DIR. GEN. OF INC.TAX(INV) PUNE vs. M/S. SPACEWOOD FUNISHERS PVT. LTD.

REPORTABLE IN THE SUPREME COURT OF INDIA

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 J U D G M E N T RANJAN GOGOI, J. JUDGMENT 1. Leave granted. 2. The block assessment of the respondent-assessee for the assessment years 2004-05 to 2009-10 was sought to be initiated by notices issued under Section 153A of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’) following a 1 Page 1 search made under the provisions of the Act. The same has been interdicted by the High Court of Delhi by interfering with

th st between 19 June, 2009 to 21 July, 2009. Aggrieved, the Revenue has filed this appeal by special leave under Article 136 of the Constitution. 3. We have heard Shri Guru Krishna Kumar, learned senior counsel for the appellants and Shri Krishnan Venugopal, learned senior counsel appearing for the respondents. 4. The issues that arise in the present appeal lie within a short circumference. As the warrant of authorization under Section 132, which is required to be founded on a reasonable JUDGMENT belief of the authorized official regarding the existence of the conditions precedent to the exercise of the power to issue the same, has been interdicted under Article 226 of the Constitution, the ambit of the power of the High Court to do so may be noticed at the outset. 2 Page 2 5. The “classical” notion of the extent of power that the High Court would have in the exercise of its writ jurisdiction to

JUDGMENT 1 1969 (74) ITR 836 (SC) 2 (1974) 93 ITR 505 (SC) 3 Page 3

JUDGMENT 4 Page 4

The Act and the Rules do not require that the warrant of authorisation should specify the particulars of documents and books of accounts a general authorisation to search for and seize documents and books of account relevant to or useful for any proceeding complies with the requirements of the Act and the Rules. It is for the officer making the search to exercise his judgment and seize or not to seize any documents or books of account. An error committed by the Officer in seizing documents which may ultimately be found not to be useful for or relevant to the proceeding under the Act will not by itself vitiate the search, nor will it entitle the aggrieved person to an omnibus order releasing all documents seized.” JUDGMENT 7. In Pooran Mal vs. Director of Inspection (supra) the constitutional validity of Section 132 was under challenge. While negating the said challenge, this Court at page 515 of its report had held that: “Dealing first with the challenge under Article 19(1)( f ) and ( g ) of the Constitution it is to be 5 Page 5

portion of the unaccounted money should normally fill the Government coffers. Instead of doing so it distorts the economy. Therefore, in the interest of the community it is only right that the fiscal authorities should have sufficient powers to prevent tax evasion.” JUDGMENT 8. What is significant and, therefore, must be noticed is that in both the aforesaid two decisions while this Court has emphasized the necessity of recording of reasons in support of the ‘reasonable belief’ contemplated by Section 132, nowhere, in either of the decisions any view had been expressed that the 6 Page 6 reasons recorded prior to authorizing the search needs to be disclosed or communicated to the person against whom the

the Foreign Exchange Regulation Act. “The material on which the officer has reasons to believe that any documents will be useful for or relevant to any investigation need not be disclosed in the search warrant; such material may be secret, may have been obtained through intelligence, or even conveyed orally by informants. In the said case, the petitioner contended that, if the court is going to look into the file produced on behalf of the officer who authorized the search, it must be disclosed to the petitioner so that the petitioner “can controvert any false or wholly unreasonable material set out in the file”, but the Supreme Court did not accept this submission. The Supreme Court also referred to an earlier decision in S. Narayanappa v. CIT [1967] 63 ITR 219 (SC), to hold that whether grounds for ordering search were sufficient or not is not a matter for the court to investigate. However, the court may examine the question whether the reasons for the belief have a rational connection or a relevant bearing to the formation of the JUDGMENT 3 (1985 (155) ITR 166 (SC) 7 Page 7 belief and are not extraneous or irrelevant for the purpose of the section.”

decisions of this Court which continue to hold the field without any departure may be summarized as follows : (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 JUDGMENT 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 8 Page 8 either wholly or partly income or property which

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 st been repealed on and from 1 October, 1975 the reasons for the belief found should be recorded. (v) The reasons, however, need not be communicated to the JUDGMENT 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 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 9 Page 9 formation of the belief though not the sufficiency or adequacy thereof.

at hand. By Notification No.354 of 2001 dated 3.12.2001 in exercise of the powers conferred by Section 120(1) & (2) of the Act, the Central Board of Direct Taxes had directed the Directors of Income Tax (Investigation) specified in Column (2) of the Schedule to the said Notification to exercise the power vested in them under Section 132 of the Act in relation to the territorial areas specified in Column (3) of the Schedule. By virtue of the said notification the Director of Income Tax JUDGMENT (Investigation), Nagpur i.e. Appellant No.2 was authorized to exercise the power under Section 132 of the Act in respect of the territorial areas falling within the jurisdiction of the CCIT Nagpur and CCIT Nasik in the State of Maharashtra. 11 . Notice must also be had of certain provisions contained in the Search and Seizure Manual published by the Directorate 10 Page 10 of Income Tax with regard to the preparation of satisfaction note and issuing of warrant of authorization under Section 132 of

12. It will also be required to be noticed that by Notification dated 7.3.2001 administrative approval of the Director General JUDGMENT of Income Tax (investigation) was made mandatory before an authorization for search is issued. The said requirement appears to have been brought in order to obviate a malafide search and to avoid undue harassment of the taxpayers. 13. In the present case the satisfaction note(s) leading to the issuing of the warrant of authorization against the 11 Page 11 respondent-assessee were placed before the High Court. As it would appear from the impugned order the contents thereof

of the file containing the satisfaction note(s) indicate that on 8.6.2009 the Assistant Director of Income Tax (Investigation), Nagpur had prepared an elaborate note containing several reasons as to why he had considered it reasonable to believe that if summons or notice were issued to the respondent to produce the necessary books of account and documents, the same would not be produced. The Assistant Director also recorded detailed reasons why he entertains reasons to believe that the promoters of the respondent-assessee company would JUDGMENT be found to be in possession of money, bullion, jewellery etc. which represents partly or wholly income which has not been disclosed for the purposes of the Act 14. The said note was put up for consideration before the Additional Director (Investigation) who on perusal of the same once again proceeded to record elaborate reasons for his belief 12 Page 12 that the conditions precedent for issuing warrant of authorization under Section 132 does exist in the present case.

authorization for search of the residential as well as business premises of the assessee and its Directors, if the Director of Income Tax (Investigation), Nagpur is so satisfied. The aforesaid note of the Additional Director (Investigation) is dated 8.6.2009. 15. The notes of the two officers i.e. Assistant Director (Investigation) and Additional Director (Investigation) were perused and considered by the Director (Investigation). The matter was also discussed. Thereafter the Director (Investigation) recorded the relevant facts of the case and came JUDGMENT to the following conclusion: “On an overall appreciation of the facts of the case I am satisfied that M/s. Spacewood Furnishers P Ltd is suppressing its income substantially. I am also satisfied that the company is not likely to produce the details of such unaccounted income and the books of accounts and documents containing details of such unaccounted incomes and assets if notices were to be issued to it u/131 or u/s.142(1) of the 13 Page 13

JUDGMENT The Director of Income Tax (Investigation), Nagpur thereafter put his signature dated 9.6.2009 on the said note. 16. There is an endorsement to the following effect at the bottom of the said note again under the signature of the Director (Investigation) – 14 Page 14 “DGIT (Inv) Pune may kindly peruse the above satisfaction note and grant administrative approval for the search and seizure action.”

following view : “I have gone through the notes of ADIT (Inv), Nagpur and Addl.DIT (Inv.), Nagpur. The satisfaction note of DIT (Inv.) Nagpur has also been perused. I find that DIT (Inv.) Nagpur has got adequate information to arrive at his satisfaction that search and seizure action is required to be undertaken in the case of M/s. Spacewood Furnishers P. Ltd. promoted by Shri Kirit Joshi and Vivek Deshpande. Accordingly, the proposal of the DIT (Inv.) Nagpur to take action u/s 132(1) of the Act is approved.” 18. The High Court by the impugned order dated 9.12.2011 JUDGMENT has taken the view that in the present case there are four satisfaction notes of four different authorities. One of the said authority i.e. Assistant Director is not the competent authority under Section 132 of the Act. The Additional Director and the Director who are competent authorities to issue the warrant of authorization, though had recorded their satisfaction, have not 15 Page 15 taken the final decision to issue the authorization and each such authority had passed on the file to his immediate

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, the High Court 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. 19. The High Court further held that each of the satisfaction JUDGMENT notes was in loose sheets of paper and not a part of a single file maintained in proper sequence and order with due pagination. Therefore, according to the High Court, it is possible that the file containing the satisfaction note(s) was manipulated and thus is of doubtful credibility. 16 Page 16 20. The High Court also held that the materials indicated by the department in the counter affidavit and the additional

satisfaction notes alone are to be gone by, the essential details with regard to source of information; the persons who were interrogated and with whom discreet enquiries were made are not disclosed. The necessary information revealed by such interrogation and discreet enquiries with regard to over invoicing, market information etc. are not indicated. Materials like high growth, high profit margins, doubts about international brand and details thereof etc. as mentioned in the satisfaction note(s) are admitted and known facts and JUDGMENT therefore could not have induced the requisite belief. The above constitutes the broad basis on which the High Court thought it proper to cause inference with the measures undertaken by the Revenue against the assessee. 21. Before we advert to the specific reasoning of the High Court, one specific aspect of the opinion expressed by the High 17 Page 17 Court needs to be taken note of inasmuch as the precise position in law in this regard needs to be clarified. The above

“We, however, express that when the satisfaction recorded is justiciable, the documents pertaining to such satisfaction may not be immune and if appropriate prayer is made, the inspection of such documents may be required to be allowed.” 22. 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 st Rule 112 (2) with effect from 1 October, 1975, has been JUDGMENT 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, 18 Page 18 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. 23. 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. JUDGMENT 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 19 Page 19 assessee thereby frustrating the endeavor of the revenue, even if the High Court is eventually not to intervene in favour of the assessee.

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 JUDGMENT 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) 20 Page 20 th inasmuch as it is by the Finance Act, 2009 effective from 19 August, 2009 that the Additional Director came to be included

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 JUDGMENT 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. 21 Page 21 25. The possibility of manipulation of the records as found by the High Court also does not commend to us for acceptance.

order and this is where the High Court seems to have erred. 26. The remaining findings of the High Court with regard to the satisfaction recorded by the authorities appear to be in the nature of an appellate exercise touching upon the sufficiency and adequacy of the reasons and the authenticity and acceptability of the information on which satisfaction had been reached by the authorities. Such an exercise is alien to the jurisdiction under Article 226 of the Constitution. JUDGMENT 27 . In view of the foregoing discussions and for the reasons alluded to, the order of the High Court dated 9.12.2011passed in W.P. No. 2150 of 2010 is set aside. The proceedings against the respondent-assessee will now commence from the stage at which the same was interdicted by the High Court by its 22 Page 22 impugned order. Consequently, the appeal filed by the Revenue is allowed. ……………………………J. [Ranjan Gogoi] …………………..…………J. [Pinaki Chandra Ghose] New Delhi; May 13, 2015. JUDGMENT 23 Page 23