Recipe for unfettered raid raj - Retrospective change allows tax sleuths not to cite ground of suspicion

Saumitra Dasgupta, TT, Feb. 5: The Narendra Modi government has tweaked a key provision in the Income Tax Act with retrospective effect from April 1, 1962, seemingly backtracking on a promise finance minister Arun Jaitley had made two years ago that the NDA government would not backdate legislative amendments.

The retrospective amendment to the Finance Bill 2017 - with a roughly 55-year retrospective effect - raises the scary prospect that tax sleuths could raid assessees based on a rumour, canard, whim or unsubstantiated suspicion without having to disclose to anyone the source or the basis of the information on which the operation was ordered.

It will potentially allow the taxman to go on a fishing expedition to unearth concealed income and assets, fanning fears of "tax terrorism".

The latest legislative amendment to sub-sections (1) and (1A) of Section 132 of the IT Act says that tax authorities will not have to disclose "to any person or any authority or the Appellate Tribunal" why it has "reason to believe" or "reason to suspect" that a tax assessee is concealing assets which would serve as sufficient ground for ordering a search and seizure operation.

It effectively removes all fetters on the taxman and makes him unaccountable to any court or appellate tribunal to explain whether he possessed credible information to order the raid.

The legislative change could have big implications for legal disputes over search and seizure operations carried out by tax authorities to unearth concealed incomes and hidden assets by undermining an argument that several assessees have used to delay verdicts in tax cases.

The move is a throwback to the Vodafone tax case that erupted in the UPA regime.

Foreign investors had recoiled in horror after then finance minister Pranab Mukherjee introduced a retrospective tax amendment in Budget 2012, which became effective from April 1, 1962, just to undermine a Supreme Court verdict that went in favour of Vodafone in a contentious withholding tax case arising from the UK telecom giant's $11.2-billion buyout of Hutchison Whampoa's 67.5 per cent stake in India's second largest telecom entity in March 2007.

The difference is that the latest change in the IT Act doesn't have a principal target as the UPA's action appeared to have.

Similarly, sub-section (1) of section 132A provides that the specified income tax authority, based on "reason to believe", can authorise another income tax authority to "requisition from some other officer or authority to deliver books of account, documents or assets of the assessee to the income tax authority so authorised." This section is being changed retrospectively from October 1, 1975.

In his budget speech in 2014, Jaitley had said that his government "would not ordinarily bring about any change retrospectively which creates a fresh liability".

So, why was this change necessary now?

The explanatory memorandum to the Finance Bill says: "Certain judicial pronouncements have created ambiguity in respect of the disclosure of 'reason to believe' or 'reason to suspect' recorded by the income tax authority to conduct a search under section 132 or to make requisition under section 132A."

Over the years, several courts have held that a search operation conducted under Section 132 of the IT Act amounts to "a serious invasion into the privacy of a citizen".

"Section 132(1) of the act has to be strictly construed and the formation of the opinion or reason to believe by the authorising officer must be apparent from the note recorded by him.... The satisfaction note should itself show the application of mind and the formation of the opinion by the officer ordering the search," Justice Tarun Agarwala and Satish Chandra of Allahabad High Court had ruled in March 2015 in a case involving Harbhajan Singh Chadha and the director of income tax.

The judges added: "The words 'has reasons to believe' as provided in Sections 132 (1) of the Act postulates a belief and existence of reasons for that belief. The belief must be held in good faith: it cannot be a mere pretence. Such belief should not be based on mere suspicion but must be based on information which is in the possession of the authorising authority."

In Venkata Reddy and another v. income tax officer, the then Mysore High Court ruled in January 1967: "The use of the words 'has reason to believe' on the basis of information in his possession excludes the possibility of any unreasonable exercise of the power. The basis for the exercise of the power... is not mere suspicion but a reasonable belief upon information already in possession of the appropriate officer. It would also... postulate that information in the possession of the officer is not a mere canard or an unverified piece of gossip but information which, in the circumstances, may be regarded as fairly reliable."

Justice B. Kirpal and A. Kumar of Delhi High Court had handed down a verdict in November 1991 that has been cited by counsel for several tax assessees when challenging the action taken by IT authorities.

The judges said: "The expression 'information' must be something more than mere rumour or a gossip or a hunch. There must be some material, which can be regarded as information, which must exist on the file on the basis of which the authorising officer can have reason to believe that action under Section 132 is called for."

But the judges admitted that the opinion whether the action was justified on the basis of information that the taxmen had in their hands was "subjective" and, therefore, "the jurisdiction of the court to interfere is very limited".

It added that the court would be acting within its jurisdiction to see "whether the act of issuance of an authorisation under section 132 is arbitrary or mala fide."

"If the information or the reason has no nexus with the belief or there is no material or tangible information for the formation of the belief, then in such a case action taken under Section 132 would be regarded as bad in law," Justices Kirpal and Kumar had ruled.

The Modi government's latest amendment seeks to undermine this body of case law and circumscribe the rights of a tax assessee to challenge the tax authorities' right to carry out a search and seizure operation by forcing them to disclose the information on the basis of which the decision to raid was made.

In an interview with PTI after the 2014 budget, Jaitley had said: "Ordinarily, we will not legislate to create fresh liabilities, which actually means that some old taxes are being collected for the last 40 years. And (if) some technical problem arises, you can correct that. But will you create new liabilities with effect from back date, the answer is ordinarily no."

Jaitley could well argue that this retrospective amendment seeks to sort out a technical problem - but that is a quibble that the legal fraternity could counter with an equally persuasive argument.

The Modi government has budgeted to raise income tax collections by 24.9 per cent to Rs 441,255.27 crore next fiscal from Rs 3,53,173.68 crore in the budget estimates for 2016-17.

The tax amendment could remove an impediment to the resolution of a large number tax cases that have been stuck in courts across the country.