Understanding the Validity of Income Tax Search | Writ Jurisdiction

Table of Contents

1. Validity of Search under the Income-tax Act

2. Illegality of Search v. Irregularity during Search

Check out Taxmann's Law Relating to Search & Seizure which provides an in-depth analysis of various provisions of law relating to Search & Seizure and assessment of search cases with the help of FAQs, checklists, and a reckoner of leading Case Laws. This book is amended by the Finance Act 2023 & Case Laws are updated until March 2023.

1. Validity of Search under the Income-tax Act

Income tax search is an extreme and very harsh action undertaken by the department against the assessee. Such power needs to be exercised with utmost and due care and caution. Validity of the searches is often challenged by the searched persons. The courts have held that search action should be taken following due process of law strictly in accordance with provisions of section 132. In case there is any lapse, the search action may be held to be illegal.

Search action can be authorized only when “reason to believe” has been formed by the authorizing officer in consequence to relevant information in his possession as to the existence of either or more of the conditions prescribed under clause (a), (b) or (c) of section 132(1), and valid search warrant is issued as provided under the law. In the absence of any of such conditions having been fulfilled, search may be held by the courts as illegal. If the exercise of powers is in good faith, a procedural defect may be overlooked. While examining the validity of search, court cannot examine adequacy or sufficiency of information but its existence and relevance become crucial factor.

Constitutional validity of section 132 was considered by the Supreme Court in the case of Pooran Mal v. Director of Inspection [1974] 93 ITR 505 in which Hon’ble Supreme Court observed that the provisions contained in section 132 and Rule 112 of the Income-tax Rules, 1962 are not violative of Article 19(1)(f) and (g) because the restrictions placed therein were reasonable restrictions. According to the Supreme Court, the power of search and seizure is directed against persons who are believed on good grounds to have illegally evaded the payment of tax on their income and property and therefore, drastic measures to get such income and property with a view to recover government dues would stand justified in itself.

Hon’ble Supreme Court in the case of Bhupendra Ratilal Thakkar v. CIT [1976] 102 ITR 531 held that section 132 of the Income-tax Act is neither incompetent nor invalid in infringing any of the fundamental rights guaranteed under Articles 14, 19, 21 and 31 of the Constitution. Hon’ble Court further held that rules 112B and 112C are beneficial rules and their validity cannot be impugned.

Hon’ble Allahabad in the case of Shyam Jewellers v. Chief Commissioner (Administration) [1992] 196 ITR 243 held that neither the section 133A relating to survey nor section 132(3) provide for sealing of the shop or business and such an act violates the fundamental rights amounting to temporary deprivation of property under Article 19(1)(g) which guarantees the citizen the right to carry on any profession or trade or business.

Hon’ble Supreme Court in CIT v. Tarsem Kumar [1986] 27 Taxman 305 held that if the action of income tax authorities does not fall within the purview of section 132, the consequential action would then be arbitrary and unreasonable and would be violative of Article 14 of the Constitution. Similarly, Hon’ble Allahabad High Court in the case of Dr. I.S. Tomar v. DIT [1996] 85 Taxman 468 held that where the search was conducted whimsically without any material and without any good information, authorization to conduct search and to make the seizure was wholly illegal.

Hon’ble Supreme Court in the case of ITO v. Seth Brothers [1969] 74 ITR 836 administered a word of caution regarding the searches. According to Supreme Court, since serious encroachment is made upon the rights, privacy and freedom of taxpayer, the power must be exercised strictly in accordance with law and if the action of the officer is challenged in the court of law, the officer must satisfy about the regularity of action. If the action is maliciously taken or the power is exercised for collateral purpose, it is liable to be struck down by the courts.

Hon’ble Patna High Court in the case of Pawan Solvent & Chemicals v. CIT [1987] 32 Taxman 12 held that raid, search and seizure operations must be conducted to unearth unaccounted income and wealth from unscrupulous taxpayers, smugglers etc. who are scourge of the society. However, wanton and indiscriminate raid and seizure of honest taxpayers will amount to deprivation of fundamental rights of the persons living in society with dignity and grace and therefore, the same should be avoided.

Hon’ble Calcutta High Court in Shree Krishna Investments v. Union of India AIR 1976 Cal. 333 observed that it may be that a power vested in an authority may be abused by that authority but no statute or provision can be struck down only on the ground that powers thereunder when abused would result in discrimination. An abuse of powers vested by a statute or provision does not render the source of the power tainted. It only renders such act of abuse liable to be struck down.

In Dr. Nand Lal Tahiliani v. CIT [1988] 39 Taxman 127 (All.) it was held that there must be rational connection between the information or material and the belief about the undisclosed income. Reputation of roaring practice and high fees is not tangible material for invoking power u/s 132. Satisfaction is to be derived objectively and on the basis of available material.

Hon’ble Supreme Court in CIT v. Dr. Nandlal Tahiliani [1988] 172 ITR 627 observed while dismissing the departmental SLP that department was entitled to

“take into account any information derived from the inventories prepared in consequence of the search and seizure made u/s 132 of the Income-tax Act and impugned in the present case”.

In H.L. Sibal v. CIT [1975] 69 Taxman 112 (P&H), Court was of the view that there should be no indiscriminate issue of search warrant as a matter of search policy and blanket condemnation of persons of diverse activities was wholly outside section 165 of Criminal Procedure Code.

In Harmel Singh v. Union of India [1993] 69 Taxman 347 (P&H), it was held that

“existence of relevant material for taking action u/s 132 is a condition precedent for the exercise of powers”.

Any wrong action u/s 132 is a serious encroachment on the civil rights of a citizen and once the court is satisfied that there was no material before the concerned authority to form an opinion, then the court can interfere but court cannot go into the sufficiency of the material.

In Chemitex v. Union of India [1982] Tax L.R. 2871 (Goa) the Court held that the provisions for search and seizure are not hit by Article 19(1)(g) of the Constitution simply because search has to be conducted without giving prior hearing to the persons. In fact such an opportunity of being heard to a person before invoking power u/s 132 would render the power of search and seizure meaningless and the very scope of these provisions would be defeated.

In Kusum Lata v. CIT [1990] 48 Taxman 401 (Raj.), it was held by the Court that where there was no reasonable information on which the Director could have had any bona fide belief to issue the authorization u/s 132(1), the proceedings were vitiated. In that case, all that was stated was that a particular brand of chewing tobacco, pan masala etc. were selling at a high premium which was result of artificial scarcity created by the dealers. The authorization being illegal and not being in accordance with law was held illegal and therefore, the search and seizure of the assets were also held to be illegal.

In Dr. Partap Singh v. Director of Enforcement [1985] 22 Taxman 30 (SC) it was held that the material on which the officer has reason to believe that any documents will be useful or relevant to any investigation or proceedings under Foreign Exchange Regulation Act, need not be disclosed in the search warrant issued by him. The material on which the belief is grounded may be secret, may be obtained through intelligence or occasionally may be conveyed orally by the informers. It is not obligatory upon the officer to disclose his material on the mere allegation of the petitioner that there was no material before him for exercising his power to order search.

It is thus clear from the catena of judicial decisions that the courts have held that power to order search must be exercised strictly in accordance with law and only for the purpose for which these provisions were brought on the statute. The court though is not competent to go into the sufficiency of the material upon which reason to believe for the purpose of search is based but the law does not permit at the same time the indiscriminate search and seizure based on suspicion.

1.1 Circumstances when search is held to be valid

1. Where certain CDRs and Banker’s cheques valued at `3 crores were deposited with the District Excise Office as security in the name of a firm to participate in the auction for allotment of privilege of selling country made liquor and the same were seized, the search is held to be valid. [Babu Lal v. DIT (Inv.) [2005] 147 Taxman 318 (All.)]
2. Search in assessee’s premises held to be valid where it was done in connection with clandestine transaction of the group with which the assessee was inter-linked. [Bandel Traders (P.) Ltd. v. Union of India [2003] 130 Taxman 428 (Delhi)]
3. Allegation that Income Tax authorities had taken a bribe would not invalidate the search. [Kamal Khosla v. DIT (Investigation) [2002] 123 Taxman 1102 (Delhi)]
4. If a search is otherwise justified, the size of search party is not to be fatal to the validity of search. The enormity of search party could not be a ground for interference. Because of the enormity of the building and the premises it was necessary for the purpose of search and seizure to ensure the presence of a number of persons on behalf of the department. Mamchand & Co. v. CIT [1968] 69 ITR 631 (Cal.), Subir Roy v. S.K. Chattopadhyay [1986] 29 Taxman 13 (Cal.).

It has been held in the case of Jai Bhagwan Om Parkash v. Director of Inspection [1993] 67 Taxman 33 (P&H), that authenticity of complaint and allegation of tax evasion made by complainant duly checked by department independently by secret enquiry, it could not be said that there were no reason to believe for conducting search.

In the case of Dr. P.G. Viswanathan v. DIT (Inv.) [2013] 30 taxmann.com 33/214 Taxman 105 (Mad.)(HC)

Muthulakshmi v. DIT (Inv.) [2013] 351 ITR 217/88 DTR 33 (Mad.) (HC)

Viswanathan alias Kumar v. DIT (Inv.) [2013] 351 ITR 217/88 DTR 33 (Mad.)(HC)

Dr. Aruna Viswanathan v. DIT (Inv.) [2013] 351 ITR 217/88 DTR 33 (Mad.)(HC)

Dr. Anjana Viswanathan v. DIT (Inv.) [2013] 351 ITR 217/88 DTR 33 (Mad.)(HC)

Dr. Vikram Viswanathn v. DIT (Inv.) [2013] 351 ITR 217/88 DTR 33 (Mad.)(HC)

The assessee challenged the action under section 132 of the Act by way of writ before the High Court. The Court dismissed the petition by observing that there were materials available before the authority concerned, for the formation of his belief to issue such a warrant. Further, the authority had also reason to believe that such documents and things would not be produced by the persons concerned, in the normal course, to enable the Department to conduct necessary inquiries in the matter. Therefore, it was premature on the part of the assessees to stall further proceedings relating to the allegations of evasion of payment of tax by the assessees, by raising the issues relating to the jurisdiction of the Department to issue the search warrants. Of course, it would be open to the assessees to defend themselves by showing, at the appropriate stage of the proceedings, that they were not liable to pay the tax, as assessed by the authorities of the Department. The belief of the authorities that the assessees had secreted certain documents relevant for the purpose of investigation of the matter relating to the evasion of tax by the assessees, was based on materials available before the authorities. When serious allegations of tax evasion by the assessees, to the tune of several lakhs of rupees, have been made, it would not be appropriate for the court to scuttle the process by placing undue emphasis on the hyper technical pleas put forth on behalf of the assessees, with regard to the procedural formalities in the issuance of the search warrants.

In the case of Emaar Alloys (P) Ltd. v. DGIT (Inv) & Ors. [2015] 64 taxmann.com 67/235 Taxman 569 (Jharkhand), High Court observed that there was sufficient material before the IT authorities that the assessee had not disclosed huge income. Further, before the issuance of the warrant of authorization by the Director of IT to carry out search and seizure, the procedure prescribed under section 132 had been followed. High Court further observed that it need not approve the subjective satisfaction arrived at by the lower authorities.

It has been held by the High Court that search proceedings initiated cannot be declared illegal if there is sufficient material before the IT authorities on the basis of which satisfaction is arrived at that the assessee has huge undisclosed income.

It has been held in the case of Rajan Jewellery v. CIT 177 DTR 369 (Ker.) that assessee having not raised the objection on validity of search on the ground of absence of panchas before the AO, it could not raise the same before appellate authority.

It has been held in the case of Subhash Sharma v. CIT [2020] 121 taxmann.com 83/423 ITR 47 (Chhattisgarh) that before issuance of warrant and the notice under section 153A, when the authority applied its mind to the material and the formation of opinion is honest and bona fide and further that it is not based on any extraneous or irrelevant material, there is no illegality or infirmity in the entire process based on which the warrant under section  132 and the notice under section 153A was issued against the assessee.

It has been held in the case of Principal Director of IT (Inv.) v. Laljibhai Kanjibhai Mandalia 215 DTR (SC) 417 that Revenue authorities having formed the belief that the loan of Rs. 10 crores given by the assessee for a short period to an unconnected company situated in a distant city was a mere accommodation entry, and the cobweb of entries including the trial of money paid by the assessee is required to be unravelled, the prerequisite conditions of section 132 stand satisfied and further that even clause (c) of section 132(1) is satisfied as the Revenue wants to find out whether the said amount is an undisclosed income and, therefore, the impugned authorization of search could not be set aside.

1.2 Circumstances when search is held to be invalid

1. Mere information from CBI that cash was found in possession of an individual cannot justify a search [Union of India v. Ajit Jain [2003] 129 Taxman 74 (SC)]
2. Where the authorization to survey was issued initially against the doctor, search operations at the residence of the doctor and in the hospital premises held invalid where the hospital belongs to the trust and where no reasons for conversion of survey operations into search operations were given. [Dr. Nalini Mahajan v. DIT (Investigation) [2002] 122 Taxman 897 (Delhi)]
3. Where the search was in the name of partner, the search on the firm was held illegal. [Vishwanath Prasad v. Asstt. CIT [2003] 86 ITD 516 (All.-Trib.)]
4. It was held that where in his zeal for taking action under section 132(1) the Commissioner did not even care to have a look at the orders of Assessing Officers, it was held he did not at all apply his mind before initiating action against the petitioner and therefore, the search of the premises of the petitioner was illegal. [Anand Swaroop v. CIT [1976] 103 ITR 575 (P&H)]
5. The drastic powers of search and seizure cannot be used in a routine manner and are expected to be pressed into action after due care, caution and consideration. These powers have to be invoked in rarest of rare cases. If the conditions precedent are not satisfied, Courts have not hesitated in quashing the warrant of authorization, the action of seizure and in directing return of seized cash, valuables etc. and also seized books of account and documents. In appropriate cases, the harassed assessees have been awarded damages and costs. The facts constituting the information must be relevant to the enquiry. They must be such from which a reasonable and prudent man can come to the requisite belief or conclusion. If either of the aforementioned elements is missing, the action of the authority shall be regarded as lying outside the ambit and scope of the Act. Such an action would be liable to be struck down on the basis of what is commonly known as “legal malice”. [H.L. Sibal v. CIT [1975] 101 ITR 112 (P&H)]

It has been held in the case of Madhu Gupta v. Director of IT (Inv.) [2013] 30 taxmann.com 92/214 Taxman 246 (Delhi) that when the so-called information remained undisclosed and what exactly that information was, is also not known, the so-called information that there was a likelihood of the documents belonging to a group being found at the residence of the petitioner amounted only to a surmise and conjecture and not solid information and therefore warrant of authorization was liable to be quashed.

In the case of Dipen Laljibhai Mandalia v. DGIT [2013] 35 taxmann.com 508/217 Taxman 66 (Mag.) (Guj.), the assessee was carrying gold ornaments worth ` 6.42 crores on a flight from Ahmedabad to Chennai to show them to retail owners hoping to procure bulk orders for the same. On basis of information received from the security officials at the airport, revenue authorities conducted inquiries with assessee and also with the Karta of HUF who according to assessee was the owner of gold which was leased to them under certain conditions. Subsequently, on basis of a satisfaction note, search and seizure operations were carried out against the HUF. On Special Civil Application filed by the HUF, the High Court quashed search and seizure operations. The High Court, allowing the Special Civil Applications filed by the assessee, held that since search proceedings in case of HUF were already quashed, said proceedings on very similar grounds and hence would not be sustainable.

In the case of LKS Bullion Import & Export (P.) Ltd. v. DGIT [2013] 29 taxmann.com 299/214 Taxman 68 (Guj.), Assessee-company was engaged in business of wholesale trading in bullion. Director of assessee, along with other were found carrying about 23 kilos of gold ornaments by air from Ahmedabad to Chennai. Department seized said gold ornaments under section 132. Director of assessee at spot gave statement that 25 kilos of gold was received by assessee from MG-HUF on lease and gold ornaments in question were made out of said gold. Said statements given by director of assessee at airport matched with that of MG-HUF and goldsmith supported by relevant books of account. On facts, competent authority could not have formed a reasonable belief that such gold jewellery had not been or would not be disclosed for purpose of Income-tax. Therefore, search and seizure operation was to be declared illegal and seizure of gold ornament was also to be quashed.

In the case of CIT v. Smt. Umlesh Goel [2016] 141 DTR (Raj.) 25, it has been held that all the family members are separate assessable legal entities under the Act and in a case where search warrant has been issued in the name of OP and family. It cannot be stretched to cover all the family members, namely spouse and children. Search warrant has to be in the name of specific person to initiate proceeding. When names of the two assessee do not find mention in the warrant of authorisation, the A.O. has no jurisdiction to issue notice under section 158BC

It has been held in the case of Laljibhai Kanjibhai Mandalia v. Principal DIT [2019] 105 taxmann.com 260/263 Taxman 604 (Guj.) that Search warrant is invalid if provisions of section 132 not attracted; A search was conducted in case of assessee. Assessee filed petition challenging authorisation issued under section 132. It was noted that no summons or notice as envisaged under clause (a) of sub-section (1) of section 132 had been issued. It was also noted that belief of revenue that assessee would not respond to a summons or notice issued as envisaged under clause (b) of sub-section (1) of section 132 was not based upon any information or other material but was based upon conjectures and surmises that assessee would take alibi of lack of jurisdiction on part of respondents. Thus, circumstance envisaged under clause (b) of sub-section (1) of section 132 also did not exist. Finally, there was nothing on record to indicate that any belief had been formed by competent authority to effect that assessee had in his possession any money, bullion, jewellery or other valuable article or thing which would not have been disclosed by him for purposes of Act. In view of aforesaid, it could be concluded that none of clause (a), (b), or (c) of sub-section (1) of section 132 was attracted and, thus, authorisation being invalid, search proceedings in question deserved to be quashed.

The above decision has been reversed by Hon’ble Supreme Court in the case of Principal Director of IT (Inv.) v. Laljibhai Kanjibhai Mandalia 215 DTR (SC) 417 and in the above circumstances, search has been held valid.

It has been held in the case of Mectec v. Director of IT (Inv.) [2021] 125 taxmann.com 96/278 Taxman 214/433 ITR 203 (Telangana) that as to the authorisation under section 132(1) and seizure of cash by Police vis-a-vis validity of search warrant, cash from petitioner’s employee was seized by police and handed over to IT Department on 27th Aug., 2019 and therefore search warrant dt. 28th Aug., 2019, that too not mentioning the place to be searched, was a fabricated document and the intimation by the Police to the IT Department on 27th Aug., 2019 would not confer jurisdiction on the IT Department to detain and withhold cash and that too by issuance of an invalid search warrant under section 132 and thus Respondents were directed to refund the cash to the petitioner No. 1 along with interest.

1.3 Allegation of mala fide or bias in search

There is presumption in law that Government authorities while discharging their official duty act bona fide and in good faith. Search action is a harsh action on an assessee and at times tough decisions are required to be taken by the authorized officer in discharging this function, but of course, within the parameters of law. Some degree of high handedness or excessiveness may be perceived by the searched person to have been resorted to during search by the search team. In general, courts do not entertain the charge of mala fide or personal bias attributed to the authorities during search unless strong evidences are brought on record.

However, this presumption of good faith can be rebutted by the assessee by leading evidences. Heavy burden of proof lies on the person searched who is making such allegation. Such person has to lead cogent, irrefutable and concrete direct or circumstantial evidences to prove the charge. Mere making a statement or filing bald affidavit would not be sufficient.

There may be temptation on the part of assessee to challenge a search on the ground of mala fide, high handedness, bias or arbitrariness but such action should be taken only in extreme cases where the facts are very strong in favour of the assessee.

The mere fact that the Assessing Officer was also an authorized officer for conducting the search, does not ipso facto justify apprehension of bias. Therefore, search cannot be held to be invalid. [Union of India v. Vipan Kumar Jain [2003] 129 Taxman 59 (SC)].

A search cannot be treated as mala fide merely because certain outsiders were associated at the time of search. Where some inspectors were taken along for doing clerical and ministerial work and some policemen were taken for ensuring the maintenance of peace and order and for preventing obstruction and illicit removal of documents, the search could not be held to be invalid. [Hindustan Metal Works v. CIT [1968] 68 ITR 798 (All.)]

In the absence of anything to show that the documents were either replaced or tampered, any omission to place identification marks on documents will not by itself supply a ground for holding that the search was mala fide. [ITO v. Seth Bros. [1969] 74 ITR 836 (SC)]

Doubtless, he who seeks to invalidate or nullify any act or order must establish the charge of bad faith, an abuse or misuse by Government of its powers.” [S. Pratap Singh v. State of Punjab AIR 1964 SC 72]

The onus of proving ‘malice’ is on the person who levels the allegation. Because of the very serious nature of the allegations, the Courts would demand a highly credible proof. [E.P. Royappa v. State of Tamil Nadu AIR 1974 SC 555]

In absence of any proof of allegations of mala fide, the search was held to be not bad. [Dr. Partap Singh v. Director of Enforcement [1985] 22 Taxman 30 (SC)]

Vague allegations are not enough to prove mala fide. [Express Newspapers (P.) Ltd. v. UOI AIR 1986 SC 872]

There cannot be any blanket formula in this regard. The question of judicial bias or administrative bias or personal bias would have to be decided on the facts of each case. The party alleging bias must prove the fact and should leave no scope for any other finding.

Where an officer is sought to be condemned on the ground that he was personally biased, then the character of such officer is under assassination. Every person who acts as an officer has to face such situation. Every person who is aggrieved by the action of such an officer would always raise such allegation. If the simple allegations which are devoid of legal proof are allowed to stand, then it would become impossible for an officer, especially administrative officer, to work.

The allegation that an officer is prejudiced or biased would not be sufficient unless the evidence is brought on the record leading to the positive conclusion that the bias is established. If the person who raises an allegation is able to establish that the officer in fact is biased, then the Court would give weight to the allegation. [Takshila Educational Society v. DIT (Inv.) [2005] 141 Taxman 704 (Pat.)]

2. Illegality of Search v. Irregularity during Search

There may be certain procedural irregularities committed by the authorized officer in the conduct of search, but this will not vitiate the search action as a whole. Nature of procedural defect will also decide whether it is mere procedural irregularity or it is so fundamental in nature that whole process of search can be said to be illegal.

In the case of Naraindas v. CIT [1983] 14 Taxman 447 (MP) at page 572, the assessee contended that the action of the authorized officers in making search and seizure was illegal because of the irregularity in not calling respectable persons of the same locality as witnesses. The department in its reply affidavit filed before the High Court stated that the names of the witnesses were suggested by the petitioners. The assessee wanted that the outsiders should not be called as witnesses because that would have affect on their credit and prestige. The High Court observed that the petitioners could not complain that the witnesses suggested by him were not respectable persons of the locality in the situation stated above. The High Court, therefore, rejected the assessee’s plea based on this contention and also supplemented their conclusion by referring to the decision of the Supreme Court in the case of ITO v. Seth Bros. [1969] 74 ITR 836 to the effect that any irregularity in the course of search and seizure committed by the officers will not be sufficient to vitiate the action taken provided the officers had in executing the authorization acted bona fide.

In Dr. Partap Singh v. Director of Enforcement [1985] 22 Taxman 30 (SC) it was held that illegality of the search does not vitiate the evidence collected during illegal search the only requirement is that the court or the authority before which such material or evidence seized during the search shown to be illegal is placed has to be cautious and circumspect dealing with such evidence or material.

In Balwant Singh v. R.D. Shah (Director of Inspection) [1969] 71 ITR 550 (Delhi) it was held that the information gathered as a result of illegal search and seizure can be used subject to the value to be attached to it or its admissibility in accordance with the law relating to the evidence.