The Hindu Business Line : A search for legality

DR ANITA Sahai, a leading gynaecologist in Noida, and her husband, Dr Sharad B. Sahai, who resigned as Professor at CGHS to set up practice as a radiologist, were regular income-tax assessees and their business was audited under Section 44AB of the Income-Tax Act 1961. Though they were paying advance tax, the I-T Department thought that they were having roaring practice, which, in fact, was true. The Department went a step further and suspected tax evasion.

A search was organised on March 19, 2002, at about 8 a.m. under Section 131(1) of the Act. The search went on till 3 a.m. the next day. Cash and jewellery at the house and from the locker were seized. Bank accounts were frozen under Section 132(3). Dr Sahai surrendered Rs 10 lakh after nearly 19 hours of search and seizure action. The Department initiated action for making block assessment and notice was issued under Section 158BC. The doctor couple challenged the Department's action alleging that the search was illegal and that the confession statement offering to surrender Rs 10 lakh was extracted when they were exhausted after the gruesome 19-hour operation during which they were not allowed even to sleep.

According to them, the conditions laid down in Section 132(1) were not satisfied. There existed no material which could lead to the formation of reason to believe that any of the three conditions mentioned in Section 132(1) had been fulfilled. They had made full disclosure of their assets and incomes.

The Department filed a counter-affidavit before the Allahabad High Court. It was alleged that two registers were maintained by the doctor couple for the same period, showing different receipts from patients. Obviously, one was meant for the Department and it showed lower income. Investment in property was not fully disclosed. Reliance was placed on the confession statement and the Department denied applying any force or compulsion.

In the rejoinder affidavit, the doctors pointed out that the Department issued summons under Section 131(1A) in April 2002, and this itself showed that the search was not warranted. Such a notice could have been issued before action under Section 132(1). Section 131(1A) required two conditions to be fulfilled. Before taking action under Section 132(1), the assessing officer must first have reason to suspect that any income has been concealed or is likely to be concealed. Second, he can make the enquiry before he takes action under the section.

The Allahabad High Court agreed with these submissions. It observed:

"The very fact that the respondents issued notices under Section 131(1A) after the search and seizure operation under Section 132 of the Act goes to show that there was neither reason to believe nor material before the authorised officer on the basis of which he could issue a warrant under Section 132 of the Act.

"It is well settled that before taking any action under Section the condition precedent which must exist should be information in possession of the Director of Income-tax which gives him reason to believe that a person is in possession of some article, jewellery, bullion or money which represents wholly or partly his income which was not disclosed or would not be disclosed. If the aforesaid condition is missing, the Commissioner or Director of Investigation will have no jurisdiction to issue the warrant of authorisation under Section 132(1)."

The court pointed out that the authorised officer has to form an opinion before seizing the particular ornaments and will necessarily have to investigate the matter. There was indiscriminate seizure, violating the guidelines issued by the Central Board of Direct Taxes. All the books of accounts, which were duly reflected in the balance-sheet, income-tax returns, and so on, were seized. Patients' case records were required for medico-legal case purposes. These were also seized along with computers and related articles.

The court said, "The respondents are trying to justify the seizure on the basis of post-search materials, which in our opinion cannot be legally done." It pointed out how even the Supreme Court had laid down that mere unexplained possession of any amount, without anything more, could hardly be said to constitute information which could be treated as sufficient by a reasonable person, leading to an inference that it was income which would not have been disclosed for purpose of the Act.

Mere rumour of roaring practice, charging high fees and living in a posh house, in the absence of any other material, could not constitute information warranting a search. Section 132 does not give full-fledged powers to the authorities to order search against any person. It cannot be abused. Search and seizure cannot be a fishing expedition.

There should be reason to believe about probable concealment at the time of issuing warrant of authorisation. If the reason to believe comes into existence later, that is, after issuance of warrant of authorisation, then such authorisation and the entire search and seizure will be illegal even if the material on the basis of which the director formed his opinion that there was a reason to believe existed prior to the issuance of warrant of authorisation.

In the case of the doctors, the court declared that the warrant of authorisation was illegal since the material leading to the formation of belief was taken into consideration by the director subsequent to the issuance of the warrant of authorisation.

The Allahabad High Court quashed the search warrant and declared the search as illegal. The seizure and restraint order became infrutuous. They were directed to be released forthwith (266 ITR 597).

A concern that arises is whether the Department was so over-zealous that the court had to question the very legality of the search.

(The author is a former Chief Commissioner of Income-tax.)