Bombay High Court
Hemendra Ranchhoddas Merchant vs Director Of Income Tax (Investigation on 2 April, 2012
Author: D.Y. Chandrachud
Bench: D.Y. Chandrachud, M.S. Sanklecha
1/21 WP No. 47 of 2011
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IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
WRIT PETITION NO. 47 OF 2011
Hemendra Ranchhoddas Merchant,
an erstwhile partner of the dissolved firm
and now the proprietor of M/s. Sriram
Warehousing Corporation, residing at Sudha
Kunj, Ground Floor, Haji Ali, Opp,. Heera
Panna Shopping Centre, Mumbai 400 034. ... Petitioner
ig Versus
1. Director of Income Tax (Investigation),
Mumbai having his office at Scindia House,
Ballard Estate, Mumbai 400 038
2. Assistant Director of Income Tax,
(Investigation), Unit II, Mumbai
having his office at Scindia House,
Ballard Estate, Mumbai 400 038.
3. The Asst. Director of Income Tax
(Investigation) Mumbai
having his office at Scindia House,
Ballard Estate, Mumbai 400 038.
4. Deputy Director of Income Tax
(Investigation), Unit II (2), Mumbai
having his office at Scindia House,
Ballard Estate, Mumbai 400 038.
5. Assistant Commissioner of Income Tax,
Central Circle 35, Mumbai
having his office at Aayakar Bhawan,
::: Downloaded on - 09/06/2013 18:23:16 :::
2/21 WP No. 47 of 2011
Maharshi Karve Road,
Mumbai 400 020,
6. Commissioner of Income Tax,
Appeals - 41, Mubai
having his office at Aayakar Bhawan,
Maharshi Karve Road,
Mumbai 400 020,
7. Union of India,
through the Secretary, Ministry of Finance,
North Block, New Delhi 110 001.
Mr. O.J. Menejes with Mr. P.P. Prabhu for the petitioner.
Mr. Suresh Kumar for respondents.
CORAM : DR. D.Y. CHANDRACHUD &
M.S. SANKLECHA,JJ.
DATED : APRIL 02, 2012
ORAL JUDGMENT (Per Dr. D.Y. Chandrachud,J.):
1. In these proceedings under Article 226 of the Constitution of India, petitioner has sought to question the legality of a warrant of authorization issued by the first respondent under Section 132 of the Income Tax Act, 1961 and all proceedings consequent thereto, including the assessments for Assessment Years 2001-2002, 2002-2003, 2003-2004, 2004-2005 dated 24 November, 2008. The orders of assessment stand confirmed by the Commissioner of Income Tax (Appeals) on 30 March, 2010. The Petitioner has filed appeals against ::: Downloaded on - 09/06/2013 18:23:16 ::: 3/21 WP No. 47 of 2011 the orders of the CIT(A) which are stated to be pending before the Income Tax Appellate Tribunal.
The Petitioner and his wife formed a Deed of Partnership on 1 November 1992. The partnership firm constituted by the deed of partnership was to be known by the name and style of M/s. Sriram Warehousing Corporation. The business of the partnership consisted inter alia of providing security guards,valuation, verification, inspection of stocks, fixed assets, book debts, warehousing etc. A deed of rectification was entered into thereafter on 17 November, 1993. On 19 April 2004 a deed of dissolution was entered into by which the partnership firm was dissolved with effect from 31 March 2004. The petitioner was to continue the business of the firm as sole proprietor.
According to the petitioner, the fact of the dissolution of the firm was intimated to the Income Tax Officer, Ward No. 16(1)(4), Mumbai by a letter dated 29 September 2005.
2. Warrants of authorization were issued under Section 132 by the Director of Income Tax (Investigation). Search and seizure proceedings were conducted in pursuance of the warrants of authorization, inter alia ::: Downloaded on - 09/06/2013 18:23:16 ::: 4/21 WP No. 47 of 2011 at the business premises and at the residential premises of the petitioner and his wife. A notice was issued on 28 May, 2007 under Section 153(a) calling for the returns of Income for the Assessment Years 2001-02 to 2004-2005. On 29 May 2007 the petitioner filed an application before the Settlement Commission under section 245C(1).
On 17 July 2007 returns of income were filed. The orders of assessment were passed on 24 November 2008. The CIT(A) disposed of the appeals filed by the petitioner by an order dated 24 November 2008. The CIT(A) held that the validity of the search and seizure cannot be challenged either before him or before the Tribunal but only before this Court in the exercise of its writ jurisdiction. As noted earlier, the petitioner is in appeal before the Tribunal against the orders passed by the C.I.T.(A).
3. Counsel appearing on behalf of petitioner submitted that the warrants of authorization under Section 132(1) are unlawful and must be set aside by this Court for the following reasons :
(i) The Director of Income Tax (Investigation) who issued the warrants of authorization had no reason to believe, within the meaning of Clause ::: Downloaded on - 09/06/2013 18:23:16 ::: 5/21 WP No. 47 of 2011
(b) of sub section (1) of section 132 that any person to whom summons or notices might be issued under sub section (3) of section 142 would not produce or cause to be produced any books of account or other documents which will be useful for or relevant to any proceedings under the Act;
(ii) The warrants of authorization were issued in the name of a dissolved firm which is not in existence in law and are therefore a nullity;
(iii) In pursuance of the warrants of authorization issued in the name of a dissolved firm, the residential premises of the erstwhile partners cannot be searched.
(iv) All the assessment proceedings which were commenced pursuant to illegal warrants of authorization and the orders of assessment would have to be quashed and set aside.
(v) The documents which were seized during the course of the search and seizure operation must be ordered to be returned, having regard to ::: Downloaded on - 09/06/2013 18:23:16 ::: 6/21 WP No. 47 of 2011 the provisions of Section 132(8). Though the petitioner had moved an application on 13 August 2007 for the release of the books of account and other documents seized, no order for release has been passed.
4. On the other hand, Counsel appearing for the Revenue submits that:
(i) The principle of law laid down by the Supreme Court, is that where the power under Section 132 is exercised bona fide and the Commissioner entertains the requisite belief and, for reasons to be recorded, authorizes a designated officer to enter and carry out a search of premises for books of account and documents relevant to proceedings under the Act, the Court will not substitute its own judgment or opinion on the question as to whether the order authorizing the search should have been issued;
(ii) The Income Tax Act, 1961 makes specific provisions in Section 189 for assessment of a dissolved firm and by a deeming provision all the provisions of the Act are attracted as if the firm had not been dissolved.
(iii) As a matter of fact, in the present case, the warrants of ::: Downloaded on - 09/06/2013 18:23:16 ::: 7/21 WP No. 47 of 2011 authorization have been issued also in the individual names of the petitioner and his spouse and covered not only the business but the residential premises as well; and
(iv) An order has been passed under Section 132(8) extending the period for the retention of the documents seized untill 31 March 2013 or until pending the proceedings are disposed of, whichever is earlier.
5. Section 132(1) empowers inter alia the Commissioner and the Director to issue a warrant of authorization to an authorized officer to enter and search any building, place, vessel, vehicle or aircraft where he has reason to suspect that books of account, other documents, money, bullion, jewellery or other valuable article or thing are kept. The authorization may extend to the seizure of any such books of account, documents or things that are found as a result of the search. Before he proceeds to issue a warrant of authorization, the Director must have reason to believe that :
"(a) any person to whom a summons under sub- section (1) of section 131 of this Act, or a notice under sub- section (1) of section 142 of this Act was issued to produce, or cause to ::: Downloaded on - 09/06/2013 18:23:16 ::: 8/21 WP No. 47 of 2011 be produced, any books of account or other documents has omitted or failed to produce, or cause to be produced, such books of account or other documents as required by such summons or notice, or
(b) any person to whom a summons or notice as aforesaid has been or might be issued will not, or would not, produce or cause to be produced, any books of account or other documents which will be useful for, or relevant to, any proceeding under the Act, or
(c) any person is in possession of any money, bullion, jewellery or other valuable article or thing and such money, bullion, jewellery or other valuable article or thing represents either wholly or partly income or property which has not been, or would not be disclosed for the purposes of the Act."
The formation of a reason to believe is the foundation of an authorization which is issued under section 132(1).
6. The power which is conferred by Section 132(1) constitutes, as the Supreme Court noted an invasion upon the rights, privacy and ::: Downloaded on - 09/06/2013 18:23:16 ::: 9/21 WP No. 47 of 2011 freedom of the tax payer and has to be therefore, exercised strictly in accordance with law. The Commissioner or as the case may be the Director, must record reasons for the belief which he entertains. In the leading judgment of the Supreme Court in Income Tax Officer, Special Investigation Circle "B" Meerut Versus Seth Brothers and Others1, the nature of jurisdiction and parameters of judicial review were set out in the following observations :
"If the action of the Officer issuing the authorization, or of the designated Officer is challenged the Officer concerned must satisfy the Court about the regularity of his action. If the action is maliciously taken or power under the section is exercised for a collateral purpose, it is liable to be struck down by the Court. If the conditions for exercise of the power are not satisfied the proceeding is liable to be quashed. But where power is exercised bona fide, and in furtherance of the statutory duties of the tax officers any error of judgment on the part of the Officers will not vitiate the exercise of the power. Where the Commissioner entertains the requisite belief and for reasons 1 (1969) 74 ITR 836 (SC) ::: Downloaded on - 09/06/2013 18:23:16 ::: 10/21 WP No. 47 of 2011 recorded by him authorises a designated Officer to enter and search premises for books of account and documents relevant to or useful for any proceeding under the Act, the Court in a petition by an aggrieved person cannot be asked to substitute its own opinion whether an order authorising search should have been issued. Again, any irregularity in the course of entry, search and seizure committed by the Officer acting in pursuance of the authorisation will not be sufficient to vitiate the action taken, provided the Officer has in executing the authorisation acted bona fide."
These principles where thereafter reiterated in a subsequent decision in Commissioner of Income Tax U.P. and Others Vs. Jawahar Lal Rastogi2.
In Pooran Mal Versus Director of Inspection3 a Constitution Bench of the Supreme Court, while considering the ambit of Section 132 (1)(b) noted that it is impossible to enumerate all the circumstances in which a necessary, reasonable belief may be entertained in clause (b).
The Supreme Court however indicated by way of illustration the 2 (197) ITR 78 486 (SC) 3 (1974) 93 ITR 505 (SC) ::: Downloaded on - 09/06/2013 18:23:16 ::: 11/21 WP No. 47 of 2011 following situation :
"As an illustration, however, we may point out a case which falls completely under Sub-clause
(b). An assessee may be filing his returns from year to year regularly and his assessments may be also completed in due course over years.
His books of account and documents have been duly checked from year to year and the assessing officer is also completely satisfied that the returns are correct. But it might so happen that this apparently honest assessee has invested large funds in properties and other financial deals, reliable information about which finds its way to the Director of Inspection. In such a case no oracle is needed to tell the Director of Inspection that if a requisition is made on the assessee to produce his documents in connection with these financial deals and investments, the assessee will most certainly omit to produce or cause to be produced such documents. On the other hand, there is danger that all these documents may be destroyed because the very fact that a requisition is made with a view to investigate concealed deals would put the assessee on his ::: Downloaded on - 09/06/2013 18:23:16 ::: 12/21 WP No. 47 of 2011 guard and the relevant documents may either disappear or be destroyed. Indeed, it is possible that an assessee may, after knowing that the game is up, produce the requisite documents. But in the nature of things such an assessee would be rare. The question for us to consider is whether the authority under Section 132(1) may entertain the reasonable belief that in such circumstances the assessee will not or would not produce the documents.
In our opinion though in a very rare case a tax evader may comply with a requisition, the Director of Inspection who has reliable information that the assessee has consistently concealed his income derived from certain financial deals may be justified in entertaining the reasonable belief that the assessee, if called upon to produce the necessary documents, will not produce the same. There is no substance, therefore, in the contention that Sub-clause (b) has over-reached itself."
7. In a number of decisions of the High Courts, the provisions of Section 132(1) have fallen for interpretation. Since they have been relied upon by the Petitioner, we proceed to cull out the gist. In Southern ::: Downloaded on - 09/06/2013 18:23:16 ::: 13/21 WP No. 47 of 2011 Herbals Ltd. Vs. Director of Income Tax (Investigation) 4, a learned Single Judge of the Karnataka High Court held that the scope of the writ jurisdiction while examining the validity of an authorization under Section 142(1) is limited to determine whether the belief formed by the authority issuing the authorization was reasonable, in the sense whether the belief was formed on the basis of relevant material or information. In Mahesh Kumar Agarwal Vs. Deputy Director of Income Tax and others5, a learned Single Judge of Calcutta High Court held that the mere fact that the assessee had changed his residence would not form a reason to believe. In Dr. Sushil Rastogi Vs. Director of Investigations, Income Tax Department6, the Allahabad High Court emphasized that an authorization under section 132 cannot be founded merely on generalities. In a judgment in Ajit Jain Vs. Union of India and Others7, the Delhi High Court held that the mere providing of information of a general nature by the Central Bureau of Investigation that the petitioner was in possession of cash amounting to Rs.8.5 lacs. cannot straightaway lead to the inference that it represented his undisclosed income. In the judgment of the Rajasthan 4 (1994) 207 ITR 55 5 (2003) 260 ITR 67 6 (2003 260 ITR 249 7 (2000) 242 ITR 302 ::: Downloaded on - 09/06/2013 18:23:16 ::: 14/21 WP No. 47 of 2011 High Court in Commissioner of Income Tax Vs. Smt. Chitra Devi Soni8, a Division Bench emphasized that the existence of one or more eventualities catalogued in clauses (a) to (c) of section 132(1), is a mandatory condition before the authority concerned issues an authorization as spelt out in the section. In a recent judgment a Division Bench of the Gujarat High Court in Suvidha Association Vs. L.R. Meena, Additional Director of Income Tax (Investigation)9, emphasized that the satisfaction which is recorded by issuing a warrant of authorization has to be imminent and proximate in time.
8. Now it is in this background that the facts of the present case will have to be assessed. The satisfaction note on the basis of which the warrants of authorization were issued has been produced for the perusal of the Court. The Assistant DIT (Inv) Unit II, Mumbai recorded that Sriram Group of Companies was in the business of providing security for Properties/sick units attached by the Debt Recovery Tribunal. The group members comprise of several entities including the following :
i) Sri. Ram Securities & Consultancy Services 8 (2009) 313 ITR 174 (Raj) 9 (2010) 320 ITR 461 (Guj) ::: Downloaded on - 09/06/2013 18:23:16 ::: 15/21 WP No. 47 of 2011
ii) Sri Ram Warehousing Corporation
iii) Sri Ram Security Agency
iv) Srikrishan Security Services
v) Sriramkrishna Security Services
vi) Sriram Maintenance Services
vii) Manubhai & Sons
viii) Hemendra R. Merchant
ix) Smt. Hemaben H. Merchant The group is being run by the petitioner whose residential and business addresses are set out in the note. The group specializes in providing security for companies/units, which have been declared sick and where the Court Receiver has been appointed to take possession of the company/unit. The Group is stated to be on the panel of the Debt Recovery Tribunal and is usually given all the security contracts for sick units. The allegation is that whereas the Group enters into an agreement with the DRT for providing a stipulated number of guards, in actuality only a fraction of the number of guards contracted for is engaged. For instance payments are received for 60 guards whereas expenditure is incurred only for 10 to 12 guards. The profits which are reflected in the ::: Downloaded on - 09/06/2013 18:23:16 ::: 16/21 WP No. 47 of 2011 books of account are therefore, not a correct estimate of what is actually realized. To deflate the profits, bogus expenses (wages to non existent security guards) are entered in the books of account. The money so siphoned off is reintroduced as advances from the employees.
The money is withdrawn form the bank in cash for bogus expenses. But the same is transfered to the personal account of the petitioner or is used for taking fixed deposits from various banks located in Mumbai, Palghar, Panvel, Lonavala, Pune etc. The fixed deposits, the satisfaction note states, have not been disclosed to the Income Tax Department. Such fixed deposits would be kept either in the individual names of the petitioner and his spouse or in the joint names.
A Trust had been created by the petitioner. It was alleged that the fixed deposits were to the tune of Rs.25 to Rs.35 Crores. The satisfaction note records a reference to the banks in which the Group maintains accounts, fixed deposits and lockers. The places where incriminating documents may be found and the persons whose custody they are likely to be are mentioned. On the basis of the satisfaction note recorded by the Assistant Director of Income Tax (Investigation), the Additional Director of Income Tax (Investigation) put up a note together with his remarks before the Director of Income Tax (Investigation) Unit I. The ::: Downloaded on - 09/06/2013 18:23:16 ::: 17/21 WP No. 47 of 2011 Director of Income Tax (Investigation) Unit I recorded his satisfaction on the basis of the facts set out by the Assistant Director of Income Tax and Additional Director of Income Tax that this was a fit and proper case in which action under Section 132 was necessary and justified. As a matter of record, the warrants of authorization were not merely issued in the names of the firms. As a matter of fact the warrants of authorization were also separately issued in the name of the petitioner and his spouse.
Section 189 of the Income Tax Act, 1961 stipulates that where any business or profession carried on by a firm has been discontinued or where a firm is dissolved, the Income-tax Officer shall make an assessment of the total income of the firm as if no such discontinuance or dissolution had taken place, and all the provisions of this Act, including the provisions relating to the levy of a penalty or any other sum chargeable under any provision of this Act, shall apply, so far as may be, to such assessment. By sub section (3) of section 189, every person who was at the time of such discontinuance or dissolution a partner of the firm, and the legal representative of any such person who is deceased, shall be jointly and severally liable for the amount of tax, penalty or other sum payable, and all the provisions of this Act, so far as may be, ::: Downloaded on - 09/06/2013 18:23:16 ::: 18/21 WP No. 47 of 2011 shall apply to any such assessment or imposition of penalty or other sum.
Sub section (1) of section 189 creates a legal fiction. The effect of the fiction created by law is that notwithstanding the discontinuance of the business of a firm or the dissolution of a firm, assessment has to be made by the Assessing Officer of the total income of the firm as if no such discontinuance or dissolution has taken place. Counsel appearing on behalf of the assessee submits that this would be subject to service of notice under section 283(2). Whether and to what extent the provisions of Section 283(2) were complied with is a matter which would fall for determination in the appeal which is pending against the orders of assessment and those passed by the CIT (A). We may, only record the submission of the Revenue that the Petitioner was aware all along of the assessment proceedings and participated in the assessment.
In the present proceedings, the ambit and jurisdiction of this Court is limited to a determination of whether the Director of Income Tax (Investigation) had a reason to believe within the meaning of Section 132(1). In our view, the circumstances which are set out in the satisfaction note provided adequate material on the basis of which the Director of Income Tax (Investigation) has formed a reason to believe within the meaning of Section 132(1)(b). Applying the test, that was ::: Downloaded on - 09/06/2013 18:23:16 ::: 19/21 WP No. 47 of 2011 laid down by the Supreme Court in Seth Brothers and in Pooran Mal (supra) the power in the present case has been exercised in furtherance of the statutory duties cast upon the Director of Income Tax. The Director of Income Tax (Investigation) has entertained the requisite belief for bona fide reasons which fall within the ambit and purview of Section 132(1)(b). The sufficiency of these reasons cannot be questioned by this Court in exercise of the writ jurisdiction under Article 226 of the Constitution. The satisfaction has been arrived at on the basis of relevant and material circumstances which are recorded.
As regards the return of the documents, Section 132(8) provides that the books of account and other documents seized under sub section (1) shall not be retained by the authorized officer for a period exceeding thirty days from the date of the order of assessment under Section 153(A) or Section 158BC(c) unless reasons for retaining the same are recorded by the officer in writing and the approval of the Chief Commissioner, Commissioner, Director General or Director for such retention is obtained. Under the proviso, the Chief Commissioner, Commissioner, Director General or Director shall not authorize the retention of books of account and other documents for a ::: Downloaded on - 09/06/2013 18:23:16 ::: 20/21 WP No. 47 of 2011 period exceeding thirty days after all the proceedings under the Act in respect of the years for which books of account and other documents are relevant are completed. However, by sub section (3) the person from whose custody any books of account and other documents are seized under sub section (1) is permitted to make copies thereof or take extracts therefrom. Counsel for the Petitioner states on instructions that the Fixed Deposit Receipts have been returned to the Petitioner. Counsel appearing on behalf of the Revenue has placed on the record the last order dated 16 March 2012 passed by the Commissioner of Income Tax Unit III Mumbai authorizing retention of the documents, having regard to the pendency of the appeal proceedings, until 31 March 2013 or until the proceedings are disposed of, whichever is earlier. Having regard to the provisions of Section 132 that direction is lawful and cannot be faulted. The Petitioner is entitled, however, to take copies of extracts as may be required.
9. Counsel appearing on behalf of the petitioner has relied upon a judgment of the Punjab and Haryana High Court in Commissioner of Income Tax Vs. Rakesh Kumar10 where the Division Bench held that since the person in whose name the search authorization was issued, 10 (2009) 313 ITR 305 (P & H) ::: Downloaded on - 09/06/2013 18:23:16 ::: 21/21 WP No. 47 of 2011 had died prior to the issuance of the authorization and since the search warrant and panchanama were prepared in the name of a dead person, the authorization for conducting a search was invalid and void ab initio.
In the present case, however, as noted earlier, the warrant of authorization has also specifically been issued in the name of the petitioner and his spouse.
10. For the aforesaid reasons, we are of the view that there is no merit in the petition. The Petition shall accordingly stand dismissed. Rule discharged. There shall be no order as to costs.
(DR. D.Y. CHANDRACHUD,J.) (M.S. SANKLECHA,J.) ::: Downloaded on - 09/06/2013 18:23:16 :::