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[2008] 2 S.C.R. 168

M/S. K.C.C. SOFTWARE LTD. AND ORS.

DIRECTOR OF INCOME TAX (INV.) AND ORS.

(Civil Appeal No. 769 of 2008)

JANUARY 29, 2008.

(DR. ARIJIT PASAYAT AND S.H. KAPADIA, JJ.) ,..,

~ Income Tax Act, 1961; Ss. 132(1 )(iii), 132(3), 132(8A), 132(b), 153(A) and 158(A): c Search of premises of assessee by income tax authorities

- -Seizure of jewellery, cash and fixed deposit receipts - Operation of bank accounts restrained in terms of order passed by authorities uls. 132(8) of the Act- Representations

of_ assessees for release of seized articles, cash and to lift D restraint order not considered by authorities - Writ petition - dismissed by High Court - On appeal, Held: Since order passed by the authorities u/s. 132(8) of the Act not challenged --+ by assessee, no relief could be granted to him - Authorities .. are directed to complete the assessment within the time period ;

E statutorily provided for - Cash seized and transferred to the account of Commissioner be kept in interest bearing fixed deposit - Directions issued - Income Tax Search and Seizure Manual- Paras 5.01 and 5.02 - Check List of articles seized

- Cash seized - Deposit of.

F Words and Phrases:

_, A ..,

'Cash in hand' and 'cash in bank' - Distinction between - Discussed in the context of search and seizure of cash.

Pursuant to warrant of authorization, search and G seizure was conducted by the authorities of Income-tax , Department in the premises of the assessee. Certain

assets including jewellery, cash and fixed deposit receipts were seized. Operation of five bank accounts of appellant

Nos.1 and 3 had also been restrained in terms of order H 168

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Mts: K.C.C. SOFTWARE LTD. & ORS. v. DIRECTOR 169

OF INCOME TAX (INV.) & ORS.

issued by the authorities under S.132(3) of the Income Tax A Act, 1961. Appellant represented for lifting the restraint order as the information about all bank accounts under restraint have been disclosed in the regular books of account and the restraint order was hampering the day to day operations of the business of the company. B Appellant No.3 moved an application under Section 132(8) of the Act to the authorities for release of jewellery and FDR. Appellant No.2 addressed a letter to the Manager of the Bank informing him that as per provisions of Section 132 (SA) of the Act, the restraint order was no longer c operative. However, the authorities issued two fresh warrants of authorization to the Bank in respect of the bank accounts in question and the bank accounts of the appellants were seized. Since then, appellants Nos. 1 & 3 represented for release of the amount seized by the 0 authorities after adjusting self-assessment tax for the assessment years 2005-2006 and advance tax for the year 2006-2007, but the authorities had failed to release the balance amount. The appellants filed writ petitions for appropriate directions to the authorities for release of seized articles and balance amount and to quash the E warrants of authorization. The writ petitions were dismissed by the High Court. Hence the present appeal.

Appellants contended that the order passed under Section 132B of the Act shows that the amount was F ordered to be retained for estimated liability. However, such a course is not available after deletion of the provision relating to estimated liability in the year 2002; that since the authorities themselves permitted adjustment of self assessment and advance tax, the balance amount has perforce to be refundabte; that there G is no dispute that Section 132 (3) read with Section 132 (SA) of the Act restricts the period of operation of the order of restraint to 60 days; that s.132B relates to adjusting liability on completion of assessment under Section 153A H

A and it is relatable to the year in which search and seizure was initiated and block period in terms of Chapter XIV-8 of the Act; and that s.158 relates to retention and not appropriation of the cash seized.

Respondents submitted that reference to Section B 153A in Section 1328 shows that it relates to estimated

liability; that though it is accepted that the provision -r

-~ relating to estimated liability in terms of Section 132 (5) was deleted w.e.f. 1.6.2002, yet in view of Section 1538 the period of assessment is continuing; and that the C amount even though withdrawn has not been taken to the consolidated funds, there is no appropriation in that sense.

Dismissing the appeal with directions, the Court

D HELD: 1.1 There are different stages under Section . 132 (1) .of the Income Tax Act. First stage is seizure, then comes adjudication on the non disclosure aspect and theri determination relatable to Section 132 (BA). Lastly, the order can be passed under Section 1328 of the Act.

E (Para -12) [176-G, G]

1.2 On a. bare reading of Income Tax Search and seizure Manual, it is clear that the same is relatable to cash seized and cash in bank is conceptually different from cash in hand. (Para - 16) [179-C]

F Shanti Prasad Jain \I." The Director of Enforcement (1963) /'- 2 SCR 297 - followed.

Foley v. Hill [(1843 to 1860) All E.R. Re-print 16] - . referred to.

2. This Court need not go into the broader issue in view of the fact that there is no challenge to the order >-- passed under Section 1328 of the Act. But it has been stated by counsel for the revenue that it is permissible to .complete the assessment by 31st March, 2008. In view of H the aforesaid scenario, the appeal is disposed of with the

directions that since order passed by the authorities A under Section 1328 of the Act was not challenged, no relief can be granted to the appellants; that it would be in the interests of the assessee as well as the revenue if the amount transferred to the PD account of the Commissioner is kept in interest bearing fixed deposit as B ultimately in the event the assessee succeeds, would be entitled to interest as provided in the statute and that the assessment has to be completed within the time ' statutorily provided. (Para - 19) [181-A, B, C, D]

CIVILAPPELLATE JURISDICTION: Civil Appeal No. 769 , C of 2008.

From the final Judgment and Order dated 15.11.2006 of the High Court of Delhi at New Delhi in W.P. (C) Nos. 6313-15/ 2006

S.K. Bagaria, Meenakshi Arora and S. Gupta for the Appellants.

Vikas Singh, A.S.G., Navin Prakash and B.V. Balaram Das for the Respondents.

The Judgment of the Court was delivered by

Dr. ARIJIT PASAYAT, J. 1. Leave granted.

2. Challenge in this appeal is to the order passed by a Division Bench of the Delhi High Court dismissing the writ petitions filed by the appellants.

3. Background facts in a nutshell are as follows:

A search and seizure was conducted by the respondents in the premises of the appellants pursuant to warrants of authorization dated 3.8.2005. On 4.8.2005 certain assets G including jewellery, cash and fixed deposit receipts were seized.

On that very day, appellants received a letter from the HDFC Bank at 8-28, Community Centre, Janakpuri, New Delhi that operation of five bank accounts of appellant No.1 had been restrained by order issued under Section 132 (3) of the Income H

A Tax Act, 1961 (in short the 'Act'). The Bank issued a similar

letter to appellant No.3 intimating that the said appellant had been restrained from operating her Savings Bank account by order dated 3.8.2005 passed under Section 132(3) of the Act.

Appellant's stand was that existence of the locker~ and the bank B accounts were disclosed by the appellants in the regular books of account maintained and no opportunity was provided to • establish the said fact. It was further submitted that the computers . which contained the details of the bank accounts were available

at the business premises at Janakpuri and no opportunity was c allowed to the appellants to place these before the authorities.

Grievance is made that apart from the non grant of opportunity no effort whatsoever was made to ascertain whether the accounts had been disclosed in the regular books of account maintained by the appellants. On 8.8.2005 appellant addressed D a letter to the Additional Director of Income Tax stating inter alia

that all bank accounts under restraint have been disclosed in the regular books of account and also that the restraint order was hampering the day to day operations of the business of the company. On the same day, appellant No.3 wrote another letter E to the concerned authority requesting him to remove the restraint order in Savings Bank account. On 16.9.2005, appellant No.1 addressed another letter to the Assistant Director of Income Tax (Investigation) again reiterating its stand that the bank accounts have been disclosed in the regular books of account F and there was no justification for keeping the restraint on the operation for the bank accounts.

4. According to the appellants no reply was received to the letters dated 8.8.2005 and 16.9.2005 and the respondents did not make any effort to verify the correctness of the appellant's G contentions. On 21.9.2005 appellant No.3 moved an application under Section 132(B) of the Act to the Deputy Commissioner of I ricome Tax for release of jewellery worth Rs.4, 76,588/- and FDR of Rs.1, 79, 710/-. Since the nature and source was duly explained, the limitation of 60 days in terms of Section 132(8A) H expired w.e.f. 31.8.2005 i.e. the date of issuance of the order of

restraint. On 3.10.2005 appellant No.2 addressed a letter to A the Manager, HDFC Bank informing him that as per provisions of Section 132 (SA) of the Act, the restraint order was no longer operative. On 4.10.2005 Bank through its Bank Manager sought clarification from the Deputy Director of Income Tax. The Income Tax Department on 4.10.2005 issued two fresh warrants of B authorization under Section 132 of the Act in respect of the bank accounts. It is alleged that the appellants were not informed about the warrants of search. On 5.10.2005 the bank accounts of the appellants were searched and seized through withdrawal of cash by demand drafts.Appellant's stand in essence is that the fresh c warrants of authorization were without jurisdiction and in any event since the accounts had been duly disclosed in the regular books of account, there was no scope for operating Section 132 (3) of the Act. The earlier order passed under Section 132

(3) of the Act ceased to be operative w.e.f. 2/3.10.2005. On D 8.10.2005 the bank by a letter informed the appellants about search and seizure of the bank accounts under Section 132 (3) of the Act and also gave details of demand drafts issued in favour of respondent No.2 withdrawing the money from. the accounts of the appellants.

5. On 28.10.2005 the appellants were supplied with copies of the Panchnama. On 29.10.2005 appellant No.1 requested the respondents to adjust towards self assessment tax of

Rs. 77,68,177 /-for the assessment year 2005-06 from the seized amount of Rs.1,81,91,982/- and to release the balance. On F 29.11.2005 appellants Nos.1 and 3 moved an application under Section 132 (B) of the Act for release of the amount seized on 5.10.2005 i.e. within 30 days of the end of the month in which seizure took place. Several documents were filed to substantiate the claim. Again on 16.2.2006 Income tax G authorities were requested for adjustment of Rs.40,00,000/- as advance tax for the assessment year 2006-07 from the seized amount and to release the balance. Since the respondents failed to respond to the requests of the appellants, writ petitions Nos.6313-6315 of 2006 were filed inter alia for the following

A directions: ~

"(a) to respondents to release the balance amount of Rs.61,85,502/- to petitioner No.1 after accepted adjustments;

B (b) to respondents to release amount of Rs.25,27 ,035 to petitioner No.3;

(c) quash and set aside Warrants of Authorization dated "'f 4.10.2005; c (d) declare restraint order dated 3.8.2005 as i11egal;

(e) release FDRs/jewellery of petitioner No.3 seized on 4.8.2005. ~

6. The respondents filed counter affidavit contending inter

D alia as follows

"(i) 1st order of search and seizure was passed and served only on 4th August, 2005;

(ii) The application dated 29.11.2005 had been disposed

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E off vide order dated 1st February, 2006 (which order was not communicated to the petitioners). '

(iii) It is contended that in the search and seizure operations carried out on 4.8.2005 authorized officer arrived at the conclusion that the Bank accounts in question.

F were undisclosed and immediately passed as restraint order. t-·

(iv) The respondent acknowledged that 60 days from the date of issue of restraint order expired on 3.8.2005.

(v) It is admitted that on 4.10.2005 warrants of authorization in respect of the same accounts only were again issued by DIT.

(vi) On the strength of such warrants and seizure operation on 4th and 5th October, 2005 amount of Rs.80,59,539, H Rs.1,01,32,443 and Rs.25,27,035 respectively were

.,_ seized from the said Bank accounts.

(vii) That the entries in the books of accounts etc. were 27.7.2005 and no entries were found between 28.7.2005 to 4.8.2005 hence non disclosure in books of accounts since books were not written for 516 days.

(viii) It was alleged that the amounts lying in the Bank were ,.. not disclosed and not accounted for and therefore ther~

~ was no question of lifting the restraint order."

7. A rejoinder affidavit was filed on 2.11.2006 taking the c stand that the order dated 1.2.2006 was not served and there were apparent contradictions as regards the search and seizure in the pleadings. By the impugned order the writ petitions were dismissed observing that the respondents had taken a stand that there was estimated tax liability of approximately

Rs.10,00,000/-. The satisfaction note dated 13.9.2005 of ADIT, D Unit I and the notings of the Director (investigation) clearly indicated that the stand of the appellants was without substance. r

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8. Learned counsel for the appellants submitted that the factual scenario clearly shows that the authorities acted without E jurisdiction in directing either to retain the amount after adjustment of the self assessment and advance tax or also

withdrawing the amount by demand drafts from the bank accounts. The order passed under Section 132B shows that it ' was retained for estimated liability. Such a course is not available after deletion of the provision relating to estimated F

>~ liability in 2002. Similarly, the provisions relating to block period assessments in Chapter XIV were deleted w.e.f. 1.6.2003. As the authorities themselves permitted adjustment of self

assessment and advance tax, there was in effect release accepting the stand of the appellants and the balance amount G

... , of Rs.81,00,000/- has perforce to be refundable. Tile power under Section 132(1 )(iii) relates to seizure and the proviso deals with assets which cannot be seized. There is no dispute that

Section 132 (3) read with Section 132 (8A) restricts the period of operation of the order of restraint to 60 days. Section 132B H

A relates to adjusting liability on completion of assessment under

Section 153A and it is relatable to the year in which search and seizure was initiated and block period in terms of Chapter XIV-

B. Section 158 relates to retention and not appropriation.

9. Stand of the respondents on the other hand was that reference to Section 153A in Section 1328 shows that it relates to estimated liability. Though it is accepted that the provision _, relating to estimated liability in terms of Section 132 (5) was

deleted w.e.f. 1.6.2002, yet in view of Section 1538 the per:iod

c of assessment is continuing. The amount even though withdrawn has not been taken to the consolidated funds. There is no appropriation in that sense.

10. It was stated that the order passed under Section 132

(3) was revoked but a fresh order was passed. The money has

D been withdrawn in terms of "Search and Seizure Manual, 1989",

particularly Paras 5.01 and 5.02 thereof. The adjustment that has been done is for existing liability. There is no appropriation in that sense because it can be done only after assessment is --< )!lo completed by transfer.

11. Stand of the appellants essentially was that there is no power for retaining any amount seized for the purpose of meeting. estimated liability. That according to the appellants was ,. permissible upto 1.6.2002 and by deletion of Section 132 (5) the position has been materially changed.

12. Stand of the revenue on the other hand seems to be 1" ' that what is appropriated can be cash and not money. The bank account in essence is not cash but is money. There are different stages under Section 132 (1 ). First stage is seizure, then comes adjudication on the non disclosure aspect and then G determination relatable to Section 132 (BA). Lastly, the order can be passed under Section 1328. It has been specifically )...

stated by learned counsel for the revenue that Section 132(3) order was revoked. It is stated in para 1 O of the affidavit filed on 15.11.2007 as follows: H

"That it is submitted that in the instant case the power A under Section 132(3) was exercised at the initial stage for the purposes of verification of the source of funds lying in the bank account. Thereafter, when the assessee was unable to satisfactorily explain the source of these funds, the same were seized under a fresh warrant under Section B 132(1) issued by the Director of Income Tax (Inv.), who duly recorded his satisfaction as provided under Section 132 (1)(c).

13. In paragraph 11 it has been stated as follows. c "It is submitted that an Authorized Officer acting under Section 132 (1 )(iii) of the Act has full power and jurisdiction

to seize cash balance lying in .bank account as these would come within the meaning of 'money' and/o~ 'assets' as provided under Section 132 (1)(iii) of the Act. It is submitted D that the subsequent action of converting these balances into a demand draft is only a safeguard for safe custody of these assets and is irrelevant to the legality of the seizure itself. It is therefore submitted that in the instant case, the seizure was made legally and as per the powers vested E in the Director of Income Tax (Investigation), respondent No.1 under Section 132 (1) of the Act."

14. "The Search and Seizure Manual" to which reference has been made deals with in Chapter V under heading "Post Search Work". The relevant paras 5.01and5.02 read as follows: F

"5.01 After the return of the search parties, a check list should be prepared for pending and immediate follow up work. The check list may inter alia include:-

(a) List of places where search has to be continued.

(b) Details of bank lockers sealed and to be opened subsequently. _

( c) List of places where valuables are sealed in premises itself on the ground that verifiation with Wealth-tax records . H

is not possible or pending valuation of assets.

(d) List of godowns holding stocks, in respect of which prohibitory orders have been issued.

(e) List of places where police guards have been posted.

(f) Details of bank accounts which have been frozen under Section 132 (3).

(g) List of places where further section has to be taken for any other reason.

(h) List of promissory notes, fixed deposit's receipts, Hundies etc. requiring special attention.

(i) Details of packages of cash which are to be deposited into the Personal deposit Account in the Reserve Bank/ State Bank.

(j) Details of packages of bullions, jewellery etc. required to be deposited in the strong room/safe deposit vault of the bank.

(k) Work regarding valuation of jewellery seized.

(I) Details of sealed covers containing damaged/ mutilated documents.

(m) Particulars of complaints filed in police, as result of any incident during the search, which are required to be followed up.

5.02 Deposit of Cash

The cash seized is required to be deposited in the bank in the Personal Deposit Account of the G Commissioner, at the earliest opportunity preferably on the next working day. However, if due to unavoidable reasons, it is not possible, the cash with other valuables may be kept in the strong room of the Commissioner or the safe deposit vault of the bank. Where cash has been H brought in sealed packet, it is expected that the authorized

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~- officer has already issued a letter to the assessee A requesting him to be .present before the AD IT-in-charge on the following morning before 12 O' clock. Where the cash seized relates to an assessee who is assessed in the charge of some other Commissioner, a crossed ccount payee demand draft in favour of the concerned B Commissioner should be obtained and dispatched to him."

15. It is stated that amount has not become a part of the [' +

Consolidated Fund of India and is deposited in separate PD account of the concerned Commissioner and is held in the custody till final determination of the tax liability by the assessing c

officer for the relevant assessment years.

16. On a bare reading of the Manual it is clear that the same is relatable to cash seized and cash in bank is conceptually different from cash in hand.

17. In Shanti Prasad Jain v. The Director of Enforcement (1963 (2) SCR 297) it was inter alia observed as follows: ,.

""' "Under the law the time relationship between a Banker and a customer is that of a debtor and creditor and that it E makes no difference in that relationship that the deposits were conditional.

xx xx xx

Now the law is well settled that when moneys are deposited F in a Bank, the relationship that is constituted between the banker and the customer is one of the debtor and creditor and not trustee and beneficiary. The banker is entitled to use the monies without being called upon to account for such user, his only liability being to return the amount in accordance with the terms agreed between him and the G

__., customer. And it makes no difference in the jural relationship whether the deposits were made by the customer himself, or by some other persons, provided the customer accepted them. There might be special arrangement under which a Banker might be constituted H

A a trustee, but apart from such an arrangement,.his position qua Banker is that of a debtor, and not trustee. The law was stated in those terms in the old and well-known decision of the House of Lords in Foley v. Hill (1848 11 H.L.C. 289 E.R. 1002) and that has never been B questioned."

18. In the judgment of House of Lords in Foley v. Hill [(1843 to 1860) All E. R. Re-print 16] referred in the aforesaid judgment of the Constitution Bench, it was inter a, lia held as under:

"Money, when paid into a bank, ceases altogether to be the money of the owner, it is then the money of the banker, who is bound to return an equivalent by paying a similar sum to that deposited with him when he is asked for it.

The money paid into the bankers, is money known by the customer to be placed there for the purpose of being under the control of the banker; It is then the banker's money; he is known to deal with it as his own; he makes what profit on .it he can, which profit he retains to himself, paying back only the principal, according to the custom of bankers in some places, or the principal and a small rate of interest, according to the custom of bankers in other places .... He is guilty of no breach of trust in employing it, he is not answerable to the customer if he puts it into jeopardy, if he engages in a hazardous speculation; he is not bound to keep it or deal with it as the property of the customer, but he is, of course, answerable for the amount because he has contracted, having received that money; to repay to the customer, when demanded, a sum equivalent to that paid into his hands. That has been the subject of discussion in various cases, and that has been established to be the relative situation of banker and customer. That being established, to be the relative situation of banker and customer, the banker is not an agent or factor, but he is a debtor."

19. At this juncture, it is to be clarified about the

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impermissibility to convert assets to cash and thereafter A impound the same. We need not go into the broader issue in view of the fact that there is no challenge to the order passed under Sectin 1328 of the Act. But it has been stated by learned counsel for the revenue that it is permissible to complete the assessment by 31st March, 2008. In view of the aforesaid B scenario, we dispose of the appeal with the following directions:

.,, (i) In view of the non challenge to the order passed under Section 1328, no relief can be granted to the appellants. c (ii) However, it would be in the interests of the assessee as well as the revenue if the amount transferred to the .PD account of the Commissioner is kept in interest bearing fixed deposit as ultimately in the event the assessee succeeds, would be entitled to 0 interest as provided in the statute. The assessment has to be completed on or before 31st March, 2008

~..., i.e. within the time statutorily provided.

20. The appeal is dismissed subject to the aforesaid directions. There will be no order as to costs.

S.K.S.

Appeal dismissed.