Holding

The Supreme Court held that the warrant of authorization under Section 132 was valid because the revenue’s belief was reasonable and the sufficiency of the reasons to believe is not subject to judicial scrutiny.

Summary

The appellant, the Principal Director of Income Tax (Investigation), sought to validate a search and seizure warrant issued under Section 132 of the Income Tax Act, 1961 against Laljibhai Kanjibhai Mandalia, who had transferred Rs 10 crore as a loan to a newly formed company and later repaid it with interest. The High Court of Gujarat quashed the warrant, holding that the reasons recorded did not satisfy the statutory conditions. The Supreme Court held that the High Court was not justified in setting aside the authorization because the revenue’s belief was reasonable, not whimsical, and the sufficiency of the reasons to believe is not a justiciable issue. The Court reiterated that the formation of opinion under Section 132 is an administrative act and must be based on bona‑fide material, even if the reasons are not disclosed. Consequently, the warrant of authorization was upheld and the revenue may proceed with its investigation.

Issues considered

The adequacy and relevance of the reasons recorded under Section 132(1) of the Income Tax Act to justify a search and seizure warrant.
Whether the High Court was correct in quashing the warrant on the ground that clauses (b) and (c) of Section 132(1) were not satisfied.
Whether the sufficiency of the reasons to believe is a justiciable matter in a writ petition.
Whether the search and seizure constituted a fishing enquiry or a bona‑fide tax investigation.

Legislation cited

Essential Commodities Act, 1955
Finance Act, 2017 (explanation to Section 132(1))
Foreign Exchange Regulation Act, 1973
Income Tax Act, 1961s. 132, s. 133, s. 133A, s. 143(3), s. 147, s. 148, s. 34

Subjects

search and seizureIncome Tax ActSection 132reasons to believejudicial reviewWednesbury principletax investigationundisclosed incomeadministrative lawhigh court quashappeal

Judgment

232 [2022]
SUPREME COURT 15 S.C.R. 232
REPORTS [2022] 15 S.C.R.

A PRINCIPAL DIRECTOR OF INCOME TAX
(INVESTIGATION) & ORS.
v.
LALJIBHAI KANJIBHAI MANDALIA
B (Civil Appeal No. 4081 Of 2022)
JULY 13, 2022
[HEMANT GUPTA AND V. RAMASUBRAMANIAN, JJ.]
Income Tax Act, 1961: ss. 132 and 133 – Search and Seizure
C under – Reason to believe –Assessee during the financial year
transferred a sum of 10 Crores to a company –Assessee secured the
loan by way of a mortgage of the property –Assessee became director
to the company and ceased to be so the next month – Amount of
Rs.10 crores was repaid with interest on different dates and after
repayment of the loan, mortgage was released- Assessee filed his
D income-tax return showing the interest income which has been taxed
as well – After recording reasons to believe in the satisfaction note,
search was conducted in terms of s.132 – Satisfaction note was not
supplied to the assessee nor was required to be disclosed in terms
of Explanation to s. 132(1) –Assessee challenged the warrant of
E authorization issued by Revenue – High Court quashed the warrant
of authorization –On appeal, held: The view of the High Court that
the authorization to search the premises of the assessee is invalid,
cannot be sustained –Detailed satisfaction note shows multiple
entries in the account books of Company’s Director –Manner in
which Director contacted the assessee in Ahmedabad for a loan of
F Rs.10 crores does not appear to be a normal transaction –
Subsequent repayment of mortgage and the interest income reflected
in the relevant assessment year appears to be the steps taken by the
assessee to give a colour of genuineness –Investmentof Rs.10 crores
for a short period was not for earning interest income as the same
G was repaid in the same assessment year –Revenue intends to
investigate the fund trail of the money paid by the assessee– Such
belief is not out of hat or whimsical–It was a reasonable belief drawn
by the Revenue that the assessee shall not produce or cause to be
produced any books of accounts or other documents which would
be useful or relevant to the proceedings – Such believe was
H
232
PRINCIPAL DIRECTOR OF INCOME TAX (INVESTIGATION) & 233
ORS. v. LALJIBHAI KANJIBHAI MANDALIA

not based upon conjectures but on a bona-fide opinion framed in A
the ordinary conduct of the affairs by the assessee generally-
Revenue wishes to find out as to whether amount is an undisclosed
income – Sufficiency or inadequacy of the reasons to believe
recorded cannot be gone into while considering the validity of an
act of authorization to conduct search and seizure – Thus, the High
B
Court not justified in setting aside the authorization of search.
s. 132 –Search and seizure under – Principles to be followed
– Stated.
Allowing the appeal, the Court
HELD: 1. The detailed satisfaction note shows multiple C
entries in the account books of SS and others. The manner of SS
who was either in Siliguri (West Bengal) or in Goa contacting the
assessee in Ahmedabad for a loan of Rs.10 crores does not appear
to be a normal transaction. Subsequent repayment of mortgage
and the interest income reflected in the relevant assessment year D
appears to be the steps taken by the assessee to give a colour of
genuineness but the stand of the Revenue that such entry was an
accommodation entry is required to be found out and also the
cobweb of entries required to be unravelled including the trail of
the money paid by the assessee.The reasons to believe are not
the final conclusions which the revenue would arrive at while E
framing block assessment in terms of Chapter XIV-B of the Act.
The test to consider the justiciability of belief is whether such
reasons are totally irrelevant or whimsical. The reply in the
counter affidavit shows that the intention of the Revenue was to
un-layer the layering of money which is suspected to be done by F
the assessee. The Revenue has asserted that the accommodation
entry is a common modus operandi to bring the unaccounted black
money to books for a brief period. The investment of Rs.10 crores
for a short period was not for earning interest income as the same
was repaid in the same assessment year. The Revenue intends
to investigate the fund trail of the money paid by the assessee. G
Such belief is not out of hat or whimsical. [Paras 24 and 25][257-
B-H; 258-A-B]
2. As per the Revenue, Clauses (b) & (c) of Section 132 (1)
were satisfied before the warrant of authorization was approved.
H
234 SUPREME COURT REPORTS [2022] 15 S.C.R.

A The satisfaction note was recorded in terms of an assessee whose
jurisdictional assessing officer was in the State of the West Bengal.
It is the cobweb of accounts of such assessee which are required
to be unravelled. It is not unreasonable for the Revenue to
apprehend that the assessee would not respond to the summons
before the Assessing Officer in the State of West Bengal. It was
B
also alleged that such summons would lead to disclosure of
information collected by the Revenue against SS and his group.
Therefore, it was a reasonable belief drawn by the Revenue that
the assessee shall not produce or cause to be produced any books
of accounts or other documents which would be useful or relevant
C to the proceedings under the Act. Such believe was not based
upon conjectures but on a bona-fide opinion framed in the ordinary
conduct of the affairs by the assessee generally. The notice to
the assessee to appear before the Income Tax authorities in the
State of West Bengal would have been sufficient notice of the
material against the Company and its group, to defeat the entire
D
attempt to unearth the cobweb of the accounts by the Company
and its associates. Even clause (c) of Section 132(1) is satisfied.
The assessee was in possession of Rs.10 crores which was
advanced as loan to the Company. The Revenue wishes to find
out as to whether such amount is an undisclosed income which
E would include the sources from which such amount of Rs.10 crores
was advanced as loan to a totally stranger person, unconnected
with either the affairs of assessee or any other link, to justify as
to how a person in Ahmedabad has advanced Rs.10 crores to the
Company situated at Kolkata in West Bengal for the purpose of
investment in Goa. The Revenue may fail or succeed but that
F
would not be a reason to interfere with the search and seizure
operations at the threshold, denying an opportunity to the
Revenue to unravel the mystery surrounding the investment
made by the assessee. [Paras 27 and 28][258-E-H; 259-A-D]
3. The sufficiency or inadequacy of the reasons to believe
G recorded cannot be gone into while considering the validity of an
act of authorization to conduct search and seizure. The belief
recorded alone is justiciable but only while keeping in view the
Wednesbury Principle of Reasonableness. Such reasonableness
is not a power to act as an appellate authority over the reasons to
H believe recorded. [Para 32][262-E-F]
PRINCIPAL DIRECTOR OF INCOME TAX (INVESTIGATION) & 235
ORS. v. LALJIBHAI KANJIBHAI MANDALIA

Tata Cellular v. Union of India (1994) 6 SCC 651 : A
[1994] 2 Suppl. SCR 122; Indian Oil Corporation Ltd.
v. Rajendra D. Harmalkar 2022 SCC Online SC
486;Utkal Suppliers v. Maa Kanak Durga Enterprises
2021 SCC Online SC 301- referred to.
4. The principles in exercising the writ jurisdiction in the B
matter of search and seizure under Section 132 of the Act are as
follows: i) The formation of opinion and the reasons to believe
recorded is not a judicial or quasi-judicial function but
administrative in character; ii) The information must be in
possession of the authorised official on the basis of the material
and that the formation of opinion must be honest and bona fide. It C
cannot be merely pretence. Consideration of any extraneous or
irrelevant material would vitiate the belief/satisfaction; iii) The
authority must have information in its possession on the basis of
which a reasonable belief can be founded that the person
concerned has omitted or failed to produce books of accounts or D
other documents for production of which summons or notice had
been issued, or such person will not produce such books of
accounts or other documents even if summons or noticeis issued
to him; or iv) Such person is in possession of any money, bullion,
jewellery or other valuable article which represents either wholly
or partly income or property which has not been or would not be E
disclosed; v) Such reasons may have to be placed before the High
Court in the event of a challenge to formation of the belief of the
competent authority in which event the Court would be entitled
to examine the reasons for the formation of the belief, though
not the sufficiency or adequacy thereof. The Court will examine F
whether the reasons recorded are actuated by mala fides or on a
mere pretence and that no extraneous or irrelevant material has
been considered; vi) Such reasons forming part of the satisfaction
note are to satisfy the judicial consciousness of the Court and
any part of such satisfaction note is not to be made part of the
order; vii) The question as to whether such reasons are adequate G
or not is not a matter for the Court to review in a writ petition.
The sufficiency of the grounds which induced the competent
authority to act is not a justiciable issue; viii) The relevance of
the reasons for the formation of the belief is to be tested by the
judicial restraint as in administrative action as the Court does H
236 SUPREME COURT REPORTS [2022] 15 S.C.R.

A not sit as a Court of appeal but merely reviews the manner in
which the decision was made. The Court shall not examine the
sufficiency or adequacy thereof; ix) In terms of the explanation
inserted by the Finance Act, 2017 with retrospective effect from
1.4.1962, such reasons to believe as recorded by income tax
authorities are not required to be disclosed to any person or any
B
authority or the Appellate Tribunal. The High Court was not
justified in setting aside the authorization of search. The order
passed by the High Court is set aside. [Paras 33 and 34][262-F-
G; 263-A-H; 264-A-C]
S. Narayanappa v. CIT, AIR 1967 SC 523 : [1967]
C 1 SCR 590; N.K. Jewellers and Another v. Commissioner
of Income Tax, New Delhi (2018) 12 SCC 627; The
Income Tax Officer, I Ward, District VI, Calcutta and
Ors. v.LakhmaniMewal Das (1976) 3 SCC 757 : [1976]
3 SCR 956; Partap Singh (Dr) v. Director of
D Enforcement (1985) 3 SCC 72 : [1985] 3 SCR 969;
Union of India v. Agarwal Iron Industries (2014) 15
SCC 215 : [2014] 11 SCR 181; Commissioner of
Income Tax, Allahabad and Ors. v. Vindhya Metal
Corporation and Ors. (1997) 5 SCC 321; Income Tax
Officer, Special Investigation Circle-B, Meerut v. Seth
E Brothers and Ors. (1969) 2 SCC 324 [1970] 1 SCR
601; Director General of Income Tax (Investigation),
Pune and Ors. v. Spacewood Furnishers Private Limited
and Ors. (2015) 12 SCC 179 : [2015] 6 SCR 807;
Union of India v. Ajit Jain & Anr. (2003) 260 ITR 80
F (SC); Phool Chand Bajrang Lal and Anr. v. Income Tax
Officer and Anr. (1993) 4 SCC 77 : [1993] 1 Suppl.
SCR 28; N. Nagendra Rao & Co. v. State of A.P. (1994)
6 SCC 205 : [1994] 3 Suppl. SCR 144; Seth Brothers
& Ors. etc.; Vindhya Metal Corporation & Ors; Ajit
Jain v. Union of India (2000) 242 ITR 302 (Del.);
G Dimondstar Exports Ltd. v. Director General of Income-
Tax (Investigation) (2005) 278 ITR 36 (Bom.);
MECTEC v. Director of Income-Tax (Investigation)
(2021) 433 ITR 203 (Telangana); L.R. Gupta & Ors. v.
Union of India & Ors. (1991) SCC OnLine Del. 584 :
H (1992) 194 ITR 32 (Del.); Janak Raj Sharma v.
PRINCIPAL DIRECTOR OF INCOME TAX (INVESTIGATION) & 237
ORS. v. LALJIBHAI KANJIBHAI MANDALIA

Director of Inspection (Investigation) & Ors. (1995) 215 A
ITR 234 (P&H) – referred to.
Case Law Reference
(2018) 12 SCC 627 referred to Para 10
(1997) 5 SCC 321 referred to Para 10 B
[1970] 1 SCR 601 referred to Para 10
[2015] 6 SCR 807 referred to Para 10
[1967] 1 SCR 590 referred to Para 13
[1976] 3 SCR 956 referred to Para 15 C
[1985] 3 SCR 969 referred to Para 16
[1993] 1 Suppl. SCR 28 referred to Para 17
[1994] 3 Suppl. SCR 144 referred to Para 18
[2014] 11 SCR 181 referred to Para 19 D
[1994] 2 Suppl. SCR 122 referred to Para 11
CIVIL APPELLATE JURISDICTION : Civil Appeal No.4081
of 2022.
From the Judgment and Order dated 22.02.2019 of the High Court E
of Gujarat at Ahmedabad in R/Special Civil Application No.16360 of
2018.
Balbir Singh, ASG, Rupesh Kumar, Ms. Swarupama Chaturvedi,
Sandeep Kumar Mahapatra, Saurabh Mishra, Udai Khanna, Rajesh
Nayak, Ms. Surbhi Singh, Samarvir Singh, Sagarika Kaul, Shyam Gopal, F
Gopal Chandra Mishra, Raj Bahadur Yadav, Advs. for the Appellants.
Arvind P. Datar, Sr. Adv., Galav C. Sharma, Parthasarthi Mehd.,
Somanadri Goud Katam, Nitin Thukral, Mrs. Sarabjot Walia, Sirajuddin
malik, Advs. for the Respondent.
The Judgment of the Court was delivered by G

HEMANT GUPTA, J.
1. The challenge in the present appeal is to an order dated
22.02.2019 passed by the High Court of Gujarat at Ahmedabad whereby
H
238 SUPREME COURT REPORTS [2022] 15 S.C.R.

A the warrant of authorization dated 07.08.2018 issued by the appellant 1
under Section 132 of the Income Tax Act,1961 2 was quashed.
Consequently, all actions taken pursuant to such warrant of authorization
were ordered to be rendered invalid.
2. The respondent 3 in its writ petition challenged the act of
B authorization for search and seizure on the ground that it is a fishing
enquiry and the conditions precedent as specified in Section 132 of the
Act are not satisfied. It is the stand of the assessee that he was looking
for an avenue to invest some money and the M/s. Goan Recreation
Clubs Private Ltd4. was in need of finance for setting up of its business
and hence consequently approached the assessee herein for a loan. As
C a security, the borrower company offered that another company would
give its property to the assessee. It may be noticed that there is no
allegation of mala-fides against the officers of the Revenue.
3. In the counter-affidavit filed by the Revenue, giving the history
of transaction, it was stated that the “chain of events raised credible
D doubt on the transaction entered into by the petitioner (assessee) with
the company in question as it is the familiar modus operandi being
practiced by the entry operators”. It was also stated that the assessee
was not expected to comply with the notice of the Revenue as the
assessee would have brought the alibi of jurisdiction to evade or not
E comply with the notice. It was in the interest of revenue that it was not
expected to disclose to any outside agency/body or to any of the members
directly or indirectly involved in the cob-web of financial transactions
with the core groups, viz. Sarju Sharma and associated group of
companies. Any inkling of action contemplated by the Revenue was
likely to compromise the confidentiality and secrecy of the case intact.
F It was further stated that the apparent investment made by the assessee
was found to be not a judicious investment choice from the point of view
of a prudent businessman as the company to which loan was provided
by the assessee had no established business, no goodwill in the market,
nor was it enlisted in any of the stock exchanges, nor did the assessee
G had any financial dealings with the company previously. The quick
repayment of loan shows that the investment was not meant to earn
steady interest income. The investment and nature of transaction entered
1
For short, ‘Revenue’
2
For short, ‘Act’
3
For short, ‘Assessee’
4
H For short, ‘Company’
PRINCIPAL DIRECTOR OF INCOME TAX (INVESTIGATION) & 239
ORS. v. LALJIBHAI KANJIBHAI MANDALIA [HEMANT GUPTA, J.]

into by the assessee was akin to the familiar modus operandi employed A
by the entry operators to provide an accommodation entry to bring the
unaccounted black money to books for brief period to run the business
till sufficient fund is generated by running the business or some fund
from any other unaccounted source comes later on. This is the angle of
the investigative process underway in which trail of the money being
B
paid by the assessee is being investigated.
4. The undisputed facts are that the assessee during the financial
year 2016-17 transferred a sum of Rs. 6 crores on 01.06.2016 and Rs. 4
crores on 21.06.2016 to M/s Goan Recreation Clubs Private Ltd. The
assessee secured the loan by way of a mortgage of the property forming
part of Survey No. 31/1-A situated in Village Bambolim, Distt. North C
Goa. It is an admitted fact that the assessee became the Director of the
Company on 18.05.2016 and then ceased to be so on 23.06.2016. It is
also admitted that amount of Rs.10 crores was repaid on different dates
starting from 06.10.2016 till 31.03.2017 and after repayment of the loan,
mortgage was released on 10.07.2017. The Company paid interest as D
well. It is admitted that the assessee has filed his income-tax return
showing the interest income of Rs.42,51,946/- which has been taxed as
well. The assessment was finalized under Section 143(3) of the Act on
02.03.2021.
5. In terms of the authorization after recording reasons to believe E
in the satisfaction note, search was conducted on 10.08.2018 at the
residential premises of the assessee which continued till 3:00 am on
11.08.2018 in terms of Section 132 of the Act. The satisfaction note was
not supplied to the assessee nor was required to be disclosed in terms of
Explanation to Section 132(1) of the Act inserted by the Finance Act,
2017 with retrospective effect i.e. on 01.04.1962.The reasons recorded F
were produced before the High Court and before this Court.
6. The High Court has reproduced the stand of the Revenue to
explain the action of search and seizure against the assessee as under:
“a) The authorized officers/ investigating officers conducted search G
and seizure operation at various spots across various states related
to the case of Shri Sarju Sharma & other associated group ‘of
companies which had financial transactions with Shri Sarju Sharma
(PANAKOPS3325A) and M/s. Goan Recreation Clubs Pvt Ltd.,
Goa (PAN-ANYPS6038F), hereinafter referred to as ‘the
H
240 SUPREME COURT REPORTS [2022] 15 S.C.R.

A company’. Shri Sarju Sharma is a leading business entrepreneur
of Siliguri, Dist-Jalpaiguri, engaged in the hospitality business of
Hotel, Restaurant and Bar running business under the name and
style of M/s Hotel Alishan and Restaurant. The company M/s.
Goan Recreation Clubs Pvt Ltd. after being incorporated in the
year 2015 has stepped into the world of gaming & entertainment
B
unit of Casino industry. The casino business is being operated
from the premises of Grand Hyatt Hotel, Bambolin, Goa w.e.f.
29th Ju1y, 2016.
b) The name of M/s Goan Recreation Clubs Pvt Ltd. appeared in
the credible information on high value cash deposits/ data of
C suspicious cash deposits post demonetization period disseminated
by the DGIT(Inv.), W.B., Sikkim & NER, wherein it was found
that the said company had deposited cash to the tune of
Rs.13,79,10,500/- into its two bank accounts maintained with ICICI
Bank and HDFC Bank, North Goa.
D c) M/s Goan Recreation Clubs Pvt. Ltd. was incorporated on
28.09.2015 with a nominal paid up share capital of Rs 2,00,000/-.
The initial Directors were Sarju Shanna and Shri Rohit Gurubhakta
Sharma. During the initial year of its incorporation, i.e., in the
financial year 2015-16 the company raised huge unsecured loan
E of Rs 5.77 crore from various individuals and companies in a very
peculiar manner, as the company at that juncture was yet to
commence any substantive business activities. Again, in the
financial year 2016- 17 the company raised an unsecured loan of
Rs.34.10 crore from various individuals and companies which
includes an amount of Rs.10 crore from the petitioner viz. Shri
F Laljibhai Kanjibhai Mandalia from Ahmedabad. The details of
unsecured loan received by the company and credited into the
bank accounts of the company are given below:
xx xx xx

G d) From the above chart it is noticed that the company raised
huge unsecured loans within two years of its incorporation from
various individuals and companies.
e) Whereas, in the pre search analysis, on going through the records
available with the MCA (Ministry of Corporate Affairs) and ITBA
(Income Tax Business Application) it came to light that the
H
PRINCIPAL DIRECTOR OF INCOME TAX (INVESTIGATION) & 241
ORS. v. LALJIBHAI KANJIBHAI MANDALIA [HEMANT GUPTA, J.]

company M/s Goan Recreation Clubs Pvt. Ltd. During the financial A
year 2016-17 have introduced three new Directors along with the
exit of then existing Director Shri Rohit Gurubhakta Sharma on
03.03.2017, the details given in the following table:
xx xx xx
(f) xx xx xx B

(g) xx xx xx
The search and seizure operation in the premises of the petitioner
was contemplated and carried out on the basis of the information
gathered as explained in the above point nos. (a) to (g) of this C
para.
From the above though it is found that Shri Mandalia had resigned
as Additional Director of the company on 25.06.2016 and the loan
was repaid by the company in the same year as noticed from the
table given at point no. (g) of this para but the chain of events D
raises credible doubt on the transactions entered into by the
petitioner with the company in question as it is the familiar modus
operandi being practiced by the entry operators.
Therefore, from the foregoing paras it can be concluded that the
department initiated the search and seizure operation in the
E
premises of the petitioner after conforming to all the criteria
mentioned in the Section 132 sub-section 1 clause (s), (b) and (c)
of the Income Tax Act, 1961. The search and seizure action was
initiated after detailed analysis of information, duly recording of
reasons in the Satisfaction Note and approval of the same by the
competent authorities.” F
7. The Company was incorporated on 28.09.2015 with two
Directors holding 10,000 shares each of the face value of Rs.10. The
stand of the Revenue shows that the said Company stepped into the
business of gaming and entertainment and launched a casino in Goa on
29.07.2016 without having any adequate capital. The allegation against G
the company is in relation to cash deposits of total Rs.13,79,10,500/-
soon after demonetization on 08.11.2016. The satisfaction note prepared
by DDIT (Investigation), Unit-1, Jalpaiguri was approved by Additional
Director of Income Tax (Investigation) Unit-5, Kolkata and further
approved by DGIT (Investigation), Kolkata on 07.08.2018. The High
H
242 SUPREME COURT REPORTS [2022] 15 S.C.R.

A Court also quoted paragraph 4.3 from an affidavit in-reply filed by the
Revenue which reads thus:
“5.3. As far as the investment opportunity is concerned, it is quite
glaring that the petitioner invested 10 crores within a span of one
month on 01.06.2016 and 21.06.2016 by way of loan on interest
B given to M/s Goan Recreation Clubs Pvt. Ltd. The investment
was made from the Kotak Mahindra Bank A/c No. 80116714807
of the petitioner and deposited into the HDFC Bank A/c No.
50200015405430 of the company, M/s Goan Recreation Clubs
Pvt. Ltd. Interestingly, the loan was repaid by the latter in five
installments from 06.10.2016 to 31.03.2017 [as shown in point no.
C (g) of para 4.1]. The apparent investment made by the petitioner
is found to be not a judicious investment choice from the point of
view of a prudent business man as the company to which the
petitioner provided loan, had no established business, no goodwill
in the market, nor was it enlisted in any of the stock exchanges,
D nor did the petitioner have had any financial dealings with the
company previously. The quick repayment of the loan shows that
the investment was not meant to earn steady interest income. All
this goes on to suggest that the investment and nature of transaction
entered into by the petitioner was akin to the familiar modus
operandi being employed by the entry operators to provide an
E accommodation entry to bring the unaccounted black money to
books for brief period to run the business till sufficient fund is
generated by running the business or some fund from any other
unaccounted source came later on. That is the angle of the
investigative process underway in which fund trail of the money
F paid by the petitioner is being investigated”
8. The High Court found that none of the reasons to believe to
issue authorization met the requirement of Section 132(1)(a), (b) and
(c). The said Section reads thus:
“132. Search and seizure - (1) Where the Principal Director
G General or Director General or Director or the Principal Chief
Commissioner or Chief Commissioner or Principal Chief
Commissioner or Commissioner or Additional Director or
Additional Commissioner, or Joint Director or Joint Commissioner
in consequence of information in his possession, has reason to
H believe that-
PRINCIPAL DIRECTOR OF INCOME TAX (INVESTIGATION) & 243
ORS. v. LALJIBHAI KANJIBHAI MANDALIA [HEMANT GUPTA, J.]

(a) any person to whom a summons under sub-section (1) of A
section 37 of the Indian Income Tax Act, 1922 (11 of 1922), or
under sub-section (1) of section 131 of this Act, or a notice under
sub-section (4) of section 22 of the Indian Income Tax Act, 1922
(11 of 1922), or under sub-section (1) of section 142 of this Act
was issued to produce, or cause to be produced, any books of
B
account or other documents has omitted or failed to produce, or
cause to be produced, such books of account, or other documents
as required by such summons or notice, or
(b) any person to whom a summons or notice as aforesaid has
been or might be issued will not, or would not, produce or cause to
be produced, any books of account or other documents which will C
be useful for, or relevant to, any proceeding under the Indian
Income Tax Act, 1922 (11 of 1922), or under this Act, or
(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 D
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).
Explanation- For the removal of doubts, it is hereby declared that E
the reason to believe, as recorded by the income-tax authority
under this sub-section, shall not be disclosed to any person or any
authority or the Appellate Tribunal.
………………………..”
F
9. Mr. Balbir Singh, learned Additional Solicitor General of India,
appearing for the Revenue argued that the High Court has completely
misdirected itself in quashing the authorization as the jurisdiction of the
High Court while exercising judicial review is very limited. It was
contended that the High Court erred in law in finding that clauses (b)
and (c) of Section 132(1) of the Act are not satisfied when it recorded G
as under:
“16……Thus, as rightly submitted by the learned counsel for the
petitioner, the belief that the petitioner would not respond to a
summons or notice issued as envisaged under clause (b) of sub-
section (1) of section 132 is not based upon any information or H
244 SUPREME COURT REPORTS [2022] 15 S.C.R.

A other material but is based upon conjectures and surmises that
the petitioner would take the alibi of lack of jurisdiction on the part
of the respondents. This contention of the first respondent also
lends support to the contention raised on behalf of the petitioner
that powers under section 132 of the Act have been resorted to
because that is the only provision which vests jurisdiction in the
B
Kolkata authorities for taking action against the petitioner.
Evidently, therefore, the circumstance envisaged under clause (b)
of sub-section (1) of section 132 of the Act does not exist in the
present case.
17…..There is nothing on record to indicate that any belief has
C been formed by the competent authority to the effect that the
petitioner has in his possession any money, bullion, jewellery or
other valuable article or thing which would not have been disclosed
by him for the purposes of the Act. On the contrary, in the facts
of the present case, from the record of the case as produced by
D the respondents as well as by the petitioner, it is evident that the
loan transaction whereby the petitioner had advanced
Rs.10,00,00,000/- to the borrower company has been duly reflected
in the books of account of the petitioner. In his return of income,
the petitioner has duly shown the interest income from such
transaction. The tax deducted at source in respect of such interest
E income, has been credited to the account of the petitioner by the
concerned authority. Therefore, the entire transaction has been
disclosed by the petitioner. There is no other material on record
on the basis the respondents could have formed the belief as
contemplated under clause (c) of sub-section (1) of section 132
F of the Act. Evidently, therefore the circumstance envisaged under
clause (c) of section 132(1) of the Act also does not exist in the
present case.”
10. Mr. Balbir Singh referred to the judgments of this Court
reported as N.K. Jewellers and Another v. Commissioner of Income
G Tax, New Delhi5, Commissioner of Income Tax, Allahabad and Ors.
v. Vindhya Metal Corporation and Ors.6, Income Tax Officer, Special
Investigation Circle-B, Meerut v. Seth Brothers and Ors.7 and Director
5
(2018) 12 SCC 627
6
(1997) 5 SCC 321
7
H (1969) 2 SCC 324
PRINCIPAL DIRECTOR OF INCOME TAX (INVESTIGATION) & 245
ORS. v. LALJIBHAI KANJIBHAI MANDALIA [HEMANT GUPTA, J.]

General of Income Tax (Investigation), Pune and Ors. v. Spacewood A
Furnishers Private Limited and Ors.8 to contend that though it is open
to the Court to examine the question whether “reasons to believe” have
any rational connection or a relevant bearing to the formation of the
belief and that such reasons are not extraneous or irrelevant as the officer
has to produce relevant evidence to sustain his belief in case the reasons
B
to believe are questioned in court, however, it was argued that the
jurisdiction of the High Court is to examine the existence of reasons not
the legality of the same.
11. On the other hand, Mr. Datar, learned senior advocate
appearing for the assessee argued that the High Court has rightly held
that none of the pre-requisite conditions for search and seizure under C
Section 132 of the Act are satisfied. It was argued that it is not the case
of the Revenue that clause (a) of sub-section (1) of Section 132 of the
Act is applicable, whereas the High Court has recorded a finding that
even clause (b) and clause (c) of sub-section (1) of Section 132 of the
Act are not satisfied. Since the view of the High Court is based upon D
established principles of law, no case for interference is made out in the
present appeal under Article 136 of the Constitution of India. Mr. Datar
referred to the following judgments, namely, Seth Brothers & Ors. etc.;
Vindhya Metal Corporation & Ors; Ajit Jain v. Union of India9, Union
of India v. Ajit Jain & Anr.10, Dimondstar Exports Ltd. v. Director
General of Income-Tax (Investigation) 11, MECTEC v. Director of E
Income-Tax (Investigation)12, L.R. Gupta & Ors. v. Union of India
& Ors. 13 and Janak Raj Sharma v. Director of Inspection
(Investigation) & Ors.14.
12. We have heard learned counsel for the parties and find that
the view of the High Court that the authorization to search the premises F
of the assessee is invalid, cannot be sustained. The expression “reasons
to believe” is a component of many statutes such as in the case of
reassessment of Income under the Act or its predecessor statute, the
Essential Commodities Act, 1955; the Foreign Exchange Regulation Act,
8
(2015) 12 SCC 179 G
9
(2000) 242 ITR 302 (Del.)
10
(2003) 260 ITR 80 (SC)
11
(2005) 278 ITR 36 (Bom.)
12
(2021) 433 ITR 203 (Telangana)
13
(1991) SCC OnLine Del. 584 : (1992) 194 ITR 32 (Del.)
14
(1995) 215 ITR 234 (P&H) H
246 SUPREME COURT REPORTS [2022] 15 S.C.R.

A 1973 as well as in respect of action of the Revenue in the matter of
search and seizure.
13. In S. Narayanappa v. CIT,15 a case of re-assessment for
the reason that income had escaped assessment, this Court held the
Revenue must have reason to believe that the income, profits or gains
B chargeable to income tax had been underassessed. The Court held as
under:
“2. ….. ….. But the legal position is that if there are in fact some
reasonable grounds for the Income Tax Officer to believe that
there had been any non-disclosure as regards any fact, which
C could have a material bearing on the question of underassessment
that would be sufficient to give jurisdiction to the Income Tax
Officer to issue the notice under Section 34. Whether these
grounds are adequate or not is not a matter for the court to
investigate. In other words, the sufficiency of the grounds
which induced the Income Tax Officer to act is not a justiciable
D issue. It is of course open for the assessee to contend that the
Income Tax Officer did not hold the belief that there had been
such non-disclosure. In other words, the existence of the belief
can be challenged by the assessee but not the sufficiency of
the reasons for the belief. Again the expression “reason to
E believe” in Section 34 of the Income Tax Act does not mean a
purely subjective satisfaction on the part of the Income Tax
Officer. The belief must be held in good faith: it cannot be merely
a pretence. To put it differently it is open to the court to examine
the question whether the reasons for the belief have a rational
connection or a relevant bearing to the formation of the belief and
F are not extraneous or irrelevant to the purpose of the section. To
this limited extent, the action of the Income Tax Officer in starting
proceedings under Section 34 of the Act is open to challenge in a
court of law. (See Calcutta Discount Co. Ltd. v. Income Tax
Officer, Companies District I, Calcutta [41 ITR 191]
G xxx xxx xxx
4. ………….. The earlier stage of the proceeding for recording
the reasons of the Income Tax Officer and for obtaining the
sanction of the Commissioner are administrative in character
15
AIR 1967 SC 523
H
PRINCIPAL DIRECTOR OF INCOME TAX (INVESTIGATION) & 247
ORS. v. LALJIBHAI KANJIBHAI MANDALIA [HEMANT GUPTA, J.]

and are not quasi-judicial. The scheme of Section 34 of the A
Act is that, if the conditions of the main section are satisfied a
notice has to be issued to the assessee containing all or any of the
requirements which may be included in a notice under sub-section
(2) of Section 22. ………….”
14. Seth Brothers is referred to by both Revenue and the assessee B
relating to the act of search and seizure. It was held that the exercise of
power is a serious invasion upon the rights, privacy and freedom of the
tax-payer. The power must be exercised strictly in accordance with law
and only for the purposes for which law authorizes it to be exercised.
The High Court had accepted that the correctness of the opinion actually
formed by the Income Tax Officer was not open to scrutiny in a writ C
petition, but the search and seizure of documents and books of accounts
held to be made in excess of the powers conferred upon the Income Tax
Officer was mala fide. This Court found no merit in such finding in view
of the sworn affidavits by the concerned Income Tax Officers that they
did in fact form the requisite opinion under Section 132 of the Act. This D
Court set aside the findings recorded by the High Court, when it was
held as under:
“8. The section does not confer any arbitrary authority upon the
Revenue Officers. The Commissioner or the Director of
Inspection must have, in consequence of information, reason to E
believe that the statutory conditions for the exercise of the power
to order search exist. He must record reasons for the belief and
he must issue an authorisation in favour of a designated officer to
search the premises and exercise the powers set out therein.
………….... If the action of the officer issuing the authorization,
or of the designated officer is challenged the officer concerned F
must satisfy the Court about the regularity of his action. If the
action is maliciously taken or power under the section is
exercised for a collateral purpose, it is liable to be struck
down by the Court. If the conditions for exercise of the power
are not satisfied the proceeding is liable to be quashed. But where G
power is exercised bona fide, and in furtherance of the
statutory duties of the tax officers any error of judgment on
the part of the Officers will not vitiate the exercise of the
power. Where the Commissioner entertains the requisite belief
and for reasons recorded by him authorises a designated
H
248 SUPREME COURT REPORTS [2022] 15 S.C.R.

A officer to enter and search premises for books of account
and documents relevant to or useful for any proceeding under
the Act, the Court in a petition by an aggrieved person cannot
be asked to substitute its own opinion whether an order
authorising search should have been issued. Again, any
irregularity in the course of entry, search and seizure
B
committed by the officer acting in pursuance of the
authorisation will not be sufficient to vitiate the action taken,
provided the officer has in executing the authorisation acted
bona fide.
xxx xxx xxx
C 21. These proceedings were brought before the High Court by
way of a writ petition under Article 226 of the Constitution before
any investigation was made by the Income Tax Officers pursuant
to the action taken by them. In appropriate cases a writ petition
may lie challenging the validity of the action on the ground
D of absence of power or on a plea that proceedings were taken
maliciously or for a collateral purpose. ……………………”
15. In The Income Tax Officer, I Ward, District VI, Calcutta
and Ors. v. Lakhmani Mewal Das16, this Court was examining the
scope of the expression “reason to believe” in the context of reopening
E of assessment on the ground that income had escaped assessment. It
was held that the powers of the Income Tax Officer to reopen assessment,
though wide, but are not plenary. The words of the statute are “reason
to believe” and not “reason to suspect”. It was held that no doubt the
Court cannot go into the sufficiency or adequacy of the material and
substitute its own opinion for that of the Income Tax Officer on the point
F as to whether action should be initiated for reopening assessment, but at
the same time, it is not any and every material, howsoever vague and
indefinite or distant, remote and farfetched, which would warrant the
formation of the belief relating to escapement of the income of the
assessee from assessment. This Court held as under:-
G “11. As stated earlier, the reasons for the formation of the belief
must have a rational connection with or relevant bearing on
the formation of the belief. Rational connection postulates
that there must be a direct nexus or live link between the
material coming to the notice of the Income Tax Officer and
16
H (1976) 3 SCC 757
PRINCIPAL DIRECTOR OF INCOME TAX (INVESTIGATION) & 249
ORS. v. LALJIBHAI KANJIBHAI MANDALIA [HEMANT GUPTA, J.]

the formation of his belief that there has been escapement of A
the income of the assessee from assessment in the particular
year because of his failure to disclose fully and truly all
material facts. It is no doubt true that the court cannot go
into the sufficiency or adequacy of the material and substitute
its own opinion for that of the Income Tax Officer on the
B
point as to whether action should be initiated for reopening
assessment. At the same time we have to bear in mind that it is
not any and every material, howsoever vague and indefinite
or distant, remote and farfetched, which would warrant the
formation of the belief relating to escapement of the income
of the assessee from assessment.……. The reason for the C
formation of the belief must be held in good faith and should not
be a mere pretence.
12. The powers of the Income Tax Officer to reopen assessment
though wide are not plenary. The words of the statute are
“reason to believe” and not “reason to suspect” The reopening D
of the assessment after the lapse of many years is a serious matter.
The Act, no doubt, contemplates the reopening of the assessment
if grounds exist for believing that income of the assessee has
escaped assessment. The underlying reason for that is that
instances of concealed income or other income escaping
assessment in a large number of cases come to the notice of the E
Income Tax Authorities after the assessment has been completed.
The provisions of the Act in this respect depart from the normal
rule that there should be, subject to right of appeal and revision,
finality about orders made in judicial and quasi-judicial proceedings.
It is, therefore, essential that before such action is taken the F
requirements of the law should be satisfied. The live link or close
nexus which should be there between the material before the
Income Tax Officer in the present case and the belief which
he was to form regarding the escapement of the income of the
assessee from assessment because of the latter’s failure or
omission to disclose fully and truly all material facts was G
missing in the case. ……………...”
16. In Partap Singh (Dr) v. Director of Enforcement17, this
Court was considering the action of search and seizure under the Foreign
17
(1985) 3 SCC 72
H
250 SUPREME COURT REPORTS [2022] 15 S.C.R.

A Exchange Regulation Act,1973. It was held that when an officer of the
Enforcement Department proposes to act under Section 37, he must
have reason to believe that the documents useful for investigation or
proceeding under the Act are secreted. It was further held that the reasons
must be sufficient for a prudent man to come to the conclusion that
income escaped assessment and that the Court can examine the
B
sufficiency or adequacy of the reasons on which the Income Tax Officer
has acted.This Court held as under:-
“9. When an officer of the Enforcement Department proposes
to act under Section 37 undoubtedly, he must have reason to
believe that the documents useful for investigation or
C proceeding under the Act are secreted. The material on which
the belief is grounded may be secret, may be obtained through
Intelligence or occasionally may be conveyed orally by
informants. ………….. ….
The Court in terms held that whether these grounds are
D adequate or not is not a matter for the court to investigate.
10. The expression “reason to believe” is not synonymous with
subjective satisfaction of the Officer. The belief must be held
in good faith; it cannot merely be a pretence. In the same
case, it was held that it is open to the court to examine the
E question whether the reasons for the belief have a rational
connection or a relevant bearing to the formation of the belief
and are not extraneous or irrelevant to the purpose of the
section. To this limited extent the action of the Income Tax Officer
in starting proceedings under Section 34 is open to challenge in a
F court of law. ……………… The last part of the submission
does not commend to us because the file was produced before
us and as stated earlier, the Officer issuing the search warrant
had material which he rightly claimed to be adequate for
forming the reasonable belief to issue the search warrant.

G xxx xxx xxx
14. Assuming that it was obligatory to record reasons in writing
prior to directing the search, the file submitted to the court
unmistakably shows that there was material enough before the
officer to form a reasonable belief which prompted him to direct
the search. That the documents seized during the search did not
H
PRINCIPAL DIRECTOR OF INCOME TAX (INVESTIGATION) & 251
ORS. v. LALJIBHAI KANJIBHAI MANDALIA [HEMANT GUPTA, J.]

provide sufficient material to the officer for further action cannot A
be a ground for holding that the grounds which induced the
reasonable belief were either imaginary or fictitious or mala fide
conjured up.
xxx xxx xxx
16. In this behalf, the appellant further contended that if the search B
was genuine or bona fide for carrying out the purposes of the Act,
it is surprising that when the matter was before the High Court,
the Enforcement Directorate submitted that it does not wish to
take any further action in respect of the material seized during the
search. There is no warrant for the assertion that every search C
must result in seizure of incriminating material. Such an approach
would be a sad commentary on human ingenuity. There can be
cases in which search may fail or a reasonable explanation in
respect of the documents may be forthcoming. ……..”
17. This Court in a judgment reported as Phool Chand Bajrang D
Lal and Anr. v. Income Tax Officer and Anr.18 was examining the
reasons to be recorded for the purpose of re-assessment of the Income
Tax already assessed. It was only on the basis of specific, reliable and
relevant information coming to the knowledge of Income Tax Officer
subsequently, he has reasons which must be recorded, to believe that
due to omission or failure on the part of the assessee to make a true and E
full disclosure of all material facts necessary for his assessment during
the concluded assessment proceedings, any part of his income, profit or
gains chargeable to income tax has escaped assessment. This Court
held as under:-
“25. ……. Since, the belief is that of the Income Tax Officer, F
the sufficiency of reasons for forming the belief, is not for
the Court to judge but it is open to an assessee to establish
that there in fact existed no belief or that the belief was not at
all a bona fide one or was based on vague, irrelevant and
non-specific information. To that limited extent, the Court may G
look into the conclusion arrived at by the Income Tax Officer and
examine whether there was any material available on the record
from which the requisite belief could be formed by the Income
Tax Officer and further whether that material had any rational
18
(1993) 4 SCC 77 H
252 SUPREME COURT REPORTS [2022] 15 S.C.R.

A connection or a live link for the formation of the requisite belief. It
would be immaterial whether the Income Tax Officer at the time
of making the original assessment could or, could not have found
by further enquiry or investigation, whether the transaction was
genuine or not, if on the basis of subsequent information, the Income
Tax Officer arrives at a conclusion, after satisfying the twin
B
conditions prescribed in Section 147(a) of the Act, that the assessee
had not made a full and true disclosure of the material facts at the
time of original assessment and therefore income chargeable to
tax had escaped assessment……..”
18. This Court in a judgment reported asN. Nagendra Rao &
C Co. v. State of A.P. 19, was examining the provisions of Essential
Commodities Act, 1955. This Court considering the objective of the Act,
the provisions dealing with search, seizure and confiscation and the nature
of their powers and manner of its exercise to assist in determining if the
statutory authorities are responsible for any loss or damage to the stocks,
D held as under:-
“5. ……… The expression “reason to believe” has been
interpreted by this Court to mean that even though formation
of opinion may be subjective but it must be based on material
on the record. It cannot be arbitrary, capricious or whimsical.
E It is, thus, a check on exercise of power to seize the goods. The
procedure after seizure is provided for by Section 6-A of the Act.
………….
……………………But what needs to be mentioned is that since
the power is very wide as a person violating the Control Orders is
F to be visited with serious consequences leading not only to the
confiscation of the seized goods, packages or vessel or vehicle in
which such essential commodity is found or is conveyed or carried,
but is liable to be prosecuted and penalised under Section 7 of the
Act, it is inherent in it that those who are entrusted with
responsibility to implement it should act with reasonableness,
G fairness and to promote the purpose and objective of the Act.
Further, it should not be lost sight of that the goods seized are
liable to be confiscated only if the Collector is satisfied about
violation of the Control Orders. The language of the section and
its setting indicate that every contravention cannot entail
19
H (1994) 6 SCC 205
PRINCIPAL DIRECTOR OF INCOME TAX (INVESTIGATION) & 253
ORS. v. LALJIBHAI KANJIBHAI MANDALIA [HEMANT GUPTA, J.]

confiscation. That is why the section uses the word ‘may’. A A
trader indulging in black marketing or selling adulterated goods
etc. should not, in absence of any violation, be treated on a par
with technical violations such as failure to put up the price-list etc.
or even discrepancies in stock”.
19. In a judgment reported as Union of India v. Agarwal Iron B
Industries20 it was noticedthatit is difficult to appreciate how the denial
in the counter-affidavit filed by the Revenue could be treated as an
admission by implication to come to a conclusion that no reason was
ascribed for search and seizure and, therefore, action taken under Section
132 of the Act was illegal. The relevant confidential file, if required and
necessary, could have been called for and examined. The Revenue in C
the counter-affidavit was not required to elucidate and reproduce the
information and details that formed the foundation of search. It was
further held that the issuance of search and seizure on the basis of
formation of opinion which a reasonable and prudent man would form
for arriving at a conclusion to issue a warrant was done by way of an D
interim measure. The search and seizure is not to be treated as
confiscation. This Court held as under:-
“10. The provision contained in Section 132(1) of the Act enables
the competent authority to direct for issuance of search and seizure
on the basis of formation of an opinion which a reasonable
and prudent man would form for arriving at a conclusion to E
issue a warrant. It is done by way of an interim measure. The
search and seizure is not confiscation. The articles that are
seized are the subject of enquiry by the competent authority after
affording an opportunity of being heard to the person whose
custody it has been seized. The terms used are “reason to F
believe”. Whether the competent authority had formed the opinion
on the basis of any acceptable material or not, as is clear as crystal,
the High Court has not even remotely tried to see the reasons.
Reasons, needless to say, can be recorded on the file and the
Court can scrutinise the file and find out whether the authority
has appropriately recorded the reasons for forming of an G
opinion that there are reasons to believe to conduct search
and seizure. As is evincible, the High Court has totally
misdirected itself in quashing the search and seizure on the
basis of the principles of non-traverse.”
20
(2014) 15 SCC 215 H
254 SUPREME COURT REPORTS [2022] 15 S.C.R.

A 20. This Court in another judgment in Spacewood Furnishers
(P) Ltd. set aside the order of the High Court, wherein it had interdicted
with the action of search and seizure under Article 226 of the Constitution.
It was held as under:
“12. In the present case the satisfaction note(s) leading to the
B issuing of the warrant of authorisation against the respondent
assessee were placed before the High Court. As it would appear
from the impugned order [Spacewood Furnishers (P) Ltd. v. DG
of Income Tax, 2011 SCC OnLine Bom 1610 : (2012) 340 ITR
393] the contents thereof were exhaustively reproduced by the
High Court. The said satisfaction note(s) have also been placed
C before us. A perusal of the file containing the satisfaction note(s)
indicate that on 8-6-2009 the Assistant Director of Income Tax
(Investigation), Nagpur had prepared an elaborate note containing
several reasons as to why he had considered it reasonable to
believe that if summons or notice were issued to the respondent
D to produce the necessary books of account and documents, the
same would not be produced. The Assistant Director also recorded
detailed reasons why he entertains reasons to believe that the
promoters of the respondent assessee company would be found
to be in possession of money, bullion, jewellery, etc. which
represents partly or wholly income which has not been disclosed
E for the purposes of the Act.
xx xx xx
21. In the light of the views expressed by this Court in ITO v. Seth
Bros. [ITO v. Seth Bros., (1969) 2 SCC 324 : (1969) 74 ITR 836]
F and Pooran Mal [Pooran Mal v. Director of Inspection
(Investigation), (1974) 1 SCC 345 : 1974 SCC (Tax) 114 : (1974)
93 ITR 505] , the above opinion expressed by the High Court is
plainly incorrect. The necessity of recording of reasons, despite
the amendment of Rule 112(2) with effect from 1-10-1975, has
been repeatedly stressed upon by this Court so as to ensure
G accountability and responsibility in the decision-making process.
The necessity of recording of reasons also acts as a cushion in
the event of a legal challenge being made to the satisfaction
reached. Reasons enable a proper judicial assessment of the
decision taken by the Revenue. However, the above, by itself,
H would not confer in the assessee a right of inspection of the
PRINCIPAL DIRECTOR OF INCOME TAX (INVESTIGATION) & 255
ORS. v. LALJIBHAI KANJIBHAI MANDALIA [HEMANT GUPTA, J.]

documents or to a communication of the reasons for the belief at A
the stage of issuing of the authorisation. Any such view would be
counterproductive of the entire exercise contemplated by Section
132 of the Act. It is only at the stage of commencement of the
assessment proceedings after completion of the search and seizure,
if any, that the requisite material may have to be disclosed to the
B
assessee.
22. At this stage we would like to say that the High Court had
committed a serious error in reproducing in great detail the contents
of the satisfaction note(s) containing the reasons for the satisfaction
arrived at by the authorities under the Act. We have already
indicated the time and stage at which the reasons recorded may C
be required to be brought to the notice of the assessee. In the light
of the above, we cannot approve of the aforesaid part of the
exercise undertaken by the High Court which we will understand
to be highly premature; having the potential of conferring an undue
advantage to the assessee thereby frustrating the endeavour of D
the Revenue, even if the High Court is eventually not to intervene
in favour of the assessee.”
21. The judgment of this Court in N.K. Jewellers referred to by
Mr. Balbir Singh is on line of the facts of the case. The proceedings
initiated under Section 132 of the Act were held to be valid as the E
explanation given by the appellant regarding the amount of cash of Rs
30 lakhs found by GRP and seized by the authorities has been disbelieved
and has been treated as income not recorded in the books of accounts
maintained by it. In Vindhya Metal Corpn., this Court had not interfered
with the order passed by the High Court that on the information in
possession of the Commissioner, no reasonable person could have F
entertained a belief that the amount in possession of the assessee
represented income which would not have been disclosed by him for
purpose of the Act.
22. The judgment of Delhi High Court in Ajit Jain is on the facts
of that case but the law stated is not in dispute. The High Court found G
the act of search as invalid on the facts of that case. In that case, a
survey under Section 133-A of the Act was conducted to ascertain
whether the cash of Rs. 8.6 lakhs was reflected in the accounts of the
company. The action of respondent No. 4 in issuing the authorisation
under Section 132(1) of the Act and seizure of Rs. 8.5 lakhs was H
256 SUPREME COURT REPORTS [2022] 15 S.C.R.

A challenged on the ground that there was no “information” on record on
the basis whereof respondent No. 4 could form the belief that the said
amount recovered from the petitioner represented wholly or partly income
which had not been or would not have been disclosed for the purpose of
the Act, a condition precedent for exercise of power under Section 132(1)
of the Act. The High Court held thus:-
B
“Thus, for authorising action under Section 132, the conditions
precedent are: (i) the information in the possession of the named
authority; and (ii) in consequence of which he may have reason
to believe that the person concerned is in possession of money,
bullion etc. which represents, either wholly or partly, income which
C has not been or would not be disclosed for the purpose of the Act.
If either of these conditions are missing or have not been adhered
to, then power under Section 132 cannot be invoked. Thus, the
basis of exercise of power under Section 132(1) has to be
formation of belief and the belief has to be formed on the basis of
D receipt of information by the authorising officer that the person is
in possession of money etc. which represents undisclosed income.
“Information”, in consequence of which the Director General or
the Chief Commissioner etc., as the case may be, has from to his
belief is not only to be authentic but capable of giving rise to the
E inference that a person is in possession of money etc. which has
not been or would not be disclosed for the purpose of the Act. In
other words, it must necessarily be linked with the ingredients
mentioned in the Section.
xxx xxx
F By now it is well settled that while the sufficiency or otherwise of
the information cannot be examined by the court in writ jurisdiction,
the existence of information andits relevance to the formation of
the belief is open to judicial scrutiny because it is the foundation
of the condition precedent for exercise of a serious power of
G search of a private property or person, to prevent violation of
privacy of a citizen…………….But the Court could examine
whether the reasons for the belief have a rational connection or
relevant bearing to the formation of the belief and search warrant
could not be issued merely with a view to making a roving or
fishing enquiry.
H
PRINCIPAL DIRECTOR OF INCOME TAX (INVESTIGATION) & 257
ORS. v. LALJIBHAI KANJIBHAI MANDALIA [HEMANT GUPTA, J.]

The expression ‘reason to believe’ has been explained in various A
decisions by the Apex Court and High Courts while dealing with
Sections 132 and 148 of the Act. It has been held that the word
“reason to believe” means that a reasonable man, under the
circumstances, would form a belief which will impel him to take
action under the law. The formation of opinion has to be in good
B
faith and not on mere pretence. For the purpose of Section 132 of
the Act, there has to be a rational connection between the
information or material and the belief about undisclosed income,
which has not been and is not likely to be disclosed by the person
concerned.”
23. The judgments of the High Courts relied upon by Mr. Datar C
are primarily on the facts of the respective case but in view of the judgment
of this Court, we do not feel the necessity to discuss such judgments
herein.
24. The detailed satisfaction note shows multiple entries in the
account books of Sarju Sharma and others. The manner of Sarju Sharma D
who was either in Siliguri (West Bengal) or in Goa contacting the assessee
in Ahmedabad for a loan of Rs.10 crores does not appear to be a normal
transaction. Subsequent repayment of mortgage and the interest income
reflected in the relevant assessment year appears to be the steps taken
by the assessee to give a colour of genuineness but the stand of the E
Revenue that such entry was an accommodation entry is required to be
found out and also the cobweb of entries required to be unravelled
including the trail of the money paid by the assessee.
25. The High Court quoted extensively from the counter-affidavit
filed by the Revenue as well as quoted para 4.3 of the affidavit-in reply F
but still returned a finding that the Court could not find any other material
whatsoever insofar as the assessee is concerned for the purpose of
recording satisfaction under Section 132 of the Act. We find that reasons
to believe are not the final conclusions which the revenue would arrive
at while framing block assessment in terms of Chapter XIV-B of the
Act. The test to consider the justiciability of belief is whether such reasons G
are totally irrelevant or whimsical. The reply in the counter affidavit
shows that the intention of the Revenue was to un-layer the layering of
money which is suspected to be done by the assessee. The Revenue
has asserted that the accommodation entry is a common modus operandi
to bring the unaccounted black money to books for a brief period. The H
258 SUPREME COURT REPORTS [2022] 15 S.C.R.

A investment of Rs.10 crores for a short period was not for earning interest
income as the same was repaid in the same assessment year. The
Revenue intends to investigate the fund trail of the money paid by the
assessee. Such belief is not out of hat or whimsical. The assessee’s
stand is that it is fishing enquiry and not a malafide action of the Revenue.
The Revenue is specific so as to find out the genuineness of the
B
transaction believing that it was a mere accommodation entry.
26. In Partap Singh, the action of search and seizure was found
to be valid. Though the stand of the Enforcement Directorate was that
in view of the material seized during the search, it does not wish to take
any further action, it was found that there was no warrant for the assertion
C that every search must result in seizure of incriminating material. There
can be cases in which search may fail or reasonable explanation of the
documents may be forthcoming. At this stage of search and seizure, the
Court has to examine whether the reason to believe are in good faith; it
cannot merely be pretence. The belief recorded must have a rational
D connection or a relevant bearing to the formation of the belief and should
not be extraneous or irrelevant to the purpose of the section. In view of
the detailed reasons recorded in the satisfaction note including the
investment made by the assessee for brief period and that investment is
alleged to be an accommodation entry, it cannot be said to be such which
does not satisfy the pre-requisite conditions of Section 132(1) of the
E Act.
27. As per the Revenue, Clauses (b) & (c) of Section 132 (1)
were satisfied before the warrant of authorization was approved. The
satisfaction note was recorded in terms of an assessee whose
jurisdictional assessing officer was in the State of the West Bengal. It is
F the cobweb of accounts of such assessee which are required to be
unravelled. It is not unreasonable for the Revenue to apprehend that the
assessee would not respond to the summons before the Assessing Officer
in the State of West Bengal. It was also alleged that such summons
would lead to disclosure of information collected by the Revenue against
G Sarju Sharma and his group. Therefore, it was a reasonable belief drawn
by the Revenue that the assessee shall not produce or cause to be
produced any books of accounts or other documents which would be
useful or relevant to the proceedings under the Act. Such believe was
not based upon conjectures but on a bona-fide opinion framed in the
ordinary conduct of the affairs by the assessee generally. The notice to
H
PRINCIPAL DIRECTOR OF INCOME TAX (INVESTIGATION) & 259
ORS. v. LALJIBHAI KANJIBHAI MANDALIA [HEMANT GUPTA, J.]

the assessee to appear before the Income Tax authorities in the State of A
West Bengal would have been sufficient notice of the material against
the Company and its group, to defeat the entire attempt to unearth the
cobweb of the accounts by the Company and its associates.
28. Even clause (c) of Section 132(1) is satisfied. The assessee
was in possession of Rs.10 crores which was advanced as loan to the B
Company. The Revenue wishes to find out as to whether such amount is
an undisclosed income which would include the sources from which
such amount of Rs.10 crores was advanced as loan to a totally stranger
person, unconnected with either the affairs of assessee or any other
link, to justify as to how a person in Ahmedabad has advanced Rs.10
crores to the Company situated at Kolkata in West Bengal for the purpose C
of investment in Goa. The Revenue may fail or succeed but that would
not be a reason to interfere with the search and seizure operations at the
threshold, denying an opportunity to the Revenue to unravel the mystery
surrounding the investment made by the assessee.
29. In a celebrated judgment of this Court in Tata Cellular v. D
Union of India21, on the scope of judicial review, though in the context
of tenders, is very well applicable to the powers or limitations of the
Courts while exercising the jurisdiction under Article 226 of the
Constitution. One of the principles is that of judicial restraint. This Court
held that: E
“73. Observance of judicial restraint is currently the mood in
England. The judicial power of review is exercised to rein in any
unbridled executive functioning. The restraint has two
contemporary manifestations. One is the ambit of judicial
intervention; the other covers the scope of the court’s ability to F
quash an administrative decision on its merits. These restraints
bear the hallmarks of judicial control over administrative action.
74. Judicial review is concerned with reviewing not the merits of
the decision in support of which the application for judicial review
is made, but the decision-making process itself. G
xx xx xx
78. What is this charming principle of Wednesbury
unreasonableness? Is it a magical formula? In R. v. Askew [(1768)
21
(1994) 6 SCC 651 H
260 SUPREME COURT REPORTS [2022] 15 S.C.R.

A 4 Burr 2186 : 98 ER 139] , Lord Mansfield considered the question
whether mandamus should be granted against the College of
Physicians. He expressed the relevant principles in two eloquent
sentences. They gained greater value two centuries later:
“It is true, that the judgment and discretion of determining upon
B this skill, ability, learning and sufficiency to exercise and practise
this profession is trusted to the College of Physicians and this
Court will not take it from them, nor interrupt them in the due
and proper exercise of it. But their conduct in the exercise of
this trust thus committed to them ought to be fair, candid and
unprejudiced; not arbitrary, capricious, or biased; much less,
C warped by resentment, or personal dislike.”
xx xx xx
80. At this stage, The Supreme Court Practice, 1993, Vol. 1, pp.
849-850, may be quoted:
D “4. Wednesbury principle.— A decision of a public authority
will be liable to be quashed or otherwise dealt with by an
appropriate order in judicial review proceedings where the court
concludes that the decision is such that no authority properly
directing itself on the relevant law and acting reasonably could
have reached it. (Associated Provincial Picture Houses
E Ltd. v. Wednesbury Corpn. [(1948) 1 KB 223 : (1947) 2 All
ER 680] , per Lord Greene, M.R.)”
xx xx xx
82. Bernard Schwartz in Administrative Law, 2nd Edn., p. 584
has this to say:
F
“If the scope of review is too broad, agencies are turned into
little more than media for the transmission of cases to the courts.
That would destroy the values of agencies created to secure
the benefit of special knowledge acquired through continuous
administration in complicated fields. At the same time, the scope
G of judicial inquiry must not be so restricted that it prevents full
inquiry into the question of legality. If that question cannot be
properly explored by the judge, the right to review becomes
meaningless. ‘It makes judicial review of administrative orders
a hopeless formality for the litigant. … It reduces the judicial
H process in such cases to a mere feint.’
PRINCIPAL DIRECTOR OF INCOME TAX (INVESTIGATION) & 261
ORS. v. LALJIBHAI KANJIBHAI MANDALIA [HEMANT GUPTA, J.]

Two overriding considerations have combined to narrow the scope A
of review. The first is that of deference to the administrative expert.
In Chief Justice Neely’s words:
‘I have very few illusions about my own limitations as a judge
and from those limitations I generalise to the inherent limitations
of all appellate courts reviewing rate cases. It must be B
remembered that this Court sees approximately 1262 cases a
year with five judges. I am not an accountant, electrical
engineer, financier, banker, stock broker, or systems
management analyst. It is the height of folly to expect judges
intelligently to review a 5000 page record addressing the
intricacies of public utility operation.’ C

It is not the function of a judge to act as a superboard, or with the
zeal of a pedantic schoolmaster substituting its judgment for that
of the administrator.
The result is a theory of review that limits the extent to which the D
discretion of the expert may be scrutinised by the non-expert judge.
The alternative is for the court to overrule the agency on technical
matters where all the advantages of expertise lie with the agencies.
If a court were to review fully the decision of a body such as
state board of medical examiners ‘it would find itself wandering
amid the maze of therapeutics or boggling at the mysteries of the E
pharmacopoeia’. Such a situation as a state court expressed it
many years ago ‘is not a case of the blind leading the blind but of
one who has always been deaf and blind insisting that he can see
and hear better than one who has always had his eyesight and
hearing and has always used them to the utmost advantage in F
ascertaining the truth in regard to the matter in question’.
The second consideration leading to narrow review is that of
calendar pressure. In practical terms it may be the more important
consideration. More than any theory of limited review it is the
pressure of the judicial calendar combined with the elephantine G
bulk of the record in so many review proceedings which leads to
perfunctory affirmance of the vast majority of agency decisions.”
xx xx xx
94. The principles deducible from the above are:
H
262 SUPREME COURT REPORTS [2022] 15 S.C.R.

A (1) The modern trend points to judicial restraint in administrative
action.
(2) The court does not sit as a court of appeal but merely reviews
the manner in which the decision was made.
(3) The court does not have the expertise to correct the
B administrative decision. If a review of the administrative decision
is permitted it will be substituting its own decision, without the
necessary expertise which itself may be fallible.
(4) …..”

C 30. The power of judicial review and interference by the Courts
in the matters of disciplinary proceedings was being examined in the
judgement of this Court reported as Indian Oil Corporation Ltd. v.
Rajendra D. Harmalkar22. It was held that interference was not
permissible unless the order was contrary to law, or relevant factors
were not considered, or irrelevant factors were considered, or the decision
D was one which no reasonable person could have taken.
31. In another judgment reported as Utkal Suppliers v. Maa
Kanak Durga Enterprises23,this Court was examining tender conditions
in a writ petition.It was held that judicial review in these matters is
equivalent to judicial restraint.
E
32. In the light of judgments referred to above, the sufficiency or
inadequacy of the reasons to believe recorded cannot be gone into while
considering the validity of an act of authorization to conduct search and
seizure. The belief recorded alone is justiciable but only while keeping in
view the Wednesbury Principle of Reasonableness. Such reasonableness
F is not a power to act as an appellate authority over the reasons to believe
recorded.
33. We would like to restate and elaborate the principles in
exercising the writ jurisdiction in the matter of search and seizure under
Section 132 of the Act as follows:
G i) The formation of opinion and the reasons to believe recorded
is not a judicial or quasi-judicial function but administrative
in character;
22
2022 SCC Online SC 486
23
2021 SCC Online SC 301
H
PRINCIPAL DIRECTOR OF INCOME TAX (INVESTIGATION) & 263
ORS. v. LALJIBHAI KANJIBHAI MANDALIA [HEMANT GUPTA, J.]

ii) The information must be in possession of the authorised A
official on the basis of the material and that the formation
of opinion must be honest and bona fide. It cannot be merely
pretence. Consideration of any extraneous or irrelevant
material would vitiate the belief/satisfaction;
iii) The authority must have information in its possession on B
the basis of which a reasonable belief can be founded that
the person concerned has omitted or failed to produce books
of accounts or other documents for production of which
summons or notice had been issued, or such person will not
produce such books of accounts or other documents even
if summons or notice is issued to him; or C

iv) Such person is in possession of any money, bullion, jewellery
or other valuable article which represents either wholly or
partly income or property which has not been or would not
be disclosed;
D
v) Such reasons may have to be placed before the High Court
in the event of a challenge to formation of the belief of the
competent authority in which event the Court would be
entitled to examine the reasons for the formation of the
belief, though not the sufficiency or adequacy thereof. In
other words, the Court will examine whether the reasons E
recorded are actuated by mala fides or on a mere pretence
and that no extraneous or irrelevant material has been
considered;
vi) Such reasons forming part of the satisfaction note are to
satisfy the judicial consciousness of the Court and any part F
of such satisfaction note is not to be made part of the order;
vii) The question as to whether such reasons are adequate or
not is not a matter for the Court to review in a writ petition.
The sufficiency of the grounds which induced the competent
authority to act is not a justiciable issue; G
viii) The relevance of the reasons for the formation of the belief
is to be tested by the judicial restraint as in administrative
action as the Court does not sit as a Court of appeal but
merely reviews the manner in which the decision was made.
H
264 SUPREME COURT REPORTS [2022] 15 S.C.R.

A The Court shall not examine the sufficiency or adequacy
thereof;
ix) In terms of the explanation inserted by the Finance Act,
2017 with retrospective effect from 1.4.1962, such reasons
to believe as recorded by income tax authorities are not
B required to be disclosed to any person or any authority or
the Appellate Tribunal.
34. In view of the above, we find that the High Court was not
justified in setting aside the authorization of search dated 07.08.2018.
Consequently, the appeal is allowed and the order passed by the High
C Court is set aside. As a consequence thereof, the Revenue would be at
liberty to proceed against the assessee in accordance with law.

Nidhi Jain Appeal allowed.
(Assisted by : Shubhanshu Das, LCRA)

D

E

F

G

H