the Act, albeit the authorized officer directing consequential search must record and state the reason why another place, building, vehicle etc. was being subjected to search. Some latitude and stringent requirements in comparison may not be required when the satisfaction note records the reason for issue of warrants of authorization under clause (i) of Section 132(1) of the Act. However, the satisfaction note in such cases must evince and bespeak this reason. Confluence and connection between the justification and reasons to believe recorded earlier meeting the mandate of clause (a), (b) and (c) of Section 132(1) and the consequential warrant of authorization under clause (i) of Section 132(1) of the Act should be indicated and so stated.

The Hon’ble High Court opined that clause (i) of Section 132(1) of the Act is not a substitute and an independent provision to authorize search and seizure operations against third persons not included and subjected to the search after recording “reasons to believe”. Connection and link between “such” assets, articles etc. of the person subjected to search and the place, building etc. to be intruded and subjected to search must be elucidated by setting out “reasons to suspect” why “such” infringing articles could be found in the place, building, vehicle etc. mentioned in the authorization under clause (i) to Section 132(1) of the Act.

The Hon’ble High Court noted that the Allahabad High Court held that where an article, money or bullion is already seized, search under clause (i) to Section 132(1) of the Act cannot be authorized. Ratio of this decision was upheld by the Supreme Court. The aforesaid ratio exposits the object and purpose behind using the expression “reasons to suspect” with reference to “such” books of account, bullion, articles etc. The expression “reasons to suspect” used in clause (i) and subsection (1A) to Section 132 is not to dilute the requirement of “reasons to believe” but to only clarify that on occasions authorities will not know the exact location or the place where the offending books of account, money, bullion etc., may be kept for which consequential warrant of authorization can be issued.

It was further added that the Courts are conscious and aware that “such” documents, articles etc. can be hidden off and kept with third parties and clandestinely concealed at different places and locations to prevent seizure and hamper investigation. The Hon’ble High Court opined that it was in this context that a Division Bench of the Court had observed that Section 132 (1) of the Act envisages that a person could be in possession of undisclosed income not only in his or her own bank account but in the bank account of someone else. Thus, the legislature had deliberately used the word “any” to preface safe, locker, place, books of accounts and not “his” “her” or “its”. Therefore, in a given case, the satisfaction note which records reasons to believe could also record the reasons why a third person is being searched not for his own income, books of account etc. but because he has in his custody the books of account, money, bullion etc. belonging to a third person, who is subjected to search.

Accordingly, the Hon’ble High Court following the decisions of the Supreme Court and Division Bench held that “reasons to believe” and not “reasons to suspect” were sufficient to conduct a search of the lockers in question. The need and requirement to record “reasons to believe”, which is the statutory mandate was required and necessary in the present case, in the absence of the satisfaction of the condition and requirements of clause (i) to Section 132(1) of the Act in the satisfaction note.  

The Hon’ble High Court held that the warrants of authorization for search and seizure operations in respect of the three lockers in the case of three petitioners were vitiated and illegal. Warrants of authorization against the petitioners were quashed and set aside. Consequently, proceedings under Section 153A of the Act are also set aside and quashed.

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