The Supreme Court of India in its latest judgment has reiterated its stand that recording of reasons for an income tax search authorization do not confer in the assessee a right of inspection of the documents or to a communication of the reasons for the belief at the stage of issuing of the authorization. It is only after completion of the search and seizure and at the stage of commencement of the assessment proceedings the requisite material may have to be disclosed to the assessee.

Case Details:
Civil Appeal No.4394 Of 2015 (Arising out of S.L.P.(C) No. 38611 of 2012)
Director General of Income Tax (Investigation) Pune & Ors. .. Appellants
Versus
M/s. Spacewood Furnishers Pvt. Ltd. & Ors. ... Respondents
Coram: J. Ranjan Gogoi ; J. Pinaki Chandra Ghose
Date of Judgment: 13-05-2015

Important Case Law Considered:
ITO vs. Seth Brothers 1969 (74) ITR 836 (SC), Pooran Mal vs. Director of Inspection (Investigation), Income Tax (1974) 93 ITR 505 (SC)

Facts of the Case:
In the present case, High Court of Delhi prohibited the initiation of block assessment of the respondent-assessee for AY 2004-05 to 2009-10 under a notice Section 153A of the Income Tax Act, 1961 for the search made under the provisions of the Act. The High Court, expressed many reservations with the warrant of search authorization issued under Section 132 which is required to be founded on a reasonable belief of the authorized official regarding the existence of the conditions precedent to the exercise of the power to issue the same.

The High Court held that it is eventually the Director General who took the decision to issue the search warrant but the said decision was not on the basis of its own satisfaction but on the basis of the satisfaction recorded by the Director of Income Tax (Investigation). Consequently, it held that the satisfaction mandated by Section 132 of the Act was not that of the authority who has issued the search warrant, thereby vitiating the authorization issued. The High Court also held that satisfaction notes was in loose sheets of paper and not a part of a single file maintained properly and it was possible that the file containing the satisfaction note(s) was manipulated and thus lacked credibility. The High Court also held that the essential details with regard to source of information; the persons who were interrogated and with whom discreet enquiries were made are not disclosed.

Revenue, being aggrieved by this, filed an appeal by special leave under Article 136 of the Constitution.

The Supreme Court relying on its previous judgments in Seth Brothers and Pooran Mal (supra)  observed that it is only the necessity of recording of reasons in support of the ‘reasonable belief’ which is contemplated by Section 132 and that the reasons recorded prior to authorizing the search needs not to be disclosed or communicated to the person against whom the warrant of authorization is issued.

The Court summarised the principles as under:

(i) The authority must have information in its possession on the basis of which a reasonable belief can be founded that-
(a) the concerned person has omitted or failed to produce books of account or other documents for production of which summons or notice had been issued  
OR
such person will not produce such books of account or other documents even if summons or notice is issued to him.
OR
(b) such person is in possession of any money, bullion, jewellery or other valuable article which represents either wholly or partly income or property which has not been or would not be disclosed.
(ii) Such information must be in possession of the authorized official before the opinion is formed.
(iii) There must be application of mind to the material and the formation of opinion must be honest and bonafide. Consideration of any extraneous or irrelevant material will vitiate the belief/satisfaction.
(iv) Though Rule 112(2) of the Income Tax Rules which specifically prescribed the necessity of recording of reasons before issuing a warrant of authorization had been repealed on and from 1st October, 1975 the reasons for the belief found should be recorded.
(v) The reasons, however, need not be communicated to the person against whom the warrant is issued at that stage.
(vi) Such reasons, however, may have to be placed before the Court in the event of a challenge to formation of the Court in the event of a challenge to formation of the belief of the authorized official in which event the court (exercising jurisdiction under Article 226) would be entitled to examine the relevance of the reasons for the formation of the belief though not the sufficiency or adequacy thereof.

The Supreme Court, after examining all the issues in detail, set aside the order of the High Court and held that The proceedings against the respondent-assessee will now commence from the stage at which the same was interdicted by the High Court by its impugned order.

Important excerpts from the Judgment:

In the light of the views expressed by this Court in ITO vs. Seth Brothers (supra) and Pooran Mal (supra), the above opinion expressed by the High Court is plainly incorrect. The necessity of recording of reasons, despite the amendment of Rule 112 (2) with effect from 1st October, 1975, has been repeatedly stressed upon by this Court so as to ensure accountability and responsibility in the decision making process. The necessity of recording of reasons also acts as a cushion in the event of a legal challenge being made to the satisfaction reached. Reasons enable a proper judicial assessment of the decision taken by the Revenue. However, the above, by itself, would not confer in the assessee a right of inspection of the documents or to a communication of the reasons for the belief at the stage of issuing of the authorization. Any such view would be counter productive of the entire exercise contemplated by Section 132 of the Act. It is only at the stage of commencement of the assessment proceedings after completion of the search and seizure, if any, that the requisite material may have to be disclosed to the assessee.

At this stage we would like to say that the High Court had committed a serious error in reproducing in great details the contents of the satisfaction note (s) containing the reasons for the satisfaction arrived at by the authorities under the Act. We have already indicated the time and stage at which the reasons recorded may be required to be brought to the notice of the assessee. In the light of the above, we cannot approve of the aforesaid part of the exercise undertaken by the High Court which we will understand to be highly premature; having the potential of conferring an undue advantage to the assessee thereby frustrating the endeavor of the revenue, even if the High Court is eventually not to intervene in favour of the assessee.

Having clarified the above issue in the manner indicated, we may turn to the reasons assigned by the High Court for its decision. The view expressed by the High Court with regard to the satisfaction note(s); the alleged absence of a final decision to issue the authorization at the level of the Additional Director and the Director; the absence of any satisfaction of the Director General who, according to the High Court took the decision to issue the authorization are all seriously flawed. The different steps in the decision making process is lucidly laid down in the instructions contained in the search and seizure manual published by the department, relevant part of which has been extracted above. The steps delineated have been scrupulously followed. Besides we may take note of the fact that the Additional Director was not one of the competent authorities under Section 132 on 8.6.2009 (date of his note) inasmuch as it is by the Finance Act, 2009 effective from 19 ^th August, 2009 that the Additional Director came to be included amongst the authorized officials though with retrospective effect from 1.10.1998. The reading of the relevant part of the satisfaction note of the Director goes to show that on the basis of materials produced satisfaction was duly recorded by him that authorization for search should be issued. The file was put up before the Director General (Investigation) for accord of administrative approval as required by Notification dated 7.3.2001. In fact, the requirement to obtain administrative approval is prompted by the need to provide an additional safeguard to the tax payer. A careful reading of the order of the Director General would go to show that all that he did was to record the view that the satisfaction of the Director, Income Tax (Investigation) was reasonable and therefore administrative approval should be accorded. The view taken by the High Court, therefore, cannot be sustained.

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