Sufficiency Or Inadequacy Of Reasons To Believe Cannot Be Looked Into While Considering Validity Of Search & Seizure U/Sec 132 Income Tax Act: Supreme Court

The Supreme Court, in a judgment delivered on Wednesday, restated the principles in exercising the writ jurisdiction in the matter of search and seizure under Section 132 of the Income Tax Act.

"The sufficiency or inadequacy of the reasons to believe recorded cannot be gone into while considering the validity of an act of authorization to conduct search and seizure", the bench comprising Justices Hemant Gupta and V. Ramasubramanian observed

The court was considering an appeal against the judgment of High Court of Gujarat whereby the warrant of authorization issued by Principal Director Of Income Tax (Investigation)  under Section 132 of the Income Tax Act,1961 was quashed.

Before the High Court, the writ petitioner assessee had contended that it was a fishing enquiry and the conditions precedent as specified in Section 132 of the Act are not satisfied.According to him, he was looking for an avenue to invest some money and the M/s. Goan Recreation Clubs Private Ltd was in need of finance for setting up of its business and hence consequently approached the assessee herein for a loan. As a security, the borrower company offered that another company would give its property to the assessee. 

Before the Apex Court, the Revenue contended that though it is open to the Court to examine the question whether "reasons to believe" have any rational connection or a relevant bearing to the formation of the belief and that such reasons are not extraneous or irrelevant as the officer has to produce relevant evidence to sustain his belief in case the reasons to believe are questioned in court, however, the jurisdiction of the High Court is to examine the existence of reasons not the legality of the same. The respondent assessee contended that the High Court has rightly held that none of the pre-requisite conditions for search and seizure under Section 132 of the Act are satisfied.

The bench, referring to facts of the case, and also precedents in this regard, 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 that the formation of opinion must be honest and bona fide. It cannot be merely pretence. Consideration of any extraneous or irrelevant material would vitiate the belief/satisfaction;
3. The authority must have information in its possession on the basis of which a reasonable belief can be founded that the person concerned has omitted or failed to produce books of accounts or other documents for production of which summons or notice had been issued, or such person will not produce such books of accounts or other documents even if summons or notice is issued to him; or
4. Such person is in possession of any money, bullion, jewellery or other valuable article which represents either wholly or partly  income or property which has not been or would not be disclosed; 
5. Such reasons may have to be placed before the High Court in the event of a challenge to formation of the belief of the competent authority in which event the Court would be entitled to examine the reasons for the formation of the belief, though not the sufficiency or adequacy thereof. In other words, the Court will 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;
6.  Such reasons forming part of the satisfaction note are to satisfy the judicial consciousness of the Court and any part of such satisfaction note is not to be made part of the order; 
7. 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; 
8. 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 in which the decision was made. The Court shall not examine the sufficiency or adequacy thereof;
9. In terms of the explanation inserted by the Finance Act, 2017 with retrospective effect from 1.4.1962, 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.

Applying these principles to facts of the case in hand, the bench held that the High Court was not justified in setting aside the authorization of search.

Case details

Principal Director Of Income Tax (Investigation) vs Laljibhai KanjiBhai Mandalia | 2022 LiveLaw (SC) 592 | CA 4081 OF 2022 | 13 July 2022

Coram: Justices Hemant Gupta and V. Ramsubramanian

 Headnotes

Income Tax Act, 1961 ; Section 132 - Sufficiency or inadequacy of the reasons to believe recorded cannot be gone into while considering the validity of an act of authorization to conduct search and seizure. The belief recorded alone is justiciable but only while keeping in view the Wednesbury Principle of Reasonableness. Such reasonableness is not a power to act as an appellate authority over the reasons to believe recorded. (Para 32)

Constitution of India, 1950 ; Article 226 - Income Tax Act, 1961 ; Section 132 - Principles in exercising the writ jurisdiction in the matter of search and seizure under Section 132 restated. (Para 33)

Summary : Appeal against the judgment of High Court of Gujarat whereby the warrant of authorization issued by Principal Director Of Income Tax (Investigation) under Section 132 of the Income Tax Act was quashed - Allowed - 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.

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