Dimondstar Exports Ltd. And Ors. vs Director General Of Income Tax And ...
2004 Latest Caselaw 1344 Bom

JUDGMENT

A.P. Shah, J.

1. The 1st petitioner is a company incorporated under the Companies Act and is engaged in the business of manufacture, purchase and sale of gold, diamonds, ornaments "and jewellery and 2nd and 3rd petitioners are respectively director and sales manager of the 1st petitioner. The petitioners have approached this Court for quashing the warrant of authorisation issued under Section 132 of the IT Act and follow up action including search and seizure of gold, diamonds, ornaments and jewellery and consequent notices issued under Section 158BC of the IT Act.

2. According to the petitioners the 1st petitioner with a view to explore local and foreign markets, regularly participates in various jewellery exhibitions held in India and abroad. One such jewellery exhibition called "Swarna Sambandh" was organised by M/s Sercon India (P) Ltd., New Delhi, to be held at Taj Hotel, Lucknow, for three days from 13th Jan., 2001 to 15th Jan., 2001, for which the 1st petitioner sent its three employees i.e., Mr. Parimal Patel, Mr. Manish Jhaveri and petitioner No. 3 to Lucknow, Mr. Patel and. Mr. Jhaveri went to Lucknow by train and they reached there on 12th Jan., 2001, the petitioner No. 3 proceeded to leave Mumbai on 12th Jan., 2001 to Lucknow by flight No. S27907 of Sahara Air Lines which was to depart from Santacruz Airport at 4 p.m. He was carrying with him gold, diamonds, jewellery and ornaments having an estimated sale value of Rs. 84.68 lakhs. It appears that the petitioner No. 3 was intercepted at the airport at Mumbai when he was about to board the flight to Lucknow by the officers of the IT Investigation Department, Mumbai. It is the case of the petitioners that the petitioner No. 3 answered all the queries and produced various documents in his possession like invitation from M/s Sercon India (P) Ltd., introductory letter from Bank of India, Mumbai, to its branch in Lucknow for opening of account for depositing the sale proceeds of the exhibition and income-tax, sales-tax and gem and jewellery membership certificates. The concerned officer stationed at the airport at Mumbai took declaration of the petitioner No. 3 and allowed him to proceed to Lucknow. It appears that on the basis of a fax message received from the Investigation Department, Mumbai, the respondent No. 1 issued an authorisation under Section 132 of the Act and on arrival at Lucknow, officers of Investigation Department at Lucknow went to the aircraft and served search warrant on the petitioner No. 3. The petitioner No. 3 was interrogated by the officers and once again, he explained and showed all the above referred records and documents; however the officers seized the diamonds, gold and jewellery, etc. Two other employees who had reached Lucknow were also interrogated. It is further case of the petitioners that subsequent to search and seizure action carried on at Lucknow, the 1st petitioner as also its associate concern and its directors were subjected to search from 12th Jan., 2001 to 20th Jan., 2001. During the said search, jewellery and ornaments in the business premises were kept under prohibitory order and after due verification of the stock books. documentary records, challans and stock sent to Lucknow for exhibition and after having been satisfied regarding the records, source and valuation, the said stock was released to the petitioner No. 1 on 20th Jan., 2001. There has been no seizure from any of the business premises of petitioner No. 1 and its associate concern or from residences of its directors. Thereafter, the petitioners addressed several letters to the respondents contending inter alia that the search and seizure was illegal and requesting immediate release of gold, diamonds, ornaments and jewellery but the letters failed to evoke any response from the respondents. In the meanwhile, the respondents proceeded to issue notices to the petitioners under Section 158BC of the IT Act.

3. The action of the respondent No. 1 in issuing authorisation under Section 132 of the IT Act and follow up action of search and seizure is challenged mainly on the ground that there was no information on record, on the basis whereof the respondent No. 1 could form belief that the said gold, diamonds, jewellery, etc. recovered from the petitioner No. 3 represented wholly or partly the income which had not been or would not have been disclosed for the purpose of the Act, a condition precedent for exercise of powers under Section 132(1) of the Act. The contention is that since the authorisation itself was illegal and void ab initio, all proceedings taken consequent thereto are also rendered illegal and void.

4. In the affidavit in reply filed on behalf of the respondent Nos. 1 and 2, a preliminary objection has been raised as to maintainability of the petition on the ground that the petition is premature and the petitioners have got efficacious alternate remedy of raising these contentions in proceedings under Section 158BC of the Act. On merits, it is stated that the authorisation was given on the basis of the fax communication from the Investigating Unit, Mumbai, and there is no illegality or infirmity in the action of warrant and seizure.

5. Mr. Jhaveri, learned counsel appearing for the petitioners submitted that mere intimation by the Investigating Unit that the petitioner No. 3 was possessing gold, diamonds, and jewellery, etc., could not constitute information within the meaning of Section 132 of the Act particularly when the sales representative of the 1st petitioner from whom gold, diamonds, jewellery, etc., was seized had shown documentary proof that the same was part of the stock-in-trade of the petitioner No. 1, a regular assessee in Mumbai and it was being taken to Lucknow for participation in the exhibition. The learned counsel urged that there could be no reason for the respondent No. 1 to form a belief that the petitioner No. 3 was in possession of gold, diamonds, jewellery, etc. which represented undisclosed income, wholly or partly. Therefore, the learned counsel submitted that none of the ingredients of Section 132(1)(c) of the Act was made out and, therefore, the entire action of search and seizure was illegal. On the other hand, it was contended by Mr. Ashokan that the information supplied by the Investigating Unit at Mumbai constituted foundation for the belief that the jewellery and ornaments in question represented undisclosed income and in any case according to him this is not a fit case for entertaining under Article 226 and the petitioners should be directed to agitate all these contentions in proceedings under Section 158BC of the Act.

6. Section 132 of the Act clothes the Director General or Chief CIT and some other officers, in the circumstances mentioned therein, with the power to authorise entry into and search of any building, place, etc. and seizure of any books of account, documents, money, etc. found therein, and prescribes the procedure to be adopted consequent upon such seizure or acquisition. The relevant portion of these provisions which concern us for the disposal of writ petition are these :

"132. Search and seizure.-(1) Where the Director General or Director or the Chief CIT or CIT or any such Jt. Director or Jt. CIT as may be empowered in this behalf by the Board in consequence of information in his possession, has reason to believe that-

(a)..........

(b)..........

(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 purpose of the Indian IT Act, 1922 (11 of 1922) or this Act hereinafter in this section referred to as the undisclosed income Or property,

then -

(A) the Director General or Director or the Chief CIT or CIT as the case may be, may authorize any Jt. Director, Jt. CIT, Asstt. Director or Dy. Director, Asstt. CIT or Dy. CIT or ITO, or

(B) such Jt. Director or Jt. CIT as the case may be, may authorize any Asstt. Director or Dy. Director, Asstt. CIT or Dy. CIT or ITO,

the officer so authorized in all cases being hereinafter referred to as the authorized officer to-

(i) enter and search any building, place, vessel, vehicle or aircraft where he has reason to suspect that such books of account, other documents, money, bullion, jewellery or other valuable article or thing are kept;"

7. It is well-settled that the existence, or otherwise of the condition precedent to exercise of power under these provisions is open to judicial scrutiny. The absence of the condition precedent would naturally have the effect of vitiating the authorisation made under Section 132 and the proceedings consequent thereto. While the sufficiency or otherwise of the information cannot be examined by the Court, the existence of information and its relevance to the formation of the belief can undoubtedly be gone into. Also, whether on the material available with the Director/CIT, any reasonable person could have arrived at the conclusion that a search, seizure, requisition should be authorised is a field open to judicial review. In Dr. Nand Lal Tahiliani v. CIT and Ors. , R.M. Sahai J. (as his Lordship then was) observed :

"Search and seizure are a common feature of fiscal statutes. Its utility cannot be undermined in a civilized society. But it is capable of being abused as well. That is why the legislation always provides inbuilt safeguards. For instance, the condition precedent for action under Section 132 is the information in the possession of the authority in consequence of which he may have reason to believe that any person was in possession of any money, bullion or jewellery or other valuable articles which represented undisclosed income. How each of them should be understood and what they mean has been explained by Courts from time to time. If either of these conditions is missing or have not been adhered to, then the authority is precluded from invoking the powers under this section [see Ganga Prasad Maheshwari and Ors. v. CIT . Information in consequence of which the Director or the CIT has reason to believe is the foundation for action. It sets the machinery in motion, Therefore, it has not only to be authentic but capable of giving rise to the inference that the person was in possession of undisclosed income which has not been or would not be disclosed. Reason to believe has been explained in many decisions both under Sections 132 and 148 of the IT Act [see Chhugamal Rajpal v. S.P. Chaliha and Ors. , ITO and Ors. v. Lakhmani Mewal Das , Ganga Prasad Maheshwari and Ors. v. CIT (supra) and Vindhya Metal Corporation and Ors. v. CIT and Ors. ]. In order that the formation of opinion must be in good faith and not a mere pretence it is necessary that the information in consequence of which it is formed must be valid and linked with the ingredients mentioned in the section. That is, there must be rational connection between the information or material and the belief about undisclosed income...........

.......Satisfaction of the authorities may be subjective, but it must be arrived at objectively on materials. Not one could be found on record. The expression is 'reason to believe that the income has not been disclosed and not probably it may not have been disclosed'. It is not left to guessing. It carries with it the impress of certainty... Reasonable belief exists if the information is not only trustworthy but reasonable and sufficient in itself to warrant the conclusion that the provisions of Section 132 were being violated. Because if the exercise of power is bad or unlawful in inception, then it is not validated or nor does it change character from its success. It would not, therefore, be asking too much from the authorities to comply with the basic requirements of the section, before they are permitted to invade the secrecy of one's home."

8. The Special Leave Petition filed against this judgment was dismissed by the Supreme Court [see CIT v. Dr. Nandlal Tahiliani ].

9. In L.R. Gupta and Ors. v. Union of India and Ors. , it was held by the Delhi High Court that the expression "information" must be something more than a mere rumour or a gossip or a hunch. There must be some material which can be regarded as information which must exist on the file on the basis of which the authorizing officer can have reason to believe that action under Section 132 is called for any of the reasons mentioned in Clauses (a), (b) or (c). When the action of issuance of an authorization under Section 132 is challenged in a Court, it will be open to the petitioner to contend that, on the facts or information disclosed, no reasonable person could have come to the conclusion that action under Section 132 was called for. B.N. Kripal, J. (as His Lordship then was) explained the scope of the expression "information" as under :

"The expression 'information' must be something more than a mere rumour or a gossip or a hunch. There must be some material, which can be regarded as information which must, exist on the file on the basis of which the authorizing officer can have reason to believe that action under Section 132 is called for any of the reasons mentioned in Clauses (a), (b) or (c). When the action of issuance of an authorization under Section 132 is challenged in a Court, it will be open to the petitioner to contend that, on the facts or information disclosed, no reasonable person could have come to the conclusion that action under Section 132 was called for. The opinion which has to be formed is subjective and, therefore, the jurisdiction of the Court to interfere is very limited. A Court will not act as an appellate authority and examine meticulously the information in order to decide for itself as to whether action under Section 132 is called for. But the Court would be acting within its jurisdiction in seeing whether the act of issuance of an authorization under Section 132 is arbitrary or mala fide or whether the satisfaction which is recorded is such which shows lack of application of mind of the appropriate authority. The reason to believe must be tangible in law and if the information or the reason has no nexus with the belief or there is no material or tangible information for the formation of the belief, then, in such a case, action taken under Section 132 would be regarded as bad in law."

10. In Ajit Jain v. Union of India and Ors. (2000) 242 ITR 302 (Del), the Division Bench of Delhi High Court has held as follows :

"Thus, for authorizing action under Section 132, the conditions precedent are : (i) the information in the possession of the named authority; and (ii) in consequence of which he may have reason to believe that the person concerned is in possession of money, bullion, etc., which represents, either wholly or partly, income which has not been or would not be disclosed for the purpose of the Act. If either of these conditions are missing or have not been adhered to, then power under Section 132 cannot be invoked. Thus, the basis of exercise of power under Section 132(1) has to be formation of belief and the belief has to be formed on the basis of receipt of information by the authorizing officer that the person is in possession of money, etc., which represents undisclosed income."

11. In CIT v. Vindhya Metal Corporation (1997) 224 ITR 614, a resident of Mirzapur was detained while travelling to Calcutta by train, and cash of Rs. 4.63 lakhs was seized from him by the police on the suspicion that the money was stolen property or had been obtained through some other offence. The CIT issued a warrant of authorization under Section 132A(1) of the IT Act. A search was conducted under Section 132 of the Act on the premises of the respondent-firm. The respondent firm filed a writ petition questioning the validity of the warrant of authorization issued by the CIT under Section 132A(1) of the Act. The High Court held that on the information in the possession of the CIT, no reasonable person could have entertained a belief that the amount in his possession represented undisclosed income. Upholding the judgment of the High Court, the Supreme Court observed as under :

"Mere unexplained possession of the amount, without anything more, could' hardly be said to constitute information which could be treated as sufficient by a reasonable person, leading to a inference that it was income which would not have been disclosed by the person in possession for purpose of the Acts."

[Emphasis, italicized in print, supplied]

12. It is in the light of the above principles of law we proceed to examine the question whether fax message sent by the Investigation Officer at Mumbai constitutes "information" and could be said to be relevant for formation of the belief that the gold, diamonds, jewellery, etc. found in possession of the petitioner No. 3 had not been or would not be disclosed for the purpose of the Act. We called for the original papers containing reasons recorded and the order passed by the respondent No. 1 authorizing search of the sales manager of the petitioner No. 1 in the aircraft. Mr. Ashokan placed on record copies of the relevant papers and we are constrained to observe that this material can hardly be said to be relevant material for the purpose of invoking powers under Section 132 of the Act. It seems to be admitted position that the sole basis of the order of authorization is confidential fax message sent by the Addl. Director of IT (Inv.), Unit IX, Mumbai, to the Addl. Director of IT (Inv.), Lucknow. This fax message reads as follows :

"Confidential Fax Message

Office of the Addl. Director of IT (Inv.), Unit IX, Mahalaxmi Chambers, Mumbai

dt. 12th Jan., 2001

To

Mr. U.K. Shukla

The Addl. Director of IT (Inv.),

Lucknow.

Sir,

Sub : Intimation regarding passenger Shri Dharmesh Surana carrying jewellery items

Kindly refer to telephonic message given by the undersigned at 4.15 p.m. today regarding the abovementioned passenger Shri Dharmesh Surana is travelling to Lucknow by Sahara Airlines flight No. S27907 whose scheduled departure time from Mumbai is 4.05 p.m. today i.e., 12th Jan., 2001. He has stated that he is carrying jewellery items worth Rs. 69 lakhs. This is for your information and necessary action please.

Yours faithfully

Sd/-

A.A. Shankar 12.1.2001

Addl. Director of IT (Inv.),

Unit IX, Mumbai

Copy for information to :

Shri A.K. Gautam, Addl. Director of IT (Inv.)

(HQ) Aayakar Bhavan, Mumbai with reference to directions of learned DGIT, Inv., Mumbai vide meeting dt. 10th Jan., 2001.

Sd/-

A.A. Shankar

12.1.2001

Addl. Director of IT (Inv.)

Unit IX, Mumbai"

13. We have no hesitation in holding that on the basis of this fax message, without anything more, respondent No. 1 as a reasonable person, could not entertain a belief that the said gold, diamonds and jewellery, etc. in possession of the sales manager of the petitioner No. 1 represented income which had not been or would not be disclosed by the company for the purpose of the Act. The fax sent by the Addl. Director of IT, Mumbai, was general in nature. Mere fact that the petitioner No. 3 was in possession of gold, diamonds and jewellery, etc. would not lead to the inference that it was undisclosed income. There was nothing before the respondents to suggest that in fact the gold, diamonds, and jewellery, etc. represents wholly or in part undisclosed income for the purposes of the Act. The fact that the petitioner No. 3 was in possession of jewellery ornaments, etc. could not be treated as appear to have been done by respondent No. 1 as information relatable to the conclusion that it represented income which would not have been disclosed for the purposes of the Act. There is no doubt, in our mind, that on the information in possession of respondent No. 1, no reasonable man could have entertained a belief that the gold, diamonds and jewellery, etc. in possession of the petitioner No. 3 represented income which would not have been disclosed for the purposes of the Act. Thus, the condition precedent for the exercise of power under Section 132 was lacking in the present case and the authorisation granted by the respondent No. 1 was without jurisdiction.

14. It has also come on record that before the IT authorities at Mumbai as well as Lucknow in answer to the questions about the source of gold, diamonds and jewellery, etc. the petitioner No. 3 stated that this was part of the stock-in-trade of the company and was brought to Lucknow for the purpose of exhibition at "Swarna Sambhandh". It is also seen from the record that the petitioner No. 3 produced relevant documents before the concerned officer in order to show that the goods have been brought to Lucknow with sole intention of displaying the same in the exhibition and requested the authorities not to seize the goods. In the fax message there was not a whisper about the documents produced by the petitioner No. 3. Mere intimation that a person is in possession of certain jewellery or ornaments cannot be construed to be sufficient for the purpose of action under Section 132 of the Act for it would amount to giving untrammelled and unrestricted power on the authorities to search against any person and such power is likely to be abused.

15. In view of the foregoing discussion, the impugned action under Section 132 of the IT Act and further action in consequence thereto including notices under Section 158BC are liable to be quashed and set aside. The seizure of the gold, diamonds and jewellery, etc. on 12th Jan., 2001, was not valid and legal search and as a necessary corollary, the provisions relating to block assessment have no application. The illegal search and seizure and all consequent actions are accordingly quashed and set aside. The respondents are directed to forthwith return the gold, diamonds, jewellery and ornaments seized from the petitioner No. 3 with interest at the rate of 8 per cent per annum on the value of the jewellery and ornaments, i.e., Rs. 84.68 lakhs from the date of seizure till payment. Rule is made absolute accordingly.