Delhi High Court
Shri Ganesh Enterprises P. Ltd. And ... vs Union Of India And Others on 2 May, 1994
Equivalent citations: 55(1994)DLT354, [1994]210ITR786(DELHI)
JUDGMENT K. Shivashankar Bhat, J.
1. The petitioners basically question the restraint order dated April 2, 1991, issued under section 132(2) of the Income-tax Act, 1961 ("the Act"), as modified by the order dated April 25, 1991. The other reliefs are consequential to this basic relief sought by the petitioners. By the impugned order dated April 25, 1991, the third respondent clarified that the earlier order dated April 2, 1991, was confined to an amount lying with the fifth respondent-company as on the said date of April 2, 1991, and there was no bar against the party (the petitioner-company) from carrying out further business transactions with the fifth respondent-company. According to the petitioners, the first petitioner is a company engaged in the business of manufacture and sale of non-ferrous metals, alloys, etc., and the company owns a factory in Okhla Industrial Area. The second petitioner is a director of the said company. The petitioner-company has been subjected to assessment under the Income-tax Act and assessments up to the years 1988-89 have been completed while for the subsequent years they were pending at the time of the writ petition. For the purpose of the petitioner's manufacturing activity the Commissioner of Industries files and allots the quota of copper wire bars which is the raw material used by the petitioner-company. The raw material is being supplied by the fifth respondent-company which is a public sector undertaking. On fixation of the allotment of the quota the petitioner gets itself registered with the fifth respondent-company for the requirements, and the petitioner-company had to make payment of the price in advance at the rates stipulated by the fifth respondent. As and when the material is made available the petitioner-company takes the same. In March, 1991, the price of copper wire bars was Rs. 1 lakh per metric tonne. The petitioner sought release of the quota of 32 metric tonnes of copper wire bars for the said month and paid a sum of Rs. 31,36,925 by way of bank pay order. The fifth respondent issued an appropriate receipt for the same. Another sum of Rs. 9,80,289 was paid by way of pay order dated March 30, 1991, towards ten metric tonnes of the raw material. However, 14 metric tonnes of copper wire bars were directed to be delivered though in fact only 12.720 metric tonnes were delivered. A balance of 29.280 metric tonnes of the raw material had to be delivered by the fifth respondent out of 42 metric tonnes. Since the petitioner had paid the full price, the fifth respondent had with it a substantial balance amount to the credit of the petitioner-company. This amount was restrained under section 132(3).
2. The petitioner asserts that the petitioner-company usually receives advance payments from its customers for supply of finished products and accordingly in March, 1991, the petitioner-company received a sum of Rs. 31,35,000 from Messrs. Gandhi Metals by way of account payee crossed cheque. Similarly, it received Rs. 8,80,000 by way of cheque dated March 27, 1991, and another sum of Rs. 35,000 by way of cheque and these were from Messrs. R. A. International, New Delhi, as advance payments. These amounts were used by the petitioner-company for making payments to the fifth respondent-company. The impugned restraint order restrained the fifth respondent from releasing 29.280 metric tonnes raw material to the petitioner by the fifth respondent. Future releases were also restrained. This order was subsequently modified by confining the restraint order to the amount as on April 2, 1991, with the fifth respondent-company to the credit of the petitioner-company.
3. On April 3, 1991, the second petitioner was asked to attend the enquiry with the books of account, etc. On April 16, 1991, the petitioner-company wrote explaining the nature of the transactions and the circumstances under which this company made payment to the fifth respondent-company. On April 25, 1991, the restraint order was modified by permitting future business between the petitioner and the fifth respondent. On May 13, 1991, the petitioner wrote again, explaining in detail the nature of its business, advances received by the petitioner from the customers and payments made to the fifth respondent for supply of the raw materials.
4. The case of the Revenue is that Messrs. Ganesh Enterprises which purported to have paid huge sums to the petitioner-company while placing orders for the supply of goods had unexplained money and this was the reason for the impugned restraint orders. The relevant statements made on behalf of the Revenue are as follows :
"(iv) Perusal of accounts of Messrs. Shri Ganesh Enterprises Pvt. Ltd. with Messrs. Hindustan Copper Ltd. showed that an amount of Rs. 28,44,846 remained with Messrs. Hindustan Copper Ltd. pending execution of supply.
(v) Perusal of the books of Messrs. Hindustan Copper Ltd. showed that Messrs. Shri Ganesh Enterprises Pvt. Ltd. had deposited a sum of Rs. 3,77,32,721 with Messrs. Hindustan Copper Ltd. in the month of March, 1991.
(vi) Efforts were made to determine the source of funds out of which such amounts were deposited by Shri Ganesh Enterprises Pvt. Ltd. and to find out whether the sources were out of explained or unexplained sources :
(vii) In the course of enquiries Messrs. Shri Ganesh Enterprises Pvt. Ltd. submitted that amounts deposited with Messrs. Hindustan Copper Ltd. were out of the amounts received in March, 1991, to the tune of Rs. 3,30,30,000 on different dates from Messrs. Gandhi Metals owned by Shri Pradeep Grover and a sum of Rs. 48,75,000 from Messrs. R. A. International received in the period March 26, 1991, to March 30, 1991.
(viii) The petitioner had also filed a Miscellaneous Petition C. M. No. 2761 of 1991 requesting for staying the operation of the restraint order under section 132(3) dated April 2, 1991. On June 10, 1991, the court ordered as under :
(a) Fifty per cent. of the stock may be released on the applicant furnishing security to the satisfaction of the Department.
(b) Enquiry by the Department be completed within two weeks. The petitioner was directed to co-operate in such enquiries."
5. Thereafter, the various notices and enquiries held in connection with the source of money paid by Ganesh Enterprises are stated. The counter affidavit states thereafter :
"(xii) Show-cause notice dated June 18, 1991, was served on Messrs. Ganesh Enterprises Pvt. Ltd. calling upon them to show cause why the credits introduced in their books in the name of Messrs. Gandhi Metals and Messrs. R. A. International should not be treated as unexplained, since Messrs. Gandhi Metals and Messrs. R. A. International have not been able to furnish proof of the source out of which advances were made to Messrs. Shri Ganesh Enterprises. The onus of proving the identity of the creditor, creditworthiness of the creditor and the genuineness of the transaction was on Messrs. Shri Ganesh Enterprises Pvt. Ltd. (Sreelekha Banerjee v. CIT ). Messrs. Shri Ganesh Enterprises filed a reply dated June 20, 1991.
The Revenue, therefore, asserts :
"(xiii) From the enquiries made the following facts emerge :-
(a) Messrs. Ganesh Enterprises has not been able to establish the creditworthiness of the creditors alleged to be Messrs. Gandhi Metals and Messrs. R. A. International.
(b) The claim of Shri Ganesh Enterprises as to the genuineness of the transaction is also not acceptable because of the following :
(i) The amounts allegedly deposited by Messrs. Gandhi Metals in its bank account from January, 1991, to March, 1991, is of the order of Rs. 10,63,77,000 approximately, yet no income-tax returns are being filed.
(ii) He has not been able to prove the source of deposits in his account or to even give the names and addresses of the parties with whom he entered into such large transactions.
(iii) Messrs. Gandhi Metals does not maintain books of account.
(iv) His capital is only Rs. 10,000.
(v) He was also found to be in possession of vehicle No. DNJ 0224, which has a mobile telephone installed which was stated by him to be registered in the name of Messrs. Shri Ganesh Enterprises.
(vi) Source of amounts deposited by showing cash sales in books of R. A. International are also not explained as even the names of such parties to whom sales have been made have not been furnished."
6. Again in another counter, the case of the Revenue is stated as follows :
"The Income-tax Department further found that pay orders were purchased by the said two parties, namely, Messrs. Gandhi Metals and Messrs. R. A. International, from the banks on tendering cash. As the source of the deposits by the petitioner, Shri Ganesh Enterprises P. Ltd., with Hindustan Copper Ltd. was not proved, therefore, a restraint order under section 132(3) of the Income-tax Act was issued to Hindustan Copper Ltd. restraining the amounts which were lying deposited with them which at that time was Rs. 28,44,846.
Messrs. Ganesh Enterprises Pvt. Ltd. is assessed by the Assistant Commissioner of Income-tax, Company Circle No. 1(3), New Delhi. He has completed the assessment for the assessment year 1989-90 on March 31, 1992, on an income of Rs. 1,70,890 with the remark in the office note that the advances made by Shri Pradeep Grover, proprietor of Messrs. Gandhi Metals, to the above concern and the source thereof will be considered in the hands of Shri Pradeep Grover. In the assessment of Shri Pradeep Grover, the assessment was completed for the assessment year 1989-90 on March 30, 1992, at an income of Rs. 82,63,374 which includes unexplained investment of Rs. 44.50 lakhs deposited with M. M. T. C. and further unexplained investment of Rs. 27,25,874. A copy of the assessment order is enclosed as annexure R-I. It is learnt that assessment for the assessment year 1990-91 is still pending with the said Assessing Officer."
7. The said Assessing Officer has issued a provisional attachment order under section 281B of the Income-tax Act, 1961, on December 17, 1992, to the Manager (Marketing), Hindustan Copper Ltd., after obtaining approval of the Commissioner of Income-tax, Delhi-I, New Delhi. The said order under section 281B of the Income-tax Act attaching Rs. 28 lakhs is annexed as annexure R-II to this reply.
8. The petitioner has enclosed along with the captioned CMP, a copy of the assessment order of Messrs. Gandhi Metals for the assessment year 1988-89, wherein the income of Gandhi Metals for the assessment year 1988-89 has been assessed at Rs. 20.20 lakhs by assessment order dated March 30, 1992. As already submitted, Gandhi Metals claimed that it did not maintain any account books, though its purchases were of fts. 9.48 crores during the said year and the sales were of Rs. 11.70 crores.
9. Messrs. Gandhi Metals was assessed for the assessment year 1989-90 on an income of Rs. 82,63,374 and it had shown purchases of Rs. 11.94 crores in that year. The said assessment order is enclosed as annexure R-III.
10. It is reported by the Assessing Officer of Gandhi Metals that no returns for the assessment year 1990-91 and onwards have been filed by Messrs. Gandhi Metals.
11. Messrs. R. A. International claimed to have come into existence as a partnership-firm in the accounting year 1990-91 relevant for the assessment year 1991-92. Its income for the assessment year 1991-92 has been assessed at Rs. 1,91,91,464 by the Assistant Commissioner of Income-tax, Circle No. 21(2), New Delhi. A copy of the assessment order is enclosed as annexure R-IV.
12. In view of the foregoing, it is submitted that the petitioner, Messrs. Shri Ganesh Enterprises Pvt. Ltd., has failed to explain the source of its deposit with Hindustan Copper Ltd., and, therefore, the restraint order under section 132(3) was validly issued to Hindustan Copper Ltd. by my directorate. However, in view of the fact that the provisional attachment order under section 281B of the Income-tax Act has since been issued by the Assessing Officer, namely, Assistant Commissioner of Income-tax, Company Circle No. 1(3), New Delhi, the said restraint order has become infructuous."
13. From the above, it is clear that the failure of Gandhi Metals to establish its source of income from which payments were made to the petitioner-company was the ultimate reason for the impugned action. Further, an order was later made, lifting the restraint order during the pendency of the writ petition in view of the provisional order of attachment made under section 281B of the Act attaching a sum of Rs. 28 lakhs with the fifth respondent for which the Commission issued the directive to the concerned officer of the Income-tax Department on December 15, 1992.
14. Technically, the writ petition became infructuous since the restraint order ceased to operate after December 15, 1992. However, learned counsel for the petitioner contended that respondents Nos. 1 to 4 acted arbitrarily in issuing the restraint order under section 132(3) resulting in harassment of the petitioner-company and its officers and that the business of the petitioner was adversely affected by the said order. In the circumstances, the petitioners seek costs to be awarded against respondents Nos. 1 to 4.
15. Learned counsel for the petitioners relied on a few decisions explaining the scope of the power under section 132. In particular, a decision of this court in L. R. Gupta v. Union of India [1992] 194 ITR 32 was relied upon.
16. I do not think I should go into the question of examining the validity of the exercise of the power under section 132(3) in the instant case, as the impugned orders had ceased to operate. I had occasion to consider the scope of section 132(1) in Southern Herbals Ltd. v. Director of Income-tax (Investigation) [1994] 207 ITR 55 (Writ Petition No. 39381 of 1993, decided on December 22, 1993, of the Karnataka High Court). It was a case of search authorised under section 132(1)(c). The following observations are found in the said order (at page 60) :
"It is not for the court to examine the sufficiency of the material leading to the belief of the authority that search shall have to be conducted; the court has to see that the belief was reasonable, in the sense, it was formed on the basis of relevant material (information); the court cannot substitute its own opinion as to the reasonableness of the belief. The court has to examine to see whether the belief is an irrational or blind belief, formed out of prejudice or the result of relying on wild gossip or baseless rumours, etc. In this regard, the relevant principles enunciated by the Supreme Court will be referred to in due course, hereinafter. Suffice if I state here, that it is not permissible for the court to sit in appeal over the belief formed by the officer issuing the authorisation and the court cannot venture to reappreciate the materials available to the said officer to see whether the belief formed was correct or erroneous. There is a difference in law between an incorrect inference drawn from certain basic facts and the relevancy of those basic facts to the inference drawn. In the former case, the incorrectness of the inference drawn can be rectified or nullified by a superior authority or court, provided the law permits it to be rectified. The said rectification or nullification is part of the appellate or revisional power, which the law should specifically provide for. The writ jurisdiction is not so comprehensive as to comprise within it such an appellate or revisional power. It is essentially a supervisory jurisdiction to see that statutory authorities function within their bounds and that their decisions are not arbitrary, fanciful or based on irrelevant considerations. The scope of the writ jurisdiction while examining the validity of the authorisation under section 132(1) is clearly limited to see whether the reasonable belief formed by the authority issuing the authorisation was a reasonable belief, in the sense whether the said belief was formed only on the basis of relevant material/information."
17. After a few more observations, the order proceeded to say (at page 61) :
"The power vested in the State is to see that rights and liberties vested in individuals are not misused to the detriment of the public. The menace of tax evasion has to be curbed by the State so that the vast revenues needed by the State to expend on its welfare activities, beneficial to the law-abiding people in the State, could be preserved and collected. The rights and liberties of a vast number of citizens would be meaningful and properly enjoyable only if the State is able to create proper opportunities for the same through its welfare activities. Therefore, when prevention of tax evasion measures are taken and unearthing of hidden wealth is aimed at by recourse to the power of search and seizure, all that the court can examine is to find out whether there is a relevant basis for the exercise of the said power by the State or its officers. An arbitrary invasion of the rights or liberties of the citizen is not permissible and the court's role as the guardian of the fundamental rights is to see whether the State's action is arbitrary or unauthorised. To form a particular opinion and take a decision to act under a given set of circumstances as provided under law is the exclusive function of the administrators. The process of arriving at the decision should not be vitiated by irrationality or irrelevancy because, in such a case, the resultant decision will become arbitrary. There is a vast and qualitative difference between an administrative act and a judicial act, in spite of the recent dilution of the concept of an administrative action. Assuming that power to order search and seizure is a quasi-judicial power (though I do not think so), the scope for judicial scrutiny of the exercise of the said power is very much limited, bearing in mind the respective roles assigned to the executive and the judicial departments of the State.
Disclosure of the materials or information to the persons against whom the action under section 132(1) is taken is not mandatory, because the very disclosure would affect or hamper the investigation. Further, many a time, the source of information could easily be inferred from the said material and it is not in the interest of the public to reveal the source through which the authority received the information relevant to the action under section 132(1). Information would have been collected by the promise of confidentiality; even otherwise, to avoid embarrassment to the persons conveying the information, the source cannot be revealed. When investigation is in progress and in the meanwhile, persons against whom action is proposed come to know of the material on which the investigation is based, there is every likelihood of further manipulative devices being adopted by such persons to give a different orientation to the relevant facts. The person against whom the action is to be taken will be given all the relevant facts and materials on which further action is proposed, after investigation is completed. Search and seizure is only an initial step in the enquiry to be held regarding tax evasion. At this stage, its purpose is to get hold of evidence bearing on the tax liability of a person, which the said person is suspected to have been withholding from the assessing authority and to get hold of the assets representing income believed to be undisclosed income. The stage for disclosure of the materials is reached only when the Revenue resolves to proceed to make an appropriate order imposing tax liability or penalty, etc., and at that stage, all relevant materials from which the liability of the taxpayer is sought to be inferred, shall have to be disclosed.
At the initial stage of search and seizure, it is sufficient if the Revenue places the material before the court to examine whether the said material on which search and seizure is ordered, was relevant to the exercise of the power under section 132(1); the material placed for the court's perusal cannot be disclosed to the petitioner."
18. After quoting the decision of the Supreme Court in Seth Brothers' case [1969] 74 ITR 836, it was said in the order of the Karnataka High Court (at page 65) :
"It is, therefore, clear that, before issuing authorisation, the authority should record reasons for his reasonable belief and the court cannot be asked to substitute its own opinion whether an order authorising search should have been issued. When the power is exercised bona fide and in furtherance of the statutory duties of the tax officers, any error of judgment on their part will not vitiate the exercise of the power."
19. The court also pointed out that reasons recorded for authorising the search need not be disclosed to the petitioner, though the court may examine the file to satisfy itself whether the reasons were relevant or not.
20. However, search and issuance of a restraint order invade the rights of the petitioner, though the said invasion may be of a temporary duration. Therefore, utmost care shall have to be taken by the authorities before exercising the powers under section 132. Even after the search the subsequent enquiries and investigations shall have to be concluded expeditiously, so that the innocent person who is affected by the actions/orders of the authorities may be relieved of the hardship caused to the said person by this exceedingly harsh measure.
21. No doubt measures to unearth undisclosed income are to be resorted to in the larger interest of the public. At the same time, the measures taken should be expeditiously concluded to minimise the injury to the person against whom the measures are taken on the basis of the suspicion (though the suspicion was based on relevant material or information).
22. Safeguards to the trade and industry are as much necessary as the prevention of black money. A balance shall have to be struck between the exercise of the statutory powers by the officers of the State and those against whom the powers are exercised, so that genuine income earners may not get suffocated in the course of investigations. The injury to the entrepreneurs should be as minimum as possible.
23. In the instant case, the impugned action took place on April 2, 1991, restraint order continued to operate till about middle of December, 1992. The petitioner fully co-operated with the respondent in all the enquiries. The fault, if any, was with the customer of the petitioner-company. The source of the money shall have to be investigated in the hands of Pradeep Grover of Messrs. Gandhi Metals, and not in the hands of the petitioner-company. If only the investigation/enquiry had been expedited and concluded, the relevant order affecting the petitioner-company could have been lifted far earlier to December, 1992.
24. A Division Bench of this court had made an order on June 10, 1991, as follows :
"The petitioner is calling in question the action of respondents Nos. 2 and 3 in restraining respondent No. 5 from supplying copper wire bars to the petitioner for which the money has already been paid to the said respondent. Learned counsel for the petitioner says that his whole business has come to a grinding halt because of the restraint order passed by respondents Nos. 2 and 3. He submits that 50 per cent. of the material should be released to the petitioner on his furnishing security to the satisfaction of respondents Nos. 2 and 3. We order accordingly. List the matter on July 11, 1991. In the meanwhile, respondents Nos. 2 and 3 will complete the enquiry and also file their answer to the writ petition. Learned counsel seeks leave to file reply to the C. M. in the court. The same be taken on record."
25. From the above order, it is clear that respondents Nos. 2 and 3 had to complete the enquiry by July 11, 1991. Instead, the enquiry got prolonged till the middle of December, 1992. Respondents Nos. 2 and 3 did not even seek extension of time to complete the enquiry.
26. In the circumstances, I am constrained to hold that there has been an unexplained and unreasonable delay in concluding the enquiry by respondents Nos. 2 and 3. The need to expeditiously conclude the enquiry after an order of restraint under section 132, is implicit in the very provision, to dilute its harsh implications.
27. I am of the view that the petitioners are entitled to their costs, though otherwise, the writ petition has become infructuous. Consequently, I dismiss the writ petition as infructuous. However, respondents Nos. 2 to 4 shall pay the petitioner a sum of Rs. 3,500 as costs. The writ petition is disposed of accordingly.