Formation of reasons to believe for search & seizure under Income Tax Act is an administrative function, to be tested by judicial restraint: SC 

Supreme Court: The Division Bench of Hemant Gupta* and V. Ramasubramanian, JJ., held that non-supply of satisfaction note to the assessee will not make the whole act of search and seizure contrary to Section 132(1) of the Income Tax Act,1961.  

Reversing the impugned decision of the Gujarat High Court, the Court held that formation of reasons to believe being an administrative act, the courts have only limited power to determine whether such reasons are whimsical or malafide, the sufficiency of the grounds which induced the competent authority to act is not a justiciable issue to be determined by courts. 

Factual Backdrop  

The appellant-assessee had transferred a sum of Rs. 10 crores to M/s Goan Recreation Clubs Private Ltd. during the financial year 2016-17. He had secured the loan by way of a mortgage of the property situated in North Goa. Thereafter, the assessee became the Director of the Company from 18-05-2016 to 23-06-2016. Later on, Rs. 10 crores were repaid and the mortgage was released on 10-07-2017. In the income-tax return filed by the assessee for that financial year, he had shown an interest income of Rs.42,51,946 which had been taxed as well. 

In the above backdrop, the Revenue had started a search and seizure operation against the assessee, suspecting that unaccounted black money was involved in the transaction since the Company stepped into the business of gaming and entertainment and launched a casino in Goa without having any adequate capital. Further, the company had made cash deposits of a total Rs.13,79,10,500 soon after demonetization.  

Grievances of the Assessee  

The assessee challenged the act of authorization for search and seizure before the Gujarat High Court on the ground that it was a fishing enquiry and the conditions precedent as specified in Section 132 of the Act were not satisfied. The assessee contended that he was not supplied with the satisfaction note as required to be disclosed in terms of Explanation to Section 132(1) of the Income Tax Act,1961  inserted by the Finance Act, 2017 with retrospective effect i.e., on 01-04-1962.  

Findings of the High Court 

The High Court found that none of the reasons to believe to issue authorization met the requirement of Section 132(1)(a), (b) and (c), hence the warrant of authorization dated 07-08-2018 issued under Section 132 of the Act was quashed. Consequently, all actions taken pursuant to such a warrant of authorization were rendered invalid.  

Whether the Revenue has Reasons to Believe 

The Revenue submitted that it was not expected to disclose to any of the members directly or indirectly involved in the cob-web of financial transactions with the core groups, viz. Sarju Sharma and associated group of companies as any inkling of action were likely to compromise the confidentiality and secrecy of the case.   

The Court noted that the detailed satisfaction note showed multiple entries in the account books of Sarju Sharma and others. Further, manner of Sarju Sharma who was either in Siliguri (West Bengal) or in Goa contacting the assessee in Ahmedabad for a loan of Rs.10 crores did not appear to be a normal transaction. Subsequent repayment of mortgage and the interest income reflected in the relevant assessment year appeared to be the steps taken by the assessee to give a colour of genuineness. Therefore, the Court opined that the Revenue had a reason to suspect that such entry was an accommodation entry and the cobweb of entries required to be unravelled including the trail of the money paid by the assessee. The Court observed, 

“The intention of the Revenue was to un-layer the layering of money which is suspected to be done by the assessee since the accommodation entry is a common modus operandi to bring the unaccounted black money to books for a brief period.”

Noting that the Revenue suspected that the investment of Rs.10 crores for a short period was not for earning interest income as the same was repaid in the same assessment year and intended to investigate the fund trail of the money paid by the assessee, the Court opined that such belief was not out of hat or whimsical.  

“The test to consider the justiciability of belief is whether such reasons are totally irrelevant or whimsical. the Court has to examine whether the reason to believe is in good faith; it cannot merely be pretence.”

Considering the reasons recorded in the satisfaction note including the investment made by the assessee for a brief period and that investment was alleged to be an accommodation entry, the Court said that it cannot be said to be such which does not satisfy the prerequisite conditions of Section 132(1) of the Act. 

With regard to non-supply of satisfaction notice to the assessee, the Court opined that such a notice would have been sufficient notice of the material against the Company and its group, to defeat the entire attempt to unearth the cobweb of the accounts by the Company and its associates. The Court opined that the Revenue may fail or succeed but that would not be a reason to interfere with the search and seizure operations at the threshold, denying an opportunity to the Revenue to unravel the mystery surrounding the investment made by the assessee.  

Hence, the Court held that the view of the High Court that the authorization to search the premises of the assessee was invalid, could not be sustained.  

Findings and Conclusion  

With a view to restate and elaborate the principles in exercising the writ jurisdiction in the matter of search and seizure under Section 132 of the Act the Court made the following observations:  

1. The formation of opinion and the reasons to believe recorded is not a judicial or quasi-judicial function but administrative in character;  
2. The information must be in possession of the authorised official on the basis of the material and the opinion must be honest and bona fide. It cannot be merely pretence;  
3. The authority must have a reasonable belief that the person concerned has omitted or failed to produce books of accounts or other documents; or such person is in possession of any money, bullion, jewellery or other valuable article indicating non-disclosed income;  
4. The Courts can examine whether the reasons recorded are actuated by mala fides or on a mere pretence and that no extraneous or irrelevant material has been considered;  
5. The question as to whether such reasons are adequate or not is not a matter for the Court to review in a writ petition. The sufficiency of the grounds which induced the competent authority to act is not a justiciable issue;  
6. The relevance of the reasons for the formation of the belief is to be tested by the judicial restraint as in administrative action as the Court does not sit as a Court of appeal but merely reviews the manner. The Court shall not examine the sufficiency or adequacy thereof;  
7. In terms of the explanation inserted by the Finance Act, 2017 with retrospective effect from 01-04-1962, such reasons to believe as recorded by income tax authorities are not required to be disclosed to any person or any authority or the Appellate Tribunal.  

In view of the above, the Court concluded that the High Court was not justified in setting aside the authorization of search. Consequently, the appeal was allowed and the impugned order was set aside. The Revenue was held to be at liberty to proceed against the assessee in accordance with the law.  

[Director of Income Tax (Investigation) v. Laljibhai Kanjibhai Mandalia, 2022 SCC OnLine SC 872, decided on 13-07-2022] 

*Judgment by: Justice Hemant Gupta 

Appearance by:  

For the Appellant: Balbir Singh, Additional Solicitor General  

For the Respondent: Datar, Senior Advocate  

Kamini Sharma, Editorial Assistant has put this report together