PRINCIPAL DIRECTOR OF INCOME TAX v. LALJIBHAI KANJIBHAI MANDALIA

From the Judgment and Order dated 22.02.2019 of the High Court of Gujarat at Ahmedabad in R/Special Civil Application No.16360 of 2018. Balbir Singh, ASG, Rupesh Kumar, Ms. Swarupama Chaturvedi, Sandeep Kumar Mahapatra, Saurabh Mishra, Udai Khanna, Rajesh Nayak, Ms. Surbhi Singh, Samarvir Singh, Sagarika Kaul, Shyam Gopal, Gopal Chandra Mishra, Raj Bahadur Yadav, Advs. for the Appellants. Arvind P. Datar, Sr. Adv., Galav C. Sharma, Parthasarthi Mehd., Somanadri Goud Katam, Nitin Thukral, Mrs. Sarabjot Walia, Sirajuddin malik, Advs. for the Respondent. The Judgment of the Court was delivered by HEMANT GUPTA, J.

#1. The challenge in the present appeal is to an order dated 22.02.2019 passed by the High Court of Gujarat at Ahmedabad whereby A B C D E F G H 238 SUPREME COURT REPORTS [2022] 15 S.C.R. A B C D E F G H the warrant of authorization dated 07.08.2018 issued by the appellant1 under Section 132 of the Income Tax Act,19612 was quashed. Consequently, all actions taken pursuant to such warrant of authorization were ordered to be rendered invalid.

#2. The respondent3 in its writ petition challenged the act of authorization for search and seizure on the ground that it is a fishing enquiry and the conditions precedent as specified in Section 132 of the Act are not satisfied. It is the stand of the assessee that he was looking for an avenue to invest some money and the M/s. Goan Recreation Clubs Private Ltd4. was in need of finance for setting up of its business and hence consequently approached the assessee herein for a loan. As a security, the borrower company offered that another company would give its property to the assessee. It may be noticed that there is no allegation of mala-fides against the officers of the Revenue.

#3. In the counter-affidavit filed by the Revenue, giving the history of transaction, it was stated that the “chain of events raised credible doubt on the transaction entered into by the petitioner (assessee) with the company in question as it is the familiar modus operandi being practiced by the entry operators”. It was also stated that the assessee was not expected to comply with the notice of the Revenue as the assessee would have brought the alibi of jurisdiction to evade or not comply with the notice. It was in the interest of revenue that it was not expected to disclose to any outside agency/body or to any of the members directly or indirectly involved in the cob-web of financial transactions with the core groups, viz. Sarju Sharma and associated group of companies. Any inkling of action contemplated by the Revenue was likely to compromise the confidentiality and secrecy of the case intact. It was further stated that the apparent investment made by the assessee was found to be not a judicious investment choice from the point of view of a prudent businessman as the company to which loan was provided by the assessee had no established business, no goodwill in the market, nor was it enlisted in any of the stock exchanges, nor did the assessee had any financial dealings with the company previously. The quick repayment of loan shows that the investment was not meant to earn steady interest income. The investment and nature of transaction entered 1 For short, ‘Revenue’ 2 For short, ‘Act’ 3 For short, ‘Assessee’ 4 For short, ‘Company’ PRINCIPAL DIRECTOR OF INCOME TAX (INVESTIGATION) & ORS. v. LALJIBHAI KANJIBHAI MANDALIA [HEMANT GUPTA, J.] 239 into by the assessee was akin to the familiar modus operandi employed by the entry operators to provide an accommodation entry to bring the unaccounted black money to books for brief period to run the business till sufficient fund is generated by running the business or some fund from any other unaccounted source comes later on. This is the angle of the investigative process underway in which trail of the money being paid by the assessee is being investigated.

#4. The undisputed facts are that the assessee during the financial year 2016-17 transferred a sum of Rs. 6 crores on 01.06.2016 and Rs. 4 crores on 21.06.2016 to M/s Goan Recreation Clubs Private Ltd. The assessee secured the loan by way of a mortgage of the property forming part of Survey No. 31/1-A situated in Village Bambolim, Distt. North Goa. It is an admitted fact that the assessee became the Director of the Company on 18.05.2016 and then ceased to be so on 23.06.2016. It is also admitted that amount of Rs.10 crores was repaid on different dates starting from 06.10.2016 till 31.03.2017 and after repayment of the loan, mortgage was released on 10.07.2017. The Company paid interest as well. It is admitted that the assessee has filed his income-tax return showing the interest income of Rs.42,51,946/- which has been taxed as well. The assessment was finalized under Section 143(3) of the Act on 02.03.2021.

#5. In terms of the authorization after recording reasons to believe in the satisfaction note, search was conducted on 10.08.2018 at the residential premises of the assessee which continued till 3:00 am on 11.08.2018 in terms of Section 132 of the Act. The satisfaction note was not supplied to the assessee nor was required to be disclosed in terms of Explanation to Section 132(1) of the Act inserted by the Finance Act, 2017 with retrospective effect i.e. on 01.04.1962.The reasons recorded were produced before the High Court and before this Court.

#6. The High Court has reproduced the stand of the Revenue to explain the action of search and seizure against the assessee as under: “a) The authorized officers/ investigating officers conducted search and seizure operation at various spots across various states related to the case of Shri Sarju Sharma & other associated group ‘of companies which had financial transactions with Shri Sarju Sharma (PANAKOPS3325A) and M/s. Goan Recreation Clubs Pvt Ltd., Goa (PAN-ANYPS6038F), hereinafter referred to as ‘the A B C D E F G H 240 SUPREME COURT REPORTS [2022] 15 S.C.R. A B C D E F G H company’. Shri Sarju Sharma is a leading business entrepreneur of Siliguri, Dist-Jalpaiguri, engaged in the hospitality business of Hotel, Restaurant and Bar running business under the name and style of M/s Hotel Alishan and Restaurant. The company M/s. Goan Recreation Clubs Pvt Ltd. after being incorporated in the year 2015 has stepped into the world of gaming & entertainment unit of Casino industry. The casino business is being operated from the premises of Grand Hyatt Hotel, Bambolin, Goa w.e.f. 29th Ju1y, 2016. b) The name of M/s Goan Recreation Clubs Pvt Ltd. appeared in the credible information on high value cash deposits/ data of suspicious cash deposits post demonetization period disseminated by the DGIT(Inv.), W.B., Sikkim & NER, wherein it was found that the said company had deposited cash to the tune of Rs.13,79,10,500/- into its two bank accounts maintained with ICICI Bank and HDFC Bank, North Goa. c) M/s Goan Recreation Clubs Pvt. Ltd. was incorporated on 28.09.2015 with a nominal paid up share capital of Rs 2,00,000/-. The initial Directors were Sarju Shanna and Shri Rohit Gurubhakta Sharma. During the initial year of its incorporation, i.e., in the financial year 2015-16 the company raised huge unsecured loan of Rs 5.77 crore from various individuals and companies in a very peculiar manner, as the company at that juncture was yet to commence any substantive business activities. Again, in the financial year 2016- 17 the company raised an unsecured loan of Rs.34.10 crore from various individuals and companies which includes an amount of Rs.10 crore from the petitioner viz. Shri Laljibhai Kanjibhai Mandalia from Ahmedabad. The details of unsecured loan received by the company and credited into the bank accounts of the company are given below: d) From the above chart it is noticed that the company raised huge unsecured loans within two years of its incorporation from various individuals and companies. e) Whereas, in the pre search analysis, on going through the records available with the MCA (Ministry of Corporate Affairs) and ITBA (Income Tax Business Application) it came to light that the PRINCIPAL DIRECTOR OF INCOME TAX (INVESTIGATION) & ORS. v. LALJIBHAI KANJIBHAI MANDALIA [HEMANT GUPTA, J.] 241 company M/s Goan Recreation Clubs Pvt. Ltd. During the financial year 2016-17 have introduced three new Directors along with the exit of then existing Director Shri Rohit Gurubhakta Sharma on 03.03.2017, the details given in the following table: (f) (g) The search and seizure operation in the premises of the petitioner was contemplated and carried out on the basis of the information gathered as explained in the above point nos. (a) to (g) of this para. From the above though it is found that Shri Mandalia had resigned as Additional Director of the company on 25.06.2016 and the loan was repaid by the company in the same year as noticed from the table given at point no. (g) of this para but the chain of events raises credible doubt on the transactions entered into by the petitioner with the company in question as it is the familiar modus operandi being practiced by the entry operators. Therefore, from the foregoing paras it can be concluded that the department initiated the search and seizure operation in the premises of the petitioner after conforming to all the criteria mentioned in the Section 132 sub-section 1 clause (s), (b) and (c) of the Income Tax Act, 1961. The search and seizure action was initiated after detailed analysis of information, duly recording of reasons in the Satisfaction Note and approval of the same by the competent authorities.”

#7. The Company was incorporated on 28.09.2015 with two Directors holding 10,000 shares each of the face value of Rs.10. The stand of the Revenue shows that the said Company stepped into the business of gaming and entertainment and launched a casino in Goa on 29.07.2016 without having any adequate capital. The allegation against the company is in relation to cash deposits of total Rs.13,79,10,500/- soon after demonetization on 08.11.2016. The satisfaction note prepared by DDIT (Investigation), Unit-1, Jalpaiguri was approved by Additional Director of Income Tax (Investigation) Unit-5, Kolkata and further approved by DGIT (Investigation), Kolkata on 07.08.2018. The High A B C D E F G H 242 SUPREME COURT REPORTS [2022] 15 S.C.R. A Court also quoted paragraph 4.3 from an affidavit in-reply filed by the Revenue which reads thus: “5.3. As far as the investment opportunity is concerned, it is quite glaring that the petitioner invested 10 crores within a span of one month on 01.06.2016 and 21.06.2016 by way of loan on interest given to M/s Goan Recreation Clubs Pvt. Ltd. The investment was made from the Kotak Mahindra Bank A/c No. 80116714807 of the petitioner and deposited into the HDFC Bank A/c No. 50200015405430 of the company, M/s Goan Recreation Clubs Pvt. Ltd. Interestingly, the loan was repaid by the latter in five installments from 06.10.2016 to 31.03.2017 [as shown in point no. (g) of para 4.1]. The apparent investment made by the petitioner is found to be not a judicious investment choice from the point of view of a prudent business man as the company to which the petitioner provided loan, had no established business, no goodwill in the market, nor was it enlisted in any of the stock exchanges, nor did the petitioner have had any financial dealings with the company previously. The quick repayment of the loan shows that the investment was not meant to earn steady interest income. All this goes on to suggest that the investment and nature of transaction entered into by the petitioner was akin to the familiar modus operandi being employed by the entry operators to provide an accommodation entry to bring the unaccounted black money to books for brief period to run the business till sufficient fund is generated by running the business or some fund from any other unaccounted source came later on. That is the angle of the investigative process underway in which fund trail of the money paid by the petitioner is being investigated”

#8. The High Court found that none of the reasons to believe to issue authorization met the requirement of Section 132(1)(a), (b) and (c). The said Section reads thus: “132. Search and seizure - (1) Where the Principal Director General or Director General or Director or the Principal Chief Commissioner or Chief Commissioner or Principal Chief Commissioner or Commissioner or Additional Director or Additional Commissioner, or Joint Director or Joint Commissioner in consequence of information in his possession, has reason to believe that- B C D E F G H PRINCIPAL DIRECTOR OF INCOME TAX (INVESTIGATION) & ORS. v. LALJIBHAI KANJIBHAI MANDALIA [HEMANT GUPTA, J.] 243 (a) any person to whom a summons under sub-section (1) of section 37 of the Indian Income Tax Act, 1922 (11 of 1922), or under sub-section (1) of section 131 of this Act, or a notice under sub-section (4) of section 22 of the Indian Income Tax Act, 1922 (11 of 1922), or under sub-section (1) of section 142 of this Act was issued to produce, or cause to be produced, any books of account or other documents has omitted or failed to produce, or cause to be produced, such books of account, or other documents as required by such summons or notice, or (b) any person to whom a summons or notice as aforesaid has been or might be issued will not, or would not, produce or cause to be produced, any books of account or other documents which will be useful for, or relevant to, any proceeding under the Indian Income Tax Act, 1922 (11 of 1922), or under this Act, or (c) any person is in possession of any money, bullion, jewellery or other valuable article or thing and such money, bullion, jewellery or other valuable article or thing represents either wholly or partly income or property which has not been, or would not be, disclosed for the purposes of the Indian Income Tax Act, 1922 (11 of 1922), or this Act (hereinafter in this section referred to as the undisclosed income or property). Explanation- For the removal of doubts, it is hereby declared that the reason to believe, as recorded by the income-tax authority under this sub-section, shall not be disclosed to any person or any authority or the Appellate Tribunal. ………………………..”

#9. Mr. Balbir Singh, learned Additional Solicitor General of India, appearing for the Revenue argued that the High Court has completely misdirected itself in quashing the authorization as the jurisdiction of the High Court while exercising judicial review is very limited. It was contended that the High Court erred in law in finding that clauses (b) and (c) of Section 132(1) of the Act are not satisfied when it recorded as under: “16……Thus, as rightly submitted by the learned counsel for the petitioner, the belief that the petitioner would not respond to a summons or notice issued as envisaged under clause (b) of sub- section (1) of section 132 is not based upon any information or A B C D E F G H 244 SUPREME COURT REPORTS [2022] 15 S.C.R. A B C D E F G H other material but is based upon conjectures and surmises that the petitioner would take the alibi of lack of jurisdiction on the part of the respondents. This contention of the first respondent also lends support to the contention raised on behalf of the petitioner that powers under section 132 of the Act have been resorted to because that is the only provision which vests jurisdiction in the Kolkata authorities for taking action against the petitioner. Evidently, therefore, the circumstance envisaged under clause (b) of sub-section (1) of section 132 of the Act does not exist in the present case. 17…..There is nothing on record to indicate that any belief has been formed by the competent authority to the effect that the petitioner has in his possession any money, bullion, jewellery or other valuable article or thing which would not have been disclosed by him for the purposes of the Act. On the contrary, in the facts of the present case, from the record of the case as produced by the respondents as well as by the petitioner, it is evident that the loan transaction whereby the petitioner had advanced Rs.10,00,00,000/- to the borrower company has been duly reflected in the books of account of the petitioner. In his return of income, the petitioner has duly shown the interest income from such transaction. The tax deducted at source in respect of such interest income, has been credited to the account of the petitioner by the concerned authority. Therefore, the entire transaction has been disclosed by the petitioner. There is no other material on record on the basis the respondents could have formed the belief as contemplated under clause (c) of sub-section (1) of section 132 of the Act. Evidently, therefore the circumstance envisaged under clause (c) of section 132(1) of the Act also does not exist in the present case.”

#10. Mr. Balbir Singh referred to the judgments of this Court reported as N.K. Jewellers and Another v. Commissioner of Income Tax, New Delhi5, Commissioner of Income Tax, Allahabad and Ors. v. Vindhya Metal Corporation and Ors.6, Income Tax Officer, Special Investigation Circle-B, Meerut v. Seth Brothers and Ors.7 and Director