Recording of reasons critical while issuing warrant under Section 132 of the Income Tax Act

Warrant of authorization under Section 132 of the Act is required to be founded on a reasonable belief of the authorized official regarding the existence of the conditions precedent to the exercise of the power to issue the same.

Whether High Court in exercise of writ jurisdiction under Article 226 of the Constitution of India can prevent the authority acting under Income Tax Act, 1961 from conducting a search was the subject matter of adjudication in the present matter. 

In the instant matter, notice under Section 153A of the Income Tax Act, 1961 (Act) was issued upon the Assessee for initiating block assessment for the relevant assessment years following a search. This was interdicted by the High Court by interfering with the warrant of authorization for the search issued under Section 132 of the Act and the consequential search on relevant dates. Revenue against the above action of High Court has filed an appeal by special leave under Article 136.

Warrant of authorization under Section 132 of the Act is required to be founded on a reasonable belief of the authorized official regarding the existence of the conditions precedent to the exercise of the power to issue the same. The principles noted by the Court as the one holding applicability are as follows:

i.    The authority must have information in its possession on the basis of which a reasonable belief can be founded that-
a.    The concerned person has omitted or failed to produce books of account or other documents for production of which summons or notice had been issued; OR
Such person will not produce such books of account or other documents even if summons or notice is issued to him; OR
b.    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.
ii.    Such information must be in possession of the authorized official before the opinion is formed.
iii.    There must be application of mind to the material and the formation of opinion must be honest and bonafide. Consideration of any extraneous or irrelevant material will vitiate the belief/satisfaction.
iv.    Though Rule 112(2) of the Income Tax Rules which specifically prescribed the necessity of recording of reasons before issuing a warrant of authorization had been repealed on and from 1st October, 1975 the reasons for the belief found should be recorded.
v.    The reasons, however, need not be communicated to the person against whom the warrant is issued at that stage.
vi.    Such reasons, however, may have to be placed before the Court in the event of a challenge to formation of the belief of the authorized official in which event the court (exercising jurisdiction under Article 226) would be entitled to examine the relevance of the reasons for the formation of the belief though not the sufficiency or adequacy thereof.
The necessity of recording of reasons, as observed, acts as a cushion in the event of a legal challenge being made to the satisfaction reached. Reasons enable a proper judicial assessment of the decision taken by the Revenue.

However, the above, by itself, would not confer in the assessee a right of inspection of the documents or to a communication of the reasons for the belief at the stage of issuing of the authorization. Any such view would be counterproductive of the entire exercise contemplated by Section 132 of the Act. It is only at the stage of commencement of the assessment proceedings after completion of the search and seizure, if any, that the requisite material may have to be disclosed to the assessee. The different steps in the decision making process is lucidly laid down in the instructions contained in the search and seizure manual published by the department. 
It was held that the steps delineated were scrupulously followed. The High Court findings with regard to the satisfaction recorded by the authorities held to be appearing in the nature of an appellate exercise touching upon the sufficiency and adequacy of the reasons and the authenticity and acceptability of the information on which satisfaction had been reached by the authorities. Such an exercise was concluded as alien to the jurisdiction under Article 226 of the Constitution. Revenue’s appeal was accordingly allowed. 

[DGIT (Investigation) Pune & Ors. vs. M/s. Spacewood Furnishers Pvt. Ltd. & Ors.]
(SC, 13.05.2015 – Civil Appeal No. 4394 of 2015)