Laptops of Auditors seized during search of an assessee

Date: Friday, 5 June, 2009, 10:01 AM

Laptops of Auditors seized during search of an assessee – Income Tax Department cannot force auditors to part with information of other parties stored in computers: Delhi HC

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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