IT Department cannot access data of other clients of a CA if search related to one particular client

S.R. Batliboi & Co. Vs Department of Income Tax (Investigation) (Delhi High Court)

Conclusion: If apparently reliable material could not be directly used against an assessee solely because it was not collected during a Search of that assessee, a fortiori, material palpably concerning a third party with no connection with the raided party must be ignored. Thus, assessee was right in denying absolute access of seized laptop to Department for gaining information and data of all the other clients of assessee.

Held: While conducting an audit of EMAAR, the laptops of two employees of assessee-firm were seized by the Deputy Director, Income Tax (DDIT) in the course of conducting a Search and Seizure operation against EMAAR. Subsequently, DDIT issued summons under Section 131 to Ms. S and Shri S. K. Jain, the employees of assessee-firm and their statements were recorded. On the request of the DDIT these employees provided him with the electronic data relating to three companies of the EMAAR Group together with the print copies of the data. Nevertheless, DDIT insisted on securing total and unrestricted access to the laptops obviously in order to gain information and data of all the other clients of assessee. This request was refused by employees. The seized laptops were sent by the Respondents to Central Forensic Science Laboratory (CFSL) who, however, could not ascertain the password and accordingly could not access the entire data on the laptops. Assessee was thereupon asked to disclose the password, which it again declined and thereafter the laptops were sealed in the presence of the said employees of assessee. Assessee contended that granting absolute access to the IT Department of all the data even pertaining to the other clients of assessee, having no dealings with the EMAAR Group, would tantamount to grave professional misconduct and would be contrary to the code of ethics applicable upon assessee as well as the obligations contained in Chartered Accountants Act, 1949, which prescribes them from disclosing confidential information to third parties. In the case of CIT –vs- G.K Senniappan, (2006) 284 ITR 220 it was held that the material collected during Survey under Section 133 did not constitute “such evidence” based on which assessment under Section 158 BB could be framed. In the case of CIT –vs- Ravi Kumar the Court held that loose slips found during a Search could not constitute substantial evidence to invoke Section 69A. Similar views had been endorsed by a Division Bench of this Court in CIT –vs- Ravi Kant Jain: [2001] 250 ITR 141, where the Court emphasized on the fact that Block Assessment under Chapter XIV-B could not be a substitute for regular assessment and thus the change of opinion of Revenue on audited accounts seized during search could not form the basis for a special assessment. If apparently reliable material could not be directly used against an assessee solely because it was not collected during a Search of that assessee, a fortiori, material palpably concerning a third party with no connection with the raided party must be ignored. It was also illogical that the rigours which apply to the Search of a particular notified person could be flagrantly ignored so far as an unconnected person was concerned. It was argued that under Section 153C the Department acted as a post-office, viz. it send the seized material to the concerned AO. This proposition advanced by the Revenue was legally acceptable so long as it was restricted to any person having dealings or transactions with the person who was the subject of the Search and Seizure operation. Respondents were directed to forthwith return the laptops to assessee.

FULL TEXT OF THE HIGH COURT ORDER /JUDGEMENT

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