Dr. R. P. Patel & Ors. Vs Asst. Director of Income Tax (Investigations) & Ors. (Kerala High Court)
Authorised officer conducting the search & seizure cannot retain the documents/ assets beyond 15 days and encash IVPs for adjustment against tax liability
Hon’ble Kerala High Court set aside the judgment of the learned Single Judge denying benefit to the assessee under the Kar Vivad Samadhan Scheme, 1998, (Scheme). Further held that, the Authorised Officer conducting the search and seizure cannot retain the documents or assets beyond 15 days as per the scheme of Section 132 of the Income Tax Act,1961 (IT Act) and all encashments has been done without authority or jurisdiction.
Facts:
Dr. R.P. Patel (“the Petitioner”) is the legal heir of the Original Appellant, who was a homoeopathic practitioner at Kottayam. The Income Tax Department conducted a search at the residence and clinic of the of the Petitioner and Petitioner’s on December 30, 1994 wherein, various documents, cash and several Indira Vikas Patras (“IVP’s”) were recovered during the search. After the seizure of those assets, the Petitioner disclosed an amount of INR 1,46,78,980/- for the assessment years 1990-91 to 1995-96 under Section 132(4) of the IT Act.
Subsequently, an order under Section 132(5) of the IT Act was issued by the Assistant Director of Income Tax (Investigation), Kottayam (“the Respondent No. 2”) on April 28, 1995, estimating the total income, the tax thereon, interest and penalty, for retaining the seized assets for appropriation after determination of tax liability of the Petitioner. The IVP’s ‘retained’ were encashed through the postmaster and on different dates the realized amount was adjusted towards income tax allegedly due from the assessee for the period 1994-95 and 1995-96.
When the Scheme was introduced in 1998, the Petitioner could not claim the full benefit of the Scheme, since by then, the tax arrears for the assessment years 1994-95 and 1995-96, were adjusted from the amounts obtained by encashing the IVP’s by the Asst. Director of Income Tax (Investigations) (“the Respondent No. 1”). This adjustment disentitled the Petition to the benefit of the Scheme. Consequnetly, a writ petition was filed , wherein, the learned Single Judge, after considering the merits of the matter, disposed of the writ petition, holding that the encashment of IVP’s was valid and that the recovery and adjustments of tax and advance tax for the year 1995-96 were also proper. However, during the pendency of the appeal, the original Appellant died, and his legal heirs were impleaded as additional appellants.
Being aggrieved by the judgment of the Learned Single Judge, the Petitioner has filed this writ petition.
Held:
The Hon’ble Kerala High Court in WA No. 352 of 2005 dated July 30, 2021 held as under:
Analysed the provision of Section 132(9A) of the IT Act and noted that, the authorised officer shall hand over all the seized assets, including documents, to the assessing officer within 15 days of seizure, and thereafter, the powers under Section 132(8) and 132(9) of the IT Act can be exercised only by such assessing officer. Thus after 15 days of seizure, the authorised officer cannot retain any of the seized documents or assets. Once the assessing officer comes into possession of the seized articles or documents, he is then obliged to pass an order under Section 132(5) of the IT Act within 120 days of the seizure.
Relied on the decision of the Hon’ble Madras High Court in Commissioner of Income Tax and Others v. K.V. Krishnaswamy Naidu & Co. [(2001) 9 SCC 767] affirmed by the Hon’ble Supreme Court of India, and clarified that the authorised officer who conducted the search and seizure cannot retain the documents or assets beyond 15 days as per Section 132 of the IT Act. If the authorised officer cannot retain the assets or the documents, it is ineluctable that the said officer could not have encashed the IVP’s. The authorised officer could not have been in de facto or de jure possession of the assets or documents seized under Section 132(1) of the IT Act after 15 days of seizure.
Observed that, all encashments were done by the Respondent No. 1 without authority or jurisdiction and that too after he had become functus officio and the encashments of IVP’s were bad in law, and the consequent adjustment of the IVP’s were also illegal. Further stated that, the Respondent No. 1 could not have acted to encash the IVP’s or to adjust the same contrary to the statutory prescriptions.
Stated that, since the invocation of IVP’s as without authority and the consequent adjustment as done contrary to the provisions of the IT Act, it is necessary that the status quo ante be restored as on the date of application under the Scheme to meet the ends of justice.
Set aside the judgment of the learned Single Judge.
Held that, even though the Scheme is not in existence now, the Petitioner ought not to be prejudiced on account of the long pendency of the appeal before the Court. As the Court has set aside the invocation of the IVP’s and the consequent adjustment of the amounts encashed and restored status quo ante, the application for the grant of benefit under the Scheme shall stand revived.
Directed the Commissioner of Income Tax Trivandrum (“the Respondent No. 3”) to pass fresh orders on the application claiming benefit of the Scheme, in accordance with law.
FULL TEXT OF THE JUDGMENT/ORDER OF KERALA HIGH COURT
By Ext.P5, the original appellant was denied the benefit under the Kar Vivad Samadhan Scheme, 1998, (‘KVS Scheme’ for brevity), wholly for the assessment years 1994-95, 1995-96, and partially for the years 1992-93 and 1993-94. The reason for denying the benefit was stated as the non-existence of tax liability for the said years on the date of application under the scheme. Appellant however claimed in the writ petition that, tax arrears existed on the date of application and the encashments of the seized Indira Vikas Patras of the appellant were without authority and illegally adjusted against the tax liabilities of the appellant. Thus, the application of the appellant was rejected stating that there were no existing tax arrears. The learned Single Judge held that the encashment was valid and disposed of the writ petition with directions most of which were contrary to the appellant’s claim. Hence this appeal
2. The original appellant was a homoeopathic practitioner at Kottayam. The income tax department conducted a search at the residence and clinic of the Homeopath (for short ‘the assessee’) on 30.12.1994. Simultaneously, the Department conducted searches at the residence of his two sons at Baroda in Gujarat State. Various documents, cash and several Indira Vikas Patras (‘IVP’s’ for brevity) were recovered during the search. After the seizure of those assets, the assessee disclosed an amount of Rs,1,46,78,980/- for the assessment years 1990-91 to 1995-96 under section 132(4) of the Income Tax Act,1961 (‘the Act’ for brevity). An order under section 132(5) of the Act was issued by the 2nd respondent on 28.4.1995, estimating the total income, the tax thereon, interest and penalty. The said order was issued for retaining the seized assets for appropriation after determination of tax liability of the assessee. The IVP’s ‘retained’ were encashed through the postmaster and on different dates the realized amount was adjusted towards income tax allegedly due from the assessee for the period 1994-95 and 1995-96. When the KVS Scheme was introduced in 1998, the assessee could not claim the full benefit of the KVS Scheme, since by then, the tax arrears for the assessment years 1994-95 and 1995-96, were adjusted from the amounts obtained by encashing the IVP’s. This adjustment disentitled the assessee to the benefit of the KVS Scheme. Ext.P5 certificate issued by the Commissioner of Income Tax under KVS Scheme denying the benefit of the scheme for the years mentioned above resulted in the writ petition.
3. The learned Single Judge, after considering the merits of the matter, disposed of the writ petition. It was held that the encashment of IVP’s was valid and that the recovery and adjustments of tax and advance tax for the year 1995-96 were also proper. However, the recovery of tax and interest by adjustment from the encashed value of the IVP’s for all the other years effected prior to the due dates for such payments were held to be bad in law, and the same was directed to be reconsidered. Aggrieved by the said judgment, the assessee is in appeal before us. During the pendency of the appeal, the original appellant died, and his legal heirs were impleaded as additional appellants.
4. To consider the issues raised at the Bar, it may be necessary to delve briefly into the pleadings in the case.
(a) After the search carried out between 30.12.1994 and 07.01.1995 and the consequent seizure by the 1st respondent, an order was passed by the assessing officer-2nd respondent on 28.4.1995 under section 132(5) of the Act. In the said order, towards the concluding portion it was mentioned that “Out of the total assets seized, cash of Rs.6 lakhs and maturity value of I.V.P. encashed, Rs.4 lakhs were adjusted against the advance tax demand for the assessment year 1995-96. Balance assets seized are retained since the demand payable as per this order exceeds the total value of balance assets seized.”
(b) On 29.3.1995, by Ext.P2, the 1st respondent requested the Post Master, Head Post Office, to encash IVP’s amounting to Rs.4,00,000/-. Similarly, between 30.3.1995 and 30.10.1997, IVP’s worth Rs.61,72,000/- were encashed by the 1st respondent.
(c) According to the appellant/petitioner, instead of retaining or handing over the encashed IVP’s, the same were all illegally adjusted against alleged advance tax for 1995-96 as well as for the tax and interest allegedly due for the earlier years.
(d) The writ petition was filed alleging that the encashments of IVP’s and consequent adjustments were all done without authority or jurisdiction and contrary to section 132(9A) of the Act. Apart from the lack of jurisdiction and authority, assessee pleaded that the mandatory notice under section 226(3) of the Act had never been given to the assessee before proceeding for recovery. Claiming that the adjustments were without authority or jurisdiction and in violation of the principles of natural justice, the appellant sought to quash the encashments of the IVP’s. Ext.P5 was also challenged on the ground that had the illegal adjustments not been made, tax arrears would have been in existence as on the date of application and assessee would have got the benefit of the KVS Scheme.
5. Counter affidavits and additional counter-affidavits were filed separately by respondents 1, 2, and 3. The 1st respondent repeatedly stated that he had handed over the seized books of account, other documents and assets to the assessing officer on 10.1.1995. Respondents 1 and 2 stated that they had carried out the encashments and that merely because the 1st respondent had sent a letter to the postmaster, there was no assumption that the 1st respondent had initiated the refund. The counter-affidavits further stated that the 1st respondent never exercised any jurisdiction to withdraw the IVP’s or adjust the amounts so encashed. It was further asserted that the appropriation of the proceeds of the IVP’s were carried out at the request of the assessee, and since the said adjustments were at the behest of the assessee, the action of the respondents cannot be faulted. The 3rd respondent, while reiterating the contentions of other respondents, pointed out that the department had acted as per the instructions given by the assessee in Ext.R3(a) letter. It was further pleaded that in view of Ext.R3(a) the assessee could not turn around and question the action carried out as per his request.
6. The assessee filed reply affidavits. It was stated that the 1st respondent encashed the IVP’s even before the quantification of tax. It was pleaded that the quantification for the years 1990-91 to 199495 was carried out only on 23.12.1997, while for the year 1995-96 the quantification was made on 25.11.1997. Appellant pleaded that the adjustments were made in gross violation of the mandatory provisions. The contents of the separate reply affidavits are not reproduced since most of them contain reiterations or rebuttals of the counter affidavits.
7. The learned Single Judge in the judgment under appeal held that it was the 2nd respondent who carried out the encashments of IVP’s while the 1st respondent had only co-ordinated the encashing by acting on behalf of the 2nd It was further found that, though under section 132(B)(i) of the Act, appropriation of seized assets can be carried out only after the determination of liability, since the assessee had by Ext.R3(a) requested for adjustment, the action of the assessing officer was valid. Except for adjustment of the encashed value of IVP’s for the years prior to the expiry of due dates for payment, all other issues were found against the assessee. It is in such circumstances that the assessee has preferred this appeal.
8. We heard Adv. Ramesh Cherian John learned counsel for the appellants and Adv. Jose Joseph learned Senior Standing Counsel for the Income Tax Department.
9. For easier assimilation, we formulate the following questions for our consideration.
(i) Whether the encashments of seized IVP’s were carried out by the 1st respondent or the 2nd respondent?
(ii) Whether the encashments of the seized IVP’s were in accordance with law?
(iii) Whether the encashed amounts under the IVP’s were liable to be adjusted. If so, for which assessment years?
(iv) What reliefs are the assessee entitled to?
10. The above questions are considered in detail as below.
Q.(i) Whether the encashments of seized IVP’s were carried out by the 1 st respondent or the 2nd respondent?
11. The main argument raised by Adv. Ramesh Cherian John is that the IVP’s were encashed by the 1 st respondent who had no authority to do so as per the provisions of the Act. In the impugned judgment, the learned Single Judge found that the encashments of IVP’s were carried out by the 2nd respondent-assessing officer, while the 1st respondent had only co-ordinated the collection and encashment of IVP’s. This finding is seriously attacked by the learned counsel for the appellant while Adv.Jose Joseph submitted that the finding needs no interference.
12. Ext.P2 series are the documents by which the IVP’s were encashed, while Ext.P3 series are the documents intimating the encashments of other IVP’s to the assessee. For a better appreciation , the first page of Ext.P2 is extracted below:-
NO.ADI/INV/KTN/S&S/BNC-49A/94-95.
OFFICE OF THE
Assistant Director of Income-tax
(Investigation),Mangad Buildings
Kottayam, dated 29th March, 1995
The Post Master,
Head Post Office,
Kottayam,
Sub:- Encashment of Indira Vlkas
Patras- request for
Sir,
Please refer to the above.
2. I tender herewith the following Indira Vikas Patras with a request to encash the same, and pay the proceeds being the maturity thereof amounting to Rs.4,00,000 (Rupees four lakhs only) to the undersigned:-
Sr. No. Distinctive numbers of IVPS. Maturity
Date. Amount.
1 10C 561030 – 561039 10 12-1-1995 Rs.50,000
