Power to examine the validity of search

    1.2 An assessment of the person being searched is made u/s.153A to S. 153C of the Act in cases of search conducted on or after 1-6-2003, which in the past was completed under Chapter XIVB in consequence of search up to 31-5-2003.

    1.3 S. 246A provides for an appeal, before the CIT(A), against such an assessment made in consequence of a search and S. 253 provides for second appeal before the ITAT.

    1.4 It is often that the person being searched challenges, in appeal, the validity of the search action, by contesting the adequacy of reasons, or, at times the very existence thereof. In such cases, the issue that often arises for consideration is about the power of the ITAT to examine the validity of a search action.

    1.5 One school of thought holds that the ITAT being a quasi-judicial authority is not empowered to sit in judgment on the validity of the action of an Income-tax authority issuing the warrant, against whose action no specific appeal is provided in the Act. The other school upholds the power of the ITAT to question the validity of a search action.

    1.6 The issue has been examined recently by two courts delivering conflicting decisions requiring us to take a note of the same.

2. Chitra Devi Soni’s case, 313 ITR 174 (Raj.) :

    2.1 In Chitra Devi Soni, 313 ITR 174 (Raj.), the assessee, Chitra Devi, filed an appeal before the Tribunal challenging the validity of the assessment order on the ground that the said order was violative of the principles of natural justice. The assessee contended that the assessment order was bad in law for the reason that the same was passed merely on the surmises and beliefs of the authority without being in possession of any material as was required u/s. 132 of the Income-tax Act. According to the assessee, there was no material with the Director to form the belief as was required under the provisions of S. 132(1) and in the absence of any material to this effect, the assessment order passed was not maintainable and, therefore, the assessment order deserved to be set aside.

    2.2 The Tribunal in appeal had adjudicated the said issue, after referring to the various judgments on the subject concerning the Tribunal’s jurisdiction to examine the validity of the authorisation when the same was challenged before the Tribunal.

    2.3 The Tribunal noting the failure of the Revenue authorities to produce the records, held that the search action was invalid in the absence of an authorisation. It held that an authorisation for search was sine qua non for the purpose of passing the order of assessment by the assessing authority and in the case before it, even the factum of authorisation based on reasons had not come on record. In those circumstances, the Tribunal passed the order to the effect that search was not valid and consequentially, the block assessment was held to be illegal.

    2.4 In the above background, the Revenue raised the following question in appeal before the High Court. “Whether for having recourse to assessment for the block period under Chapter XIV-B, a valid search u/s.132 is a condition precedent and mere fact of search is not enough to give jurisdiction to the Assessing Officer to have recourse to the provisions under Chapter XIV-B ? If so, whether, in the facts and circumstances of the present case the Tribunal was right to hold that the search conducted in the present case was invalid ?”

    2.5 The Revenue contended before the Rajasthan High Court that the Tribunal could not look into the validity of the search, conducted under the provisions of S. 132 of the Income-tax Act. It was urged that the Tribunal had no jurisdiction or competence to look into this aspect, and therefore, the judgment rendered by the Tribunal was without jurisdiction and went beyond its competence and the Tribunal had no power to declare a search to be illegal or to be invalid.

    2.6 In reply, the assessee submitted that when the basic foundation, i.e., the authorisation for search issued on the basis of the reasons was not in existence, then the Tribunal had no option but to hold that assessment of the block period was illegal and that the search was without valid authorisaton.

    2.7 It was explained to the Court that for a valid block assessment, it was necessary that a search was conducted u/s.132 and for conducting such search, authorisation was required to be given only where the concerned authority had reasons to believe that there existed circumstances enumerated in clauses (a) to (c) of S. 132(1), and in the absence of authorisation based on such reasons, the block assessment itself could not be made.

2.8 The Court took note of the provisions of Chapter XIB and of S. 132 and observed that a bare reading thereof left the Court in no manner of doubt, in view of the use of word ‘then’, that the act of authorising a search had of necessity to be preceded by the existence of reason based on material in possession of the authority. In other words, existence of reason to believe, in consequence of information in possession of the officer was the sine qua non to entitle the authority to issue an authorisation as required by S. 132. It was obvious to the Court that on dissatisfaction of the abovementioned requirements of law, there could possibly be no authorisation, irrespective of the fact that it might have been made and issued and in turn if any search was conducted in pursuance of such an authorisation issued in the absence of requisite sine qua non, the search could not be said to be a ‘search’ u/s.132 of the Act, as contemplated by the provisions of S. 158B of the Act.

2.9 The Court held that the issue of an authorisation based on the reasons recorded in turn on the basis of the material available went to the root of the matter concerning the jurisdiction of the assessing authority to proceed under Chapter XIV-B and in that view of the matter, the Tribunal was very much justified, and had jurisdiction to go into the question as to whether the search was conducted consequent upon the authorisation having been issued in the background of the existence of eventualities and material mentioned in S. 132(1). In the end the Court observed that it was conscious of the fact that it was not open for the Court to go into the question of sufficiency of the reasons on the basis of which the competent authority might have had entertained the reason to believe the existence of one or more of the eventualities under clauses (a) to (c) but then the question as to whether there at all existed any material to entertain the reason to believe, even purportedly, consequent upon information in his possession, with the competent authority was the matter which could definitely be looked into by the Tribunal so also by the Court as the absence thereof would vitiate the entire action.

3. Paras Rice Mills’ case:

3.1 In the case of Paras Rice Mills, 313 ITR 182 (P &H), a search and seizure action u/s.132(1) of the Act was carried out on September 26, 1995, at the business premises of the assessee and the assessment u/s.158BC was completed in consequence of the said search. The assessee preferred an appeal and also raised grounds contesting the validity of search. The Tribunal held that the search and seizure was illegal as no material was produced before the Tribunal to show that the requirements of S. 132(1) of the Act were complied with.

3.2 The Revenue in an appeal before the High Court raised the following question for consideration of the Punjab & Haryana High Court. “Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in deciding to go into the validity of the action taken u/s.132(1) of the Income-tax Act, 1961?”

3.3 The Revenue contended that the Tribunal acted beyond its jurisdiction in deciding the issue of validity of the action by relying upon the judgments of the Delhi Tribunal in Virinder Bhatia, 79 ITD 340 and of the Madhya Pradesh High Court in Gaya Prasad Pathak, 290 ITR 128.

3.4 In reply, the assessee claimed that the Tribunal had the power to examine the validity of the search and in support of their claim relied on the judgment of the Rajasthan High Court in Smt. Chitra Devi Soni, 313 ITR 174 and also a judgment of the Delhi High Court in the case of Raj Kumar Gupta (ITA No. 50 of 2002 passed on August 21, 2003).

3.5 The Delhi High Court expressed their agreement with the view taken by the Delhi Tribunal in Virinder Bhatia, 79 ITD 340 and the Madhya Pradesh High Court in Gaya Prasad Pathak, 290 ITR 128 and for the same reason, respectfully disagreed with the view taken by the Rajasthan High Court in Smt. Chitra Devi Soni, 313 ITR 174 and observed that the judgment of the Court  in Raj Kumar  Gupta’s case (supra) did  not deal with the issue of scope of the assessing authority and power of the Tribunal to go into the question of validity of search.

3.6 The Court held that the Tribunal when hearing an appeal against the order of assessment could not go into the question of validity or otherwise of any administrative decision for conducting the search and seizure which might be the subject matter of challenge in independent proceedings where the question of validity or otherwise of administrative order could be gone into. The appellate authority in the opinion of the court was concerned with correctness or otherwise of the assessment, only.

4. Observations:

4.1 It is puzzling for an ordinary mind to question the power of the Tribunal to examine the validity of a search action u/s.132, where the Tribunal’s power to otherwise deal with the validity of an assessment, reassessment or revision under the Income-tax Act is accepted without batting an eyelid. Like reassessment or revision, a search also is authorised by one of specified authorities and it becomes difficult to conceive as to how these acts are different in nature so that one is capable of being tried by the ITAT and the other is not.

4.2 On the first blush, it may appear to be obvious to side with the view of the Rajasthan High Court holding that the Tribunal is vested with the power to examine the validity or otherwise of the search action but on deeper examination of the fact one needs to concede that the case of the revenue also deserves due consideration as the same is also found on the edifice of sound reasoning.

4.3 A right of an appeal is not an inherent right but is derived form statute which in the present case is under S. 246A and S. 253. An appeal lies only in cases where the circumstances listed in these sections exist failing which no appeal can lie. On a reading of these provisions, one would agree that they do not specifically provide for an appeal against the action of the authority issuing a search warrant. There is no provision permitting a person being searched to challenge the act of the authority issuing the search warrant before any other Income-tax authority like CIT(A) or the quasi-judicial authority like Tribunal. The only remedy is to approach the Courts, under the writ jurisdiction, vested under Articles 32 and 226 of the Constitution of India, for challenging the validity of the search action. Relying on this understanding the Revenue authorities including the Courts have taken a view that it is not possible for the Tribunal to examine the validity of the search action.

4.4 It is in the context of what is stated above that the MP High Court in Gaya Prasad Pathak, CIT, 290 ITR 128, in an appeal against the third member order of the Tribunal concerning itself with S. 132A, observed that the jurisdiction exercised by the statutory authority while hearing the appeal could not extend to the examination of the justifiability of an action u/s.132A of the Act. That a search warrant issued by the Commissioner was without jurisdiction or not could not be the subject ma tter of assessment as the same did not arise in the course of assessment and therefore, neither the Assessing Officer nor the Appellate authority could dwell upon the said facet as the same was not a jurisdictional fact within the parameters of assessment proceeding or of an appeal arising therefrom where the scope was restricted to adjudication of the fact to the limited extent as to whether such search and seizure had taken place and what had been found during the search and seizure. The validity of search and seizure, in the considered opinion of the Court, was neither jurisdictional fact nor adjudicatory fact and therefore, the same could not be dwelt upon or delved into in an appeal.

4.5 A note also deserves to be taken of the decision of the Special Bench of the Delhi ITAT in the case of Promain Ltd. 95 ITD 489 wherein it has been held that the Tribunal appointed under the Income-tax Act does not have the power to examine the validity of a search action conducted u/s.132 or u/ s.132A while disposing of appeal against the order of block assessment.

4.6 Having noted the case of the Revenue, let us also appreciate the case of the taxpayer which also is founded on the strong base if not stronger than the Revenue’s base. On a careful observation of the provisions of Chapter XIVB as also S. 153A to S. 153C, it is noticed that a search assessment for the block period is made possible in cases where a search action u/s.132 or u/s.132A has taken place. It is only when the AO is satisfied about the fact of the search that he derives a jurisdiction to make a search assessment and it is at this stage that the authority vested with the power to make a search assessment has to satisfy himself about the validity of the search howsoever limited its scope is. Any failure by this authority to satisfy himself can be a subject matter of appeal before the CIT(A) and the tribunal and it is for this reason that the Appellate authority and with respect, an assessing authority has the power to examine whether the prima facie requirements for issue of a search authorisation were present or not.

4.7 An act of issuing a search warrant is an act carried out by the authority appointed under the Act which provides the very source on the basis of which a search assessment for the block period is carried out and it will be fair to subject such an act to examination by an appellate authority in cases where an appeal is filed against the order made on the basis of the presumption of a valid search. The power of a search assessment is derived only form an action u/s.132 or u/s.132A and in that view of the matter it is just to subject the same to the scrutiny of the appellate authorities otherwise empowered to examine the whole canvass of assessment that is springing form the search.

4.8 Article 323 of the Constitution of India lends the source for setting up of a Tribunal including ITAT. The said Article, vide clause 2(i) provides for power to examine material incidental to assessment by the Tribunal. It is this power that should empower the ITAT to examine the reasons and the validity of search.
 
4.9 It is true that the ITAT, being the creature of the Income-tax Act, derives its power under the statute and therefore its powers should be circum-scribed to those which are specifically vested in it by the Act. In our opinion, there is no reason to restrict the power of the ITAT where it is otherwise empowered to examine the validity of assessment.

Needless to say that when an Appellate authority is required to look into the validity of an assessment whose foundation is based on a single act, in this case a search action, it per force is required to examine the source material leading to such an assessment.

4.10 Initiating a search is an administrative action with dire consequences and therefore attracts principles of natural justice not only requiring but empowering the ITAT to examine the source material for search and its validity. Please see Rajesh Kumar, 287 ITR 91 (SC).

4.11 To contest such a scrutiny power of an Appellate authority only on the ground that as the AO does not have power to do so, the same cannot be done by the Appellate authorities as well is not in keeping with the prevailing times.

4.12 While two diametrically opposite views, genuinely possible, on the subject are considered, it will be fair and just and also equitable to read the power of examining validity of the Tribunal while interpreting its power u/s.253 and such reading will support the principles of natural justice instead of , frustrating it. Till such time a consensus of judicial opinion is achieved, an aggrieved person is advised to explore the possibility of approaching the High Court under Article 226 for suitable remedy which though costly may be expeditious.