# PRINCIPAL DIRECTOR OF INCOME TAX (INVESTIGATION) & ORS v. LALJIBHAI KANJIBHAI MANDALIA

- **Citation:** [2022] 15 S.C.R. 232
- **Court:** Supreme Court of India
- **Decided:** 2022-07-13
- **Case number:** Civil Appeal No. 4081 Of 2022
- **Bench:** Hemant Gupta, V. Ramasubramanian
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/principal-director-of-income-tax-investigation-ors-v-laljibhai-kanjibhai-35545
- **Pages:** 33

## Headnote

Income Tax Act, 1961: ss. 132 and 133 - Search and Seizure
under - Reason to believe -Assessee during the financial year
transferred a sum of 10 Crores to a company -Assessee secured the
loan by way of a mortgage of the property -Assessee became director
to the company and ceased to be so the next month - Amount of
Rs.10 crores was repaid with interest on different dates and after
repayment of the loan, mortgage was released- Assessee filed his
income-tax return showing the interest income which has been taxed
as well - After recording reasons to believe in the satisfaction note,
search was conducted in terms of s.132 - Satisfaction note was not
supplied to the assessee nor was required to be disclosed in terms
of Explanation to s. 132(1) -Assessee challenged the warrant of
authorization issued by Revenue - High Court quashed the warrant
of authorization -On appeal, held: The view of the High Court that
the authorization to search the premises of the assessee is invalid,
cannot be sustained -Detailed satisfaction note shows multiple
entries in the account books of Company's Director -Manner in
which Director contacted the assessee in Ahmedabad for a loan of
Rs.10 crores does not appear to be a normal transaction -
Subsequent repayment of mortgage and the interest income reflected
in the relevant assessment year appears to be the steps taken by the
assessee to give a colour of genuineness -Investmentof Rs.10 crores
for a short period was not for earning interest income as the same
was repaid in the same assessment year -Revenue intends to
investigate the fund trail of the money paid by the assessee- Such
belief is not out of hat or whimsical-It was a reasonable belief drawn
by the Revenue that the assessee shall not produce or cause to be
produced any books of accounts or other documents which would
be useful or relevant to the proceedings - Such believe was
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not based upon conjectures but on a bona-fide opinion framed in
the ordinary conduct of the affairs by the assessee generallyRevenue wishes to find out as to whether amount is an undisclosed
income - 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 - Thus, the High
Court not justified in setting aside the authorization of search.
s. 132 -Search and seizure under - Principles to be followed
- Stated.
Allowing the appeal, the Court
HELD: 1. The detailed satisfaction note shows multiple
entries in the account books of SS and others. The manner of SS
who was either in Siliguri (West Bengal) or in Goa contacting the
assessee in Ahmedabad for a loan of Rs.10 crores does not appear
to be a normal transaction. Subsequent repayment of mortgage
and the interest income reflected in the relevant assessment year
appears to be the steps taken by the assessee to give a colour of
genuineness but the stand of the Revenue that such entry was an
accommodation entry is required to be found out and also the
cobweb of entries required to be unravelled including the trail of
the money paid by the assessee.The reasons to believe are not
the final conclusions which the revenue would arrive at while
framing block assessment in terms of Chapter XIV-B of the Act.
The test to consider the justiciability of belief is whether such
reasons are totally irrelevant or whimsical. The reply in the
counter affidavit shows that the intention of the Revenue was to
un-layer the layering of money which is suspected to be done by
the assessee. The Revenue has asserted that the accommodation
entry is a common modus operandi to bring the unaccounted black
money to books for a brief period. 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. The Revenue intends
to investigate the fund trail of the money paid by the assessee.
Such belief is not out of hat or whimsical. [Paras 24 and 25][257B-H; 25

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SUPREME COURT REPORTS
[2022] 15 S.C.R.
 [2022] 15 S.C.R. 232
232
PRINCIPAL DIRECTOR OF INCOME TAX
(INVESTIGATION) & ORS.
v.
LALJIBHAI KANJIBHAI MANDALIA
(Civil Appeal No. 4081 Of 2022)
JULY 13, 2022
[HEMANT GUPTA AND V. RAMASUBRAMANIAN, JJ.]
Income Tax Act, 1961: ss. 132 and 133 - Search and Seizure
under - Reason to believe -Assessee during the financial year
transferred a sum of 10 Crores to a company -Assessee secured the
loan by way of a mortgage of the property -Assessee became director
to the company and ceased to be so the next month - Amount of
Rs.10 crores was repaid with interest on different dates and after
repayment of the loan, mortgage was released- Assessee filed his
income-tax return showing the interest income which has been taxed
as well - After recording reasons to believe in the satisfaction note,
search was conducted in terms of s.132 - Satisfaction note was not
supplied to the assessee nor was required to be disclosed in terms
of Explanation to s. 132(1) -Assessee challenged the warrant of
authorization issued by Revenue - High Court quashed the warrant
of authorization -On appeal, held: The view of the High Court that
the authorization to search the premises of the assessee is invalid,
cannot be sustained -Detailed satisfaction note shows multiple
entries in the account books of Company's Director -Manner in
which Director contacted the assessee in Ahmedabad for a loan of
Rs.10 crores does not appear to be a normal transaction -
Subsequent repayment of mortgage and the interest income reflected
in the relevant assessment year appears to be the steps taken by the
assessee to give a colour of genuineness -Investmentof Rs.10 crores
for a short period was not for earning interest income as the same
was repaid in the same assessment year -Revenue intends to
investigate the fund trail of the money paid by the assessee- Such
belief is not out of hat or whimsical-It was a reasonable belief drawn
by the Revenue that the assessee shall not produce or cause to be
produced any books of accounts or other documents which would
be useful or relevant to the proceedings - Such believe was
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not based upon conjectures but on a bona-fide opinion framed in
the ordinary conduct of the affairs by the assessee generallyRevenue wishes to find out as to whether amount is an undisclosed
income - 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 - Thus, the High
Court not justified in setting aside the authorization of search.
s. 132 -Search and seizure under - Principles to be followed
- Stated.
Allowing the appeal, the Court
HELD: 1. The detailed satisfaction note shows multiple
entries in the account books of SS and others. The manner of SS
who was either in Siliguri (West Bengal) or in Goa contacting the
assessee in Ahmedabad for a loan of Rs.10 crores does not appear
to be a normal transaction. Subsequent repayment of mortgage
and the interest income reflected in the relevant assessment year
appears to be the steps taken by the assessee to give a colour of
genuineness but the stand of the Revenue that such entry was an
accommodation entry is required to be found out and also the
cobweb of entries required to be unravelled including the trail of
the money paid by the assessee.The reasons to believe are not
the final conclusions which the revenue would arrive at while
framing block assessment in terms of Chapter XIV-B of the Act.
The test to consider the justiciability of belief is whether such
reasons are totally irrelevant or whimsical. The reply in the
counter affidavit shows that the intention of the Revenue was to
un-layer the layering of money which is suspected to be done by
the assessee. The Revenue has asserted that the accommodation
entry is a common modus operandi to bring the unaccounted black
money to books for a brief period. 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. The Revenue intends
to investigate the fund trail of the money paid by the assessee.
Such belief is not out of hat or whimsical. [Paras 24 and 25][257B-H; 258-A-B]
2. As per the Revenue, Clauses (b) & (c) of Section 132 (1)
were satisfied before the warrant of authorization was approved.
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The satisfaction note was recorded in terms of an assessee whose
jurisdictional assessing officer was in the State of the West Bengal.
It is the cobweb of accounts of such assessee which are required
to be unravelled. It is not unreasonable for the Revenue to
apprehend that the assessee would not respond to the summons
before the Assessing Officer in the State of West Bengal. It was
also alleged that such summons would lead to disclosure of
information collected by the Revenue against SS and his group.
Therefore, it was a reasonable belief drawn by the Revenue that
the assessee shall not produce or cause to be produced any books
of accounts or other documents which would be useful or relevant
to the proceedings under the Act. Such believe was not based
upon conjectures but on a bona-fide opinion framed in the ordinary
conduct of the affairs by the assessee generally. The notice to
the assessee to appear before the Income Tax authorities in the
State of West Bengal 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. Even clause (c) of Section 132(1) is satisfied.
The assessee was in possession of Rs.10 crores which was
advanced as loan to the Company. The Revenue wishes to find
out as to whether such amount is an undisclosed income which
would include the sources from which such amount of Rs.10 crores
was advanced as loan to a totally stranger person, unconnected
with either the affairs of assessee or any other link, to justify as
to how a person in Ahmedabad has advanced Rs.10 crores to the
Company situated at Kolkata in West Bengal for the purpose of
investment in Goa. 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. [Paras 27 and 28][258-E-H; 259-A-D]
3. 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 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][262-E-F]
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Tata Cellular v. Union of India (1994) 6 SCC 651 :
[1994] 2 Suppl. SCR 122; Indian Oil Corporation Ltd.
v. Rajendra D. Harmalkar 2022 SCC Online SC
486;Utkal Suppliers v. Maa Kanak Durga Enterprises
2021 SCC Online SC 301- referred to.
4. The principles in exercising the writ jurisdiction in the
matter of search and seizure under Section 132 of the Act are as
follows: i) The formation of opinion and the reasons to believe
recorded is not a judicial or quasi-judicial function but
administrative in character; ii) 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; iii) 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 noticeis issued
to him; or iv) 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; v) 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. 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; vi) 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; vii) 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; viii) 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
PRINCIPAL DIRECTOR OF INCOME TAX (INVESTIGATION) &
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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; ix) 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. The High Court was not
justified in setting aside the authorization of search. The order
passed by the High Court is set aside. [Paras 33 and 34][262-FG; 263-A-H; 264-A-C]
S. Narayanappa v. CIT, AIR 1967 SC 523 : [1967]
1 SCR 590; N.K. Jewellers and Another v. Commissioner
of Income Tax, New Delhi (2018) 12 SCC 627; The
Income Tax Officer, I Ward, District VI, Calcutta and
Ors. v.LakhmaniMewal Das (1976) 3 SCC 757 : [1976]
3 SCR 956; Partap Singh (Dr) v. Director of
Enforcement (1985) 3 SCC 72 : [1985] 3 SCR 969;
Union of India v. Agarwal Iron Industries (2014) 15
SCC 215 : [2014] 11 SCR 181; Commissioner of
Income Tax, Allahabad and Ors. v. Vindhya Metal
Corporation and Ors. (1997) 5 SCC 321; Income Tax
Officer, Special Investigation Circle-B, Meerut v. Seth
Brothers and Ors. (1969) 2 SCC 324 [1970] 1 SCR
601; Director General of Income Tax (Investigation),
Pune and Ors. v. Spacewood Furnishers Private Limited
and Ors. (2015) 12 SCC 179 : [2015] 6 SCR 807;
Union of India v. Ajit Jain & Anr. (2003) 260 ITR 80
(SC); Phool Chand Bajrang Lal and Anr. v. Income Tax
Officer and Anr. (1993) 4 SCC 77 : [1993] 1 Suppl.
SCR 28; N. Nagendra Rao & Co. v. State of A.P. (1994)
6 SCC 205 : [1994] 3 Suppl. SCR 144; Seth Brothers
& Ors. etc.; Vindhya Metal Corporation & Ors; Ajit
Jain v. Union of India (2000) 242 ITR 302 (Del.);
Dimondstar Exports Ltd. v. Director General of IncomeTax (Investigation) (2005) 278 ITR 36 (Bom.);
MECTEC v. Director of Income-Tax (Investigation)
(2021) 433 ITR 203 (Telangana); L.R. Gupta & Ors. v.
Union of India & Ors. (1991) SCC OnLine Del. 584 :
(1992) 194 ITR 32 (Del.); Janak Raj Sharma v.
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Director of Inspection (Investigation) & Ors. (1995) 215
ITR 234 (P&H) - referred to.
Case Law Reference
(2018) 12 SCC 627
referred to
Para 10
(1997) 5 SCC 321
referred to
Para 10
[1970] 1 SCR 601
referred to
Para 10
[2015] 6 SCR 807
referred to
Para 10
[1967] 1 SCR 590
referred to
Para 13
[1976] 3 SCR 956
referred to
Para 15
[1985] 3 SCR 969
referred to
Para 16
[1993] 1 Suppl. SCR 28
referred to
Para 17
[1994] 3 Suppl. SCR 144
referred to
Para 18
[2014] 11 SCR 181
referred to
Para 19
[1994] 2 Suppl. SCR 122
referred to
Para 11
CIVIL APPELLATE JURISDICTION : Civil Appeal No.4081
of 2022.
From the Judgment and Order dated 22.02.2019 of the High Court
of Gujarat at Ahmedabad in R/Special Civil Application No.16360 of
2018.
Balbir Singh, ASG, Rupesh Kumar, Ms. Swarupama Chaturvedi,
Sandeep Kumar Mahapatra, Saurabh Mishra, Udai Khanna, Rajesh
Nayak, Ms. Surbhi Singh, Samarvir Singh, Sagarika Kaul, Shyam Gopal,
Gopal Chandra Mishra, Raj Bahadur Yadav, Advs. for the Appellants.
Arvind P. Datar, Sr. Adv., Galav C. Sharma, Parthasarthi Mehd.,
Somanadri Goud Katam, Nitin Thukral, Mrs. Sarabjot Walia, Sirajuddin
malik, Advs. for the Respondent.
The Judgment of the Court was delivered by
HEMANT GUPTA, J.
1. The challenge in the present appeal is to an order dated
22.02.2019 passed by the High Court of Gujarat at Ahmedabad whereby
PRINCIPAL DIRECTOR OF INCOME TAX (INVESTIGATION) &
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SUPREME COURT REPORTS
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the warrant of authorization dated 07.08.2018 issued by the appellant1
under Section 132 of the Income Tax Act,19612 was quashed.
Consequently, all actions taken pursuant to such warrant of authorization
were ordered to be rendered invalid.
2. The respondent3 in its writ petition challenged the act of
authorization for search and seizure on the ground that it is a fishing
enquiry and the conditions precedent as specified in Section 132 of the
Act are not satisfied. It is the stand of the assessee that he was looking
for an avenue to invest some money and the M/s. Goan Recreation
Clubs Private Ltd4. 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. It may be noticed that there is no
allegation of mala-fides against the officers of the Revenue.
3. In the counter-affidavit filed by the Revenue, giving the history
of transaction, it was stated that the "chain of events raised credible
doubt on the transaction entered into by the petitioner (assessee) with
the company in question as it is the familiar modus operandi being
practiced by the entry operators". It was also stated that the assessee
was not expected to comply with the notice of the Revenue as the
assessee would have brought the alibi of jurisdiction to evade or not
comply with the notice. It was in the interest of revenue that it was not
expected to disclose to any outside agency/body or 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. Any inkling of action contemplated by the Revenue was
likely to compromise the confidentiality and secrecy of the case intact.
It was further stated that the apparent investment made by the assessee
was found to be not a judicious investment choice from the point of view
of a prudent businessman as the company to which loan was provided
by the assessee had no established business, no goodwill in the market,
nor was it enlisted in any of the stock exchanges, nor did the assessee
had any financial dealings with the company previously. The quick
repayment of loan shows that the investment was not meant to earn
steady interest income. The investment and nature of transaction entered
1 For short, 'Revenue'
2 For short, 'Act'
3 For short, 'Assessee'
4 For short, 'Company'
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into by the assessee was akin to the familiar modus operandi employed
by the entry operators to provide an accommodation entry to bring the
unaccounted black money to books for brief period to run the business
till sufficient fund is generated by running the business or some fund
from any other unaccounted source comes later on. This is the angle of
the investigative process underway in which trail of the money being
paid by the assessee is being investigated.
4. The undisputed facts are that the assessee during the financial
year 2016-17 transferred a sum of Rs. 6 crores on 01.06.2016 and Rs. 4
crores on 21.06.2016 to M/s Goan Recreation Clubs Private Ltd. The
assessee secured the loan by way of a mortgage of the property forming
part of Survey No. 31/1-A situated in Village Bambolim, Distt. North
Goa. It is an admitted fact that the assessee became the Director of the
Company on 18.05.2016 and then ceased to be so on 23.06.2016. It is
also admitted that amount of Rs.10 crores was repaid on different dates
starting from 06.10.2016 till 31.03.2017 and after repayment of the loan,
mortgage was released on 10.07.2017. The Company paid interest as
well. It is admitted that the assessee has filed his income-tax return
showing the interest income of Rs.42,51,946/- which has been taxed as
well. The assessment was finalized under Section 143(3) of the Act on
02.03.2021.
5. In terms of the authorization after recording reasons to believe
in the satisfaction note, search was conducted on 10.08.2018 at the
residential premises of the assessee which continued till 3:00 am on
11.08.2018 in terms of Section 132 of the Act. The satisfaction note was
not supplied to the assessee nor was required to be disclosed in terms of
Explanation to Section 132(1) of the Act inserted by the Finance Act,
2017 with retrospective effect i.e. on 01.04.1962.The reasons recorded
were produced before the High Court and before this Court.
6. The High Court has reproduced the stand of the Revenue to
explain the action of search and seizure against the assessee as under:
"a) The authorized officers/ investigating officers conducted search
and seizure operation at various spots across various states related
to the case of Shri Sarju Sharma & other associated group 'of
companies which had financial transactions with Shri Sarju Sharma
(PANAKOPS3325A) and M/s. Goan Recreation Clubs Pvt Ltd.,
Goa (PAN-ANYPS6038F), hereinafter referred to as 'the
PRINCIPAL DIRECTOR OF INCOME TAX (INVESTIGATION) &
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company'. Shri Sarju Sharma is a leading business entrepreneur
of Siliguri, Dist-Jalpaiguri, engaged in the hospitality business of
Hotel, Restaurant and Bar running business under the name and
style of M/s Hotel Alishan and Restaurant. The company M/s.
Goan Recreation Clubs Pvt Ltd. after being incorporated in the
year 2015 has stepped into the world of gaming & entertainment
unit of Casino industry. The casino business is being operated
from the premises of Grand Hyatt Hotel, Bambolin, Goa w.e.f.
29th Ju1y, 2016.
b) The name of M/s Goan Recreation Clubs Pvt Ltd. appeared in
the credible information on high value cash deposits/ data of
suspicious cash deposits post demonetization period disseminated
by the DGIT(Inv.), W.B., Sikkim & NER, wherein it was found
that the said company had deposited cash to the tune of
Rs.13,79,10,500/- into its two bank accounts maintained with ICICI
Bank and HDFC Bank, North Goa.
c) M/s Goan Recreation Clubs Pvt. Ltd. was incorporated on
28.09.2015 with a nominal paid up share capital of Rs 2,00,000/-.
The initial Directors were Sarju Shanna and Shri Rohit Gurubhakta
Sharma. During the initial year of its incorporation, i.e., in the
financial year 2015-16 the company raised huge unsecured loan
of Rs 5.77 crore from various individuals and companies in a very
peculiar manner, as the company at that juncture was yet to
commence any substantive business activities. Again, in the
financial year 2016- 17 the company raised an unsecured loan of
Rs.34.10 crore from various individuals and companies which
includes an amount of Rs.10 crore from the petitioner viz. Shri
Laljibhai Kanjibhai Mandalia from Ahmedabad. The details of
unsecured loan received by the company and credited into the
bank accounts of the company are given below:
xx
xx
xx
d) From the above chart it is noticed that the company raised
huge unsecured loans within two years of its incorporation from
various individuals and companies.
e) Whereas, in the pre search analysis, on going through the records
available with the MCA (Ministry of Corporate Affairs) and ITBA
(Income Tax Business Application) it came to light that the
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company M/s Goan Recreation Clubs Pvt. Ltd. During the financial
year 2016-17 have introduced three new Directors along with the
exit of then existing Director Shri Rohit Gurubhakta Sharma on
03.03.2017, the details given in the following table:
xx
xx
xx
(f)
xx
 xx
 xx
(g)
 xx
 xx
 xx
The search and seizure operation in the premises of the petitioner
was contemplated and carried out on the basis of the information
gathered as explained in the above point nos. (a) to (g) of this
para.
From the above though it is found that Shri Mandalia had resigned
as Additional Director of the company on 25.06.2016 and the loan
was repaid by the company in the same year as noticed from the
table given at point no. (g) of this para but the chain of events
raises credible doubt on the transactions entered into by the
petitioner with the company in question as it is the familiar modus
operandi being practiced by the entry operators.
Therefore, from the foregoing paras it can be concluded that the
department initiated the search and seizure operation in the
premises of the petitioner after conforming to all the criteria
mentioned in the Section 132 sub-section 1 clause (s), (b) and (c)
of the Income Tax Act, 1961. The search and seizure action was
initiated after detailed analysis of information, duly recording of
reasons in the Satisfaction Note and approval of the same by the
competent authorities."
7. The Company was incorporated on 28.09.2015 with two
Directors holding 10,000 shares each of the face value of Rs.10. The
stand of the Revenue shows that the said Company stepped into the
business of gaming and entertainment and launched a casino in Goa on
29.07.2016 without having any adequate capital. The allegation against
the company is in relation to cash deposits of total Rs.13,79,10,500/-
soon after demonetization on 08.11.2016. The satisfaction note prepared
by DDIT (Investigation), Unit-1, Jalpaiguri was approved by Additional
Director of Income Tax (Investigation) Unit-5, Kolkata and further
approved by DGIT (Investigation), Kolkata on 07.08.2018. The High
PRINCIPAL DIRECTOR OF INCOME TAX (INVESTIGATION) &
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Court also quoted paragraph 4.3 from an affidavit in-reply filed by the
Revenue which reads thus:
"5.3. As far as the investment opportunity is concerned, it is quite
glaring that the petitioner invested 10 crores within a span of one
month on 01.06.2016 and 21.06.2016 by way of loan on interest
given to M/s Goan Recreation Clubs Pvt. Ltd. The investment
was made from the Kotak Mahindra Bank A/c No. 80116714807
of the petitioner and deposited into the HDFC Bank A/c No.
50200015405430 of the company, M/s Goan Recreation Clubs
Pvt. Ltd. Interestingly, the loan was repaid by the latter in five
installments from 06.10.2016 to 31.03.2017 [as shown in point no.
(g) of para 4.1]. The apparent investment made by the petitioner
is found to be not a judicious investment choice from the point of
view of a prudent business man as the company to which the
petitioner provided loan, had no established business, no goodwill
in the market, nor was it enlisted in any of the stock exchanges,
nor did the petitioner have had any financial dealings with the
company previously. The quick repayment of the loan shows that
the investment was not meant to earn steady interest income. All
this goes on to suggest that the investment and nature of transaction
entered into by the petitioner was akin to the familiar modus
operandi being employed by the entry operators to provide an
accommodation entry to bring the unaccounted black money to
books for brief period to run the business till sufficient fund is
generated by running the business or some fund from any other
unaccounted source came later on. That is the angle of the
investigative process underway in which fund trail of the money
paid by the petitioner is being investigated"
8. 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). The said Section reads thus:
"132. Search and seizure - (1) Where the Principal Director
General or Director General or Director or the Principal Chief
Commissioner or Chief Commissioner or Principal Chief
Commissioner or Commissioner or Additional Director or
Additional Commissioner, or Joint Director or Joint Commissioner
in consequence of information in his possession, has reason to
believe that-
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(a) any person to whom a summons under sub-section (1) of
section 37 of the Indian Income Tax Act, 1922 (11 of 1922), or
under sub-section (1) of section 131 of this Act, or a notice under
sub-section (4) of section 22 of the Indian Income Tax Act, 1922
(11 of 1922), or under sub-section (1) of section 142 of this Act
was issued to produce, or cause to be produced, any books of
account or other documents has omitted or failed to produce, or
cause to be produced, such books of account, or other documents
as required by such summons or notice, or
(b) any person to whom a summons or notice as aforesaid has
been or might be issued will not, or would not, produce or cause to
be produced, any books of account or other documents which will
be useful for, or relevant to, any proceeding under the Indian
Income Tax Act, 1922 (11 of 1922), or under this Act, or
(c) any person is in possession of any money, bullion, jewellery or
other valuable article or thing and such money, bullion, jewellery
or other valuable article or thing represents either wholly or partly
income or property which has not been, or would not be, disclosed
for the purposes of the Indian Income Tax Act, 1922 (11 of 1922),
or this Act (hereinafter in this section referred to as the undisclosed
income or property).
Explanation- For the removal of doubts, it is hereby declared that
the reason to believe, as recorded by the income-tax authority
under this sub-section, shall not be disclosed to any person or any
authority or the Appellate Tribunal.
............................."
9. Mr. Balbir Singh, learned Additional Solicitor General of India,
appearing for the Revenue argued that the High Court has completely
misdirected itself in quashing the authorization as the jurisdiction of the
High Court while exercising judicial review is very limited. It was
contended that the High Court erred in law in finding that clauses (b)
and (c) of Section 132(1) of the Act are not satisfied when it recorded
as under:
"16......Thus, as rightly submitted by the learned counsel for the
petitioner, the belief that the petitioner would not respond to a
summons or notice issued as envisaged under clause (b) of subsection (1) of section 132 is not based upon any information or
PRINCIPAL DIRECTOR OF INCOME TAX (INVESTIGATION) &
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other material but is based upon conjectures and surmises that
the petitioner would take the alibi of lack of jurisdiction on the part
of the respondents. This contention of the first respondent also
lends support to the contention raised on behalf of the petitioner
that powers under section 132 of the Act have been resorted to
because that is the only provision which vests jurisdiction in the
Kolkata authorities for taking action against the petitioner.
Evidently, therefore, the circumstance envisaged under clause (b)
of sub-section (1) of section 132 of the Act does not exist in the
present case.
17.....There is nothing on record to indicate that any belief has
been formed by the competent authority to the effect that the
petitioner has in his possession any money, bullion, jewellery or
other valuable article or thing which would not have been disclosed
by him for the purposes of the Act. On the contrary, in the facts
of the present case, from the record of the case as produced by
the respondents as well as by the petitioner, it is evident that the
loan transaction whereby the petitioner had advanced
Rs.10,00,00,000/- to the borrower company has been duly reflected
in the books of account of the petitioner. In his return of income,
the petitioner has duly shown the interest income from such
transaction. The tax deducted at source in respect of such interest
income, has been credited to the account of the petitioner by the
concerned authority. Therefore, the entire transaction has been
disclosed by the petitioner. There is no other material on record
on the basis the respondents could have formed the belief as
contemplated under clause (c) of sub-section (1) of section 132
of the Act. Evidently, therefore the circumstance envisaged under
clause (c) of section 132(1) of the Act also does not exist in the
present case."
10. Mr. Balbir Singh referred to the judgments of this Court
reported as N.K. Jewellers and Another v. Commissioner of Income
Tax, New Delhi5, Commissioner of Income Tax, Allahabad and Ors.
v. Vindhya Metal Corporation and Ors.6, Income Tax Officer, Special
Investigation Circle-B, Meerut v. Seth Brothers and Ors.7 and Director
5 (2018) 12 SCC 627
6 (1997) 5 SCC 321
7 (1969) 2 SCC 324
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General of Income Tax (Investigation), Pune and Ors. v. Spacewood
Furnishers Private Limited and Ors.8 to contend 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, it was argued that the
jurisdiction of the High Court is to examine the existence of reasons not
the legality of the same.
11. On the other hand, Mr. Datar, learned senior advocate
appearing for the assessee argued 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. It was argued that it is not the case
of the Revenue that clause (a) of sub-section (1) of Section 132 of the
Act is applicable, whereas the High Court has recorded a finding that
even clause (b) and clause (c) of sub-section (1) of Section 132 of the
Act are not satisfied. Since the view of the High Court is based upon
established principles of law, no case for interference is made out in the
present appeal under Article 136 of the Constitution of India. Mr. Datar
referred to the following judgments, namely, Seth Brothers & Ors. etc.;
Vindhya Metal Corporation & Ors; Ajit Jain v. Union of India9, Union
of India v. Ajit Jain & Anr.10, Dimondstar Exports Ltd. v. Director
General of Income-Tax (Investigation)11, MECTEC v. Director of
Income-Tax (Investigation)12, L.R. Gupta & Ors. v. Union of India
& Ors.13 and Janak Raj Sharma v. Director of Inspection
(Investigation) & Ors.14.
12. We have heard learned counsel for the parties and find that
the view of the High Court that the authorization to search the premises
of the assessee is invalid, cannot be sustained. The expression "reasons
to believe" is a component of many statutes such as in the case of
reassessment of Income under the Act or its predecessor statute, the
Essential Commodities Act, 1955; the Foreign Exchange Regulation Act,
8 (2015) 12 SCC 179
9 (2000) 242 ITR 302 (Del.)
10 (2003) 260 ITR 80 (SC)
11 (2005) 278 ITR 36 (Bom.)
12 (2021) 433 ITR 203 (Telangana)
13 (1991) SCC OnLine Del. 584 : (1992) 194 ITR 32 (Del.)
14 (1995) 215 ITR 234 (P&H)
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1973 as well as in respect of action of the Revenue in the matter of
search and seizure.
13. In S. Narayanappa v. CIT,15 a case of re-assessment for
the reason that income had escaped assessment, this Court held the
Revenue must have reason to believe that the income, profits or gains
chargeable to income tax had been underassessed. The Court held as
under:
"2. ..... ..... But the legal position is that if there are in fact some
reasonable grounds for the Income Tax Officer to believe that
there had been any non-disclosure as regards any fact, which
could have a material bearing on the question of underassessment
that would be sufficient to give jurisdiction to the Income Tax
Officer to issue the notice under Section 34. Whether these
grounds are adequate or not is not a matter for the court to
investigate. In other words, the sufficiency of the grounds
which induced the Income Tax Officer to act is not a justiciable
issue. It is of course open for the assessee to contend that the
Income Tax Officer did not hold the belief that there had been
such non-disclosure. In other words, the existence of the belief
can be challenged by the assessee but not the sufficiency of
the reasons for the belief. Again the expression "reason to
believe" in Section 34 of the Income Tax Act does not mean a
purely subjective satisfaction on the part of the Income Tax
Officer. The belief must be held in good faith: it cannot be merely
a pretence. To put it differently it is open to the court to examine
the question whether the reasons for the belief have a rational
connection or a relevant bearing to the formation of the belief and
are not extraneous or irrelevant to the purpose of the section. To
this limited extent, the action of the Income Tax Officer in starting
proceedings under Section 34 of the Act is open to challenge in a
court of law. (See Calcutta Discount Co. Ltd. v. Income Tax
Officer, Companies District I, Calcutta [41 ITR 191]
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4. .............. The earlier stage of the proceeding for recording
the reasons of the Income Tax Officer and for obtaining the
sanction of the Commissioner are administrative in character
15 AIR 1967 SC 523
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and are not quasi-judicial. The scheme of Section 34 of the
Act is that, if the conditions of the main section are satisfied a
notice has to be issued to the assessee containing all or any of the
requirements which may be included in a notice under sub-section
(2) of Section 22. ............."
14. Seth Brothers is referred to by both Revenue and the assessee
relating to the act of search and seizure. It was held that the exercise of
power is a serious invasion upon the rights, privacy and freedom of the
tax-payer. The power must be exercised strictly in accordance with law
and only for the purposes for which law authorizes it to be exercised.
The High Court had accepted that the correctness of the opinion actually
formed by the Income Tax Officer was not open to scrutiny in a writ
petition, but the search and seizure of documents and books of accounts
held to be made in excess of the powers conferred upon the Income Tax
Officer was mala fide. This Court found no merit in such finding in view
of the sworn affidavits by the concerned Income Tax Officers that they
did in fact form the requisite opinion under Section 132 of the Act. This
Court set aside the findings recorded by the High Court, when it was
held as under:
"8. The section does not confer any arbitrary authority upon the
Revenue Officers. The Commissioner or the Director of
Inspection must have, in consequence of information, reason to
believe that the statutory conditions for the exercise of the power
to order search exist. He must record reasons for the belief and
he must issue an authorisation in favour of a designated officer to
search the premises and exercise the powers set out therein.
................ If the action of the officer issuing the authorization,
or of the designated officer is challenged the officer concerned
must satisfy the Court about the regularity of his action. If the
action is maliciously taken or power under the section is
exercised for a collateral purpose, it is liable to be struck
down by the Court. If the conditions for exercise of the power
are not satisfied the proceeding is liable to be quashed. But where
power is exercised bona fide, and in furtherance of the
statutory duties of the tax officers any error of judgment on
the part of the Officers will not vitiate the exercise of the
power. Where the Commissioner entertains the requisite belief
and for reasons recorded by him authorises a designated
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officer to enter and search premises for books of account
and documents relevant to or useful for any proceeding under
the Act, the Court in a petition by an aggrieved person cannot
be asked to substitute its own opinion whether an order
authorising search should have been issued. Again, any
irregularity in the course of entry, search and seizure
committed by the officer acting in pursuance of the
authorisation will not be sufficient to vitiate the action taken,
provided the officer has in executing the authorisation acted
bona fide.
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21. These proceedings were brought before the High Court by
way of a writ petition under Article 226 of the Constitution before
any investigation was made by the Income Tax Officers pursuant
to the action taken by them. In appropriate cases a writ petition
may lie challenging the validity of the action on the ground
of absence of power or on a plea that proceedings were taken
maliciously or for a collateral purpose. ........................"
15. In The Income Tax Officer, I Ward, District VI, Calcutta
and Ors. v. Lakhmani Mewal Das16, this Court was examining the
scope of the expression "reason to believe" in the context of reopening
of assessment on the ground that income had escaped assessment. It
was held that the powers of the Income Tax Officer to reopen assessment,
though wide, but are not plenary. The words of the statute are "reason
to believe" and not "reason to suspect". It was held that no doubt the
Court cannot go into the sufficiency or adequacy of the material and
substitute its own opinion for that of the Income Tax Officer on the point
as to whether action should be initiated for reopening assessment, but at
the same time, it is not any and every material, howsoever vague and
indefinite or distant, remote and farfetched, which would warrant the
formation of the belief relating to escapement of the income of the
assessee from assessment. This Court held as under:-
"11. As stated earlier, the reasons for the formation of the belief
must have a rational connection with or relevant bearing on
the formation of the belief. Rational connection postulates
that there must be a direct nexus or live link between the
material coming to the notice of the Income Tax Officer and
16 (1976) 3 SCC 757
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the formation of his belief that there has been escapement of
the income of the assessee from assessment in the particular
year because of his failure to disclose fully and truly all
material facts. It is no doubt true that the court cannot go
into the sufficiency or adequacy of the material and substitute
its own opinion for that of the Income Tax Officer on the
point as to whether action should be initiated for reopening
assessment. At the same time we have to bear in mind that it is
not any and every material, howsoever vague and indefinite
or distant, remote and farfetched, which would warrant the
formation of the belief relating to escapement of the income
of the assessee from assessment........