5.  The first applicant was born in 1941 and lives in Istanbul. He is the president of the second applicant, a company with its registered office in Istanbul. 6.  In 1984 the second applicant, Em Export Dış Ticaret A.Ş. (hereinafter “the applicant company”), entered into a business contract with a State-owned company, namely the Iron and Steel Company of Turkey (Türkiye Demir Çelik İşletmeleri), for transactions in substantial amounts of coal and iron between the two companies over a certain period of time. 7.  In 1988 and 1990 respectively, the applicant company brought two sets of proceedings before the Ankara Commercial Court, claiming that the Iron and Steel Company had failed to respect its contractual obligations. The court joined the two sets of proceedings and accepted the applicant company’s case. It ruled that the Iron and Steel Company was to give the applicant company a certain amount of iron and pay it compensation. The Iron and Steel Company appealed against the judgment. In the meantime, the applicants initiated enforcement proceedings while the case was still pending before the Court of Cassation. 8.  As a result of the enforcement proceedings, in 2000 the Iron and Steel Company paid a total of approximately 1,600,000,000,000 Turkish liras (TRL)[1] to the applicant company. 9.  By a letter dated 23 June 2000, the then under-secretary to the Treasury wrote to the Ministry of Finance requesting a tax audit of the applicant company. In their letter, the authorities indicated that the enforcement proceedings had caused such substantial damage to the Iron and Steel Company that some of its factories had stopped production. They claimed that the applicant company’s initiation of enforcement proceedings without having waited for the final decision had aimed at obstructing the Iron and Steel Company’s business and benefiting from its financial difficulties. 10.  On 27 July 2000 the Directorate General of Tax Inspectors (Vergi Denetmenleri Bürosu Başkanlığı – hereinafter “the Tax Inspectorate”) decided that an audit would be carried out in respect of the applicant company. 11.  On 23 August 2000, having established that the applicant company could not be found at its registered addresses, two tax inspectors went to another address in Mecidiyeköy, Istanbul, which appeared to be its business premises, in order to examine its account books. The records subsequently prepared by the inspectors stated that the first applicant, who had introduced himself with a false name, had requested a period of fifteen days to submit the relevant documents and had refused to sign the records. The inspectors also noted that following the first applicant’s refusal to sign the records, they had summoned a police officer and prepared an official letter in his presence. That official letter invited the applicant company to submit all documents related to its income and expenditure within fifteen days. The applicant company was informed that it should make a specific request in order to have the audit conducted at its premises, provided that the premises were available for such a procedure. The letter also stated that the representatives of the applicant company would be charged with tax evasion if they failed to declare the company’s income and present its account books. 12.  By a letter dated 5 September 2000, the applicant company informed the inspectors that the documents were ready for examination at its office. It said that a separate room at its premises would be allocated to the inspectors during the audit and asked to be given two days’ notice in order to prepare the room and the staff who would present the documents. 13.  On 13 September 2000 one of the inspectors, S.K., sent an official letter to the applicant company, stating that it was not possible to carry out the audit at its business premises as the address was not registered. She invited the first applicant to provide her with the documents requested previously within fifteen days. 14.  On 29 September 2000 the first applicant responded, arguing that S.K. had not complied with the relevant legislation and that she had acted in bad faith. He pointed out that the documents were at the disposal of the authorities for examination at the applicant company’s premises on condition that they gave it five days’ notice. 15.  On 10 October 2000 the tax inspectors went to the address in Mecidiyeköy together with two police officers. According to the records, the applicant company’s staff refused to present the required documents and requested five days’ notice to do so. Subsequent records stated that following a discussion during the drafting of the first record, the staff had decided to present the books for 1998 but not those relating to the tax year 2000. The inspectors stated that seven books and a total of 396 receipts had been submitted. They pointed out that all of the documents had been signed, stamped and given back to the company’s representatives. Lastly, they noted that although the office was physically available to them to carry out an audit, it would not be possible to do so in view of the tension caused by the company’s staff. The records were signed by those present, namely two inspectors, two police officers and the applicant company’s lawyer. 16.  On 26 October 2000 S.K. applied to the Şişli public prosecutor’s office in the name of the Tax Inspectorate, requesting a warrant to search three addresses related to the applicant company. She submitted that an examination of its tax files had revealed that the applicant company appeared to be hiding the money it had received from the Iron and Steel Company in order to evade the payment of taxes. Summarising the content of the records drawn up until that point and referring to all the correspondence between her and the applicant company, she maintained that the company’s representatives had acted in a hostile manner and tried to obstruct the work of the inspectors by hiding information such as their names and the official address of the company, as well as by unjustly accusing her. She pointed out that under section 138 of the Tax Procedure Act, the authorities were not required to inform taxpayers in advance of an audit and that in view of that provision, the applicant company’s request to have several days’ notice, despite having already been informed of the audit, was unacceptable. She concluded that a search was required under those circumstances. 17.  On the same day the Şişli Magistrates’ Court issued a warrant authorising a search of the applicant company’s premises. The relevant parts of the search warrant read as follows:
“Pursuant to the Şişli public prosecutor’s request dated 26 October 2000, it is decided that: 1.  A search will be carried out at the business premises of Em Export Dış Ticaret A.Ş., located at ... Mecidiyeköy, Istanbul, taking into account that the account books and other documents to be examined are [being] presented to the authorities at that address. The search will be conducted during the daytime and only once. 18.  Later the same day, two tax inspectors, including S.K., searched the applicant company’s premises and seized a number of documents. According to the records, the search was carried out in the presence of the first applicant, staff members of the applicant company and two police officers. It was noted that the documents that were considered relevant for the audit had been placed in a bag and sealed, and that a detailed inventory would be made at a later stage. The records were signed by the two inspectors, the two police officers and a staff member of the applicant company. The first applicant refused to sign them. 19.  On 1 November 2000 the applicant company was informed that the seized documents would be “unsealed” (mührün fekki) on 28 November 2000 and was invited to be present during the procedure. 20.  On 27 November 2000 the first applicant sent a letter, stating that he had not understood the meaning of “unsealing”. He reiterated his argument that the audit should be carried out at the applicant company’s premises. 21.  On 28 November 2000 S.K. and two other inspectors opened the two bags containing the documents that had been seized during the search and drew up an inventory. The inspectors recorded the fact that the seals had been broken in the absence of the taxpayer as it had not attended the procedure despite having been invited to do so. The inventory listed the names of all the books and tax declarations seized. A note was made that the receipts concerning various years had been classified and sealed separately. 22.  On 11 December 2000 the head of the Tax Inspectorate informed the first applicant of the address where the seized documents were being kept. He also explained what “unsealing” meant. 23.  By two letters dated 4 November and 6 December 2000 the Tax Inspectorate requested that the applicant company submit the account books for the years 1996, 1997 and 2000, as they were not among the seized documents. 24.  On 23 December 2000 the applicants submitted certain documents. 25.  On 23 January 2001 the Tax Inspectorate requested an extension of the audit period, on account of the substantial number of documents seized during the search and the fact that the applicant company had not submitted the missing documents until 23 December 2000. It also stated that the applicant company had not yet presented some of the documents requested. In line with the request, the Şişli Magistrates’ Court extended the audit period by six months. 26.  The applicants objected to that decision. On 31 May 2001 the Şişli Criminal Court of General Jurisdiction decided to annul the remainder of the extended period, holding that the four months that had passed since the Magistrates’ Court’s decision must have been sufficient to conclude the audit. 27.  During the course of the audit, tax inspector S.K. compiled three records, listing in detail the information obtained from the seized documents and putting certain questions to the applicants in respect of those. One of the records was read by the applicants’ lawyer, who objected to its findings by means of a handwritten note. The other two records stated that the applicants had submitted a letter, according to which they refused to sign them. Consequently, the seized documents had been kept by the authorities. 28.  In the meantime, S.K. had several exchanges of correspondence with the enforcement authorities, whereby she requested certain information about the amount that had been paid to the applicant company and how much of that amount corresponded to interest. 29.  By a letter dated 1 May 2002 the applicant company was informed that the audit had been completed. 30.  On 25 May 2002 S.K. drew up a tax-assessment report, noting several irregularities in the applicant company’s financial records and payment of taxes, in particular with regard to the amount it had obtained as a result of the payment made to it by the Iron and Steel Company. In that connection, among many documents examined, the report also referred to the information provided by the enforcement authorities, which specified the total amount paid to the applicant company by the Iron and Steel Company and the interest rate applied in the calculation of that amount. It pointed out that the applicant company, which had not been active for a long time, appeared to have made a substantial number of transactions with some of its partners, without any documents justifying them. Moreover, it found that the company had profited from its investments in foreign currencies, which had not been declared to the authorities. Concluding that the applicant company had acted fraudulently in its bookkeeping, the report requested that corporate income tax and provisional tax be imposed on it, together with a penalty for potential lost revenue.
As regards the procedure that had been followed, the report pointed out that the authorities had been unable to locate the applicant company at its registered addresses. It also stressed the difficulties caused to them by the company’s staff at another address which the company was using temporarily as its business premises. Reiterating the content of the records drawn up during the visits to that latter address, the report noted that after having obtained a search warrant from the Magistrates’ Court, the inspectors had had to seize the relevant documents and take them to the Tax Inspectorate, as the audit could not be carried out there due to the staff’s behaviour and as it was not the applicant company’s registered business address within the meaning of section 139 of the Tax Procedure Act (Law no. 213). 31.  On 11 July 2002 the Tax Office issued several tax notices to the applicant company under sections 341 and 344 of the Tax Procedure Act. It ordered it to pay TRL 123,205,000,000 in income tax and TRL 587,688,150,000[2] as a penalty (cezalı gelir stopaj vergisi ve fon payı tarhiyatı) in respect of different periods of year 2001. For the year 2000, the Tax Office ordered the applicant company to pay provisional income tax of TRL 111,059,520,000 and a penalty of TRL 563,071,740,000[3] (geçici kurumlar gelir vergisi ve vergi ziyaı cezası). 32.  The applicant company brought two sets of proceedings before the Istanbul Tax Court, requesting the annulment of the income tax and the penalty imposed in respect of different periods of year 2001. It stated that both the tax and the penalty had resulted from the payment made to it by the Iron and Steel Company following the judgment of the Commercial Court to that effect, and that the amount was not yet subject to any tax as proceedings were still pending before the Court of Cassation. It also challenged the findings of the tax-assessment report, arguing that the transactions between partners did not justify the imposition of the tax and the penalty.
With regard to the procedure, the applicant company claimed that both the search and the audit had been conducted unlawfully. Despite the allegations of tax inspector S.K., its address was registered and the documents should have been examined at its premises. Although the Tax Procedure Act provided that a search could only be conducted on suspicion of tax evasion, S.K. had obtained a search warrant without there being any such indication. The applicant company further alleged that S.K. had refused to make an inventory of the documents seized during the search, had prevented it from sealing the documents with its own seal and had distorted the facts in the search records as well as in the tax-assessment report she had drafted. Lastly, the audit had been carried out unlawfully after the expiry of the period indicated in the warrant issued by the domestic court. 33.  On an unspecified date the Tax Court held a hearing attended by the applicants and S.K. 34.  On 11 June 2003 the Tax Court delivered two judgments regarding the two sets of proceedings brought by the applicant company. The court allowed the applicants’ claims in part, and reduced the tax penalty to one-third of the amount originally imposed. It dismissed the applicant company’s claims as regards the unlawfulness of the search and seizure, finding that the procedure had been in compliance with the relevant legislation. Referring to section 139 of the Tax Procedure Act, the court held that the applicants’ behaviour before the search, as well as their failure to submit the required documents and to respond to the tax inspectors’ letters, had made it clear that the audit could not be conducted at the applicant company’s premises. It also held that the documents in the case file did not substantiate the company’s allegations against the tax inspector.
As for the tax and the penalty imposed, the court held that despite certain flaws in the tax inspector’s methods, the findings of the tax-assessment report were reliable. In that connection, it held that the amount paid to the applicant company by the Iron and Steel Company was subject to taxation and that the former had failed to clarify the source of substantial transactions with some of its partners. 35.  The applicant company appealed, arguing, inter alia, that the Tax Court had relied on the tax-assessment report, which, according to it, had been drawn up unlawfully. S.K. had distorted the content of certain documents she had seized during the search and had not notified it of the records she had drawn up during the course of the audit, in breach of the relevant legislation. Lastly, the applicant company requested that a criminal investigation be opened against S.K. 36.  On 27 April 2004 the Supreme Administrative Court upheld the judgments. 37. The applicant company applied for rectification of the judgment, arguing that although the tax-assessment report pointed to the absence of certain receipts as one of the reasons for the penalty, those receipts and other important documents had unlawfully been taken from its premises during the search and had not been made accessible to the applicants later on. It submitted that despite its requests to that effect, the Tax Court had failed to obtain those documents and to request that criminal proceedings be instituted against the officials who were responsible for their unlawful seizure.
The Supreme Administrative Court rejected the rectification requests on 25 November 2004. Final decisions were served on the applicant company on 10 January 2005. 38.  On 14 November 2000 and 29 June 2001 respectively, the Governorship of Istanbul imposed two provisional seizure measures on the applicant company in line with S.K.’s reports. 39.  Both seizure measures were found to be unlawful and were annulled by the Istanbul Tax Court. 40.  Subsequently, on 19 December 2001 the applicant company requested that criminal proceedings be instituted against S.K., claiming that she had abused her powers by presenting false information to the authorities. On 14 October 2002 the Governorship of Istanbul delivered a decision. Finding that S.K. had acted in compliance with the law, it refused to give permission for the opening of an investigation against her. 41.  On 20 February 2003 the District Administrative Court dismissed an objection lodged by the applicant company to that decision. 42.  The applicant company brought two sets of proceedings before the Istanbul Tax Court, this time requesting the annulment of both the provisional income tax and the penalty imposed in respect of tax year 2000. It argued that the tax assessment report had been drafted in vague terms and had failed to clearly indicate the reasons for its conclusions. In its petition, the applicant company repeated once again its claims as regards the unlawfulness of the search and the audit. 43.  On 11 June 2003 the Tax Court accepted the cases and held that both the provisional income tax and the penalty related to it had been imposed unlawfully. The domestic court noted that due to the applicant company’s failure to declare its yearly income in full, its income for year 2000 had been calculated ex proprio motu by the authorities. It found that an income calculated in that manner was not subject to provisional taxation and that no penalty could be imposed on the company as a result. The court did not mention the search and seizure. 44.  On 27 April 2004 the Supreme Administrative Court partially quashed the judgments, finding that although the annulment of the provisional taxation was in line with the relevant legislation, as the set-off period had elapsed, under the relevant provisions a penalty could still be imposed for failure on the part of the taxpayer to declare the correct amount. 45.  On 10 March 2005 the Tax Court dismissed the applicant company’s claim for annulment of the penalty, holding that it was in line with the legislation as the company had failed to declare a certain part of its income. The court held that it was not necessary to rule on the provisional tax, as that part of the judgment had already been upheld by the Supreme Administrative Court. 46.  The applicant company appealed. After raising several arguments concerning the imposition of the tax penalty and its calculation, it pointed out that the search had been conducted unlawfully in that all the documents had been seized by the inspectors without making an inventory. It further argued that the Tax Court had failed to address its arguments and to deliver a reasoned judgment. 47.  On 5 October 2005 the Supreme Administrative Court upheld the judgments. The decisions were served on the applicant company on 2 December 2005. 48.  In 2004 and 2005 the applicant company made several payments to the Tax Office as regards the years 2000 and 2001.