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April 17, 2017

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Proposed Amendment Of Sections 132 and 132 A of Income Tax Act, 1961 Some Stray Views


- B. Gopalakrishnan, Senior Partner [ M/s S K Singhi and Co ]

B. Gopalakrishnan

The Budget presented by the Finance Minister on February 01, 2017 contains a proposal to amend Sections 132 and 132A of the Income Tax Act, 1961 with retrospective effect from October 01, 1975.

Prima facie, one may not fathom the importance of the proposal as contained in the Finance Bill, 2017. Experts are divided on implications it may have on a tax payer’s daily life. Before arriving at a conclusion whether the proposal can lead to a situation of “Tax Terrorism,” we need to analyze the proposal.

The proposal is as follows:

“Reason to believe to conduct a search, etc. not to be disclosed

Sub-sections (1) and (1A) of Section 132 provide that where an authority mentioned therein, based on the information in his possession, has “reason to believe” or “reason to suspect” of circumstances referred to in the said sub- sections, he may authorize an authority specified therein to carry out search & seizure.

Similarly, sub-section (1) of Section 132A provides that the specified income tax authority based on “reason to believe” can authorize other income tax authority mentioned therein to requisition from some other officer or authority to deliver books of account, documents, or assets of the assessee to the income tax authority so authorized.

Confidentiality and sensitivity are the hallmarks of proceedings under Section 132 and Section 132A. However, certain judicial pronouncements have created ambiguity in respect of disclosure of “reason to believe” or “reason to suspect” recorded by the income tax authority to conduct a search under Section 132 or to make requisition under Section 132A. It is therefore proposed to insert an explanation to sub-section (1) and sub-section (1A) of Section 132 and to sub-section (1) of Section 132A to declare that the “reason to believe” or “reason to suspect,” as the case may be, shall not be disclosed to any person or any authority or the Appellate Tribunal.

These amendments will take effect retrospectively from the date of enactment of the said provisions viz. to sub-section (1) of Section 132 from 1st day of April, 1962 and to sub- section (1A) of Section 132 and to sub-section (1) of Section 132A from 1st day of October, 1975.”

The only difference between the existing provision and proposed amendment is that the “reason to believe” or “reason to suspect” need not be disclosed to any person or any authority or Appellate Tribunal. Interestingly, the finance minister stated that the reason for amending this section arises out of ambiguity created by certain judicial pronouncements. Therefore, it is necessary for us to examine the judicial pronouncement which is alleged to have created ambiguity in the minds of income tax authorities.

While there are plenty of judgments to substantiate either of the views, we are now referring to the Supreme Court’s latest judgment on this subject as decided on May 13, 2015: in the case of Director General of Income Tax (Investigation) Pune & Ors v/s M/s. Spacewood Furnishers Pvt. Ltd. & Ors. (Arising out of S.L.P. (C) No. 38611 of 2012) . The Hon’ble Supreme Court placed heavy reliance on the decision in ITO v/s Seth Brothers [1969 (74) ITR 836 (SC)] and Pooran Mal v/s Director of Inspection (Investigation), Income Tax [(1974) 93 ITR 505 (SC)] , while deciding on this case. The Hon’ble Supreme Court held that the view as taken by it in ITO v/s Seth Brothers continues to hold the field even today. It is therefore necessary to reproduce the said findings of the Supreme Court, considering the scope of Section 132 of the Act in ITO v/s 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 Director of Inspection must have, in consequence of information, reason to believe that statutory conditions for the exercise of the power to order search exist. He must record reasons for the belief, and he must issue an authorization in favor 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 a 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 authorized 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 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 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 authorizes 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 authorizing 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 authorization will not be sufficient to vitiate the action taken, provided the officer has in executing the authorization acted bona fide.

The Act and the Rules do not require that the warrant of authorization should specify the particulars of documents and books of accounts a general [pic] authorization 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.”

On an analysis of the said view which stands upheld, it is clear that:

“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.”

Therefore, what comes to my mind is that the amendment suffers from only one infirmity, i.e., not providing reasons to the Tribunal. In the scheme of things, Income Tax Appellate Tribunal (ITAT), which is functioning for the last five to six decades, is the highest fact-finding authority. Only questions of law are referred to the high court. Therefore, any withholding of the said reason for conducting search and seizure from the highest fact-finding authority is violative of the Principles of Natural Justice. Does it envisage a situation that the ITAT does not find favor or enjoy the confidence of the Revenue Authorities?

In the scheme of things, one cannot rule out an over- enthusiastic income tax department resorting to such raids with no rhyme or reason and invading into the privacy of a tax payer. Moreover, one cannot rule out this tool being used by certain unscrupulous officers for undue enrichment.

I focus on an article published in the Times of India, Mumbai Edition, dated February 15, 2017 by the Hon’ble Lok Sabha MP Jay Panda. Panda stated that “without having to show they had good reasons for raid, there is nothing to prevent IT officials from conducting them arbitrarily. Harassment and rent seeking - the term economist use for corruption - are sure to follow.”

Under these circumstances, unless there are strong controls, systems, and procedures to prevent the misuse of this power, the goal proposed to be achieved by this amendment shall boomerang on revenue authorities and will end up in each and every assessee filing a Writ Petition under Article 226 in various high courts in India challenging the raid itself as also requesting the court to direct the department to submit reasons for conducting such raids.

In my opinion, instead of mechanically approving any “reasons” or “suspicions” or “beliefs” put by relevant officers for approval before conducting a raid, a high- powered committee consisting of senior officers should dwell on reasons to initiate a raid. It should not be left to one person’s judgment.

It is also necessary to put fear into the minds of officers who have initiated the process that if the reasons stated are found far from reality, strict action would be taken against them. However, this should not lead to a situation where fearing such an action, unwarranted evidences are planted in an assessee’s premises.

In conclusion, while the proposal may pass the test of law if challenged, may be, with some riders, giving such powers to income tax authorities without proper and adequate control may prove to be disastrous.

Disclaimer - The views are his personal and not that of the firm.

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