[Opinion] Landmark Judgment on Illegal Search u/s 132 of the Income-Tax Act

Gaurav Bansal – [2025] 175 taxmann.com 417 (Article)

1. Introduction

In a significant and precedent-setting decision, the Hon’ble Allahabad High Court in Pramod Swarup Agarwal v. Pr. DIT [2025] 175 taxmann.com 121 (All.) examined the legality of a search and seizure operation conducted under Section 132 of the Income-tax Act, 1961. The Court quashed the warrant of authorization and declared the search illegal for want of satisfaction of mandatory legal preconditions. This case has wide implications for both tax practitioners and the Income Tax Department, particularly in how Section 132 powers are exercised.

2. Factual Matrix

The petitioners, Dr. Pramod Swarup Agarwal and his wife Smt. Sneh Lata Agarwal, both octogenarians, were promoter shareholders of India Pesticides Ltd. (IPL). On 1 July 2021, prior to the company’s listing, they transferred equity shares to the public under an Offer for Sale (OFS) as part of the IPO process. The company was listed on 5 July 2021.

Initially, advance tax was paid on the income arising from this transaction. However, after consulting tax experts, the petitioners concluded that the transaction did not attract capital gains tax due to the absence of a prescribed method for computing fair market value under Section 55(2)(ac) of the Act. Accordingly, no capital gain was offered in their return for AY 2022-23. Instead, they claimed refunds of the advance tax.

Subsequently, a retrospective amendment was made to Section 55(2)(ac) by the Finance Act, 2024 (with effect from 1 April 2018), to plug this loophole. Despite this, on 12 December 2024, a search was conducted at the petitioners’ premises under Section 132.

3. Legal Issues

1. Whether the search conducted under Section 132 was valid in law?
2. Whether there was any information justifying “reason to believe” as required under Section 132(1)(b)?
3. Whether the notice under Section 131(1A) issued post-search was legal?

4. Submissions by Petitioners’ Counsel (AR)

Senior Advocate Shri Jahangir Mistri, assisted by a team of counsels, advanced the following detailed arguments before the Hon’ble Court:

• No Valid Information in Satisfaction Note – It was vehemently argued that the satisfaction note prepared by the Department did not contain any credible or specific information justifying the belief that the petitioners would not produce or cause to be produced books of accounts or documents if summons under Section 131 or notice under Section 142 were issued. The absence of such foundational material rendered the invocation of Section 132(1)(b) wholly illegal.
• Spotless Compliance History – The petitioners, both aged around 80 years, had a flawless record of compliance. They had filed returns consistently over the past 18 years and had always responded to notices and summons issued under the Act. There was not a single instance of default in furnishing documents or explanations sought by the Department. This established conduct rebutted any presumption that the petitioners would not comply if called upon.
• Illegality of Search due to Retrospective Amendment – The capital gains on sale of shares through OFS were not taxable under the unamended provisions of law as the computation mechanism was absent. The retrospective amendment made to Section 55(2)(ac) effective from 1 April 2018 could not be invoked to justify a search conducted in December 2024. The law as applicable on the date of filing the return governs the matter. Hence, the Department’s reliance on the amendment to justify the search action was legally flawed.
• Statutory Prohibition under Section 139(8A) – Post-search, the petitioners were barred from filing an updated return under Section 139(8A) due to the operation of the second proviso, which prohibits updated returns if a search has been initiated under Section 132. Therefore, even if the petitioners wanted to offer capital gains tax in view of the retrospective amendment, they were statutorily prohibited. The Department, having initiated search, precluded lawful tax compliance and then blamed the petitioners for non-payment.
• Illegal Invocation of Section 131(1A) by Authorised Officer – A notice under Section 131(1A) was issued by Sri Adarsh Kumar, the very officer who had already exercised powers under Section 132(1)(i)-(v) by authorising the search. It was argued that under the scheme of the Act, an officer who has already taken action under clauses (i)-(v) of Section 132 cannot subsequently invoke powers under Section 131(1A). Such a sequence is legally impermissible and amounts to abuse of statutory power. This argument was buttressed by reliance on the Jharkhand High Court’s decision in Emaar Alloys (P.) Ltd. v. DIT (Investigation) [2015] 64 taxmann.com 67/235 Taxman 569, which categorically held that issuance of notice under Section 131(1A) post-search by the same officer is invalid.
  The petitioners’ counsel also emphasised that allowing such post-search actions would create a dangerous precedent and undermine statutory safeguards intended to prevent arbitrary exercise of coercive powers.

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