Circumstances under which Income-tax Search can be initiated

Table of Contents

1. Conditions precedent for initiating search
2. Text of section
3. Legislative History – Significant Amendments
4. Objective
5. Broad Framework
6. Clause (a) of sub-section (1) of section 132
7. Clause (b) of section 132(1)

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1. Conditions precedent for initiating search

The power of search given to Income Tax authorities under the Income-tax Act, 1961 are well guarded powers and the necessary safeguards are put in place so that this power cannot be used by the authorities arbitrarily. Section 132(1) of the Income-tax Act, 1961 prescribes certain basic requirements to be fulfilled before initiating search action. Search warrant can be issued when any of the conditions prescribed under clause (a), (b) or (c) of section 132(1) is existing.

2. Text of Section

Section 132(1) of the Act reads as under:
“132. (1) Where the Director General or Director or the Chief Commissioner or Commissioner or Additional Director or Additional Commissioner or Joint Director or Joint Commissioner in consequence of information in his possession, has reason to believe that—

(a) any person to whom a summons under sub-section (1) of section 37 of the Indian Income-tax Act, 1922 (11 of 1922), or under sub-section (1) of section 131 of this Act, or a notice under sub-section (4) of section 22 of the Indian Income-tax Act, 1922, or under sub-section (1) of section 142 of this Act was issued to produce, or cause to 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 Indian Income-tax Act, 1922 (11 of 1922), or under this 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 Indian Income-tax 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 Commissioner or Commissioner, as the case may be, may authorize any Additional Director or Additional Commissioner or Joint Director, Joint Commissioner, Assistant Director or Deputy Director, Assistant Commissioner or Deputy Commissioner or Income-tax Officer, or

(B) such Additional Director or Additional Commissioner or Joint Director, or Joint Commissioner, as the case may be, may authorize any Assistant Director or Deputy Director, Assistant Commissioner or Deputy Commissioner or Income-tax Officer,

(the officer so authorized in all cases being hereinafter referred to as the authorized officer) to…..”

3. Legislative History – Significant Amendments

Section 132(1) was introduced under the Income-tax Act, 1961 which was first substituted by the Finance Act, 1964 and again substituted by the Finance Act, 1965. By the Taxation Laws (Amendment) Act, 1975 with effect from 1.10.1975, under clause (c) of section 132(1), the words ‘would not be disclosed’ were added along with the words ‘which has not been disclosed’. The objective of amendment was to cover those assets which the authorizing officer believes, would not be disclosed by the person to the Income Tax department as the same have been acquired out of unaccounted income.

Finance Act, 2017 has incorporated an Explanation in sub-section (1) of section 132 clarifying that the reason to believe, as recorded by the competent authority shall not be disclosed to any person or any authority or the appellate tribunal. This Explanation has been inserted retrospectively with effect from 1.4.1962.

4. Objective

The provision of search is very harsh and is often termed as draconian. Therefore, the legislature has provided safeguards so that the same is not used by the authorities in a mechanical and arbitrary manner. The legislature has provided specific circumstances under which search action can be initiated. It has been provided that search action can be undertaken only when authorizing officer forms “reason to believe” in consequence of relevant and cogent information in his possession that the person is having in his possession evidences relating to undisclosed income or undisclosed assets or about the non-compliance of summon or the notice u/s 142(1).

Search action is generally initiated when authorizing officer is satisfied that incriminating evidences relating to undisclosed income or undisclosed assets are likely to be seized. In case no seizure is expected, there is generally no need of search and the affairs of a person can be investigated by way of open enquiry or by other methods.

The other objective of initiating search, sometimes, may be to get hold the books of account or documents which have a bearing on the tax liability of a person which such person seeks to withhold by way of repeated non-compliance of notices or summons issued by the authorities. But even under such circumstances, search action is undertaken with the objective to seize those books of account or other documents which are being repeatedly asked by the authorities to be produced but not being produced by the assessee.

Other objective which is achieved is the automatic spread of deterrence message to all those who seek to withhold the legitimate taxes due on their income so that they may desist and refrain from indulging in tax evasion.

5. Broad Framework

For the sake of simplification, the provisions of section 132(1) may be read as under:

132. (1) Where the competent authority in consequence of information in his possession, has reason to believe that

(a) any person to whom a summons was issued to produce, any books of account or other document has failed to produce, such books of account or other document,

(b) any person to whom a summons has been or might be issued will not produce, any books of account or other document which will be useful for, or relevant to, any proceedings under the Act,

(c) any person is in possession of any asset and such asset represents undisclosed income or property.

then,

the competent authority may authorize any authorized officer to…………….. undertake search action.

Competent Authority refers to Principal Director General or Director General or Principal Director or Director or the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner or any such Additional Director or Additional Commissioner or any such Joint Director or Joint Commissioner as may be empowered in this behalf by the Board or

Asset refers to money, bullion, jewellery or any other valuable article or thing.

Authorized Officer refers to Additional Director or Additional Commissioner, Joint Director or Joint Commissioner, Assistant Director or Deputy Director, Assistant Commissioner or Deputy Commissioner or Income Tax Officer as the case may be.

Summons refers to summons under sub-section (1) of section 37 of the Indian Income-tax Act, 1922 or under sub-section (1) of section 131 of this Act, or a notice under sub-section (4) of section 22 of the Indian Income-tax Act, 1922 or under sub-section (1) of section 142 of this Act.

From the above provision, the following points emerge:

• • Search can be authorized by the competent authority only
  • Before authorizing search, the competent authority has to form “reason to believe”.
  • “Reason to believe” is to be formed in consequence of information in his possession.
  • The competent authority can authorize to any authorized officer to undertake search action.
  • “Reason to believe” is to be formed when any one or more of the following three conditions exist:

(a) non-compliance of summons u/s 131(1) or notice u/s 142(1) issued to produce books of account or other documents,

(b) belief of likely non-compliance of summons u/s 131(1) or notice u/s 142(1), if issued, for production of books of account or other documents,

(c) possessing assets representing undisclosed income or property.

(i) Compliance of statutory conditions as contemplated under section 132 are mandatory

Hon’ble Supreme Court in the case of ITO v. Seth Bros. [1969] 74 ITR 836 laid emphasis on the need for strict compliance of the statutory conditions for exercising powers u/s 132 in the following words:

“Since by the exercise of the power under section 132 of the Income-tax Act, 1961 a serious invasion is made upon the rights, privacy and freedom of the taxpayer, the power must be exercised strictly in accordance with the law and only for the purposes for which the law authorizes it to be exercised. 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 the exercise of the power are not satisfied, the proceeding is liable to quashed.”

Hon’ble Allahabad High Court in the case of Ganga Prasad Maheshwari v. CIT [1981] 6 Taxman 363 held that compliance of statutory conditions as contemplated u/s 132 are mandatory in nature and must be unscrupulously adhered to before warrant for search is issued to authorizing officer.

(ii) Provisions of section 132(1) should be strictly construed

A search conducted under section 132 of the Income-tax Act, 1961, is a serious invasion into the privacy of a citizen. Section 132(1) has to be strictly construed and the formation of the “reason to believe” by the authorizing officer must be apparent from the note recorded by him. The belief so recorded must clearly show whether the belief falls under clause (a), (b) or (c) of section 132(1). No search can be ordered except for any one of the reasons contained in clause (a), (b) or (c) of section 132(1). The satisfaction note should itself show the application of mind and the formation of belief by the officer ordering the search. If the reasons recorded do not fall under clause (a), (b) or (c), the authorization under section 132(1) is liable to be quashed.
[L.R. Gupta v. Union of India [1991] 59 Taxman 305 (Delhi)]

It has been held in the case of Khem Chand Mukim v. Principal Director of IT (Inv.) 186 DTR (Del) 145 that reasons were, firstly, not recorded before undertaking the search and was therefore, completely unauthorized and a high-handed action on the part of the respondents. Also, Respondents do not state that Jewellery was concealed, or was kept by the assessee surreptitiously. Jewellery found in the assessee’s possession was his stock-in-trade and consequently, he was entitled to the protection provided in the proviso appearing after sub-cl. (iii) to sub-s. (1) of s. 132 & thus search and seizure and ex post facto warrant of authorization dt. 11th Sept., 2018 issued by respondent No. 2 under s. 132 was quashed with costs of Rs. 50,000 payable by Revenue.

6. Clause (a) of sub-section (1) of section 132

Under clause (a), it is necessary that assessee has failed as a matter of fact, to comply with the specified notice issued to him. Issue of a valid notice to the assessee to produce books of account or other documents and assessee’s failure to comply with the same, are the pre-requisites under this clause. Thus, historical fact of non-compliance of a valid specified notice may be the ground for issuing warrant of search.

The assessee must have committed the omission or failure to comply with the terms of notices under section 131(1) or 142(1). It is not necessary that the non-compliance of notices should have been committed before the same officer, who is authorizing the search. Non-compliance of the summon u/s 131(1) may be before the Assessing Officer, but search may be authorized on this ground, for example, by Director of Income Tax (Investigation). It is interesting to note that summons referred in this clause are the summons issued u/s 131(1) and not u/s 131(1A) of the Act.

However, we are of the opinion that non-compliance of the summon issued under section 131(1A) would also be covered within the ambit of clause (a) of section 132(1) and search operation on this basis can be initiated.

At this stage useful reference may be made to the decision of Delhi Bench of Income Tax Appellate Tribunal in the case of Young Indian v. ADIT ITA No. 5303/Del/2016, dated 30.8.2018 in which Tribunal held that the provisions of section 131(1A) has to be read along with the provisions of section 131(1) of the Income-tax Act.

In the case of Jorawar Singh Baid v. Asstt. CIT [1992] 198 ITR 47 (Cal.), it was held that it is the duty of the authorizing officer before issuing the warrant of search, to verify that the said notice or summons were duly served, sufficient time was allowed to comply with them, and the failure was deliberate, repeated and without any circumstance to justify it.

In L.R. Gupta v. Union of India [1991] 59 Taxman 305, the Delhi High Court observed that clause (a) refers to the facts which must exist before a belief is formed for taking action under section 132. In other words, clause (a) refers to a situation where the failure to comply with the notice(s) under section 142(1) or summons under section 131(1) has already taken place.
Clauses (a) to (d) of sub-section (1) of section 131 refer to the following matters:—

a. Discovery and inspection;

b. Enforcing attendance of any person, including any officer of a banking company and examining him on oath;

c. Compelling production of books of account and other documents;

d. Issuing commissions.

It is interesting to note that it is only the failure to comply with the requirement of above clause (c) viz. production of books of account & other documents, which is covered under clause (a) of Section 132(1). Failure to comply with summon issued merely for personal presence cannot constitute a pre-condition for authorizing a search.

Similarly, clauses (i) to (iii) of sub-section (1) of section 142 refer to the following matters:

i. Asking the assessee to file a return in the prescribed form and manner,

ii. Asking for production of books of account and documents which the Assessing Officer may require,

iii. Asking the assessee to furnish information or total wealth statements.

But it is only the failure to comply with the requirement of above clause (ii) viz. production of books of account & documents, which is covered under clause (a) of section 132(1) and not those covered under clauses (i) and (iii) above.

(i) Non-compliance of invalid summons or notice.

Non-compliance of an invalid summons or notice cannot constitute a pre-condition in terms of clause (a) of section 132(1). It is incumbent upon the authorizing officer to satisfy himself inter alia about the legal validity, relevance and utility of summons under section 131(1) as well as the notice under section 142(1) before treating the failure as a pre-condition for action under section 132(1).

(ii) No search action for non-filing of return of income

Failure to file a return or to furnish information as per notice under section 142(1) cannot be made a basis for issue of warrant of authorization. In the case of L.R. Gupta v. Union of India [1991] 59 Taxman 305, Delhi High Court held that action under section 132 could not be taken for non-filing of return in respect of income which is not liable to tax. This finding is based on the assessee’s contention that the compensation and interest thereon received on compulsory acquisition of land by the Government were not liable to tax, in view of Supreme Court’s decision in CIT v. Hindustan Housing & Land Development Trust Ltd. [1986] 27 Taxman 450A, and that the appeals had been filed against the quantum of enhanced compensation by the Union of India, which were pending before the High Court and that appeals had also been filed by the Gaon Sabha and the owners, challenging the right of the petitioners to get any compensation and that till such time as all these appeals were finally concluded in favour of the petitioners, it could not be held that the petitioners had become the owner of the money or that they had earned any capital gain or income by way of interest or otherwise, and that as receipt of the amount was not taxable, the same was not included in the Income-tax return, nor was shown in the wealth-tax return.

7. Clause (b) of section 132(1)

Clause (b) of section 132(1) is of wider connotation and covers a situation where it is apprehended by the competent authority that in case summons u/s 131(1) or notice u/s 142(1) is issued to produce any books of account or other documents, assessee will not produce the same.

This may be appreciated with the help of an example – A disgruntled employee who has fallen with his employer, walks to the Dy. Director of Income Tax (Investigation) with the duplicate set of books of account where undisclosed transactions of the employer are recorded and based on his deposition and in view of such books of account, belief can be formed by the competent authority that if summon is issued for the production of such books of account, these would not be produced because such books of account are not meant for production before the tax authorities.

It covers two situations – when notice or summons have been issued but the date of compliance may not have expired and the other is where the notice or summons have not been issued at all. In both the situations, there has to be valid basis to apprehend as to the non-compliance.

Failure to file returns of income or net wealth in response to notice under section 142(1) is not a good ground to conclude that information or document will be withheld. [L.R. Gupta v. Union of India [1991] 59 Taxman 305 (Delhi)]

In case, there is information in possession of the authorities that assessee is maintaining duplicate set of books of account containing details of transactions of undisclosed income, it can very reasonably be apprehended that in case notice is issued to the assessee to produce such books of account, assessee will not produce the same. However, with respect to regular books of account, bank statements, or registered sale deeds in respect of properties recorded in the books, it cannot be presumed ordinarily that the assessee will not produce the same in case notice is issued. Books of account or other documents referred to in this clause, are those which will be useful, or relevant to any proceeding under the Income-tax Act. Any books of account or documents containing details of financial transactions or supporting documents relating to financial transactions may be useful for or relevant to any proceeding under the Income-tax Act. It is not only the books of account or documents relating to undisclosed business transactions which are intended to be referred in this clause but this clause also refers to various records, files and details of regular business transactions which may be apprehended as not to be produced by the assessee, in case called for by the authorities.

Before making this presumption that assessee will not produce books of account or other documents, there has to be sufficient information or material in possession of the authorities on the basis of which, such “reason to believe” can be formed.

It was held that for invoking the provisions of section 132(1)(b), it is not a precondition that notice or summons should first be issued to judge, whether it would be complied with or not. [V.K. Jain v. Union of India [1975] 98 ITR 469 (Delhi) and Lit Light & Co. v. CIT [1982] 136 ITR 513 (All.)].

(i) Assumption of non-compliance of notice/summon to be based on material

Section 132(1)(b) refers to cases where there is reason to believe that if any summons or notice has been issued or will be issued, then that person will not produce or cause to be produced the books of account, etc. The competent authority must have some concrete fact, material or circumstances on the basis of which such a belief can reasonably be formed. Such belief must be based on some cogent material or basis.
It has been held that when there is information that a person is hiding or is likely to hide or destroy documents or books of account which are required or are relevant for the purposes of the Act, then, in such a case, it can be said that unless and until a search is conducted, the said books of account or documents will not be recovered. [Pooran Mal v. Director of Inspection [1974] 93 ITR 505 (SC)]

(ii) Futility of notices, even if issued

In a case, where the Commissioner had sufficient information to show both by way of information of the informant and the report of the Additional Director of Inspection that the alleged absence of books or loss of books is not believable and that the books said to have been lost and several statements and documents written in the course of the business are still available which may be of considerable help in determining the correct income, it was held that the Commissioner formed the reasonable belief that the assessee, even if called upon to produce such books and papers, which might still be in his possession would omit or fail to produce the same. [C. Venkata Reddy v. ITO [1967] 66 ITR 212 (Mys.)]

(iii) Formal notice is not necessary but basis to be proved.

Under clause (a) of sub-section (1) of section 132, an action can be taken if a person fails to comply with a summons served under section 131(1) or a notice under section 142(1) to produce or cause to be produced specified books of account or other document. Under clause (b), however a formal notice is not essential. The authorizing authority must have reason to believe that the person is not likely to produce his books, etc. In the second situation the authority, if challenged, has to prove the basis of his belief. In the case of Lit Light & Co. v. CIT [1982] 136 ITR 513, Allahabad High Court has held that it is not necessary, before effecting the search and seizure under section 132 of the Act that the officials of the Income Tax Department should have given to the person whose account books and documents are sought to be seized, a notice to produce whatever account books or other documents are needed and that the person should have failed to comply with such a notice. As laid down in clause (b) of sub-section (1) of section 132, if the CIT is satisfied that the persons would not produce or cause to be produced any books of account which will be useful for, or relevant to, any proceeding under the Act, he is empowered to direct search and seizure without giving to the persons concerned a notice to produce the account books or other documents needed.

Similar views have been expressed by the Delhi High Court in the case of V. K. Jain v. Union of India [1975] 98 ITR 469.

(iv) Authorization of search on the basis of non-compliance of summons issued under section 131(1A)

The power of issuing summon to the assessee for the purpose of production of evidences or making an enquiry or investigation under the Act has been given under section 131 of the Act. Sub-section (1) of section 131 empowers the Assessing Officer, Joint Commissioner, Chief Commissioner or Commissioner, inter alia, to issue summons for enforcing the attendance of any person or for compelling the production of books of account and other documents. This power can be exercised while trying a suit i.e. during the pendency of any proceedings under the Act before the authority(ies).

Sub-section (1A) of section 131 empowers the Director General or Director or Joint Director or Deputy Director or Assistant Director of Income Tax to issue summon for the purpose of making any enquiry or investigation under the Income-tax Act and to enforce the attendance of any person or for compelling the production of any books of account or other documents. This power can be exercised by these authorities on the basis of reason to suspect that any income had been concealed or is likely to be concealed by any person and there is no requirement of pendency of proceedings unlike sub-section (1), with respect to such person before him or any other Income Tax Authority for issuing summons under this sub-section.

Clause (a) or clause (b) of section 132(1) refers, inter alia, to summons issued under section 131(1) and not to summons issued under section 131(1A). It gives rise to a very pertinent question whether a search can be authorized on the basis of non-compliance of summons issued under section 131(1A). If we follow the rule of literal interpretation of statute, which should, in fact, be followed in interpreting the drastic power of search, it can be argued that non-compliance of summons issued or to be issued under section 131(1A) cannot result in search action and no search can be authorized merely on the basis of same. There seems to be rationale too, for this proposition and it cannot be said to be simply an omission on the part of legislature. Summons under section 131(1A) may be issued on the basis of reason to suspect that any income has been concealed or is likely to be concealed. It is not required to be issued during pendency of any proceedings but it can be issued for making any enquiry or investigation on the basis of suspicion. Thus any failure to comply with the summons under section 131(1A) issued merely on the basis of suspicion is not intended by the legislature to be the basis for undertaking drastic action of search and seizure. On the other hand, summon under section 131(1) can be issued only during the pendency of any proceeding and therefore non-compliance of such summons has been envisaged to be the basis for authorization of search.

Conversely, it may be argued that this is only an omission from making reference of summon issued under section 131(1A) in clause (a) or clause (b) of section 132(1). There cannot be the legislative intent to exclude the non-compliance of summon issued under section 131(1A) for the purpose of authorization of search. It can further be argued that operation of clause (a) or clause (b) of section 132(1) cannot be restricted to cover the situation of non-compliance of summons or notice only when some proceedings under the Act are pending against a particular person. There may be situation when a person may possess books of account or documents of incriminating nature which are not likely to be produced by him to the Income Tax Department in case called for and even if no proceeding under the Act are pending against such person, search action is intended to be authorized against such person for seizure of such books of account or documents as per object of section 132(1). In case we take the earlier interpretation, it would be a very narrow interpretation and will defeat the very purpose of section 132(1). Therefore there is need to make purposive interpretation under such circumstances. However, since a controversy exists on this issue, it needs to be clarified by the legislature.

In the case of Balwant Singh v. R.D. Shah, Director of Inspection [1969] 71 ITR 550, Delhi High Court has opined that if there was only a remote possibility of summons or notices being issued, the action would not be justified, not because there was no proceedings imminent, but because a reasonable person could not have in those circumstances reason to believe that the person concerned will not produce the books of account and documents if summons or notices were issued to him.

(v) Consequential search based upon close relationship – Whether covered under section 132(1)(b)

A report was prepared by ADI (Inv.) stating that he had received information when a search against a company had been started at Jamshedpur. Search was also started against a few of its agents in Calcutta. The report further stated that the petitioner was a person connected with the company and appeared to be in possession of some incriminating documents and assets pertaining to the company. Close relationship between the petitioner No.1 and the persons in control of the said company would certainly lead one to believe that in the ordinary course petitioner No.1 would not comply with the notice under the Income-tax Act and produce material in his possession which would be adverse to the company and the said relatives. Hence, the search was held as properly authorized. [Lajpat Rai v. CIT [1995] 215 ITR 608 (All.)]