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Income Tax Act Section 132(1) of the Act enables the competent authority to direct for issue of search and seizure on reasonable formation of opinion= CIVIL APPEAL NO. 7499 OF 2004 Union of India & Ors. … Appellants Versus M/s. Agarwal Iron Industries … Respondent



Union of India & Ors. … Appellants


M/s. Agarwal Iron Industries … Respondent

Dipak Misra, J.
In these appeals the assail is to the legal tenability of the order
dated 3.9.2003 passed by the Division Bench of the High Court of Judicature
at Allahabad in Civil Writ Petition No. 275 of 2000 whereby the High Court
has quashed the search and seizure conducted on 16.2.2000 in the factory
premises of the 1st respondent.
2. Filtering the unnecessary details, the facts that constitute the
filament of the controversy is that the 1st respondent is engaged
in the manufacture of C.I. pipes, fittings and manholes and has
obtained the licence under the Central Excise Act. The factory in
question has been filing income-tax returns under the Income Tax
Act, 1961 (for brevity ‘the Act’). On 16.2.2000 when the sole
proprietor of the factory Shri Om Prakash Agarwal was absent, the
officer of the Income Tax Department conducted a search both at the
residential as well as the business premises. During the search of
the residential premises, son of the sole proprietor was informed
by the Income Tax Officer that the search operations were also
being conducted at the factory premises. Despite such information
he was not allowed to leave the house. Assailing the search and
the seizure, the 1st respondent preferred a writ petition before
the High Court and contended therein that there was no information
in possession of the officer which could have persuaded any
reasonable person to form an opinion about the existence of
undisclosed assets of the writ-petitioner. It is further urged
that the warrant of authorization was issued mechanically,
arbitrarily and there was total non-application of mind and
moreover there was no formation of opinion about the existence of
undisclosed assets as contemplated under Section 132(1) of the Act.
On this foundation, the search and seizure were sought to be
3. A counter affidavit was filed by the revenue asseverating that
there was no illegality in the initiation of the seizure and it had
been conducted in accordance with law and the revenue had enough
material against the 1st respondent herein for the assessee had
suppressed the vital information pertaining to production and sale
and the same was also evidenced during the search operation. It
was contended that the productions declared by the 1st respondent
in the official record was not even 1/5th of the actual production
revealed by the seized documents.
4. It is interesting to note that the High Court by its order dated
29.3.2000 appointed an Advocate Commissioner to prepare an
inventory of the goods in question in respect of which the
restraint order was passed. The said Advocate Commissioner had
submitted a report which was taken on record. The High Court
placed reliance on decisions in Commissioner of Income-Tax v.
Vindhya Metal Corporation[1], Dr. N.L. Tahiliani v. Commissioner of
Income Tax[2], L.R. Gupta v. Union of India v. Union of India[3]
and Ajit Jain v. Union of India[4] and extensively quoting from Dr.
Tahiliani’s case came to hold as follows:-
“At this stage it is relevant to refer to Para 40 of the writ
petition, which is quoted below:
“40. That in the facts and circumstances the Petitioner
bonafidely believes that there was no information in possession
of the officer issuing the warrant of authorization for search
which could lead any reasonable person to form an opinion about
existence of undisclosed assets with the Petitioner. The warrant
of authorization, even if assumed that there was any, was issued
mechanically arbitrarily and without application of mind and
without forming the opinion about existence of undisclosed
assets, as contemplated by Sub-Section (1) of Section 132.”
The reply of the said paragraph has been given by the Respondents in
Para 33 of the counter affidavit, which reads as under:
“33. That in reply to Paragraph 40 of the writ petition, it is
denied that the warrant of authorization was issued mechanically,
arbitrarily and without application of mind.”
From the aforesaid reply it is clear that there is no specific denial
of the averments made in Para 40 of the writ petition. Order 8 Rule 5
of the Code of Civil Procedure provides that every allegation of fact
in the plaint if not denied specifically or by necessary implication
or stated to be not admitted in the pleading of the defendant shall be
taken to be admitted except against the person under disability. In
view of this provision in absence of a specific denial in the counter
affidavit to the assertions made in the writ petition, it can safely
be concluded that there is no denial of the facts stated in the writ
petition. We are aware that the explanation to Section 141 of the
Code of Civil Procedure provides that the provisions of Code of Civil
Procedure shall not be applicable to the writ petition. However, the
principles as stated in the Code of Civil Procedure are also
applicable to the writ proceedings.”
5. We have no hesitation in opining that the reasons ascribed in the
aforesaid paragraphs, leaves us absolutely unimpressed. We really
cannot comprehend how an Advocate Commissioner was appointed to
take inventory of the goods in respect of which the restraint order
was passed by the revenue under the Act. That apart, it is
difficult to appreciate how the denial in the counter affidavit
filed by the revenue could be treated as an admission by
implication to come to a conclusion that no reason was ascribed for
search and seizure and, therefore, action taken under Section 132
of the Act was illegal. The relevant confidential file, if
required and necessary could have been called for and examined.
Revenue in the counter affidavit was not required to elucidate and
reproduce the information and details that formed the foundation.
6. In this context, we may profitably refer to the decision in Pooran
Mal V. The Director of Inspection (Investigation), New Delhi and
others[5], wherein the Constitution Bench, while upholding the
constitutional validity of Section 132 of the Act opined thus:
“Search and seizure are not a new weapon in the armoury of those whose
duty it is to maintain social security in its broadest sense. The
process is widely recognized in all civilized countries. Our own
Criminal Law accepted its necessity and usefulness in Sections 96 to
103 and Section 165 of the Criminal Procedure Code. In M.P. Sharma v.
Satish Chandra[6] the challenge to the power of issuing a search
warrant under Section 96(1) as violative of Article 19(1)(f) was
repelled on the ground that a power of search and seizure is in any
system of jurisprudence an overriding power of the State for the
protection of social security and that power is necessarily regulated
by law. As pointed out in that case a search by itself is not a
restriction on the right to hold and enjoy property though a seizure
is a restriction on the right of possession and enjoyment of the
property seized. That, however, is only temporary and for the limited
purpose of investigation”.

Thereafter, proceeding with the ratiocination, the Court ruled that
the provision has inbuilt spheres. Proceeding to enumerate the spheres and
other consequent facets, the Court ruled:

“In the first place, it must be noted that the power to order search
and seizure is vested in the highest officers of the department.
Secondly, the exercise of this power can only follow a reasonable
belief entertained by such officer that any of the three conditions
mentioned in Section 132(1)(a),(b) and (c) exists. In this connection
it may be further pointed out that under sub-rule (2) of Rule 112, the
Director of Inspection or the Commissioner, as the case may be, has to
record his reasons before the authorisation is issued to the officers
mentioned in sub-section (1). Thirdly, the authorisation for the
search cannot be in favour of any officer below the rank of an Income
Tax Officer. Fourthly, the authorisation is for specific purposes
enumerated in (i) to (v) in sub-section (1) all of which are strictly
limited to the object of the search. Fifthly when money, bullion, etc.
is seized the Income Tax Officer is to make a summary enquiry with a
view to determine how much of what is seized will be retained by him
to cover the estimated tax liability and how much will have to be
returned forthwith. The object of the enquiry under sub-section (5) is
to reduce the inconvenience to the assessee as much as possible so
that within a reasonable time what is estimated due to the Government
may be retained and what should be returned to the assessee may be
immediately returned to him. Even with regard to the books of account
and documents seized, their return is guaranteed after a reasonable
time. In the meantime the person from whose custody they are seized is
permitted to make copies and take extracts. Sixthly, where money,
bullion, etc. is seized, it can also be immediately returned to the
person concerned after he makes appropriate provision for the payment
of the estimated tax dues under sub-section (5) and lastly, and this
is most important, the provisions of the Criminal Procedure Code
relating to search and seizure apply, as far as they may be, to all
searches and seizures under Section 132. Rule 112 provides for the
actual search and seizure being made after observing normal decencies
of behaviour. The person in charge of the premises searched is
immediately given a copy of the list of articles seized. One copy is
forwarded to the authorising officer. Provision for the safe custody
of the articles after seizure is also made in Rule 112. In our
opinion, the safeguards are adequate to render the provisions of
search and seizure as less onerous and restrictive as is possible
under the circumstances.

7. In District Registrar and Collector, Hyderabad and Another V.
Canara Bank and Others[7], while referring to Section 132 of the
Act, it has been ruled that:
“There are safeguards. Section 132 uses the words “in consequence of
information in his possession, has reason to believe”. (emphasis
supplied) Section 132(1-A) uses the words “in consequence of
information in his possession, has reason to suspect”. Section 132(13)
says that the provisions of the Code of Criminal Procedure, relating
to searches and seizure shall apply, so far as may be, to searches and
seizures under Sections 132(1) and 132(1-A). There are also Rules made
under Section 132(14). Likewise Section 132-A(1) uses the words “in
consequence of information in his possession, has reason to believe”.
(emphasis supplied) Section 133 which deals with the power to call for
information from banks and others uses the words “for the purposes of
this Act” and Section 133(6) permits a requisition to be sent to a
bank or its officer”.
8. The provision contained in Section 132(1) of the Act enables the
competent authority to direct for issue of search and seizure on
the basis of formation of an opinion which a reasonable and prudent
man would form for arriving at a conclusion to issue a warrant. It
is done by way of an interim measure. The search and seizure is
not confiscation. The articles that are seized are the subject of
enquiry by the competent authority after affording an opportunity
of being heard to the person whose custody it has been seized. The
terms used are ‘reason to believe’. Whether the competent
authority had formed the opinion on the basis of any acceptable
material or not, as is clear as crystal, the High Court has not
even remotely tried to see the reasons. Reasons, needless to say,
can be recorded on the file and the Court can scrutinize the file
and find out whether the authority has appropriately recorded the
reasons for forming of an opinion that there are reasons to believe
to conduct search and seizure. As is evincible, the High Court has
totally misdirected itself in quashing the search and seizure on
the basis of the principles of non-traverse.
9. In our considered opinion, the High Court would have been well
advised to peruse the file to see whether reasons have been
recorded or not and whether the same meet the requirement of law.
10. In view of our foregoing analysis, we allow the appeals, set aside
the impugned order passed by the High Court and remand the matter
to the High Court for fresh disposal in accordance with law. The
revenue shall produce the file before the High Court, whereafter
the High Court shall proceed to adjudicate the lis. There shall be
no order as to costs.

[Dipak Misra]

[Uday Umesh
New Delhi;
November 12, 2014
[1] (1997) 5 SCC 321
[2] (1988) 170 ITR 592 (Allahabad)
[3] (1992) 194 ITR 32 (Delhi)
[4] (2000) 242 ITR 302 (Delhi)
[5] (1974) 1 SCC 345
[6] AIR 1954 SC 300
[7] (2005) 1 SCC 496

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