Mr. S. Ramanujam (Chartered Accountant) in this article analyses the recent Madras HC ruling on various questions pertaining to search and seizure. The author is of the view that with searches becoming frequent nowadays and covered extensively by the media, it is pertinent that the taxpayers are aware of their rights. He shares his views on various aspects of the judgment that upheld the constitutionality of retrospective amendments made in the search and seizure regime. He also throws light on observations made by the Court while remanding the matter back to the Revenue on validity of search warrant, purpose of special audit etc.

New vistas in Search & seizure cases – Madras High Court’s views!

In this article the author has attempted to highlight certain new views found in the judgment in the proceedings under sec 132.

Facts of the Case:

1. A search under sec 132 was carried out against 3 individuals and totally 5 panchanamas were issued against the joint names of the individuals and on a partnership firm.

2. Consequent to the search, notices under sec 153A were issued against the firm for AY 2014-15 to 2016-17. For the ay 2017-18 the petitioner filled a return disclosing an Income of Rs 220.04 cr.

3. A special audit under sec 142(2A) was ordered by the Tax department and the same was also completed.

4. The assessment order made a reference to witnesses who were not put for cross-examination by the petitioners. Some of these witnesses later retracted their statements. Despite the fact that in the earlier writ petition filed by the petitioners the Department gave an assurance that statement of those witnesses who were not allowed to be cross examined would not be used, the assessment order made a reference to the statement of these witnesses.

Besides the above, the constitutional validity of certain provisions viz., sec 292CC, the explanation under sec 132(1) inserted in 2017 with retrospective effect from 1-4-1962, the explanation under sec 132A(1A) and sec 132A with retrospective effect from 1-4-1975, etc., were also challenged. The department objected to the maintainability of the writ petition itself.

The Hon’ble HC disposed of all these issues in an elaborate Order as detailed below.

Issue 1:

Statements by witnesses who were not subjected to cross-examination cannot be used while making assessment—an assurance given was not followed by the department.

On this aspect, the Court observed:

We seriously deprecate the revenue from going against their statement. The use of the statement by witnesses even for corroboration without affording an opportunity for cross-examination is not an admissible evidence. To declare a witness to be hostile he has to be produced before the authority and if he does not support the party called for evidence he can be declared as hostile.

The department has not informed the court about certain witnesses turning hostile and in this process the department has played hide and seek with the Court as well as the assessee.

Thus, we find that there is a violation of principle of natural justice but the action is contemptuous in using the statements of witnesses who were not made available for cross-examination. The statement of these witnesses would not qualify to be evidence in the eye of law.

Issue no 2:

Maintainability of the writ petition

Reasoning of the Court:

Violation of principles of natural justice would itself be a ground for jurisdiction of this Court under Article 226 because it violates articles 14 &19. When challenge to the authorisation of warrant of search by the competent officer is made, the writ petition would be maintainable. Here The Court relied on a recent judgment of the SC rendered in Asst  Commissioner of Sales tax v Commercial Steel Limited -2021 SCC online 884

Issue no 3:

Constitutional validity of provisions:

Reasoning of the Court:

1. Challenge to amendment made to sec 292CCC of the Act with retrospective effect has no impact in this case as this retrospective amendment was not made use in this case.

2. The amendments to sec 132, 132(1A) & 132A(1) though retrospective in nature cannot be said to be offending the fundamental rights of the petitioner under Article 14 or Article 19 unless it is otherwise unconstitutional. Hence this ground is rejected.

Issue no 4

Non consideration of the special Audit report—including the comment about the allowability of expenditure by special auditor not accepted by AO

Reasoning of the Court:

Though the Special Audit Report is not binding on the revenue, the reasons for discarding should be recorded by the assessing authority and it cannot be summarily discarded. This issue is to be properly addressed at the time of remand.

Issue no 5

Validity of warrant of authorisation

Reasoning of the Court:

Here it is noticed that many of the panchanamas are not authorised by competent officers as provided in the section but by officers who are not competent to authorise search.

It is not only that the authorisation should be by competent authority, but it is on satisfaction of that authority, search warrant can be issued. This issue would go to the root of the case. This issue should be analysed when fresh assessment is made on remand.

Issue no 6

Proceedings under sec 153A

Reasoning of The Court:

Here the panachanamas were issued in certain cases against individuals and in certain cases against the firm. If material collected against such person is used against another person, then proceedings under sec 153C can be taken and not under sec153A. Whether the materials collected against the individuals can be used against the Firm without following the mandate of sec 153C would be permissible in law, need to be examined. This issue should be examined in the remand proceedings.

Issue no 7  

Addition based on same set of materials against two assessees Reasonings of the court: 

The assessing authority before concluding the assessment of the Firm, completed assessment in the case of some yard owners and the same material which was used against the firm was made against the yard owners. This approach is totally illegal. The assessment against the yard owners were completed under sec 153C and the  same AO passed the assessment order against the Firm even though he was satisfied earlier, that the income belongs to the yard owners.

Remanded—to make fresh assessment in the case of the firm after eliminating the materials used in the assessment of the yard owners.

Issue no 8.

Disallowance of expenditure

Reasoning of the Court:

The argument that sec 40A(3) will not apply to cases where income is not computed on the basis of proper books of accounts but on the basis of certain seized documents, loose sheets, etc., is an argument with substance.

Views on certain portions of the Judgment:

1. Constitutional validity:

While researching on the subject, particularly the background to the amendment made initially to sec 132, the author came across the following passage in the circular issued by CBDT explaining the amendments made in the finance Act 1964 (circular no 20 D -dated 7-7-1964-). This is extracted below:

Substitution of the provision of Sec 132:

Under the section as it stood before the substitution, any Income tax officer (specially authorised by the Commissioner in this behalf) was permitted to enter and search any building or palace where he has reason to believe that any books of accounts or other documents which in his opinion will be useful for or relevant to any proceedings under the Income Tax Act may be found, and to (i) seize such books of accounts or documents (ii); place marks of identification thereon or take extracts or copies therefrom; and (iii)or make any inventory of articles or things found in the course of search which in his opinion would be useful or relevant to any proceedings under the Income Tax Act. This provision was on the lines of the provisions in sec 37(2) of the 1922 Act. In one case, where the assessee challenged the validity of the search conducted under the provisions sec 37(2) of the 1922 Act, the Assam HC struck down the provisions laws as violative of article 14 and 19(1)(g) of the Constitution. The main objections taken against the provisions of sec 37 (2) of the 1922 Act were that –

(a) there is nothing to indicate the purpose and object for exercising the powers under the section, or that nexus is disclosed between the purpose and object of the provision and exercise of drastic powers thereunder.

(b) There is no indication as to when and in what circumstances the power in that section can be exercised.

(c) There is no indication in the subsection in respect of which persons and whose premises the powers to be exercised.

(d) The subsection discloses or contains no policy of the legislature, nor any principles which according to the legislature afford guidance for exercise of power under that subsection by the executive.

(e) That no provision is made for the return of the seized books of accounts or any time limit for any such return.

Section 132, as substituted by sec 30 of the Finance Act 1964, has been drafted after taking the above-mentioned points into consideration.

From the above, it is clear that the challenge to the constitutionality on the basis of apprehension of encroachments into the fundamental rights of citizen was always felt in respect of many amendments made to sec 132 and no wonder in this case too, an attempt was made to attack the retrospective amendments.

2. Views on discarding of the special audit report in while completing the assessment:

The usual method adopted by the Department in all cases where special audit is ordered is to seek references only on specific issues which are clearly in their favour by taking the special auditor to dig some additional facts to support their case. In this case, a favourable point made in favour of the petitioner’s assessment is sought to be ignored by the AO and that is being objected to. Here The Court’s view is really a path-breaking one.

3. Addition made on different assessees based on same set of materials:

The practice followed generally by the Department in many cases is the use of a method known as `protective assessment‘. If, for instance, there is no clarity on whose hands the income to be assessed, at the time of completing an assessment the Department can assess both under this method of protective assessment.

Here strangely, both are taxed on the basis of same set of materials, which the Court has rightfully deleted in the hands of the Firm which was assessed last.

(The author recalls humorously an incident when fringe benefit tax (FBT) law was applicable, which also included FBT on sales promotion expenses and the Department taxed it in the regular assessment by disallowing under sec 40(a)(ia) and also making a protective assessment under FBT the same expenditure under two different tax enactments. With great difficulty the author could get this sorted out by the ITAT).

4. Views on application of sec 153C on the Firm instead of sec 153A or warrant of authorisation by non-empowered officials:

These are all intricate issues, and the court has rightly remanded these issues for reconsideration at the time of remand.

5. Views on disallowance expenditure in best judgment assessments:

This is a correct argument that there cannot be any disallowance of cash payments under sec 40A(3) when income is computed on estimated basis by applying gross profit ratio though in many cases the AO, at the time of making assessment, does not want to give up this extra disallowance.

Conclusion:

With so many actions by various regulators against allegedly named tax evaders, the time has come to lay down certain basic rules for the guidance of the Department based on few issues highlighted above. In the author’s view this is very relevant now as today there is a faceless assessment scheme in place and though raid cases are not covered therein, there is a need to lay down guidelines so that the actions of the regulators are approved by the higher judicial authorities. People who are interested to learn more about the assessee (who was initially accused of substituting old currencies with new currencies of huge magnitude during the demonetisation period) may read in full another case law where the hon’ble SC, in J. Sekar @ Sekar Reddy v Enforcement Directorate—criminal appellate jurisdiction (dated 5-05-2022). After noticing the closure reports by IT department and CBI of all inquiries against the assessee, the SC quashed the notices issued by Enforcement directorate too on the assessee, after setting aside the adverse decision of the Mad HC.

One can end up saying—in some cases the litigation too ends up faster!