Department cannot force auditors to part with information of other
parties stored in computers: Delhi HC
By TIOL News Service
NEW DELHI, JUNE 04, 2009: THE present writ petition has been filed by
the Petitioner, S.R. Batliboi & Co., reputed Auditors and Accountants
against the Department of Income Tax entreating the issuance of an
appropriate writ to prevent the Respondents from forcibly gaining or
securing access to the data contained in two laptops belonging to
them.
While conducting an audit of EMAAR on 11.9.2007, the laptops of two
employees of the Petitioner were seized by the Deputy Director, Income
Tax (DDIT) in the course of conducting a Search and Seizure operation
against EMAAR. Subsequently on 17.9.2007, the DDIT issued summons
under Section 131 of the Income Tax Act, to Ms.Sandhya Sama and Shri
Sanjay K. Jain, the employees of the Petitioner firm and their
statements were recorded on 18.9.2007. 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, the 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 the Petitioner. This
request was refused by the 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. The Petitioner 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 the
Petitioner.
In its Order dated 18.11.2008, the previous Division Bench passed the
following orders:
"The learned counsel appearing on behalf of the respondent submits
that as per his instructions he would like to argue the matter with
regard to de-sealing of the laptops and having access to the data in
the laptops. He submits that to ascertain as to whether the data
relates to EMAAR-MGF, the entire data available on the laptops would
have to be examined. On the other hand, the learned counsel for the
petitioner submits that the data concerning EMAAR-MGF is available on
different and distinct files and has nothing to do with its 47 other
clients. We had suggested that the laptops be de-sealed and the data
be examined by the Assessing Officer in the presence of
representatives of the petitioner as well as of the assessee. It was
also suggested that the entire inspection of the data on the laptops
be done without copying the data in any form for the purposes of
informing the Court as to which files were connected with EMAAR-MGF
and would be required by the Assessing Officer. Unfortunately, this
suggestion is not acceptable to the respondents though the petitioners
had accepted the same. Consequently, this matter would have to be
heard. The learned counsel for the petitioner requests for some other
date for advancing arguments inasmuch as today the respondents were
only to report as to whether the suggestion was to be carried out or
not".
The High Court observed that sub-section 132 (1)(iib) casts a
compulsion on the owner of the laptops to provide the Department with
the password to the computer to enable inspection of the Books of
Account maintained in electronic form in the laptops. The authorized
officer of the Department may, after inspection of the documents,
seize such documents and Books of Account obviously connected with the
Assessee in respect of whom steps under the other parts of Section 132
have been initiated.
It would be perilous and fatal to lose sight of the reality that the
powers of the Search and Seizure are very wide and thus the
legislature has provided a safeguard that the Assessing Officer should
have reasons to believe that a person against whom proceedings under
Section 132 are to be initiated is in possession of assets which have
not been or would not be disclosed. Secondly, the authorized officer
is also required to apply his mind as to whether the assets found in
the Search have been disclosed or not, and if no undisclosed asset is
found no action can be taken under Section 132(1)(iii) or(3). An
arbitrary seizure cannot be maintainable even where the authority has
seized documents with ulterior motives.
For a search or seizure to be legal it should not be firstly ordered
for mala fide, extraneous or for oblique reasons. Secondly, it must be
predicated on information received by the Authority who would have
reason to believe that it is necessary to conduct such an operation.
Thirdly, it should not be in the nature of a roving or fishing
exercise. These three factors must be observed rigorously and even
punctiliously since the exercise of such powers invariably results in
a serious invasion of the privacy and freedom of the citizen. However,
search and seizure operations may not be illegal if the seized
documents pertain to transactions of allied concerns, since they would
have a bearing on the case of evasion of income tax by the assessee
concerned.
In Manish Maheshwari –vs- Assistant CIT - 2007-TIOL-24-SC-IT one of
the provisions which was at the fulcrum of discussion was Section
158-BD of the Act in the context of the legitimacy of ordering a
Block-Assessment. This provision has also been relied upon by Revenue
in order to vindicate the stance of the Revenue that information that
can be gleaned from the seized computers belonging or relating to
other clients of the Petitioner, even those who have had no dealings
whatsoever with the assesses against whom the search and seizure
operations are directed, can legitimately be demanded and acted upon.
The argument is that the Act contemplates that all such information
should be forwarded by the Authority carrying out the search and
seizure to the Assessing Officer of those third parties. The High
Court was unable to accept such an extreme stand. The words "other
person" employed in the Section must only be construed as referring to
the 'other person' having dealings or transactions with the party who
is being searched or whose material is being seized. Otherwise, the
provisions may well be seen as violative of the fundamental rights
enshrined in Articles 14 and 19.
Over two score years ago the Division Bench of this very High Court
had opined in N.K. Textiles Mills –vs- CIT, that it was "necessary and
essential for these officers to take into custody only such books as
were considered relevant to or useful for the proceedings in question.
It was not open to them to indiscriminately, arbitrarily and without
any regard for relevancy or usefulness, seize all the books and
documents which were lying in the premises, and, if they did so, the
seizure would be beyond the scope of the authorization".
The High Court observed,
1. The authorized officer must have reasonable grounds for
believing that anything necessary for the purpose of recovery of tax
may be found in any place within his jurisdiction;
2. he must be of the opinion that such thing cannot be otherwise
got at without undue delay;
3. he must record in writing the grounds of his belief; and
4. he must specify in such writing, so far as possible, the thing
for which search is to be made.
Where material or document or assets belong to a third party, totally
unconcerned with the person who is raided, none of these conditions
are fulfilled.
An indiscriminate seizure deracinates the personal liberty and privacy
of the citizen and is anathematic to law. It can be proscribed under
Article 226 of the Constitution. The question of "indiscriminate
search" has to be answered by the Court by looking into the evidence
and the facts of each case.
In District Registrar and Collector, Hyderabad –vs- Canara Bank, the
Supreme Court observed,
"In the Income Tax Act, 1961 elaborate provisions are made in regard
to "search and seizure" in Section 132; power to requisition books of
account, etc. in Section 132-A; power to call for information as
stated in Section 133. Section 133(6) deals with power of officers to
require any bank to furnish any information as specified there. There
are safeguards. Section 132 uses the words "in consequence of
information in his possession, has reason to believe". (emphasis
supplied) Section 132(1-A) uses the words "in consequence of
information in his possession, has reason to suspect". Section 132(13)
says that the provisions of the Code of Criminal Procedure, relating
to searches and seizure shall apply, so far as may be, to searches and
seizures under Sections 132(1) and 132(1-A). There are also Rules made
under Section 132(14). Likewise Section 132-A(1) uses the words "in
consequence of information in his possession, has reason to believe".
(emphasis supplied) Section 133 which deals with the power to call for
information from banks and others uses the words "for the purposes of
this Act" and Section 133(6) permits a requisition to be sent to a
bank or its officer. There are other Central and State statutes
dealing with procedure for "search and seizure" for the purposes of
the respective statutes.
The High Court referred to several decisions of different High Courts
where the material which was not found as a result of search and
seizure was discarded for the purposes of assessment under Chapter
XIV-B.
Finally in view of the fact that the Respondents have rejected the
offer made by the Petitioner as recorded in the High Court Order dated
18.11.2008, the impugned summons, are set aside, and the Respondents
are directed to forthwith return the laptops to the Petitioner.
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