Income Tax – It is impermissible to convert assets to cash and thereafter impound the same; Cash seized under search and seizure and cash in bank is conceptually different : Supreme Court

NEW DELHI, FEB 01, 2008 : A search and seizure was conducted by the revenue (respondents) in the premises of the appellants (KCC software Ltd), pursuant to warrants of authorization dated 3.8.2005. On 4.8.2005 certain assets including jewellery, cash and fixed deposit receipts were seized. On that very day, appellants received a letter from the HDFC Bank at B-28, Community Centre, Janakpuri, New Delhi that operation of five bank accounts of appellant No.1 had been restrained by order issued under Section 132 (3) of the Income Tax Act, 1961 (in short the Act). The Income Tax Department on 4.10.2005 issued two fresh warrants of authorization under Section 132 of the Act in respect of the bank accounts. On 5.10.2005 the bank accounts of the appellants were searched and seized through withdrawal of cash by demand drafts.

Since the respondents failed to respond to the requests of the appellants, writ petitions were filed in the High Court WHICH were dismissed.

And so the present appeal before the Supreme Court.

It was contended by the counsel for the appellants

Ø That the authorities acted without jurisdiction in directing either to retain the amount after adjustment of the self assessment and advance tax or also withdrawing the amount by demand drafts from the bank accounts. The order passed under Section 132B shows that it was retained for estimated liability. Such a course is not available after deletion of the provision relating to estimated liability in 2002.

Ø Similarly, the provisions relating to block period assessments in Chapter XIV were deleted w.e.f. 1.6.2003. As the authorities themselves permitted adjustment of self assessment and advance tax, there was in effect release accepting the stand of the appellants and the balance amount of Rs.81,00,000/ – has perforce to be refundable.

Ø The power under Section 132(1)(iii) relates to seizure and the proviso deals with assets which cannot be seized. There is no dispute that Section 132 (3) read with Section 132 (8A) restricts the period of operation of the order of restraint to 60 days. Section 132B relates to adjusting liability on completion of assessment under Section 153A and it is relatable to the year in which search and seizure was initiated and block period in terms of Chapter XIV-B. Section 158 relates to retention and not appropriation.

Stand of the respondents

Ø The order passed under Section 132 (3) was revoked but a fresh order was passed. The money has been withdrawn in terms of Search and Seizure Manual, 1989, particularly Paras 5.01 and 5.02 thereof. The adjustment that has been done is for existing liability. There is no appropriation in that sense because it can be done only after assessment is completed by transfer.

Ø The power under Section 132(3) was exercised at the initial stage for the purposes of verification of the source of funds lying in the bank account. Thereafter, when the assessee was unable to satisfactorily explain the source of these funds, the same were seized under a fresh warrant under Section 132(1) issued by the Director of Income Tax (Inv.), who duly recorded his satisfaction as provided under Section 132 (1)(c).

Ø The Authorized Officer acting under Section 132 (1)(iii) of the Act has full power and jurisdiction to seize cash balance lying in bank account as these would come within the meaning of money and/or assets as provided under Section 132 (1)(iii) of the Act.

Ø The action of converting these balances into a demand draft is only for safe custody of these assets and is irrelevant to the legality of the seizure itself. The seizure was made legally and as per the powers vested in the Director of Income Tax (Investigation) ,

Reference was made to the decisions In Shanti Prasad Jain v. The Director of Enforcement where it was observed that

Under the law the time relationship between a Banker and a customer is that of a debtor and creditor and that it makes no difference in that relationship that the deposits were conditional.

Further Reference was also made to the old and well- known decision of the House of Lords in Foley v. Hill

It was held that

Ø What is appropriated can be cash and not money. The bank account in essence is not cash but is money.

Ø There are different stages under Section 132 (1). First stage is seizure, then comes adjudication on the non disclosure aspect and then determination relatable to Section 132 (8A).

Ø On a bare reading of the Manual on search and seizures, it is clear that the same is relatable to cash seized and cash in bank is conceptually different from cash in hand.

It was clarified about the impermissibility to convert assets to cash and thereafter impound the same. However the Supreme court did not go into the broader issue in view of the fact that there is no challenge to the order passed under Section 132B of the Act and disposed of the appeal with the following directions:

(i) In view of the non challenge to the order passed under Section 132B, no relief can be granted to the appellants.

(ii) However, it would be in the interests of the assessee as well as the revenue if the amount transferred to the PD account of the Commissioner is kept in interest bearing fixed deposit as ultimately in the event the assessee succeeds, would be entitled to interest as provided in the statute. The assessment has to be completed on or before 31st March, 2008 i.e. within the time statutorily provided.

The appeal is dismissed subject to the aforesaid direction and no order as to costs.

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