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REPORTABLE

IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.4394 OF 2015 (Arising out of S.L.P.(C) No. 38611 of 2012)

Director General of Income Tax (Investigation) Pune & Ors.         .  ..   Appellants

Versus

M/s. Spacewood Furnishers Pvt. Ltd. & Ors.   ...  Respondents

J U D G M E N T

RANJAN GOGOI, J.

1. Leave granted.

2. The block assessment of the respondent-assessee for the

assessment  years  2004-05  to  2009-10  was  sought  to  be

initiated by notices issued under Section 153A of the Income

Tax Act, 1961 (hereinafter referred to as the ‘Act’) following a

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search made under the provisions of the Act. The same has

been interdicted by the High Court of Delhi by interfering with

the  warrant  of  authorization  for  the  search  issued  under

Section  132 of  the  Act  and the  consequential  search made

between 19th June,  2009 to  21st July,  2009.  Aggrieved,  the

Revenue has filed this appeal by special leave under Article

136 of the Constitution.

3. We have heard Shri Guru Krishna Kumar, learned senior

counsel  for  the  appellants  and  Shri  Krishnan  Venugopal,

learned senior counsel appearing for the respondents.  

4. The issues that arise in the present appeal lie within a

short  circumference.  As  the  warrant  of  authorization  under

Section 132, which 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,  has  been  interdicted  under  Article  226  of  the

Constitution, the ambit of the power of the High Court to do so

may be noticed at the outset.

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5. The “classical” notion of the extent of power that the High

Court  would  have  in  the  exercise  of  its  writ  jurisdiction  to

cause  such  interference  is  formulated  in  ITO  vs.  Seth

Brothers1 and  Pooran  Mal  vs.  Director  of  Inspection

(Investigation), Income Tax2. The parameters of permissible

interference as laid down in the aforesaid two decisions have

stood  the  test  of  time  and  continue  to  hold  the  field  even

today.  We may,  therefore,  advert  to  ITO vs.  Seth Brothers

(supra) in the first instance.  

6. Considering the scope of Section 132 of the Act in ITO vs.

Seth Brothers (supra), this Court at page 843 held that :-

“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.  The condition for  entry into and making search of any building or  place is  the  reason to believe that any books of account or other documents

1 1969 (74) ITR 836 (SC)  2 (1974) 93 ITR 505 (SC)

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which  will  be  useful  for,  or  relevant  to,  any proceeding under the Act may be found. If the Officer has reason to believe that any books of account  or  other  documents  would  be  useful for,  or  relevant  to,  any proceedings under the Act, he is authorised by law to seize those books of  account  or  other  documents,  and  to  place marks of identification therein, to make extracts or copies therefrom and also to make a note or an  inventory  of  any  articles  or  other  things found in the course of the search. Since by the exercise of the power a serious invasion is made upon  the  rights,  privacy  and  freedom  of  the tax-payer, the power must be exercised strictly in  accordance  with  the  law  and  only  for  the purposes for which the law authorizes it to be exercised. 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  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

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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.

The Act and the Rules do not require that the warrant  of  authorisation  should  specify  the particulars of documents and books of accounts a general  authorisation to search for and seize documents and books of account relevant to or useful  for  any  proceeding  complies  with  the requirements of the Act and the Rules. It is for the  officer  making  the  search  to  exercise  his judgment  and  seize  or  not  to  seize  any documents  or  books  of  account.  An  error committed by the Officer in seizing documents which may ultimately be found not to be useful for or relevant to the proceeding under the Act will  not  by itself  vitiate the search,  nor will  it entitle  the  aggrieved  person  to  an  omnibus order releasing all documents seized.”

7. In  Pooran Mal vs.  Director of Inspection (supra) the

constitutional  validity  of  Section  132  was  under  challenge.

While negating the said challenge, this Court at page 515 of its

report had held that:

“Dealing first  with the challenge under  Article 19(1)(f)  and (g)  of  the  Constitution  it  is  to  be

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noted  that  the  impugned  provisions  are evidently  directed  against  persons  who  are believed  on  good  grounds  to  have  illegally evaded the payment of tax on their income and property. Therefore, drastic measures to get at such income and property with a view to recover the  government  dues  would  stand justified  in themselves.  When  one  has  to  consider  the reasonableness  of  the  restrictions  or  curbs placed  on  the  freedoms  mentioned  in  Article 19(1)(f) and (g), one cannot possibly ignore how such evasions eat into the vitals of the economic life of the community. It is a well-known fact of our  economic  life  that  huge  sums  of unaccounted  money  are  in  circulation endangering its very fabric. In a country which has  adopted  high  rates  of  taxation  a  major   portion  of  the  unaccounted  money  should normally fill the Government coffers. Instead of doing so it distorts the economy. Therefore, in the  interest  of  the  community  it  is  only  right that the fiscal authorities should have sufficient powers to prevent tax evasion.”

8. What is significant and, therefore, must be noticed is that

in  both  the  aforesaid  two  decisions  while  this  Court  has

emphasized the necessity of recording of reasons in support of

the ‘reasonable belief’ contemplated by Section 132, nowhere,

in either of the decisions any view had been expressed that the

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reasons recorded prior to authorizing the search needs to be

disclosed or communicated to the person against whom the

warrant  of  authorization  is  issued.  The  same  is  the  view

expressed by this Court in Dr. Pratap Singh vs. Director of

Enforcement3  while considering a pari material provision in

the Foreign Exchange Regulation Act.     

“The material on which the officer has reasons to believe that any documents will be useful for or  relevant  to  any  investigation  need  not  be disclosed in the search warrant;  such material may be secret, may have been obtained through intelligence,  or  even  conveyed  orally  by informants.  In  the  said  case,  the  petitioner contended that, if the court is going to look into the  file  produced  on  behalf  of  the  officer  who authorized  the  search,  it  must  be disclosed to the  petitioner  so  that  the  petitioner  “can controvert  any  false  or  wholly  unreasonable material  set  out  in  the  file”,  but  the  Supreme Court  did  not  accept  this  submission.  The Supreme  Court  also  referred  to  an  earlier decision in S. Narayanappa v. CIT [1967] 63 ITR 219  (SC),  to  hold  that  whether  grounds  for ordering search were sufficient  or  not  is  not  a matter for the court to investigate. However, the court  may  examine  the  question  whether  the reasons for the belief have a rational connection or  a  relevant  bearing  to  the  formation  of  the

3 (1985 (155) ITR 166 (SC)

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belief and are not extraneous or irrelevant for the purpose of the section.”     

9. The principles that can be deduced from the aforesaid

decisions  of  this  Court  which  continue  to  hold  the  field

without any departure may be summarized 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

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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

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formation  of  the  belief  though  not  the  sufficiency  or

adequacy thereof.

10.   Before proceeding further it will be necessary to take

note of certain other facts that may have a bearing to the issues

at hand.  By  Notification  No.354  of  2001  dated  3.12.2001  in

exercise of the powers conferred by Section 120(1) & (2) of the

Act,  the  Central  Board  of  Direct  Taxes  had  directed  the

Directors of Income Tax (Investigation) specified in Column (2)

of the Schedule to the said Notification to exercise the power

vested in them under Section 132 of the Act in relation to the

territorial  areas  specified  in  Column (3)  of  the  Schedule.  By

virtue  of  the  said  notification  the  Director  of  Income  Tax

(Investigation),  Nagpur  i.e.  Appellant  No.2  was  authorized  to

exercise the power under Section 132 of the Act in respect of

the territorial areas falling within the jurisdiction of the CCIT

Nagpur and CCIT Nasik in the State of Maharashtra.

11. Notice must also be had of certain provisions contained

in the Search and Seizure Manual published by the Directorate

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of Income Tax with regard to the preparation of satisfaction note

and issuing of warrant of authorization under Section 132 of

the Act. Para 2.38 of the aforesaid Manual being relevant may

be usefully extracted :    “2.38 The “satisfaction note”  should  ordinarily  be initiated  by  the  ADIT  (Investigation)/DDIT (Investigation).  It  should  be  put  up  to  the  DIT (Investigation)  through  the  Joint/Additional  DIT (Investigation), along with the detailed comments of the latter. The note must be recorded in the secret file,  already  prepared  for  this  purpose,  containing material  like,  the secret information collected from various  sources,  statement(s),  if  any  of  the informant(s),  reference to  tax evasion petition(s),  if any, surveillance reports and information relating to assessment(s), returns of income, wealth, etc, where available.”

12. It will also be required to be noticed that by Notification

dated 7.3.2001 administrative approval of the Director General

of  Income Tax (investigation)  was made mandatory before an

authorization  for  search  is  issued.  The  said  requirement

appears to have been brought in order to obviate a malafide

search and to avoid undue harassment of the taxpayers.

13. In the present case the satisfaction note(s) leading to the

issuing  of  the  warrant  of  authorization  against  the

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respondent-assessee were placed before the High Court.  As it

would  appear  from the  impugned order  the  contents  thereof

were   exhaustively  reproduced  by  the  High  Court.  The  said

satisfaction note(s) have also been placed before us. A perusal

of  the file  containing the satisfaction note(s)  indicate  that  on

8.6.2009 the Assistant Director of  Income Tax (Investigation),

Nagpur  had  prepared  an  elaborate  note  containing  several

reasons as to why he had considered it reasonable to believe

that  if  summons or  notice  were  issued to  the  respondent  to

produce the necessary books of account and documents,  the

same  would  not  be  produced.  The  Assistant  Director  also

recorded detailed reasons why he entertains reasons to believe

that the promoters of the respondent-assessee company would

be found to be in possession of money, bullion, jewellery etc.

which represents partly or wholly income which has not been

disclosed for the purposes of the Act

14. The  said  note  was  put  up  for  consideration  before  the

Additional Director (Investigation) who on perusal of the same

once again proceeded to record elaborate reasons for his belief

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that  the  conditions  precedent  for  issuing  warrant  of

authorization under Section 132 does exist in the present case.

Accordingly, the file was put up before the Director of Income

Tax  (Investigation),  Nagpur  for  issuing  of  warrant  of

authorization for search of the residential as well as business

premises of  the assessee and its Directors,  if  the Director  of

Income Tax (Investigation), Nagpur is so satisfied. The aforesaid

note of the Additional Director (Investigation) is dated 8.6.2009.

15. The  notes  of  the  two  officers  i.e.  Assistant  Director

(Investigation)  and  Additional  Director  (Investigation)  were

perused  and  considered  by  the  Director  (Investigation).  The

matter  was  also  discussed.  Thereafter  the  Director

(Investigation) recorded the relevant facts of the case and came

to the following conclusion:  

“On an overall  appreciation of  the facts  of  the case  I  am  satisfied  that  M/s.  Spacewood Furnishers  P  Ltd  is  suppressing  its  income substantially.  I  am  also  satisfied  that  the company is not likely to produce the details of such  unaccounted  income  and  the  books  of accounts  and  documents  containing  details  of such unaccounted incomes and assets if notices were to be issued to it u/131 or u/s.142(1) of the

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I T Act. It is also reliably learnt that the Directors S/Shri.  Kirit  Joshi  and  Vivek  Deshpande  and associated  concerns  M/S.  i3Space  Systems (India)  P  Ltd.,  Spacewood  Exports  P  ltd., Spacewood Hongkong P Ltd., i3space Hongkong Ltd.  and  Spacewood  Nest  P  Ltd  are  also  in possession of undisclosed income / assets and books,  documents  containing  details  of  such unaccounted  incomes.  It  appears  that  a substantial portion of such unaccounted money is  being  held  in  cash  also.  The  Directors  are maintaining  luxurious  life  styles  out  of  such unaccounted  income.  I  am  also  satisfied  that these companies and the directors are not likely to  furnish  the  details  of  such  unaccounted incomes and assets if notices were to be issued to them u/s.131 or 142(1) of the I.T. Act. I am therefore  satisfied  that  this  is  a  fit  case  for exercise of powers vested u/s.132 of the Act to search the persons (M/S. Spacewood Furnishers P  Ltd,  its  associated  concerns  and  Directors mentioned above) and the premises mentioned in the note of the ADIT to seize unaccounted assets and  documents  and  evidences  relating undisclosed income.”  

The  Director  of  Income  Tax  (Investigation),  Nagpur

thereafter put his signature dated 9.6.2009 on the said note.

16. There  is  an  endorsement  to  the  following  effect  at  the

bottom  of  the  said  note  again  under  the  signature  of  the

Director (Investigation) –

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“DGIT (Inv) Pune may kindly peruse the above satisfaction  note  and  grant  administrative approval for the search and seizure action.”     

17. On 11.6.2009 the matter was considered by the Director

General of Income Tax (Investigation) Pune who recorded the

following view :

“I  have  gone  through  the  notes  of  ADIT  (Inv), Nagpur  and  Addl.DIT  (Inv.),  Nagpur.  The satisfaction  note  of  DIT  (Inv.)  Nagpur  has  also been perused. I find that DIT (Inv.) Nagpur has got  adequate  information  to  arrive  at  his satisfaction  that  search  and  seizure  action  is required to  be  undertaken in  the  case  of  M/s. Spacewood Furnishers P. Ltd. promoted by Shri Kirit  Joshi  and  Vivek  Deshpande.  Accordingly, the  proposal  of  the  DIT  (Inv.)  Nagpur  to  take action u/s 132(1) of the Act is approved.”

18. The High Court by the impugned order dated 9.12.2011

has taken the  view that  in  the  present  case there  are  four

satisfaction notes of four different authorities. One of the said

authority i.e. Assistant Director is not the competent authority

under Section 132 of the Act. The Additional Director and the

Director who are competent authorities to issue the warrant of

authorization, though had recorded their satisfaction, have not

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taken the final decision to issue the authorization and each

such  authority  had  passed  on  the  file  to  his  immediate

superior, namely, the Additional Director to the Director and

the Director to the Director General. The High Court further

held that it is eventually the Director General who took the

decision to issue the search warrant but the said decision was

not on the basis of its own satisfaction but on the basis of the

satisfaction  recorded  by  the  Director  of  Income  Tax

(Investigation).  Consequently,  the  High  Court  held  that  the

satisfaction mandated by Section 132 of the Act was not that

of the authority who has issued the search warrant, thereby

vitiating the authorization issued.    19. The High Court further held that each of the satisfaction

notes was in loose sheets of paper and not a part of a single

file  maintained  in  proper  sequence  and  order  with  due

pagination.  Therefore,  according  to  the  High  Court,  it  is

possible that  the file  containing the satisfaction note(s)  was

manipulated and thus is of doubtful credibility.  

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20. The High Court also held that the materials indicated by

the  department  in  the  counter  affidavit  and  the  additional

affidavit filed before it were at variance with what was revealed

by the satisfaction note(s) placed before the Court. Even if the

satisfaction notes alone are to be gone by, the essential details

with regard to source of  information;  the persons who were

interrogated and with whom discreet enquiries were made are

not  disclosed.  The  necessary  information  revealed  by  such

interrogation  and  discreet  enquiries  with  regard  to  over

invoicing, market information etc. are not indicated.  Materials

like  high  growth,  high  profit  margins,  doubts  about

international brand and details thereof etc. as mentioned in

the  satisfaction  note(s)  are  admitted  and  known  facts  and

therefore  could  not  have  induced  the  requisite  belief.  The

above constitutes the broad basis on which the High Court

thought  it  proper  to  cause  inference  with  the  measures

undertaken by the Revenue against the assessee.     21. Before  we advert  to  the  specific  reasoning  of  the  High

Court, one specific aspect of the opinion expressed by the High

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Court  needs  to  be  taken  note  of  inasmuch  as  the  precise

position in law in this regard needs to be clarified. The above

aspect is highlighted by the following observations of the High

Court expressed in paragraph 6 of the impugned order:-

“We,  however,  express  that  when  the  satisfaction recorded is justiciable, the documents pertaining to such  satisfaction  may  not  be  immune  and  if appropriate prayer is made, the inspection of such documents may be required to be allowed.”   

22. In the light of the views expressed by this Court in  ITO

vs. Seth Brothers (supra) and Pooran Mal (supra), the above

opinion expressed by the High Court is plainly incorrect. The

necessity of  recording of reasons, despite the amendment of

Rule  112  (2)  with  effect  from  1st October,  1975,  has  been

repeatedly  stressed  upon  by  this  Court  so  as  to  ensure

accountability  and  responsibility  in  the  decision  making

process. The necessity of recording of reasons also 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,

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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 counter productive 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.   23. At this stage we would like to say that the High Court

had committed a serious error in reproducing in great details

the contents of the satisfaction note (s) containing the reasons

for the satisfaction arrived at by the authorities under the Act.

We have already indicated the time and stage at which the

reasons recorded may be required to be brought to the notice

of the assessee. In the light of the above, we cannot approve of

the  aforesaid  part  of  the  exercise  undertaken  by  the  High

Court  which  we  will  understand  to  be  highly  premature;

having the potential of conferring an undue advantage to the

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assessee thereby frustrating the endeavor of the revenue, even

if the High Court is eventually not to intervene in favour of the

assessee.

24. Having clarified the above issue in the manner indicated,

we may turn to the reasons assigned by the High Court for its

decision. The view expressed by the High Court with regard to

the satisfaction note(s); the alleged absence of a final decision

to  issue  the  authorization  at  the  level  of  the  Additional

Director and the Director; the absence of any satisfaction of

the Director General who, according to the High Court took

the decision to issue the authorization are all seriously flawed.

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, relevant part of

which has been extracted above.  The steps delineated have

been scrupulously followed. Besides we may take note of the

fact that the Additional Director was not one of the competent

authorities under Section 132 on 8.6.2009 (date of his note)

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inasmuch as it is by the Finance Act, 2009 effective from 19th

August, 2009 that the Additional Director came to be included

amongst  the  authorized  officials  though  with  retrospective

effect from 1.10.1998. The reading of the relevant part of the

satisfaction note of the Director goes to show that on the basis

of materials produced satisfaction was duly recorded by him

that authorization for search should be issued. The file was

put up before the Director General (Investigation) for accord of

administrative  approval  as  required  by  Notification  dated

7.3.2001.  In  fact,  the  requirement  to  obtain  administrative

approval  is  prompted  by  the  need  to  provide  an  additional

safeguard to the tax payer. A careful reading of the order of the

Director General would go to show that all  that he did was

to record the view that the satisfaction of the Director, Income

Tax  (Investigation)  was  reasonable  and  therefore

administrative approval should be accorded. The view taken by

the High Court, therefore, cannot be sustained.

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25. The possibility of manipulation of the records as found by

the High Court also does not commend to us for acceptance.

There  is  no  basis,  whatsoever,  for  coming  to  any  such

conclusion. Suspicion ought not to be the basis of any judicial

order and this is where the High Court seems to have erred.

 26. The remaining findings of the High Court with regard to

the satisfaction recorded by the authorities appear to be 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 is alien to the

jurisdiction under Article 226 of the Constitution.

27. In view of the foregoing discussions and for the reasons

alluded to, the order of the High Court dated 9.12.2011passed

in W.P. No. 2150 of 2010 is set aside. The proceedings against

the respondent-assessee will now commence from the stage at

which  the  same  was  interdicted  by  the  High  Court  by  its

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impugned  order.  Consequently,  the  appeal  filed  by  the

Revenue is allowed.       

……………………………J. [Ranjan Gogoi]

…………………..…………J.                                               [Pinaki Chandra Ghose]

New Delhi; May 13, 2015.

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