LALJIBHAI KANJIBHAI MANDALIA vs. PRINCIPAL DIRECTOR OF INCOME TAX (INVESTIGATION)

Facts

The petitioner, Laljibhai Kanjibhai Mandalia, a high net worth individual, advanced a loan of Rs. 10,00,00,000/- to Goan Recreation Clubs Private Limited, with Royale Recreation Private Limited providing property as security via a registered mortgage deed dated 22.06.2016. The petitioner briefly became a director of the borrower company for over a month during the loan period and paid tax on the interest earned. The loan was repaid, and a deed for release of mortgage was executed on 10.07.2017. On 10.08.2018, the Income Tax Department conducted a search at the petitioner's residence, claiming the warrant was issued by the Principal Director of Income Tax (Investigation), Kolkata. The petitioner challenged the search and consequential actions, alleging harassment and abuse of power, and sought to quash the warrant of authorisation.

Held

The High Court allowed the petition and quashed the impugned warrant of authorisation. The Court found that the circumstances envisaged under clauses (a), (b), or (c) of sub-section (1) of section 132 of the Income Tax Act, 1961, were not met. Specifically, regarding clause (c), the Court noted that the loan transaction was fully disclosed in the petitioner's books of account and tax returns, and there was no material to suggest the petitioner was in possession of undisclosed money, bullion, jewellery, or other valuable articles. The Court also observed that the genuineness of the mortgage deed provided as security for the loan was not disputed. The Court concluded that no reasonable person could have formed the belief that action under section 132(1) was called for, and the resort to section 132 appeared to be an attempt to circumvent jurisdictional limitations. Consequently, the warrant of authorisation and all actions taken pursuant thereto were rendered invalid.

Key Issues

1. Whether the warrant of authorisation issued under section 132 of the Income Tax Act, 1961, for initiating search proceedings against the petitioner is valid, considering the circumstances under which it was issued? Assessee's arguments: The petitioner argued that the search was initiated without valid reasons to believe, as required by section 132(1) of the Act. The petitioner contended that the loan transaction was fully disclosed and reflected in his accounts and tax returns, and there was no undisclosed income or asset. The petitioner also argued that the jurisdiction of the Kolkata authorities to issue the warrant was questionable and that the search was resorted to as a means to exert pressure due to lack of other powers. Revenue's arguments: The respondent contended that the search was carried out under a valid warrant of authorisation after proper recording of 'reasons to believe' and obtaining approval from the competent authority. The respondent asserted that the action was based on sound and credible information available to the department, relating to the financial transactions of Goan Recreation Clubs Private Limited and its associated group, including high value cash deposits post-demonetization.