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Wednesday, May 13, 2015

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 search made under the provisions of the Act.


                        IN THE SUPREME COURT OF INDIA
                        CIVIL APPELLATE JURISDICTION

                        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


M/s. Spacewood Furnishers Pvt. Ltd. & Ors.   ...  Respondents

                               J U D G M E N T

Leave granted.

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 search made under the provisions of  the  Act.  The  same
has been interdicted by the High Court of  Delhi  by  interfering  with  the
warrant of authorization for the search issued under Section 132 of the  Act
and the consequential search made between 19th  June,  2009  to  21st  July,
2009. Aggrieved, the Revenue has filed this appeal by  special  leave  under
Article 136 of the Constitution.

We have heard Shri Guru  Krishna  Kumar,  learned  senior  counsel  for  the
appellants and Shri Krishnan Venugopal,  learned  senior  counsel  appearing
for the respondents.

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 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.

The “classical” notion of the extent of power  that  the  High  Court  would
have in the exercise of its writ jurisdiction to cause such interference  is
formulated in ITO vs. Seth  Brothers[1]  and  Pooran  Mal  vs.  Director  of
Inspection (Investigation), Income Tax[2].  The  parameters  of  permissible
interference as laid down in the aforesaid  two  decisions  have  stood  the
test of time and continue to hold the field even today. We  may,  therefore,
advert to ITO vs. Seth Brothers (supra) in the first instance.

Considering the scope of Section 132 of the Act in  ITO  vs.  Seth  Brothers
(supra), this Court at page 843 held that :-

“The section does not  confer  any  arbitrary  authority  upon  the  Revenue
Officers. The Commissioner or the  Director  of  Inspection  must  have,  in
consequence of information, reason to believe that the statutory  conditions
for the exercise of the power to order search exist. He must record  reasons
for the belief and he must issue an authorisation in favour of a  designated
officer to search the premises and exercise the powers set out therein.  The
condition for entry into and making search of any building or place  is  the
reason to believe that any books of account or other  documents  which  will
be useful for, or relevant to, any proceeding under the Act  may  be  found.
If the Officer has reason to believe that any  books  of  account  or  other
documents would be useful for, or relevant to,  any  proceedings  under  the
Act, he is authorised by law to  seize  those  books  of  account  or  other
documents, and to place marks of identification therein,  to  make  extracts
or copies therefrom and also to make a note or an inventory of any  articles
or other things found in the course of the search. Since by the exercise  of
the power a serious invasion is made upon the rights,  privacy  and  freedom
of the tax-payer, 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 exercise  of
the power are not satisfied the proceeding is  liable  to  be  quashed.  But
where power is exercised bona fide, and  in  furtherance  of  the  statutory
duties of the tax officers  any  error  of  judgment  on  the  part  of  the
Officers will not vitiate the exercise of the power. Where the  Commissioner
entertains the requisite belief and for reasons recorded by  him  authorises
a designated officer to enter and search premises for books of  account  and
documents relevant to or useful for any proceeding under the Act, the  Court
in a petition by an aggrieved person cannot be asked to substitute  its  own
opinion whether an order authorising search should have been issued.  Again,
any irregularity in the course of entry, search  and  seizure  committed  by
the officer acting in pursuance of the authorisation will not be  sufficient
to vitiate the action taken, provided  the  officer  has  in  executing  the
authorisation acted bona fide.

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
[pic]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.”

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 noted that the impugned  provisions  are  evidently
directed against persons who are believed on good grounds to have  illegally
evaded the payment of tax on their income and property.  Therefore,  drastic
measures to get at such income and property  with  a  view  to  recover  the
government dues would  stand  justified  in  themselves.  When  one  has  to
consider the reasonableness of the  restrictions  or  curbs  placed  on  the
freedoms mentioned in Article 19(1)(f) and (g), one cannot  possibly  ignore
how such  evasions  eat  into  the  vitals  of  the  economic  life  of  the
community. It is a well-known fact of our economic life that  huge  sums  of
unaccounted money are in circulation  endangering  its  very  fabric.  In  a
country which has adopted high rates of taxation  a  major  [pic]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.”

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 reasons recorded prior to authorizing  the  search  needs
to be disclosed or communicated to the person against whom  the  warrant  of
authorization is issued. The same is the view expressed  by  this  Court  in
Dr. Pratap Singh vs. Director of Enforcement[3]  while  considering  a  pari
material provision in 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 belief and are  not
extraneous or irrelevant for the purpose of the section.”

9.    The principles that can be deduced from  the  aforesaid  decisions  of
this Court which continue to hold the field without  any  departure  may  be
summarized as follows :

The authority must have information in its possession on the basis of  which
a reasonable belief can be founded that-

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


such person will not produce such books of account or other  documents  even
if summons or notice is issued to him.


        (b)   such person is in possession of any money, bullion,  jewellery
or other valuable article which represents either wholly  or  partly  income
or property which has not been or would not be disclosed.

(ii)  Such information must be in  possession  of  the  authorized  official
before the opinion is formed.

(iii)       There must be application  of  mind  to  the  material  and  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 been  repealed  on  and  from  1st  October,  1975  the
reasons for the belief found should be recorded.

(v)   The reasons, however, need not be communicated to the  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  formation  of
the belief though not the sufficiency or adequacy thereof.

10.     Before proceeding further it will  be  necessary  to  take  note  of
certain other facts that may have a bearing to the issues 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  (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 of Income  Tax  with  regard
to  the  preparation  of  satisfaction  note  and  issuing  of  warrant   of
authorization under Section 132 of the  Act.  Para  2.38  of  the  aforesaid
Manual being relevant may be usefully extracted :

 “2.38 The “satisfaction note” should ordinarily be initiated  by  the  ADIT
(Investigation)/DDIT (Investigation).  It  should  be  put  up  to  the  DIT
(Investigation) through  the  Joint/Additional  DIT  (Investigation),  along
with the detailed comments of the latter. The note must be recorded  in  the
secret file, already prepared for this purpose,  containing  material  like,
the secret information collected from various sources, statement(s), if  any
of  the  informant(s),  reference  to  tax  evasion  petition(s),  if   any,
surveillance reports and information relating to assessment(s),  returns  of
income, wealth, etc, where available.”

12.   It will also be required to be  noticed  that  by  Notification  dated
7.3.2001 administrative approval of  the  Director  General  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 respondent-assessee were  placed
before the High Court.  As it would  appear  from  the  impugned  order  the
contents thereof were  exhaustively reproduced by the High Court.  The  said
satisfaction note(s) have also been placed before us. A perusal 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 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 that the  conditions  precedent  for
issuing warrant of  authorization  under  Section  132  does  exist  in  the
present case. Accordingly, the file  was  put  up  before  the  Director  of
Income Tax (Investigation), Nagpur for issuing of warrant  of  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
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 I T Act. It is also  reliably  learnt  that
the Directors  S/Shri.  Kirit  Joshi  and  Vivek  Deshpande  and  associated
concerns M/S. i3Space Systems (India) P  Ltd.,  Spacewood  Exports  P  ltd.,
Spacewood Hongkong P Ltd., i3space Hongkong Ltd. and Spacewood  Nest  P  Ltd
are also in possession of undisclosed income / assets and  books,  documents
containing  details  of  such  unaccounted  incomes.  It  appears   that   a
substantial portion of such unaccounted money is being held  in  cash  also.
The Directors are maintaining luxurious life styles out of such  unaccounted
income. I am also satisfied that these companies and the directors  are  not
likely to furnish the details of such  unaccounted  incomes  and  assets  if
notices were to be issued to them u/s.131 or 142(1) of the I.T.  Act.  I  am
therefore satisfied that this is a fit case for exercise  of  powers  vested
u/s.132 of the Act to search the persons (M/S. Spacewood Furnishers  P  Ltd,
its associated concerns and Directors  mentioned  above)  and  the  premises
mentioned in the note of the ADIT to seize unaccounted assets and  documents
and evidences relating undisclosed income.”

            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) –

      “DGIT (Inv) Pune may kindly peruse the  above  satisfaction  note  and
grant administrative approval for the search and seizure action.”

17.   On 11.6.2009 the matter was considered  by  the  Director  General  of
Income Tax (Investigation) Pune who recorded the 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  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
taken the final decision to issue the authorization and each such  authority
had passed on the file to his immediate  superior,  namely,  the  Additional
Director to the Director and the Director to the Director General. The  High
Court further 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  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.

20.   The  High  Court  also  held  that  the  materials  indicated  by  the
department in the counter  affidavit  and  the  additional  affidavit  filed
before it were at variance  with  what  was  revealed  by  the  satisfaction
note(s) placed before the Court. Even if the 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
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

21.   Before we advert to the specific reasoning  of  the  High  Court,  one
specific aspect of the opinion expressed by  the  High  Court  needs  to  be
taken note of inasmuch as the precise position in law in this  regard  needs
to  be  clarified.  The  above  aspect  is  highlighted  by  the   following
observations of the High Court expressed in  paragraph  6  of  the  impugned

“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 Rule 112 (2) with effect from  1st  October,  1975,
has  been  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,
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. 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 assessee thereby  frustrating  the  endeavor  of  the
revenue, even if the High Court is eventually not to intervene in favour  of
the assessee.

24.   Having clarified the above issue in the manner indicated, 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 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) inasmuch as it  is  by  the
Finance Act, 2009 effective from  19th  August,  2009  that  the  Additional
Director came to be included amongst the authorized  officials  though  with
retrospective effect from 1.10.1998. The reading of  the  relevant  part  of
the 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      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.

25.   The possibility of manipulation of the records as found  by  the  High
Court also does not commend  to  us  for  acceptance.  There  is  no  basis,
whatsoever, for coming to any such conclusion. Suspicion  ought  not  to  be
the basis of any judicial 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.

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 impugned order. Consequently, the appeal  filed  by  the  Revenue  is


      [Ranjan Gogoi]


                                                    [Pinaki Chandra Ghose]

New Delhi;

May 13, 2015.
[1]    1969 (74) ITR 836 (SC)
[2]    (1974) 93 ITR 505 (SC)
[3]    (1985 (155) ITR 166 (SC)

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