Must Assets Seized Under The Income Tax Act Be Automatically Released After 120 Days? Gujarat HC Refers Issue To Larger Bench

The Gujarat High Court has referred to a Larger Bench the question of whether seized assets must be mandatorily released upon completion of 120 days under Section 132B of the Income Tax Act, where an application for release is filed within 30 days.

A Division Bench of Justice A.S. Supehia and Justice Vaibhavi D. Nanavati referred three questions concerning the interpretation of the First and Second Provisos to Section 132B(1)(i).

The questions are:

“(1) Whether the release of seized assets is mandatory upon completion of 120 days, as prescribed under the Second Proviso to Section 132B(1)(i) of the IT Act, where an application is filed under the First Proviso within a period of 30 days, by construing the expression 'shall be released' as mandatory.

(2) Whether the seized assets can be released upon completion of 120 days in the absence of any determination of tax liabilities in the assessment proceedings, as contemplated under Clause (i) of Sub-section (1) of Section 132B of the IT Act, where no decision is taken by the Assessing Officer on an application filed under the First Proviso.

(3) Whether the Assessing Officer is required to take cognizance of an application filed by the taxpayer and intimate the taxpayer of the rejection thereof, where such application is bereft of any disclosure regarding the nature and source of the assets, and whether non-intimation thereof would result in the automatic release of the assets upon completion of 120 days.”

The bench was prima facie of the view that release of seized assets after 120 days is not routine or automatic.

It observed: “On a careful examination of the statutory framework of Section 132B of the IT Act, we find that the release of seized assets under Second Proviso to Clause(i) to Section 132B(1) of the IT Act on completion of 120 days is not routine or automatic, though it bears the expression “shall be released”. It is settled legal precedent that use of word “shall” in every statute does not mean that the intention of the legislature is its mandatory operation. The real intention of the legislature can be gathered from the overall reading and scope and realm of the statue, in which it is meant to operate and that when a statute uses the word "shall", prima facie, it is mandatory, but the Court may ascertain the real intention of the legislature by carefully attending to the whole scope of the statute, and the principle of literal construction of the statute alone in all circumstances, without examining the context and scheme of the statute may not serve the purpose of the statute.”

The court held that the First and Second Provisos to Section 132B(1)(i) have to be read together. The First Proviso requires a person seeking release of the seized asset to apply within 30 days from the end of the month in which the asset was seized and explain its nature and source to the satisfaction of the Assessing Officer.

The court further held that the Assessing Officer's satisfaction regarding the nature and source of the seized asset is mandatory. Merely establishing ownership of the asset in proceedings under another statute does not dispense with this requirement under Section 132B.

The Bench observed that filing an application for release is not an empty formality. If the taxpayer does not disclose the nature and source of the seized asset, the Assessing Officer is not required to call upon the taxpayer to provide that explanation.

The court therefore held that the seized cash cannot be ordered to be released in the absence of the required disclosure and the Assessing Officer's satisfaction on that disclosure.

The existing Gujarat High Court position is reflected in Nadim Dilip Bhai Panjvani v. Income Tax Officer. In that case, the court held that the Second Proviso to Section 132B(1)(i) has to be read with the First Proviso. Where an application is made within 30 days, the Assessing Officer can examine the nature and source of the asset.

Panjvani further held that if no decision is taken within the prescribed 120 days, “releasing of the asset becomes imminent.”

The Panjvani view was followed in Ashish Jayantilal Sanghavi v. Income Tax Officer. The present Bench also considered Mitaben R. Shah v. Deputy Commissioner of Income Tax.

However, the present Bench found that these decisions had not examined the effect of Section 132B(4) on Section 132B(1)(i) and its provisos.

Section 132B(4) provides for payment of simple interest by the Central Government on money retained after the expiry of 120 days, subject to the conditions set out in the provision. The interest runs from the day immediately following the expiry of 120 days until completion of the relevant assessment, reassessment, or recomputation.

The Bench observed that this provision operates as a compensatory measure for taxpayers whose liquidity remains restricted and also acts as a financial check on the Income Tax Department to complete assessments promptly.

Against this statutory scheme, the Bench held that the expression “shall be released” in the Second Proviso does not necessarily make release mandatory in every case upon completion of 120 days. It observed that where an application merely seeks release without disclosing the nature and source of the asset, automatic release after 120 days could defeat the scheme of Section 132B.

The bench also noted that Nadim Dilip Bhai Panjvani, Mitaben R. Shah and Ashish Jayantilal Sanghavi had not considered the effect of Section 132B(4) on the release mechanism.

It further held that Cowasjee Nusserwanji Dinshaw v. Income Tax Officer, relied upon in Mitaben, dealt with retention of books of account and other documents under Section 132(8), and that its ratio could not simply be applied to the statutory scheme governing release of seized assets under Section 132B.

The bench, therefore, considered that the issues required determination by a Larger Bench, particularly since the earlier view had subsequently been followed in other decisions.

For Petitioner: Jaimin R. Dave, Manvi A. Damle and Priyansh P. Dave

For Respondents: Varun K. Patel and Maithili D. Mehta