IT Department's Notice u/s 131 (1A) of Income Tax Act lacked basis, No Evidence of concealed Income: Gauhati HC quashes Notice [Read Order]

In a recent ruling, the Gauhati High Court set aside and quashed the notice issued under Section 131 (1A) of Income Tax Act, 1961 by the Income Tax department citing no evidence of concealed income. It was also observed that the conditions in Section 131(1A) were also not met by the officers.

The writ petition was filed challenging the illegal search and seizure conducted at their residence on 02.12.2020 and the subsequent notices issued by the respondent, arguing that they were unlawful, without jurisdiction, and in violation of the Income Tax Act.

The petitioner, Pawan Kumar Garg, is a regular taxpayer, and is regularly filing income tax returns and discharging tax liabilities by paying income tax and TDS. A search and seizure operation was conducted at their home and coal depot on 04.12.2020, authorised by the Principal Director of Income Tax (Investigation). The operation yielded cash amounting to Rs. 2,69,920, jewellery worth Rs. 10,44,695, and various documents, leading to a restraint order on two bank lockers.

Subsequently, a notice was issued on 29.12.2020 under Section 131 (1A) of the Income Tax Act, directing the petitioner to present financial documents. The petitioner argued that post-search, such a notice was unwarranted and impractical, offering to provide documents at a different location instead.

Respondent No. 3, the Deputy Director of Income Tax (Investigation), rejected the petitioner's contentions made in the letter dated 04.01.2021 regarding the jurisdiction to issue a notice under Section 131(1A) of the Income Tax Act. In the notice dated 05.01.2021, Respondent No. 3 directed the petitioner to send a soft copy of the books of account and other documents via email.

In response to the notice dated 05.01.2021 from Respondent No. 3, the petitioner sent a reply on 16.01.2021, arguing that the decision in Classic Builders & Developers v. Union of India (251 ITR 492 MP) referenced in the previous reply was related to a survey, not a post-search scenario. To support the claim that issuing a notice under Section 131(1A) after a search is illegal, the petitioner cited the Allahabad High Court decision in Anita Sahani v. DIT (Investigation) (266 ITR 597).

Despite this, Respondent No. 3 issued another notice on 21.01.2021 under Section 131(1A), directing the petitioner to appear on 25.01.2021 with the specified books and documents. The petitioner replied on 25.01.2021, stating that under Rule 6F and 6F(5) of the Income Tax Rules, they were only required to maintain books of account for six years from the end of the assessment year, and thus did not have records for the 2011-12 assessment year. The petitioner also noted they had already provided books for 2013-14 to 2014-15 and data for 2012-13 to 2020-21.

Unmoved, Respondent No. 3 issued another notice on 28.01.2021, again under Section 131(1A), directing the petitioner to appear on 02.02.2021 with the specified documents. Aggrieved by these actions, the petitioner filed a writ petition under Article 226 of the Constitution, challenging the issuance of post-search notices under Section 131(1A).

Dr. A. Saraf, Senior Counsel for the petitioner, submitted that the notices issued by Respondent No. 3 under Section 131(1A) of the Income Tax Act are illegal and without jurisdiction. He contended that Section 131(1A) empowers the authority to issue summons for conducting an inquiry or investigation if there is reason to suspect that income has been or is likely to be concealed, even if no proceedings are pending.

However, since a search and seizure had already taken place under Section 132(1)(i to v) of the Act, further summons under Section 131(1A) would not be maintainable. He asserted that Section 131(1A) can only be invoked before any action under Section 132(1)(i to v) is taken, and since such action had already occurred in this case, the precondition for invoking Section 131(1A) is not met.

Income Tax Department’ counsel Mr. S. C. Keyal contended that issuing notices under Section 131(1A) post-search does not invalidate Section 132 proceedings if they were initiated with valid authorization based on available material. He emphasised that Section 131(1A) does not require pre-search notices, as this would undermine the effectiveness of search and seizure operations. He supported his arguments with the judgment in Liberty Marine Syndicate (P) Ltd. v. PCIT, Cuttack (2017) 394 ITR 277 (Orissa High Court), Classic Builders & Developers V Union of India, 2005, Arti Gases Vs DIT (Inv.), 2001..etc.

The bench of Justice Kaushik Goswami observed that in the facts of the instant case, there could not have been any material to suspect that the petitioner had concealed or was likely to conceal any income. Section 131(1A) of the Act consists of two conditions that must be fulfilled before any action is taken under this section:

(a) the Assessing Officer must have reasons to suspect that income is concealed or likely to be concealed, and

(b) upon existence of such reasons, a notice must be issued for the purpose of making an inquiry or investigation.

Only after these two conditions are met can the Assessing Officer take action under clauses (i) to (v) of Section 132(1). Therefore, a search and seizure can only be conducted following the fulfillment of these conditions.

The High Court also noted that in the present case, the respondent has not provided any material indicating that the Assessing Authority had reasons to suspect that the petitioner concealed or was likely to conceal any income. The affidavit filed on behalf of the authority is completely silent on this matter. The fact that the respondent issued notices under Section 131(1A) of the Act after the search and seizure operation under Section 132 had been conducted indicates a lack of prior reasons to suspect or any material basis for the search operation.

“Thus, both the essential conditions have been not fulfilled in the facts of the instant case before conducting the search and seizure on 4.12.2020. Non fulfillment of the same has rendered the search and seizure illegal and without jurisdiction,” stated the Single bench.

Considering the submissions the bench stated that the search in question is unequivocally illegal as it contravenes the explicit provisions of Section 131(1A) of the Act. Therefore, the authorization dated December 4, 2020, along with the resulting search and seizure conducted on the same date, as well as the subsequent notices dated December 29, 2020, January 5, 2021, January 21, 2021, and January 28, 2021, under Section 131(1A) of the Act, were set aside and quashed.

To Read the full text of the Order CLICK HERE

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