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

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.