'Reason To Believe' Not Required To Inspect Seized Jewellery Under Income Tax Act: Calcutta High Court

The Calcutta High Court on 28 January dismissed a writ petition challenging inspection notices issued by the Income Tax Department for jewellery and bullion seized during a search operation, holding that the revenue authorities are not required to disclose the information or reasons that prompted the inspection, so long as it is undertaken for purposes permitted under the Income Tax Act (IT Act), 1961.

Justice Om Narayan Rai delivered the ruling while examining a challenge to notices issued under Rule 112(13) of the Income Tax Rules, 1962, which prescribes the procedure for opening and inspecting sealed packages seized during search and seizure operations under Section 132 of the IT Act.

The Bench observed:

“Inspection of a seized article is not an invasive act like search since it does not constitute any intrusion into someone's private and untainted space. Inspection is usually verificatory in nature and the power to inspect a seized article can therefore be exercised even without 'information' and 'reason to believe' which are the sine qua non for a search operation,”

The dispute arose from a search and seizure operation conducted in June 2022 against the petitioner under Section 132, during which jewellery, gold bars and other valuables were seized and inventoried in accordance with statutory procedure. The seized assets were sealed and kept in the custody of the department.

Subsequently, the petitioner filed the return of income for Assessment Year 2023–24, which was processed, followed by a scrutiny assessment resulting in additions on account of unexplained jewellery and bullion. The assessment order was carried in appeal and remains pending.

While the appellate proceedings were underway, the Principal Commissioner of Income Tax initiated revision proceedings under Section 263 of the Act, alleging that the assessment order was erroneous and prejudicial to the interests of the revenue due to inadequate inquiry into the source of the seized assets.

During the pendency of the revision proceedings, the Department issued notices proposing inspection of the seized jewellery and bullion kept in the strong room and called upon the petitioner to remain present during the inspection.

The inspection notices were challenged before the High Court on the ground that they did not disclose the purpose of inspection or the information triggering the exercise, rendering the action arbitrary and violative of the principles of natural justice.

Rejecting the challenge, the High Court held that inspection of seized assets under Rule 112(13) is distinct from a search and seizure under Section 132. While a search requires “information” and “reason to believe”, a post-seizure inspection is only a verificatory exercise.

The Court further held that an inspection notice does not result in any adverse civil consequences and that the petitioner would have a full opportunity to contest any findings arising from the inspection during the revision proceedings under Section 263.

The Court also rejected the argument that inspection would disturb the chain of custody, noting that the exercise would be conducted in the petitioner's presence and in accordance with statutory safeguards.

Justice Rai added: 

“Inspection or inquiry conducted by statutory authorities can seldom be interfered with in situations where the person against whom such inspection or inquiry is directed… has opportunity to state his case before the appropriate authority prior to the final decision being taken. A notice calling upon a person to attend an inspection of a seized article cannot be treated as a decision and made justiciable,” 

Accordingly, the High Court dismissed the writ petition. However, noting that the dates mentioned in the notices had already expired, the Court granted liberty to the Income Tax Department to issue fresh inspection notices per the law.

For Petitioner: J. P. Khaitan, Abhratosh Majumdar, Avra Mazumder, Pratyush Jhunjhunwala, Alisa Das, Shruti Dutta, Sakshi Singhi

For Respondent: Dhiraj Kumar Trivedi, Aryak Dutt, Prithu Dudhoria, Amit Sharma, Abhishek Kr. Agrahari