Blog by CA Sunil Arora on Section 132 : Reasons to believe.

A search under the provisions of the Income tax Act, 1961 is a serious invasion in the privacy of a person. Those of us who have not experienced a search operation under Section 132 of the Income tax Act, 1961 will find it difficult to appreciate the trauma faced by a person when we have outsiders walking into personal spaces like bedrooms and personal closets, etc. In addition thereto even innocuous-looking acts of scanning and probing into personal mobile handsets as well as laptops of an individual can be stressful at times.

The Legislature in its wisdom has tried to put in sufficient safeguards in the provisions to ensure that the action of Search under Section 132 is not blatantly misused. The law provides for the issue of authorisation of a search by an officer of the rank of Principal Chief Commissioner or Principal Director General and going down in the hierarchy to the rank of Joint Director or the Joint Commissioner. The law further provides for authorisation of search under Section 132 of the Act only in three situations:

In case a person fails to produce books of account or other documents as summoned by the officer of the Income Tax Department.

In case a person despite of having been issued summons or notice to produce the books of accounts or other documents will not produce the same.

In case a person is in possession of any money, bullion, jewellery or any other valuable article or thing acquired from Income which has not been disclosed before the Income Tax Authorities.

The Act further provides that the designated officer will on the basis of information in its possession shall arrive at reason to believe that the aforesaid situation prevails or is likely to prevail.

In other words, the designated officer of the Income tax department authorising the search in a particular case must have information in its possession based on which the said officer can arrive at reasons to believe that the assessee has not produced books of accounts and other documents in spite of having been given an opportunity to provide the same through summons / notice, or shall not produce the books of accounts and other documents even if summoned or notice is issued to him. And the third situation where an authorisation to search the premises can be issued is a situation where the designated officer of the Income tax department has information in its possession to arrive at reasons to believe that the assessee is in possession of money, bullion, jewellery or any other valuable article or thing which has not been disclosed before the Income tax department while filing the return of Income by the assessee.

Although the term “reasons to believe” has not been defined in the statute but the said expression reasons to believe has been examined by a number of courts in different proceedings. The courts have tried to distinguish between reasons to believe and reasons to suspect and repeatedly held that a suspicion howsoever strong it may be, cannot become a belief. Moreover, a strong invasive action of search as provided under the statute cannot be authorised for making fishing and probing enquiries against the assessee. In addition thereto, action of search and seizure under Section 132 of the Act cannot be authorised for collecting evidence which may be found during the search to form reasons to believe.

Needless to say that the said reasons to believe will have to be recorded by the officer authorising such search. The law further provides that the said reasons to believe which authorises a search shall not be open for inspection to the assessee whose premises are being searched or by any other officer and even Income tax appellate Tribunal. In other words, the said reasons to believe recorded by the designated officer can be examined only by the High Court or the Hon’ble Supreme Court of the country.

The assessee would have no option other than filing a writ in the concerned High Court of the State or agitate the matter up to the said High Court in a situation where the assessee is not satisfied that there were sufficient information as a result of which the Ld. designated officer has arrived at a belief that at least one of the aforesaid three conditions would be fulfilled.

In a recent judgement LaljibhaiKanjibhaiMandalia [[2022] 140 taxmann.com 282 (SC)],the Hon’ble apex court of the country had an occasion to examine the reasons to believe for initiation of search in a particular case. The Hon’ble Supreme Court overruled the judgement of the Hon’ble Gujarat High Court which had arrived at finding that none of the reasons to believe to issue authorisation met the requirement of Section 132 of the Act.

The assessee in this particular case had given a loan of ₹ 60,000,000 to Goan Recreation Clubs Private Limited who was being probed by the department for allegedly being an accommodation entry provider and was purported to be carrying on dubious transactions. Although Prima facie, the facts and circumstances of this case do not justify initiation of search against the assessee but the Hon’ble apex of the country after examining the reasons to believe submitted to them in sealed cover arrived at finding that the authorisation of search was valid and Hon’ble court overruled the orders of the Hon’ble Gujarat High Court which had held the searches to be invalid.

In the light of the aforesaid judgement, the bar which was set for initiation of search seems to have been lowered as giving of loan to a Company could possibly form a basis for initiatioin of search u/s 132 of the Act.