Legality of roping in an unconnected third party in the rigors of an Income Tax Search and Seizure action (including bank lockers of such unconnected third parties)

Introduction:-

The authority and power to conduct search and seizure operations is strident and caustic power authorized by law to be taken recourse to when the conditions mentioned under different clauses of Section 132 (1) of the Act are satisfied.

The jurisdictional facts that have to be established before a search under Section 132 (1) of the Act can be authorised are that (i) the authority issuing the authorisation is in possession of some credible information, other than surmises and conjectures (ii) that the authority has reason to believe that the conditions stipulated in clauses (a), (b) and (c) of Section 132 (1) qua the person searched exist; and (iii) the said information has nexus to such belief.

The law is well settled that a warrant of search and seizure under Section 132(1) can only be issued on the basis of some material or information on which the Commissioner/Director has reason to believe that any person is in possession of money, jewellery or other valuable articles representing wholly or partly income or property which has not been or would not be disclosed, under the IT Act. The satisfaction of the authorities under Section 132 must be on the basis of relevant material or information. The word used in Section 132(1) are “reason to believe” and not “reason to suspect”.

The aforesaid legal position, viz., on the statutory mandate to record “reasons to believe” and their nexus with the three pre-conditions in clauses (a), (b) and (c) to Section 132 was thereafter emphasized and elucidated by the Supreme Court in DGIT (Investigation) v. Spacewood Furnishers (P.) Ltd. [2015] 57 taxmann.com 292/232 Taxman 131/374 ITR 545 which also refers to an earlier decision of the Supreme Court in ITO v. Seth Bros. [1969] 74 ITR 836 and Partap Singh v. Director of Enforcement Foreign Exchange Regulation [1985] 22 Taxman 30/155 ITR 166 (SC). In Spacewood Furnishers (P.) Ltd. (supra), the apex court has laid down the following principles:—

“8. The principles that can be deduced from the aforesaid decisions of this Court which continue to hold the field without any departure may be summarised as follows:

8.1. The authority must have information in its possession on the basis of which a reasonable belief can be founded that—

(a) the person concerned 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 either wholly or partly income or property which has not been or would not be disclosed.

8.2. Such information must be in possession of the authorised official before the opinion is formed.

8.3. There must be application of mind to the material and the formation of opinion must be honest and bona fide. Consideration of any extraneous or irrelevant material will vitiate the belief/satisfaction.

8.4. Though Rule 112(2) of the Income Tax Rules which specifically prescribed the necessity of recording of reasons before issuing a warrant of authorisation had been repealed on and from 1-10-1975 the reasons for the belief found should be recorded.

8.5. The reasons, however, need not be communicated to the person against whom the warrant is issued at that stage.

8.6 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 formation of the belief though not the sufficiency or adequacy thereof.”

Issue under consideration:-

A vital question arises at this juncture as to whether an unconnected third party can be roped in with such rigors of Search and Seizure action.

To understand this issue let us conceive an illustration. Let us suppose, the premises of XYZ Ltd. were subjected to a search and seizure action u/s 132 of the act after fulfilling the mandate of law as discussed above. Now during the course of search at the premises of XYZ Ltd., the auditors of the company XYZ Ltd. were camped in the premise of XYZ Ltd. for last few days before the search and were conducting the audit of books of accounts of XYZ Ltd. Since the audit was continuing, the auditors were also present in the premises of XYZ Ltd. on the date of search. The laptops of the audit team were also containing financial data of other client companies having no connection whatsoever with XYZ Ltd. Whether in such circumstances, Section 153C or 148 can be resorted by the tax authorities or otherwise on other client companies of the auditors by using the material available in their laptops.

This is a controversial issue. There can be two sides of arguments to address this issue.

Analysis:-

On one side, a rigid argument may be that by virtue of clause (iib) of Section 132(1) of the act, any person who is in possession or control of any document or books of accounts maintained in any electronic form as defined in clause (t) of sub-section (1) of section 2 of the Information Technology Act ‘2000 shall be mandated to afford the necessary facility to the authorized officer to inspect such books of accounts or other documents, as the case may be. The pleaders of such an argument may also rely on Section 275B which reads as under:-

“Failure to comply with the provisions of clause (iib) of sub-section (1) of section 132.

275B. If a person who is required to afford the authorised officer the necessary facility to inspect the books of account or other documents, as required under clause (iib) of sub-section (1) of section 132, fails to afford such facility to the authorised officer, he shall be punishable with rigorous imprisonment for a term which may extend to two years and shall also be liable to fine.”

Therefore, considering the legal matrix as discussed above, one may say that the auditors of XYZ Ltd. who were present in the premises of XYZ. Ltd. at the time of search on XYZ Ltd. are legally bound to afford an unrestricted, unambiguous, unconditional inspection of the laptops of the auditors in totality. It is irrelevant that the laptops also contain confidential data of other clients of auditor. Such laptop can also be subjected to a seizure and thereafter such unconnected other clients of the auditor can also be roped in by invoking Section 153C or 148 during the assessment stage.

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