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Alleppey Financial Enterprises V/S Assistant Director of Income Tax (Investigations) and Another.

    O.P. No. 1935 of 1997-E

    Decided On, 15 October 1998

    At, High Court of Kerala

    By, THE HONORABLE JUSTICE: G. SIVARAJAN

    For Petitioner: P.G.K. Warriyar and P. Balakrishnan, Advocates And For Respondents: N.R.K. Nair, Advocate.



Judgment Text


1. The matter arises under the Income Tax Act, 1961 (hereinafter referred to as "the Act").

2. The petitioner is a partnership firm engaged in the business of money-lending; It is aggrieved by exhibit P-2 order passed by the first respondent under Section 132(1) of the Act. The legality of the said order is under challenge in this writ petition.

3. The first respondent conducted a search of the business premises of the petitioner under Section 132 of the Act on January 6, 1997, which continued on January 7, 1997 also. Alleging that the petitioner had effected unaccounted loan transactions to the tune of Rs. 39,56,630 on the security of gold pledged by the customers, the first respondent seized the said gold ornaments valued at Rs. 47,53,000.

4. The petitioner by representation dated January 11, 1997 (exhibit P-3), requested the first respondent for return of the seized gold. The petitioner filed another representation on January 13, 1997 (exhibit P-4), to the second respondent also for the same relief. Since, according to the petitioner, there was no response from the respondents, the present writ petition is filed.

5. In the affidavit filed in support of the writ petition, it is stated that even assuming that a sum of Rs. 39,56,630 advanced by way of loan is unaccounted money and, therefore, undisclosed income the tax payable thereon conies to only Rs. 24,00,000 as mandated by Section 113 read with Section 158BA(2) of the Act. It is further stated that since it was urgently required to get back the above referred ornaments for meeting the petitioner's obligations to its customers, it was prepared, without prejudice to its other contentions, to furnish collateral security to the extent of Rs. 24,00,000, as the same will secure the alleged interests of the Revenue. The petitioner has offered to furnish as security 22 cents of land in Ernakulam city. A copy of the title deed in respect of the said property is produced as exhibit P-5. The petitioner also produced a valuation report of the authorised valuer as exhibit P-6, an encumbrance certificate as exhibit P-7 and tax receipts as exhibits P-8 and P-9 in respect of the said property.

6. C. M. P. No. 3435 of 1997--Alleppey Financial Enterprises v. Asst Director of Income Tax: [1998]233ITR216(Ker) , which was a petition for interim direction was heard elaborately and an order was passed on February 13, 1997. The court, prima facie, did not accept the contention of the petitioner that the pledged articles do not belong to it. This was on the basis of the decision of the Division Bench of the Madras High Court in Madras Pawn Brokers' Association v. State of Tamil Nadu [1995

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] 98 STC 457. On that basis, it was observed that the action of the Department in seizing the jewels which represented undisclosed investment cannot be held to be illegal. The court passed a conditional order directing the first respondent to release and hand over the gold ornaments and pledge forms and applications immediately on the petitioner furnishing bank guarantee for a sum of Rs. 47,53,000 to the satisfaction of the first respondent. Thereafter a statement was filed on behalf of the respondents. It is stated therein that the interim order passed in C. M. P. No. 3435 of 1997--Alleppey Financial Enterprises v. Asst Director of Income Tax : [1998]233ITR216(Ker) , was taken in appeal by the petitioner. It further stated as follows :

"7. The search and seizure was conducted under the valid authorisation of the Director of Income Tax, Bangalore. The authorisation issued by the Director of Income Tax, Bangalore, who is not a party to the proceedings, being valid and with jurisdiction the execution/implementation of the warrant order by the respondent is equally valid and within jurisdiction. Except making a bald dogmatic assertion in a stereotyped legal jargon that the seizure order is illegal, unwarranted, unauthorised and beyond jurisdiction vested in the respondent (there are two respondents) the petitioner has not chosen to specify or pinpoint the illegality in any manner whatsoever. The allegations are vague and baseless. The issuance of warrant and the proceedings pursuant to the warrant of authorisation are legal and in accordance with law,"
7. Learned counsel appearing for the petitioner submitted that the seizure of the articles admittedly belonging to various customers, who had pledged the same with the petitioner as security for the loans sanctioned by it was wholly unauthorised and without jurisdiction. He further submitted that the power of search and seizure conferred under Section 132 of the Act is an extraordinary power, which must be exercised strictly within the four corners of the said provision. It is stated that under Clause (c) of Sub-section (1) of Section 132, the authority can seize only jewellery representing either wholly or partly income or property belonging to the person in possession and since the seized gold ornaments admittedly do not belong to the petitioner the seizure of the same is illegal and unauthorised. In order to substantiate the same counsel referred to the definition of income in Section 2(24) of the Act and submitted that the items which can be included in the said definition must be ejusdem generis to the items already mentioned in the said definition. On that basis, he submitted that only amounts received and non-utilisation of the amounts in hand can represent income. Counsel also took me to the meaning of the word "represent" from the Concise Oxford Dictionary. The submission of counsel is that the officer authorised under Section 132 can seize only articles which belong to the person whose premises are searched by the said officer. He, in support of the said contention, further relied on the provisions of Section 132(4A)(i) of the Act. Counsel also drew my attention to the provisions of Section 132B, Schedules II and III of the Act and Rule 37 of the Rules. He also took me to the provisions of Sections 173 - 179 of the Indian Contract Act and the decision of the Gujarat High Court in CIT v. Avkash Nidhi : [1986]160ITR729(Guj) . He accordingly submitted that the first respondent acted wholly without jurisdiction in seizing the pawned articles from the possession of the petitioner. He further submitted that the respondents failed to consider the aforesaid circumstances in spite of it being brought to their notice in exhibits P-3 and P-4 petitions.

8. Sri N.R.K. Nair, learned standing counsel appearing for the respondents, submitted that there is no specific challenge to the search and seizure made by the first respondent and that all the officers concerned are not made parties in the O. P. He also submitted that all the arguments advanced by the petitioner had been considered in the order passed in C.M.P. No. 3435 of 1997 (see [1998]233ITR216(Ker) ). He further submitted that the petitioner had a right over the gold ornaments to the extent of the loan amount and, therefore, it cannot be said that the gold jewellery does not represent undisclosed income of the petitioner. Counsel maintained that the presumption available under Section 132(4A) of the Act could be applicable. He further submitted that the petitioner has not pinpointed, having not stated as to how exhibit P-2 order of seizure is illegal and unauthorised. He accordingly submitted that there is no merit in this O. P. and the same is liable to be dismissed.

9. In order to consider the merits of the rival submissions, it is necessary to consider the relevant provisions of Section 132 of the Act under which exhibit P-2 order is issued. The relevant portion of Section 132(1) reads as follows :

"132. Search and seizure.--(1) Where the Director-General or Director or the Chief Commissioner or Commissioner or any such Deputy Director or Deputy Commissioner as may be empowered in this behalf by the Board, in consequence of information in his possession, has reason to believe that--. . .

(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),

then,--

(A) the Director-General or Director or the Chief Commissioner or Commissioner, as the case may be, may authorise any Deputy Director, Deputy Commissioner, Assistant Director, Assistant Commissioner or Income Tax Officer, or

(B) such Deputy Director or Deputy Commissioner, as the case may be, may authorise any Assistant Director, Assistant Commissioner or Income Tax Officer, . . . to-. . .

(iii) seize any such books of account, other documents, money, bullion, jewellery or other valuable article or thing found as a result of such search".

10. In order to understand the scope of the above provision, it is also necessary to refer to certain other provisions of the Act. Section 132(4A)(i) reads as follows :

"(4A) Where any books of account, other documents, money, bullion, jewellery or other valuable article or thing are or is found in the possession or control of any person in the course of a search, it may be presumed--

(i) that such books of account, other documents, money, bullion, jewellery or other valuable article or thing belong or belongs to such person ;"
11. Section 132(5) excluding two provisos reads as follows :

"(5) Where any money, bullion, jewellery or other valuable article or thing (hereafter in this section and in Sections 132A and 132B referred to as the assets) is seized under Sub-section (1) or Sub-section (1A), as a result of a search initiated or requisition made before the 1st day of July, 1995, the Assessing Officer, after affording a reasonable opportunity to the person concerned of being heard and making such enquiry as may be prescribed, shall, within one hundred and twenty days of the seizure, make an order, with the previous approval of the Deputy Commissioner,--

(i) estimating the undisclosed income (including the income from the undisclosed property) in a summary manner to the best of his judgment on the basis of such materials as are available with him ;

(ii) calculating the amount of tax on the income so estimated in accordance with the provisions of the Indian Income Tax Act, 1922 (11 of 1922), or this Act ;

(iia) determining the amount of interest payable and the amount of penalty imposable in accordance with the provisions of the Indian Income Tax Act, 1922 (11 of 1922), or this Act, as if the order had been the order of regular assessment ;

(hi) specifying the amount that will be required to satisfy any existing liability under this Act and any one or more of the Acts specified in Clause (a) or Sub-section (1) of Section 230A in respect of which such person is in default or is deemed to be in default,

and retain in his custody such assets or part thereof as are in his opinion sufficient to satisfy the aggregate of the amounts referred to in Clauses (ii), (iia) and (iii) and forthwith release the remaining portion, if any, of the assets to the person from whose custody they were seized."

12. Section 132(6) reads as follows :

"(6) The assets retained under Sub-section (5) may be dealt with in accordance with the provisions of Section 132B."
13. Section 132B, which deals with the disposal of the seized assets, also is relevant. Section 132B(1) and (3) reads as follows :

"132B. Application of retained assets.--(1) The assets retained under Sub-section (5) of Section 132 may be dealt with in the following manner, namely :

(i) The amount of the existing liability referred to in Clause (iii) of the said Sub-section and the amount of the liability determined on completion of the regular assessment or reassessment for all the assessment years relevant to the previous years to which the income referred to in Clause (i) of that Sub-section relates (including any penalty levied or interest payable in connection with such assessment or reassessment) and in respect of which he is in default or is deemed to be in default may be recovered out of such assets.

(ii) If the assets consist solely of money, or partly of money and partly of other assets, the Assessing Officer may apply such money in the discharge of the liabilities referred to in Clause (i) and the assessee shall be discharged of such liability to the extent of the money so applied.

(iii) The assets other than money may also be applied for the discharge of any such liability referred to in Clause (i) as remains undischarged and for this purpose such assets shall be deemed to be under distraint as if such distraint was effected by the Assessing Officer or, as the case may be, Tax Recovery Officer under authorisation from the Chief Commissioner or Commissioner under Sub-section (b) of Section 226 and the Assessing Officer or, as the case may be, Tax Recovery Officer may recover the amount of such liabilities by the sale of such assets and such sale shall be effected in the manner laid down in the Third Schedule . . . (3) Any assets or proceeds thereof which remain after the liabilities referred to in Clause (i) of Sub-section (1) are discharged shall be forthwith made over or paid to the persons from whose custody the assets were seized."

14. It is seen from Clause (c) of Sub-section (1) of Section 132 of the Act that for seizure of the gold articles under Sub-clause (iii) thereof, the same must be in the possession of the person from whom it is seized and that it must represent either wholly or partly income or property, which has not been or would not be disclosed for the purpose of the Act. There is no dispute that the gold ornaments seized belong to the customers, who had taken loans from the petitioner by offering the same as security. The question then is as to whether the gold ornaments admittedly pledged by the customers as security for the loan amounts sanctioned can be treated as representing the income or property either wholly or partly of the petitioner. Since the petitioner had advanced loans to the customers on the security of gold ornaments pledged, it would, prima facie, appear that the gold ornaments in the possession of the petitioner represent income or property in part of the petitioner. However, it is necessary to consider with reference to the provisions of the other Sub-sections of Section 132 and the provisions of Section 132B also as to whether the legislative intent by the use of the words "possession" and "represents" is to signify the ownership of the article seized or as to whether it only refers to the extent of the right over the said articles. The meanings of the word "represent" in the Concise Oxford Dictionary of Current English, 7th Edition, edited by J.B. Sykes, inter alia, are "(3) make out to be, etc...., allege that, describe or depict as, (5) symbolize, act as embodiment of, stand for, correspond to, be specimen of". In this context, Sub-section (4A)(i) of Section 132 is relevant which says that where any jewellery is found in the possession or control of any person in the course of a search, it may be presumed that such jewellery belongs to such person. The above provision gives an indication that the jewellery that can be seized under the section must belong to the person in possession of the same. Sub-section (5) also is relevant in that context. It provides for passing an order within a time-frame for the continued retention of the seized assets to the extent it is necessary to satisfy the amount of tax, interest and other liabilities referred to in Clauses (i) to (iii) of the said Sub-section. Sub-section (6) also says that the retained assets can be dealt with in accordance with the provisions of Section 132B.

15. The said Sub-section provides for application of assets retained under Sub-section (5) of Section 152. Clause (iii) of Sub-section (1) of Section 132B provides that the assets other-than money may also be applied for the discharge of the liabilities provided under Clause (i) of the said Sub-section and for that purpose such assets shall be deemed to be under distraint as if such distraint was effected by the Assessing Officer or, as the case may be, the Tax Recovery Officer under authorisation from the Chief Commissioner or Commissioner under Sub-section (5) of Section 226 and the said authorities may recover the amount of such liabilities by the sale of such assets. Sub-section (3) also provides that if any assets or proceeds thereof remain after the liabilities referred to in Clause (i) of Sub-section (1) are discharged, the same shall be made over or paid to the persons from whose custody the assets were seized.

16. On a conspectus of the aforesaid provisions of the Act, it would appear that the legislative intent by using the words "possession" and "represent" in Section 132(1) is to denote the ownership of the gold ornaments to be seized. The various provisions which I have already referred to also lend support to the view that the authorities can seize only such of those gold ornaments which belong to the person in possession. It is for that reason the Legislature has inserted Sub-section (4A) by the Taxation laws (Amendment) Act, 1975, with effect from October 1, 1975, by which it is presumed that the gold ornaments or other valuable articles or things found in the possession and control of any person in the course of a search belong or belongs to such person. The provisions of Section 132B which I have already referred to which says that the assets in the form of gold ornaments, etc., can be sold for realisation of the dues mentioned in Clause (i) of Sub-section (1) thereof also is indicative of the fact that the Legislature assumes that the seized articles belong to the person from whom they are seized. It cannot be assumed or presumed that the Legislature had intended to deal with a property which admittedly did not belong to the person from whose possession it was seized, in the manner specified in Section 132(5) and (6) read with Section 132B or Schedules II and II of the Act. In these circumstances I am of the view that the officer, who is authorised to conduct a search under Section 132 of the Act is empowered to seize only such of those articles which absolutely belong to the person in possession of the same and no property which admittedly does not belong to the said person can be seized under Section 132 of the Act.

17. In the above background, it is necessary to consider as to what exactly are the rights of the petitioner over the gold ornaments pledged. Section 172 of the Indian Contract Act, defines a "pledge" as the bailment of goods as security for payment of a debt or performance of a promise. Under Section 148 of the said Act, "bailment" is the delivery of goods by one person to another for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them. Section 173 of the said Act gives a pawnee the right to retain the goods pledged, not only for a payment of the debt or the performance of the promise, but also for the interest of the debt, and all necessary expenses incurred by him in respect of the possession or for the preservation of the goods pledged. Section 176 gives the pawnee a right to bring a suit against the pawner upon the debt or promise, and retain the goods pledged as a collateral security ; or sell the pledged goods after reasonable notice to the pawner, if the pawner makes a default in payment of the debt or performance of the promise, at the stipulated time. Section 177 entitles a pawner to redeem the goods until the pawnee has exercised the right to sell the pledged goods. It also provides that if a time is stipulated for the payment of the debt, or performance of the promise, for which the pledge is made, and the pawner makes a default in payment of the debt or performance of the promise at the stipulated time, he may redeem the goods pledged at any subsequent time before the actual sale of the same ; but he must, in that case, pay, in addition, any expenses which have arisen from his default. From the aforesaid provisions it is clear that in a pledge, there must be a transfer of possession of goods to the pawnee by way of security for the payment of the debt. Regarding the nature of the right of the pawnee over the pledged articles, it will be useful to refer to the statement appearing on page 218 of Halsbury's Laws of England, third edition, volume 29, which reads as follows :

"The pawnee has a special property or special interest in the thing pledged, while the general property therein continues in the owner. That special property or interest exists so that the pawnee can compel payment of the debt, or can sell the goods when the right to do so arises. This special property or interest is to be distinguished from the mere right of detention which the holder of a lien possesses, in that it is transferable in the sense that a pawnee may assign or pledge his special property or interest in the goods or may, as agent of the pawner, in due course, sell the goods . . ."
18. This statement was referred to by the Supreme Court in Bank of Bihar v. State of Bihar [1971] 41 Comp Cas 591 and the Supreme Court observed that the pawnee has a special property and a lien which is not of an ordinary nature on the goods and so long as his claim is not satisfied, no other creditor of the pawner has any right to take away the goods or its price. It would appear from the above statement that the pawnee has a right to retain possession of the pledged goods until the debt for which the pledge is a security is tendered or paid and that the security is available to the pawnee to satisfy the obligation in the event of the pawner committing a default in payment of the debt due within the stipulated time. In other words, the pawnee has a special property in the thing pledged, while the general property continued to remain with the owner. This legal position is stated by the Bombay High Court in Percy F. Fisher v. Ardeshir Hormasji Gazdar : AIR 1935 Bom 213. The High Court of Rangoon in Dwarika v. Bagawati, AIR 1939 Rang 413 had also stated the legal position as follows (page 415) :

"... a pledge confers a special interest in the property pledged, that is to say, a right to sell the property if the loan be not repaid. If the pledgee sells, he does so by virtue and to the extent of the pledger's ownership and not with a new title of his own. He only holds possession for the purpose of securing to himself the advance which he has made. The pledgee has no right of foreclosure since he never had the absolute ownership at law. In a mortgage, the right to the property is transferred to the creditor ; in the case of a pledge, the pledgee has no property in the pawn, but merely a right to sell."
19. The Supreme Court in Lallan Prasad v. Rahmat Ali : [1967]2SCR233 , observed that once the debt is satisfied or the engagement extinguishes the pawn, the pawnee on such satisfaction is bound to deliver the property to the pawnor and that the pawnor has an absolute right to redeem the property pledged upon tender of the amount advanced but that right would be lost if the pawnee has in the meantime lawfully sold the property pledged. The Supreme Court further observed that the pawnee's right of sale is derived from an implied authority from the pawnor and such a sale is for the benefit of both the parties. The court also observed that there was no difference between the common law of England and the codified law found in Sections 172 - 176 of the Contract Act.

20. A Division Bench of the Gujarat High Court in CIT v. Avkash Nidhi : [1986]160ITR729(Guj) had occasion to consider the said question in the context of pledging of certain shares of companies. In that context, his Lordship Justice A.M. Ahmadi (as his Lordship then was) considered the question with reference to the provisions of Sections 172 - 176 of the Contract Act and in the light of the decisions discussed hereinabove and observed as follows (page 737) :

"It will appear from the above discussion of the provisions of law and the decisions referred to that in the case of a pledge, the general property remains with the pawnor and he is entitled to dividend, bonus and right issues, that is, to all accretions, since the title to the property does not pass to the pawnee. The pawnee has no property in the pawn. He has merely a right to sell if the debt is not discharged within the stipulated time. The security is one intermediate between a simple loan and a mortgage."
21. The decision of the Madras High Court in Madras Pawn Brokers Association v. State of Tamil Nadu 1995 98 STC 457 relied on in the C. M. P. order also only states that the pledgee has a special right over the pledged articles. If this is the legal position in so far as the rights of the pawnee in relation to the pawned articles it is not possible to hold that the Income Tax Department can invoke the provisions of Section 132(6) read with Section 132B, Section 226 arid Schedules II and III of the Income Tax Act, for, as already stated, the said powers can be exercised only in relation to the property absolutely belonging to the person from whom it is seized.

22. Coming to the facts of the present case, there is no dispute regarding the ownership of the seized gold ornaments. Admittedly, the gold ornaments belong to the various customers to whom the petitioner had granted loans and they were pledged with the petitioner by way of security for the loan amount. In view of the fact that the petitioner admittedly is not the owner of the seized gold ornaments, notwithstanding the fact that they in a way represent the alleged unaccounted income of the petitioner, the respondents have no right to seize the said gold ornaments. It is so declared. I accordingly quash exhibit P-2 seizure order. The respondents are directed to return the gold ornaments together with the pledged forms seized under exhibit P-2 order.

23. I make it clear that I have not considered the question as to whether the loans sanctioned by the petitioner to the various customers on the security of the pledged gold ornaments represent unaccounted or undisclosed income of the petitioner or not. If the respondents have a case that the loans so advanced represent undisclosed income, it is for the respondents to deal with the matter in accordance with law. It is also for the respondents to invoke the other provisions of law, if any, for safeguarding the interest of the Revenue.

24. The original petition is allowed as above.

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