Authorised officer conducting the search & seizure cannot retain the documents/ assets beyond 15 days and encash IVPs for adjustment against tax liability

The Hon'ble Kerala High Court in Dr. R.P. Patel & Ors. v. the Assistant Director of Income Tax (Investigations) & Ors. [WA No. 352 of 2005 dated July 30, 2021] set aside the judgment of the learned Single Judge denying benefit to the assessee under the Kar Vivad Samadhan Scheme, 1998, ("the Scheme"). Further held that, the Authorised Officer conducting the search and seizure cannot retain the documents or assets beyond 15 days as per the scheme of Section 132 of the Income Tax Act,1961 ("the IT Act") and all encashments has been done without authority or jurisdiction.

Facts

Dr. R.P. Patel ("the Petitioner") is the legal heir of the Original Appellant, who was a homoeopathic practitioner at Kottayam. The Income Tax Department conducted a search at the residence and clinic of the of the Petitioner and Petitioner’s on December 30, 1994 wherein, various documents, cash and several Indira Vikas Patras ("IVP's") were recovered during the search. After the seizure of those assets, the Petitioner disclosed an amount of INR 1,46,78,980/- for the assessment years 1990-91 to 1995-96 under Section 132(4) of the IT Act.

Subsequently, an order under Section 132(5) of the IT Act was issued by the Assistant Director of Income Tax (Investigation), Kottayam ("the Respondent No. 2") on April 28, 1995, estimating the total income, the tax thereon, interest and penalty, for retaining the seized assets for appropriation after determination of tax liability of the Petitioner. The IVP's 'retained' were encashed through the postmaster and on different dates the realized amount was adjusted towards income tax allegedly due from the assessee for the period 1994-95 and 1995-96.

When the Scheme was introduced in 1998, the Petitioner could not claim the full benefit of the Scheme, since by then, the tax arrears for the assessment years 1994-95 and 1995-96, were adjusted from the amounts obtained by encashing the IVP's by the Asst. Director of Income Tax (Investigations) ("the Respondent No. 1"). This adjustment disentitled the Petition to the benefit of the Scheme. Consequnetly, a writ petition was filed , wherein, the learned Single Judge, after considering the merits of the matter, disposed of the writ petition, holding that the encashment of IVP's was valid and that the recovery and adjustments of tax and advance tax for the year 1995-96 were also proper. However, during the pendency of the appeal, the original Appellant died, and his legal heirs were impleaded as additional appellants.

Being aggrieved by the judgment of the Learned Single Judge, the Petitioner has filed this writ petition.

Held

The Hon’ble Kerala High Court in WA No. 352 of 2005 dated July 30, 2021 held as under:

• Analysed the provision of Section 132(9A) of the IT Act and noted that, the authorised officer shall hand over all the seized assets, including documents, to the assessing officer within 15 days of seizure, and thereafter, the powers under Section 132(8) and 132(9) of the IT Act can be exercised only by such assessing officer. Thus after 15 days of seizure, the authorised officer cannot retain any of the seized documents or assets. Once the assessing officer comes into possession of the seized articles or documents, he is then obliged to pass an order under Section 132(5) of the IT Act within 120 days of the seizure.
• Relied on the decision of the Hon’ble Madras High Court in Commissioner of Income Tax and Others v. K.V. Krishnaswamy Naidu & Co. [(2001) 9 SCC 767] affirmed by the Hon’ble Supreme Court of India, and clarified that the authorised officer who conducted the search and seizure cannot retain the documents or assets beyond 15 days as per Section 132 of the IT Act. If the authorised officer cannot retain the assets or the documents, it is ineluctable that the said officer could not have encashed the IVP’s. The authorised officer could not have been in de facto or de jure possession of the assets or documents seized under Section 132(1) of the IT Act after 15 days of seizure.
• Observed that, all encashments were done by the Respondent No. 1 without authority or jurisdiction and that too after he had become functus officio and the encashments of IVP's were bad in law, and the consequent adjustment of the IVP's were also illegal. Further stated that, the Respondent No. 1 could not have acted to encash the IVP’s or to adjust the same contrary to the statutory prescriptions.
• Stated that, since the invocation of IVP's as without authority and the consequent adjustment as done contrary to the provisions of the IT Act, it is necessary that the status quo ante be restored as on the date of application under the Scheme to meet the ends of justice.
• Set aside the judgment of the learned Single Judge.
• Held that, even though the Scheme is not in existence now, the Petitioner ought not to be prejudiced on account of the long pendency of the appeal before the Court. As the Court has set aside the invocation of the IVP’s and the consequent adjustment of the amounts encashed and restored status quo ante, the application for the grant of benefit under the Scheme shall stand revived.
• Directed the Commissioner of Income Tax Trivandrum ("the Respondent No. 3") to pass fresh orders on the application claiming benefit of the Scheme, in accordance with law.