-
by Admin
23 December 2025 2:16 AM
"Jurisdictional Prerequisites Under Section 132(1)(b) Were Woefully Absent in This Case" – In a landmark judgment Allahabad High Court (Lucknow Bench) declared illegal a high-profile search and seizure operation carried out by the Income Tax Department under Section 132 of the Income Tax Act, 1961.
The Court held that the search was "arbitrary and illegal," emphasizing that no material existed to support the Revenue's “reason to believe” as required under the Act. The Court further invalidated a subsequent notice under Section 131(1A), calling it a clear violation of statutory safeguards. This decision is expected to have wide ramifications for tax administration in cases involving retrospective tax amendments and procedural overreach.
Background of the Case
The petitioners, Pramod Swarup Agarwal and Sneh Lata Agarwal, both elderly individuals and longstanding promoter-shareholders of India Pesticides Ltd., were subjected to search and seizure operations on December 12, 2024, at their shared residence. They challenged the legality of the warrant of authorization issued under Section 132 and also the notice dated January 27, 2025, issued to Sneh Lata Agarwal under Section 131(1A).
The genesis of the dispute lay in the petitioners’ sale of equity shares through an Offer For Sale (OFS) during the company's initial public offering on July 1, 2021. The petitioners paid advance tax but later claimed exemption in their returns for Assessment Year 2022–23, citing the absence of a fair market value mechanism under Section 55(2)(ac) of the Act, prior to its retrospective amendment in September 2024.
Despite the department processing their refunds without objection, the Revenue initiated search operations based on this retrospective change in law.
Court on Legal Issues: “No Reason to Believe, Only a Pretence”
The central legal issue was whether the statutory threshold under Section 132(1)(b) — i.e., "reason to believe" that the petitioners would not produce relevant documents if summoned — had been met. The Court examined the satisfaction note, the sine qua non for such a search, and found it completely wanting.
Justice Rajan Roy, speaking for the Division Bench, categorically held:
“We have no hesitation to say that the entire search operations based on such satisfaction note and warrant of authorization are illegal. The information and reason to believe based thereon... are a mere pretence.” [Para 40]
The Court reminded that Section 132 authorizes “serious invasion into the privacy of a citizen”, and as such, “must be exercised strictly in accordance with law”. Citing L.R. Gupta v. Union of India [(1992) 194 ITR 32], the Court reinforced that the belief “must be referable to clause (a), (b) or (c)”, and if not, the entire action collapses.
In this case, the Revenue admitted during arguments that only clause (b) — the assumption that the assessee would not produce documents if called upon — was relied upon. However, the Court found no material in the satisfaction note justifying even this minimal threshold.
“There is no information in the satisfaction note which could be the basis for a belief as envisaged under Section 132... Nor any past conduct of the petitioners is referred to.” [Para 38]
The Court emphasized that the petitioners had filed returns for over 18 years, had responded to all previous notices, and had even written to the department explaining the non-taxability of the OFS transaction.
“Post-Search Material Is Irrelevant”: Court Rejects Revenue’s Attempt to Justify Action Retroactively
The Revenue's fallback was to rely on supplementary documents and post-search material, including vague allegations and data about other shareholders. This, the Court said, was wholly impermissible:
“The search and post-search information or reason to believe cannot form the basis for justifying the warrant of authorization or the search conducted in pursuance thereof. The legal position is settled in this regard.” [Para 45]
It further noted that reliance on such material was not only irrelevant, but also undermined statutory protections guaranteed to assessees:
“Post-search information cannot be used to justify such an act.” [Para 46]
On Section 139(8A): “Illegal Search Disabled Right to File Updated Returns”
The Court also addressed a critical consequence of the illegal search — that it barred the petitioners from filing updated returns under Section 139(8A) of the Act due to the statutory prohibition triggered by a search:
“Petitioners were placed at an irreversible disadvantage due to illegal action by Revenue, reinforcing the need to strike down the search.” [Para 43]
Thus, the search had not only violated procedural safeguards but also deprived the petitioners of their statutory remedy, causing direct prejudice.
On Notice under Section 131(1A): “Authorized Officer Cannot Circumvent Statutory Bar Post-Search”
In Writ Tax No. 31 of 2025, the petitioner additionally challenged a notice issued under Section 131(1A) post-search, by the same officer who conducted the search.
The Court held:
“Sri Adarsh Kumar being the Authorized Officer... could not have issued the notice under sub-Section (1A) of Section 131 of the Act... post-search operations. The impugned notice dated 27.01.2025 is accordingly quashed.” [Para 54]
The argument that the officer acted in a different capacity (as Deputy Director of Investigation) was rejected:
“The explanation offered... cannot be accepted as it will render the conditions imposed upon the authorized officer under Section 131(1A) otiose.” [Para 53]
Final Verdict: “Satisfaction Note Was a Mere Pretence”
Summing up its conclusions, the Court held:
“The jurisdictional prerequisites for exercise of power under Section 132 were woefully absent in this case… The satisfaction note and the warrant of authorization are nothing but a pretext, unsupported by any credible information or belief.” [Para 40]
Consequently, the Court:
Quashed the Warrant of Authorization and Search Operations
Declared the Notice under Section 131(1A) illegal
Allowed both writ petitions in entirety
Clarified that the Revenue may still proceed under other legal provisions, including Section 148, if permissible
Conclusion
This ruling is a powerful reminder that tax enforcement powers are not immune from judicial scrutiny, particularly when they infringe on citizens' rights without legal basis. The High Court’s meticulous dissection of the legal requirements under Section 132 sends a clear message: Retrospective tax policy cannot retroactively justify coercive search actions without robust, pre-existing material.
“We only wish we could have discussed the satisfaction note more elaborately... but the law as declared by Hon’ble the Supreme Court prevents us from doing so.” [Para 46]
Yet, even within these constraints, the Court’s message was unambiguous: Arbitrary tax searches, unsupported by legal standards, will not withstand judicial review.
Date of Decision: June 3, 2025
