Deputy Director Of Income-Tax (Investigation) And Others v. Mahesh Kumar Agarwal

D.K Seth, J.:— A notice under section 132(1) of the Income-tax Act, 1961, is the subject matter of challenge in this proceedings. The writ petition, however, was allowed by a judgment dated October 8, 2002 (Mahesh Kumar Agarwal v. Deputy Director of Income-tax, [2003] 260 ITR 67), quashing the notice. Challenging the said order passed in Writ Petition No. 2506 of 2001, the present appeal has since been filed.

2. Mr. Pronab Pal, learned senior counsel for the Revenue/appellant, pointed out the materials on which the opinion as to the existence of reason to believe was formulated, as is appearing from the paper book (pages 422-447). He pointed out that it satisfies the pre-conditions provided in section 132(1). According to him, the enquiry was conducted by an officer of the rank of the Deputy Director. He had made discreet enquiries, as is recorded in the notes prepared by him. He had given details of the reasons. These were considered by the Director and the Director-General who had authorised the search and seizure. According to him, the materials available on the note were sufficient for the formation of an opinion that there were reasons to believe. A reasonable man could very well form such an opinion on the basis of the materials available. He had relied on the decision in Phool Chand Bajrang Lal v. ITO, [1993] 203 ITR 456, 477 (SC), in support of his contention. He had also relied on the decision in ITO v. Seth Brothers, [1969] 74 ITR 836, 847 (SC), for the same proposition. He also relied on the decision in Pooran Mal v. Director of Inspection (Investigation), [1974] 93 ITR 505, 518-520 (SC). Elaborating his submission, he had led us through the detailed report and ratio laid down in those decisions. He pointed out that there is no infirmity in the issuance of notice under section 132(1) of the Act having regard to the facts and circumstances of the case. The court cannot adjudge the sufficiency or adequacy of the materials. It is only the existence of the materials that are to be examined and it is to be seen whether on such materials a reasonable man can form an opinion that there are reasons to believe for the purpose of issuance of notice under section 132(1) of the Act. Mr. Mihir Lal Bhattacharya, learned senior counsel for the respondent, on the other hand, contended that the judgment appealed against is well reasoned and is based on facts and materials. The note seems to be biased and the materials contained therein were not sufficient to form the necessary belief for the purpose of section 132(1). These were in the nature of rumour, gossip and newspaper reports. These could not form the material. As such there existed no materials. He contended that the search and seizure is in effect a trespass into the privacy of the assessee. Therefore, it has to conform to the strict compliance of the provisions authorising search and seizure. Having regard to the materials that the entire thrust was in respect of “Pratik Food Products Pvt. Ltd.”, as is seen from the various materials, to which he had pointed out from the paper book. Inasmuch as the initial report and the authorisation were related to Pratik Food Products Pvt. Ltd., and the seizure list also bears the name of Pratik Food Products Pvt. Ltd. whereas there is no existence of Pratik Food Products Pvt. Ltd., on the other hand, “Pratik Food Products” is a proprietary concern belonging to one Mahesh Kumar Agarwal. Therefore, the authorisation in the name of Pratik Food Products Pvt. Ltd., is not an authorisation. As such so far as the search and seizure in respect of the assessee are concerned, namely, Mahesh Kumar Agarwal and Pratik Food Products, that is wholly invalid and cannot be sustained. Since there was nonapplication of mind, there could not be any material to form an opinion in the absence of mention of Pratik Food Products. The subsequent authorisation in respect of Pratik Food Products seems to be an afterthought, which is apparent from the fact that in the seizure list, the name of Pratik Food Products does not appear. He referred to page 136 of the paper book and pointed out that there was no reason to form an opinion that there existed any reason to believe that if notices were issued, the said documents would not be produced. Inasmuch as the assessee had been a regular assessee and used to respond to any notice that might have been issued to him. There was no occasion when he did not respond to any notice. Therefore, there was no scope of forming such an opinion with regard thereto. He also pointed out that the expansion of business or improvement in lifestyle of the assessee or the members of his family would not be material for the purpose of exercising power under section 132. In any event, there is nothing to show that Pratik Food Products or Mahesh Kumar Agarwal was expanding his business. The improvement of lifestyle is not a matter to contribute to the formation of the opinion that there are reasons to believe as contemplated in section 132(1). Mr. Bhattacharya had relied on the decision in Dr. Nand Lal Tahiliani v. CIT, [1988] 170 ITR 592 (All) to contend that improvement in the lifestyle is not a ground. Mr. Bhattacharya had also relied on the decision in L.R Gupta v. Union of India, [1992] 194 ITR 32 (Delhi) in support of his contention that search and seizure is a serious invasion into the privacy of the individual which invites application of mind and formation of opinion. Such opinion must be something more than rumour or gossip and not subjective but objective. He also relied on the decision in Ganga Prasad Maheshwari v. CIT, [1983] 139 ITR 1043, 1050 (All), to contend that the “reason to believe” is a salutary safeguard for the assessee preventing the authority from indiscriminate exercise of such power putting an assessee in jeopardy. Therefore, the court has to examine the existence of reasons to believe having regard to the facts and circumstances of the case with somewhat strict compliance with the provisions of law. He had also relied on the decision in ITO v. Lakhmani Mewal Das, [1976] 103 ITR 437 (SC), to support the said proposition. In order to insist that what would form information is something more than mere apprehension and suspicion, he relied on the decision in H.L Sibal v. CIT, [1975] 101 ITR 112, 131 (P&H). Relying on Shyam Jewellers v. Chief Commissioner (Administration), [1992] 196 ITR 243, 264-265 (All), Mr. Bhattacharya had contended that the information on which the reason to believe was founded must be authentic and related to the person against whom the power was exercised. Relying on Dwarka Prosad Agarwalla v. Director of Inspection, [1982] 137 ITR 456, 469 (Cal), he contended that suspicion, even if supported by subsequent discovery, was irrelevant. He further contended that from the materials, as it appears from the records, the authority had proceeded to make a fishing or roving enquiry under the garb of exercise of power under section 132(1). Since there were sufficient materials to form an opinion that there were no reasons to believe, the entire exercise was invalid. He also pointed out that by an order of this court, the documents were directed to be returned and that there was no extension of the period of retention after the expiry of the statutory period provided under section 132(8) of the Act, but yet the authority had not returned the documents. According to him, if there is an order of retention, in that event, that has to be communicated to the assessee as was held in CIT v. Oriental Rubber Works, [1984] 145 ITR 477, 483 (SC). According to him, the approval of the Commissioner is required to be communicated to the assessee in view of section 132(10) of the said Act. Therefore, according to him, the appeal should be dismissed and the order of the learned single judge should be affirmed.

3. We have heard the respective counsel at length. Both of them had made elaborate and erudite arguments on the question. The law is well settled as has been held in different decisions so cited. Section 132(1) requires satisfaction of the condition precedent for exercising the power as provided therein. The power can be exercised by any of the officers mentioned therein only, when, in consequence of information in his possession, he has reason to believe that any person to whom summon or notice has been or might be issued, will not or would not produce or cause to be produced any books of account or other documents useful or relevant to any proceeding under the Act, or any person is in possession of any money, bullion or other valuable article or thing that represents either wholly or partly income or property, which has not been or would not be disclosed for the purposes of this Act, then such officer may cause search and seizure in the manner provided in different clauses (i) to (v) of the said section.

4. Therefore, the condition precedent imposed is that the officer must be (i) in possession of information on the basis whereof, (ii) he has reason to believe that, (iii) the concerned person has not produced or would not cause to be produced the books of account or has not or would not disclose the money, bullion, jewellery or other valuable articles or things in his possession. This condition has to be fulfilled before a decision to issue a notice under section 132(1), is taken.

5. A search is a serious invasion into the privacy of a citizen. Therefore, section 132(1) is to be construed strictly. The formation of the opinion or belief by the authorised officer must be apparent from the note recorded by him. This note must disclose the possession of information to form an opinion that the books of account or documents have not been produced or would not be produced or the article, etc., are in possession of the person and such articles, etc., have not been or would not be disclosed, upon notice, for the purpose of the Act. Such information must be something more than mere rumour or gossip or hunch and not merely a suspicion. The information must exist before the opinion is formed. The authorised officer must actively apply his mind to the information in his possession and form an opinion that there are reasons to believe. Such opinion must be formed on the basis of the material available at that time. The materials must have rational nexus or bearing to the reasons for formation of the belief. Such formation of belief, through active application of mind, shall be bona fide and not actuated by mala fides, bias or extraneous or irrelevant materials. These are, as observed earlier, conditions precedent.

6. This is open to judicial scrutiny. The court has to examine whether the authority had before him materials to form an opinion whether there is rational connection between the information possessed and the opinion formed. But the court cannot sit in appeal over the opinion formed, if there are materials and the opinion is formed on such material. The court would not examine whether the material possessed is adequate or sufficient to form an opinion. The court cannot go into the aptness or sufficiency of the grounds upon which the satisfaction, which is subjective, is based, if the belief is bona fide and is cogently supported, the court will not interfere with or sit in appeal over it.

7. What would be the extent of the information has since been already settled and laid down. In H.L Sibal's case, [1975] 101 ITR 112, the Punjab High Court had laid down that the information is something of which one is apprised or told and the word “reason” is a statement of fact employed as an argument to justify or condemn some act. The word “conclusion” is a judgment arrived at by reasoning; or an information; deduction, etc. In other words, when an information is received or the basic facts are harnessed in support of an argument, the resultant fact assumes the shape of a reason and when the number of reasons are considered in relation to each other, the final result to this consideration assumes the shape of a belief. A necessary concomitant of this approach is that the fact constituting an information must be relevant to an enquiry. They must be such from which a reasonable and prudent man can come to the requisite belief or conclusion. If either of the aforementioned elements is missing, the action of the authority shall be regarded as outside the ambit and scope of the Act. Such an action would be liable to be struck down on the basis of what is commonly known as legal malice.

8. In Shy am Jewellers' case, [1992] 196 ITR 243, the Allahabad High Court dealing with section 132(1) had taken the view that “reason to believe” postulates application of mind and assigning of reasons. It is a rational nexus between reason and belief. A reason to believe does not mean a purely subjective satisfaction. The belief must be held in good faith and cannot be merely pretence. It is open to the court to examine whether the reason to believe has a rational connection or a relevant bearing to the formation of the belief and is not extraneous or irrelevant. This observation was made relying on the decision in S. Narayanappa v. CIT, [1967] 63 ITR 219 (SC).

9. In Lakshmani Mewal Das's case, [1976] 103 ITR 437, the apex court had held that the words of the statute were “reason to believe” and not “reason to suspect”. Therefore, it has to be examined whether the materials disclosed are sufficient to form an opinion that there are reasons to believe or it only creates an impression with regard to a suspicion. Relying on the same decision, Mr. Pal had pointed out, from page 445, thereof, that the information leading to the formation of the belief must have a material bearing on the question for which the power is exercised. The sufficiency of the grounds that induced the Income-tax Officer to undertake the action is not justiciable. Whether the grounds are adequate or not is not a matter for the court to investigate. Once there exist reasonable grounds for the income-tax authority to form the belief, it would be sufficient to clothe him with jurisdiction to issue notice. The existence of the belief can be challenged by the assessee but not the sufficiency of the reasons for the belief. The expression “reason to believe” does not mean a purely subjective satisfaction on the part of the income-tax authority. The belief must be held in good faith. It cannot be merely a pretence. It is open to the court to examine whether the reasons for the formation of the belief have a rational connection with or a relevant bearing on the formation of the belief and are not extraneous or irrelevant for the purpose of the section.

10. In Dwarka Prosad Agarwalla v. Director of Inspection, [1982] 137 ITR 456, 469 (Cal), this court had held that if the materials led to a suspicion but not to a belief, even if such suspicion came to be true by subsequent discovery of materials after search and seizure, such suspicion would not suffice to undertake the exercise of the jurisdiction to issue notice under section 132(1). Relying on this decision, Mr. Bhattacharya had contended that in this case the materials disclosed were merely rumours, gossip and suspicions, which did not form materials that could provide reason to believe. To support his contention he relied upon L.R Gupta v. Union of India, [1992] 194 ITR 32 (Delhi), and contended that search and seizure were a serious invasion of the privacy of the assessee. Therefore, it required an application of mind for the purpose of formation of opinion and the information on which such opinion was to be formed and there must be something more than rumours or gossip.

11. In Ganga Prasad Maheshwari v. CIT, [1983] 139 ITR 1043, 1050 (All), relied on by Mr. Bhattacharya, the Allahabad High Court had dealt with the expression “reason to believe” and had held that this has a salubrious safeguard to protect the privacy of the assessee and, therefore, it had to be exercised with care and caution only when there were reasons to believe. “Reason to believe” is a common feature in taxing statutes. It has been considered to be the most salutary safeguard on the exercise of power by the officer concerned. It is made of two words “reason” and to “believe”. The word “reason” means cause or justification and the word “believe” means to accept as true or to have faith in it. Before the officer has faith or accepts a fact to exist, there must be a justification for it. The belief may not be open to scrutiny as it is the final conclusion arrived at by the officer concerned as a result of mental exercise made by him on the information received. But, the reason due to which the decision is reached can always be examined. When it is said that reason to believe is not open to scrutiny what is meant is that the satisfaction arrived at by the officer concerned is immune from challenge but where the satisfaction is not based on any material or it cannot withstand the test of reason, which is an integral part of it, then it falls through and the court is empowered to strike it down. In order to support this observation, the Allahabad High Court had relied on the decision in ITO v. Lakhmani Mewal Das, [1976] 103 ITR 437 (SC). On the other hand, in Phool Chand Bajrang Lal's case, [1993] 203 ITR 456 (SC), the same view as was taken in Lakhmani Mewal Das case, [1976] 103 ITR 437 (SC) was taken, as we find from page 477, after reviewing various judgments on this point. In the said decision, it was held that the sufficiency of reasons for forming the belief is not for the court to judge but it is open to an assessee to establish that there, in fact, existed no belief or that the belief was not at all a bona fide one or was based on vague, irrelevant and non-specific information. To that limited extent, the court may look into the conclusion arrived at by the income-tax authority and examine whether there was any material available on the record from which the requisite belief could be formed by the Income-tax Officer and further whether that material had any rational connection or a live link for the formation of the requisite belief.

12. In Seth Brothers' case, [1969] 74 ITR 836, the apex court had dealt with the relevance of the document with regard to the question involved and had pointed out that information must have direct bearing on the question involved. In Pooran Mal's case, [1974] 93 ITR 505, the apex court had answered the question raised that the Director of Inspection or the Commissioner might not entertain any reason to believe since the enquiry was not made by him but by someone else, in the negative, that the materials placed before such officers by the officers authorised to make the enquiry or dealing with the enquiry, would be sufficient to enable them to possess the information in this respect.

13. Having regard to the above proposition, we may now examine the materials in order to find out as to whether there exist sufficient materials for the purpose of establishing that there were informations for the formation of an opinion that there existed reasons to believe. One of the grounds mentioned was that the family of the assessee had improved their lifestyle. But, simply because the lifestyle of a person has undergone a change towards improvement will not be a material for the purpose of formation of opinion that there are reasons to believe. In fact, so far as the books of account are concerned, the reason to believe would be related to the fact that the assessee has not or would not produce or cause to be produced the books of account if notice is issued to him. Whereas reason to believe in relation to money, bullion or other valuable articles or things, as the case may be, relates to the fact that the assessee has not disclosed or would not disclose if notice is issued to him. That has nothing to do with the change in the lifestyle towards improvement, as was held in the decision in Oriental Rubber Works' case, [1984] 145 ITR 477 (SC).

14. We have examined the notes, which are part of the paper book at pages 422-447. In fact, there are references to two newspaper reports, or, even net items where the group has been said to have been expanding its business. These, according to Mr. Bhattacharya, are either gossip or rumours or news items, which cannot be a sufficient ground for forming the opinion with regard to the existence of reason to believe. In fact, this also relates to the group with which, Mr. Bhattacharya claims that his client, has nothing to do, since the group represented by Prabhu Sankar Agarwal has disclosed and submitted returns and accepted the notice. He confined his argument to the case of Pratik Food Products and Mahesh Kumar Agarwal in respect of No. 58, J.L Nehru Road, and his residence at No. 87, Southern Avenue.

15. Before we examine that question, we may find out apart from those newspaper reports, or, the lifestyle, whether there are some other materials in the report. Mr. Bhattacharya had contended that these were based on mere hunch or suspicion and these could not be regarded as materials for forming an opinion that there were reasons to believe. The expansion of business would not be a sufficient ground and there was nothing to show that this expansion related to Pratik Food Products or Mahesh Kumar Agarwal. In fact, this was a question with regard to the adequacy and sufficiency of the materials. It was only the existence of materials, which were to be looked into. It appears from page 424 of the paper book that the report contains a sentence that “the business at Calcutta is controlled and run by Shri Prabhu Sankar Agarwal and Shri Mahesh Kumar Agarwal” and Mr. Pal had sought to contend that the search was directed against those two persons not against the group. The group was mentioned because those two persons were controlling the groups. He also pointed out that the name of Pratik Food Products and M.K Agarwal were mentioned in the report, at page 425 of the paper book, at items Nos. 1 and 8, respectively, and it is mentioned that the first seven were controlled and supervised by Prabhu Sankar Agarwal whereas the factory and sale and office at No. 58, J.L Nehru Road were controlled and supervised by Mahesh Kumar Agarwal and it was also mentioned that it was gathered that both of them were generating huge cash out of the business. The report also speaks of making discreet on the spot enquiries and also receipt of estimate slips instead of cash memos without mentioning the names of the group, etc. It also points out that the business involves huge cash transactions, which might be used for cash purchase of raw materials. It speaks of personal visit to the shops and reference to non-issuance of cash memos to the customers except on demand and that too by estimate slips without mentioning the name of the concern or shop. Reference was made to one of the returns for the assessment year 1993-94 of Haldiram Bhujiawala with a gross turnover of Rs. 1.51 crore and gross profit of Rs. 23.59 lakhs showing net profit of Rs. 10,240. There is also an estimate about the gross profit and net profit ratio to be 15.62 per cent, and 0.066 per cent., respectively, and that because of secrecy the reference could not be verified. It had also attempted to make an average calculation of the cost of the production and difference between the cost of production and the sale price. It had also estimated the investment made by the groups and the undertaking of fresh new projects and formation of new companies. However, the question of investment in share scam in benami may not be acceptable as a reasonable ground for formation of the opinion that there exists reasonable ground for belief. But then even we exclude those aspects, still then it appears that there were some materials. But according to Mr. Bhattacharya, these are not materials to form an opinion with regard to the existence of reason to believe. It might be a suspicion.

16. Having regard to the materials disclosed, in our view, it is not possible for this court to examine as to the sufficiency or adequacy of the materials for forming opinion that there exists “reason to believe”. We may only examine as to whether these are materials on the basis whereof a reasonable man can arrive at the formation of opinion that there exists reason to believe. In fact, these are materials, which are in existence, which one cannot deny and a reasonable man can very well arrive at an opinion that there are reasons to believe on the basis of these materials.

17. Now it is to be seen whether these materials would be sufficient to drag the assessee into the net of section 132(1), which was attempted to be issued as against the group. Whether after search and seizure, it can be proved or not is a matter which is to be determined in appropriate proceedings. At the stage of formation of opinion, these factors cannot be gone into. It is only the question of the existence of materials, which can be gone into. Whether Mahesh Kumar Agarwal was involved with the group or not, whether Pratik Food Products was also involved in the process or not, are not factors to be considered. It is only to be ascertained whether the reasons that have been disclosed are sufficient to lead a reasonable man to form a belief to the extent as postulated under section 132(1). Admittedly, it has also been noted in the report that huge profits are shown, investments are being made, but the returns do not disclose net profit or taxable income about Rs. 2 lakhs and which were not scrutinised in the process. Therefore, they had reason to believe that the books of account had not been shown with regard to the cash sales when admittedly there were huge cash sales. These are definitely materials, which hint at the existence of reason to believe. How far it is adequate or sufficient is not a question to be gone into.

18. Now we may deal with the aspect that Pratik Food Products was not dragged in the net. It was only at 7.10 a.m on September 24, 2001, Pratik Food Products came into the picture. Mr. Bhattacharya pointed out that despite the name being Pratik Food Products, the seizure list was prepared in the name of Pratik Food Products Pvt. Ltd. But these are questions, which are not necessary to be gone into because that was something, which was discovered after the decision was taken to proceed to search the premises and seize the materials. It seems that the entire gamut of the report was in respect of Prabhu Sankar Agarwal and Mahesh Kumar Agarwal and their groups. Therefore, it is immaterial that the name of one of the enterprises was or is wrongly mentioned.

19. But then it will not make any difference when Pratik Food Products appears to be a proprietorship concern, which has no separate entity other than the proprietor himself Mahesh Kumar Agarwal. Therefore, the wrong description of Pratik Food Products would be immaterial in the present case when Pratik Food Products Pvt. Ltd., has no existence other than the proprietor himself Mahesh Kumar Agarwal, proprietor, Pratik Food Products. That apart, the name figures in the report and that its office and sales counter are situated at No. 58, J.L Nehru Road, which was within the list of search. Therefore, mentioning of the name of Pratik Food Products Pvt. Ltd., in the search warrant issued before 7.10 a.m on September 24, 2001, would not be much material for our present purpose. However, Mr. Bhattacharya wanted to contend that this indicated non-application of mind on the part of the appellant. The question is not the sufficiency of the materials but the existence of the materials. Therefore, we would not want to go into the question of sufficiency or adequacy of the information to find out as to whether this is sufficient to cause search and seizure at the premises of Mahesh Kumar Agarwal or not.

20. We are, therefore, of the view that there is no infirmity in the exercise of the power or authorisation of the search and seizure at No. 58, J.L Nehru Raod, or No. 87, Southern Avenue, Calcutta, in respect of Mahesh Kumar Agarwal and that of Pratik Food Products, as was sought to be urged on behalf of the respondent-assessee.

21. In that view of the matter, we are unable to persuade ourselves to agree with the decision of the learned single judge. We, therefore, set aside the judgment and order appealed against. The writ petition stands dismissed. The appeal thus, stands allowed.

22. So far as the question of return of the documents is concerned, if there was no extension for retention of the documents under section 132(8) with the approval of the authority, there is no scope for retaining the documents any further. However, Mr. Bhattacharya contends that there is an order for return of the documents and the assessee had applied for return of the documents. The scope of the appeal does not enable us to issue any direction with regard thereto. However, we expect that the authority concerned shall decide and dispose of such application by passing a reasoned order after giving opportunity to the parties and in accordance with law within the period of three weeks from the date of the communication of this order.

23. Mr. Pal has contended that since the writ petition is dismissed, therefore, there cannot be any direction for disposal of the application for return of the document. We are not supposed to go into this question. All points are kept open to be agitated before the appropriate forum at the appropriate stage. Parties shall act on a signed copy of the minutes of the operative portion of this judgment.

Maharaj Sinha, J.:— I agree.