S.R. Batliboi & Co. v. Department of Income-tax (Investigation) VIKRAMAJIT SEN AND RAJIV SHAKDHER, JJ.

in search case revenue cannot have unrestricted access to records present in Laptop of assessee’s CA



HIGH COURT OF DELHI

S.R. Batliboi & Co.

v.

Department of Income-tax (Investigation)

VIKRAMAJIT SEN AND RAJIV SHAKDHER, JJ.

W.P. (C) NO. 9479 OF 2007

AND CM NO. 9520 OF 2008

MAY 27, 2009

Section 132 of the Income-tax Act, 1961 - Search and seizure - General - Whether in terms of section 132(1)(iib) revenue was entitled to demand an unrestricted access to and/or right to acquire electronic records present in laptops, that belonged to auditor of assessee and not to assessee himself, including electronic records pertaining to third parties unconnected with assessee group - Held, no

Words and phrases : ‘A person’ as occurring in section 153C of the Income-tax Act, 1961

‘Other person’ as occurring in section 158BD of the Income-tax Act, 1961

Facts

The petitioner was a reputed firm of auditors and accountants. While conducting an audit of the assessee, the laptops of two employees of the petitioner were seized by the Dy. Director in the course of conducting a search and seizure operation against the assessee. On the request of the Dy. Director, said employees provided him with the electronic data relating to three companies of the assessee-group together with the print copies of the data. Nevertheless, the Dy. Director insisted on securing total and unrestricted access to the laptops, obviously in order to gain information and data of all the other clients of the petitioner. That request was refused by the petitioner. The seized laptops were sent by the respondents to the Central Forensic Science Laboratory (CFSL) who, however, could not ascertain the password and, accordingly, could not access the entire data on the laptops. The petitioner was thereupon asked to disclose the password, which it again declined and thereafter, the laptops were sealed in the presence of the said employees of the petitioner. The petitioner, thereafter, filed instant writ petition seeking an appropriate writ to prevent the respondents from forcibly gaining or securing access to the data contained in two seized laptops. The contention of the petitioner was that granting absolute access to the department of all the data even pertaining to the other clients of the petitioner having no dealings with the assessee group, would tantamount to grave professional misconduct and would be contrary to the Code of Ethics applicable upon the petitioner as well as the obligations contained in the Chartered Accountants Act, 1949, which proscribes them from disclosing confidential information to third parties. On the other hand, the revenue contended that the petitioner was legally bound to provide unabridged, unrestricted and comprehensive data available/stored on the laptops pertaining to all the clients/companies. The argument was that the law entitles the Income-tax Department to seize not only the data concerning the assessee to whom notice under section 132 has been served, but by virtue of section 153C, its dominion is extended over any money, bullion, jewellery or other valuable article or thing or books of account or documents seized by the department even if it belongs to a third party.

Held

It could not be accepted that section 153C would entitle and empower the Dy. Director to seize any or all the articles, valuables or documents found during the course of the search, regardless of whether they are relevant for the purpose of assessment of the assessee on whom a search and seizure is conducted. The section provides for ‘assessment of income of any other person’ and the same is a much later stage to one which was present in the instant case. The question under consideration was whether the revenue was entitled to demand an unrestricted access to and/or right to acquire the electronic records present in the laptops, that belonged to the auditor of the assessee and not to the assessee himself, including electronic records pertaining to third parties unconnected with the assessee group. [Para 7]

Section 132(1)(iib) casts a compulsion on the owner of the laptops to provide the department with the password to the computer to enable inspection of the books of account maintained in electronic form in the laptops. The authorized officer of the department may, after inspection of the documents, seize such documents and books of account, obviously connected with the assessee in respect of whom steps under the other parts of section 132 have been initiated.

It would be perilous and fatal to lose sight of the reality that the powers of the search and seizure are very wide and, thus, the Legislature has provided a safeguard that the Assessing Officer should have reasons to believe that a person, against whom proceedings under section 132 are to be initiated, is in possession of assets which have not been or would not be disclosed. Secondly, the authorized officer is also required to apply his mind as to whether the assets found in the search have been disclosed or not, and if no undisclosed asset is found, no action can be taken under section 132(1)(iii) or sub-section (3). An arbitrary seizure cannot be maintainable even where the authority has seized documents with ulterior motives. [Para 9]

For a search or seizure to be legal, firstly it should not be ordered for mala fide, extraneous or for oblique reasons. Secondly, it must be predicated on information received by the authority who would have reason to believe that it is necessary to conduct such an operation. Thirdly, it should not be in the nature of a roving or fishing exercise. These three factors must be observed rigorously and even punctiliously, since the exercise of such powers invariably results in a serious invasion of the privacy and freedom of the citizen. However, search and seizure operations may not be illegal if the seized documents pertain to transactions of allied concerns, since they would have a bearing on the case of evasion of income-tax by the assessee concerned. CIT v. Jawahar Lal Rastogi [1970] 2 SCC 225 mandates that if the seized material is to be retained beyond 180 days, it must be supported by good and adequate reasons which have received the approval of the Commissioner. Although the warrant of authorization needs not specify the particulars of documents and books of account, yet an indiscriminate search or seizure is not postulated by the Act. Form Nos. 45 and 45A and rule 112(2) of the Income-tax Rules, 1962 which seek to effectuate the purposes of section 132(1) reinforce the distillation of the law articulated above. To justify search and/or seizure, it is essential that : (a) there must exist information which is laid before the Commissioner as a consequence of which he has (b) reason to believe that it is expedient to issue summons to produce books of account or other documents specified therein, which summons must (c) be addressed to a particular person, which formality obtains even in the case of money, bullion, jewellery, etc., that has not been declared; (d) specific particulars of the place where the above items are believed to be available must be indicated. All these rigorous formalities are indicative of the intention of the Parliament that the extremely harrowing experience of search or seizure made available under the Act must be particular to the named person and be confined to the mentioned place. If this is applicable to all and sundry, it would infract and nullify the fundamental rights of the citizen (third or unconnected party) concerned. [Para 10]

The words ‘other person’ employed in the section 158BD must only be construed as referring to the ‘other person’ having dealings or transactions with the party who is being searched or whose material is being seized. Otherwise, the provisions may well be seen as violative of the fundamental rights enshrined in articles 14 and 19 of the Constitution. [Para 11]

The petitioner had argued that the laptops, that had been seized by the respondent had confidential information relating to the accounts of 46 other clients, having no relation or business dealings with the assessee, and seizure of those accounts would amount to serious breach of confidentiality which they were bound to protect by the principles of professional ethics. The Income-tax Department could not make fishing or roving inquiry to initiate proceedings against all those companies which were the clients of the petitioner. It had been argued orally as well as in the synopsis that the petitioner could not assist any party in breaking the law. This submission was illogical, since it could not be presumed that the accounts relating to 46 other clients of the petitioner contained in the two laptops were of that character. The rigours of the law, inter alia, the necessity to have reasons to believe so must be recorded and be followed by warrants. An indiscriminate search frustrates the whole scheme of section 132 and emasculates the protective measures against these draconian powers. [Para 14]

So far as the case in hand was concerned, the words ‘a person’ employed in the section 153C have to be interpreted. The consideration would be whether these words would include a person totally unconnected with the party in respect of whom the seizure or seizure maneuver is directed, who by a quirk of fate chances to be in the wrong place at the wrong time. [Para 16]

The Supreme Court in District Registrar & Collector, Hyderabad v. Canara Bank AIR 2005 SC 186, which concerns the challenge to section 73 of the Stamp Act, 1899 (as substituted by the A.P. Act No. 17 of 1986), permitting any person authorized by the Collector to inspect registers, books, papers, documents and proceedings and to take notes and extracts, as may be deemed necessary, reiterated. The triple tests distilled by the 7 Judge Bench in Maneka Gandhi v. Union of India [1978] 1 SCC 248, viz., that a law interfering with personal liberty must : (a) be consonant with a prescribed procedure which should, (b) be compliant with one or more rights mentioned in article 19 and (c) with article 14 additionally. The Court thought it to be essential that documents deposited or stored in a bank must remain confidential. The same privilege of confidentiality must extend to auditors as well. The decision of the High Court striking down unbridled power sought to be given in section 73 of the Stamp Act was affirmed by the Supreme Court. This ratio could logically be extrapolated upon the facts of the instant case to conclude that the revenue was not empowered to make use of material stumbled upon by its officers in search conducted against a third party. [Para 17]

There are several decisions of the different High Courts where the material which was not found as a result of search and seizure was discarded for the purposes of assessment under Chapter XIV-B. If apparently reliable material cannot be directly used against an assessee solely because it was not collected during a search of that assessee, a fortiori, material palpably concerning a third party with no connection with the raided party must be ignored. It is also illogical that the rigours which apply to the search of a particular notified person can be flagrantly ignored so far as an unconnected person is concerned. It was argued that under section 153C, the department acts as a post office, viz., it sends the seized material to the concerned Assessing Officer. This proposition advanced by the revenue is legally acceptable so long as it is restricted to any person having dealings or transactions with the person who is the subject of the search and seizure operation. [Para 18]

Finally, so far as the prayers in the petition were concerned, in view of the fact that the respondents had rejected the offer made by the petitioner that the laptops be de-sealed, the entire data be examined by the Assessing Officer in the presence of representatives of the petitioner and the assessee; and inspection of the data on the laptops be done, without copying the data in any form for the purposes of informing the Court as to which files were connected with the assessee and would be required by the Assessing Officer, the impugned summons were to be set aside, and the respondents were to be directed to forthwith return the laptops to the petitioner. [Para 19]

Case review

District Registrar & Collector, Hyderabad v. Canara Bank AIR 2005 SC 186 [Para 17] followed.

Cases referred to

ITO v. Seth Bros [1969] 2 SCC 324 [Para 10], CIT v. Jawahar Lal Rastogi [1970] 2 SCC 225 [Para 10], Manish Maheshwari v. Asstt. CIT [2007] 159 Taxman 258 (SC) [Para 11], N.K. Textile Mills v. CIT [1966] 62 ITR 58 (Punj.) [Para 12], H.L. Sibal v. CIT [1975] 101 ITR 112 (Punj. & Har.) [Para 12], Commissioner of Commercial Taxes v. Ramkishan Shrikishan Jhaver [1967] 66 ITR 664 (SC) [Para 12], Saraya Industrial Ltd. v. Union of India [2008] 306 ITR 189/171 Taxman 194 (Delhi) [Para 16], District Registrar & Collector, Hyderabad v. Canara Bank AIR 2005 SC 186 [Para 17], Govind v. State of MP AIR 1975 SC 1378 [Para 17], Maneka Gandhi v. Union of India [1978] 1 SCC 248 [Para 17], CIT v. G.K. Senniappan [2006] 284 ITR 220/155 Taxman 118 (Mad.) [Para 18], CIT v. Ravi Kumar [2008] 168 Taxman 150 (Punj. & Har.) [Para 18] and CIT v. Ravi Kant Jain [2001] 250 ITR 141/117 Taxman 28 (Delhi) [Para 18].

S. Ganesh and Akhil Anand for the Petitioner. Vikas Singh, Ms. P.L. Bansal, M.P. Gupta and Sanjeev Rajpal for the Respondent.




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