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CASE NO.: Appeal (civil)  769 of 2008

PETITIONER: K.C.C. Software Ltd. and Ors.

RESPONDENT: Director of Income Tax (Inv.) and Ors.

DATE OF JUDGMENT: 29/01/2008

BENCH: Dr. ARIJIT PASAYAT & S.H. KAPADIA

JUDGMENT: J U D G M E N T (Arising out of SLP (C) No.3654 of 2007)      Dr. ARIJIT PASAYAT, J.

1.      Leave granted.           2.      Challenge in this appeal is to the order passed by a  Division Bench of the Delhi High Court dismissing the writ  petitions filed by the appellants.  

3.      Background facts in a nutshell are as follows:

       A search and seizure was conducted by the respondents  in the premises of the appellants pursuant to warrants of  authorization dated 3.8.2005. On 4.8.2005 certain assets  including jewellery, cash and fixed deposit receipts were  seized. On that very day, appellants received a letter from the  HDFC Bank at B-28, Community Centre, Janakpuri, New  Delhi that operation of five bank accounts of appellant No.1  had been restrained by order issued under Section 132 (3) of  the Income Tax Act, 1961 (in short the \021Act\022). The Bank issued  a similar letter to appellant No.3 intimating that the said  appellant had been restrained from operating her Savings  Bank account by order dated 3.8.2005 passed under Section  132(3) of the Act. Appellant\022s stand was that existence of the  lockers and the bank accounts were disclosed by the  appellants in the regular books of account maintained and no  opportunity was provided to establish the said fact. It was  further submitted that the computers which contained the  details of the bank accounts were available at the business  premises at Janakpuri and no opportunity was allowed to the  appellants to place these before the authorities.    

       Grievance is made that apart from the non grant of  opportunity no effort whatsoever was made to ascertain  whether the accounts had been disclosed in the regular books  of account maintained by the appellants. On 8.8.2005  appellant addressed a letter to the Additional Director of  Income Tax stating inter alia that all bank accounts under  restraint have been disclosed in the regular books of account  and also that the restraint order was hampering the day to day  operations of the business of the company. On the same day,  appellant No.3 wrote another letter to the concerned authority  requesting him to remove the restraint order in Savings Bank  account. On 16.9.2005, appellant No.1 addressed another  letter to the Assistant Director of Income Tax (Investigation)  again reiterating its stand that the bank accounts have been  disclosed in the regular books of account and there was no  justification for keeping the restraint on the operation for the

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bank accounts.  4.      According to the appellants no reply was received to the  letters dated 8.8.2005 and 16.9.2005 and the respondents did  not make any effort to verify the correctness of the appellant\022s  contentions. On 21.9.2005 appellant No.3 moved an  application under Section 132(B) of the Act to the Deputy  Commissioner of Income Tax  for release of jewellery worth  Rs.4,76,588/- and FDR of Rs.1,79,710/-. Since the nature  and source was duly explained, the limitation of 60 days in  terms of Section 132(8A) expired w.e.f. 31.8.2005 i.e. the date  of issuance of the order of restraint. On 3.10.2005 appellant  No.2 addressed a letter to the Manager, HDFC Bank informing  him that as per provisions of Section 132 (8A) of the Act, the  restraint order was no longer operative. On 4.10.2005 Bank  through its Bank Manager sought clarification from the  Deputy Director of Income Tax. The Income Tax Department  on 4.10.2005 issued two fresh warrants of authorization under  Section 132 of the Act in respect of the bank accounts. It is  alleged that the appellants were not informed about the  warrants of search. On 5.10.2005 the bank accounts of the  appellants were searched and seized through withdrawal of  cash by demand drafts. Appellant\022s stand in essence is that  the fresh warrants of authorization were without jurisdiction  and in any event since the accounts had been duly disclosed  in the regular books of account, there was no scope for  operating Section 132 (3) of the Act. The earlier order passed  under Section 132 (3) of the Act ceased to be operative w.e.f.  2/3.10.2005.  On 8.10.2005 the bank by a letter informed the  appellants about search and seizure of the bank accounts  under Section 132 (3) of the Act and also gave details of  demand drafts issued in favour of respondent No.2  withdrawing the money from the accounts of the appellants.  

5.      On 28.10.2005 the appellants were supplied with copies  of the Panchnama. On 29.10.2005 appellant No.1 requested  the respondents to adjust towards self assessment tax of  Rs.77,68,177/- for the assessment year 2005-06 from the  seized amount of Rs.1,81,91,982/- and to release the balance.   On 29.11.2005 appellants Nos.1 and 3 moved an application  under Section 132 (B) of the Act for release of the amount  seized on 5.10.2005 i.e. within 30 days of the end of the  month in which seizure took place. Several documents were  filed to substantiate the claim. Again on 16.2.2006 Income tax  authorities were requested for adjustment of Rs.40,00,000/-  as advance tax  for the assessment year 2006-07 from the  seized amount and to release the balance. Since the  respondents failed to respond to the requests of the  appellants, writ petitions Nos.6313-6315 of 2006 were filed  inter alia for the following directions:

\023(a) to respondents to release the balance amount  of Rs.61,85,502/- to petitioner No.1 after  accepted adjustments; (b)     to respondents to release amount of  Rs.25,27,035 to petitioner No.3; (c)     quash and set aside Warrants of Authorization  dated 4.10.2005; (d)     declare restraint order dated 3.8.2005 as  illegal; (e)     release FDRs/jewellery of petitioner No.3  seized on 4.8.2005.  6.      The respondents filed counter affidavit contending inter  alia as follows:

       \023(i) Ist order of search and seizure was passed and

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served only on 4th August, 2005;         (ii)    The application dated 29.11.2005 had been  disposed off vide order dated Ist February, 2006  (which order was not communicated to the  petitioners).         (iii)   It is contended that in the search and seizure  operations carried out on 4.8.2005 authorized  officer arrived at the conclusion that the Bank  accounts in question were undisclosed and  immediately passed as restraint order.         (iv)    The respondent acknowledged that 60 days  from the date of issue of restraint order expired on  3.8.2005.         (v)     It is admitted that on 4.10.2005 warrants of  authorization in respect of the same accounts only  were again issued by DIT.         (vi)    On the strength of such warrants and seizure  operation on 4th and 5th October, 2005 amount of  Rs.80,59,539, Rs.1,01,32,443 and Rs.25,27,035  respectively were seized from the said Bank  accounts.         (vii)   That the entries in the books of accounts etc.  were 27.7.2005 and no entries were found between  28.7.2005 to 4.8.2005 hence non disclosure in  books of accounts since books were not written for  5/6 days.         (viii)  It was alleged that the amounts lying in the  Bank were not disclosed and not accounted for and  therefore there was no question of lifting the  restraint order.\024  

7.      A rejoinder affidavit was filed on 2.11.2006 taking the  stand that the order dated 1.2.2006 was not served and there  were apparent contradictions as regards the search and  seizure in the pleadings. By the impugned order the writ  petitions were dismissed observing that the respondents had  taken a stand that there was estimated tax liability of  approximately Rs.10,00,000/-. The satisfaction note dated  13.9.2005 of ADIT, Unit I and the notings of the Director  (investigation) clearly indicated that the stand of the  appellants was without substance.  

8.      Learned counsel for the appellants submitted that the  factual scenario clearly shows that the authorities acted  without jurisdiction in directing either to retain the amount  after adjustment of the self assessment and advance tax or  also withdrawing the amount by demand drafts from the bank  accounts.  The order passed under Section 132B shows that it  was retained for estimated liability. Such a course is not  available after deletion of the provision relating to estimated  liability in 2002. Similarly, the provisions relating to block  period assessments in Chapter XIV were deleted w.e.f.  1.6.2003. As the authorities themselves permitted adjustment  of self assessment and advance tax, there was in effect release  accepting the stand of the appellants and the balance amount  of Rs.81,00,000/- has perforce to be refundable.  The power  under Section 132(1)(iii) relates to seizure and the proviso  deals with assets which cannot be seized. There is no dispute  that Section 132 (3) read with Section 132 (8A) restricts the  period of operation of the order of restraint to 60 days. Section  132B relates to adjusting liability on completion of assessment  under Section 153A and it is relatable to the year in which  search and seizure was initiated and block period in terms of  Chapter XIV-B. Section 158 relates to retention and not  appropriation.

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9.      Stand of the respondents on the other hand was that  reference to Section 153A in Section 132B shows that it  relates to estimated liability. Though it is accepted that the  provision relating to estimated liability in terms of Section 132  (5) was deleted w.e.f. 1.6.2002, yet in view of Section 153B the  period of assessment is continuing. The amount even though  withdrawn has not been taken to the consolidated funds.  There is no appropriation in that sense.       10.     It was stated that the order passed under Section 132 (3)  was revoked but a fresh order was passed. The money has  been withdrawn in terms of \023Search and Seizure Manual,  1989\024, particularly Paras 5.01 and 5.02 thereof. The  adjustment that has been done is for existing liability. There is  no appropriation in that sense because it can be done only  after assessment is completed by transfer.        11.     Stand of the appellants essentially was that there is no  power for retaining any amount seized for the purpose of  meeting estimated liability. That according to the appellants  was permissible upto 1.6.2002 and by deletion of Section 132  (5) the position has been materially changed.        12.     Stand of the revenue on the other hand seems to be that  what is appropriated can be cash and not money. The bank  account in essence is not cash but is money. There are  different stages under Section 132 (1). First stage is seizure,  then comes adjudication on the non disclosure aspect and  then determination relatable to Section 132 (8A). Lastly, the  order can be passed under Section 132B. It has been  specifically stated by learned counsel for the revenue that  Section 132(3) order was revoked.  It is stated in para 10 of the  affidavit filed on 15.11.2007 as follows:           \023That it is submitted that in the instant  case the power under Section 132(3) was  exercised at the initial stage for the purposes  of verification of the source of funds lying in  the bank account. Thereafter, when the  assessee was unable to satisfactorily explain  the source of these funds, the same were  seized under a fresh warrant under Section  132(1) issued by the Director of Income Tax  (Inv.), who duly recorded his satisfaction as  provided under Section 132 (1)(c).                  13.     In paragraph 11 it has been stated as follows.

\023It is submitted that an Authorized Officer  acting under Section 132 (1)(iii) of the Act has  full power and jurisdiction to seize cash  balance lying in bank account as these would  come within the meaning of  \021money\022 and/or  \021assets\022 as provided under Section 132 (1)(iii) of  the Act. It is submitted that the subsequent  action of converting these balances into a  demand draft is only a safeguard for safe  custody of these assets and is irrelevant to the  legality of the seizure itself. It is therefore  submitted that in the instant case, the seizure  was made legally and as per the powers vested  in the Director of Income Tax (Investigation),  respondent No.1 under Section 132 (1) of the

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Act.\024              14.     \023The Search and Seizure Manual\024 to which reference has  been made deals with in Chapter V under heading \023Post  Search Work\024. The relevant paras 5.01 and 5.02 read as  follows:          \0235.01        After the return of the search  parties, a check list should be prepared for  pending and immediate follow up work. The  check list may inter alia include:-

(a)     List of places where search has to be  continued.

(b)     Details of bank lockers sealed and  to be opened subsequently.

(c)     List of places where valuables are  sealed in premises itself on the ground that  verification with Wealth-tax records is not  possible or pending valuation of assets.

(d)     List of godowns holding stocks, in  respect of which prohibitory orders have been  issued.

(e)     List of places where police guards  have been posted.

(f)     Details of bank accounts which have  been frozen under Section 132 (3).

(g)     List of places where further section  has to be taken for any other reason.

(h)     List of promissory notes, fixed  deposit\022s receipts, Hundies etc. requiring  special attention.

(i)     Details of packages of cash which  are to be deposited into the Personal deposit  Account in the Reserve Bank/State Bank.

(j)     Details of packages of bullions,  jewellery etc. required to be deposited in the  strong room/safe deposit vault of the bank.

(k)     Work regarding valuation of  jewellery seized.   (l)     Details of sealed covers containing  damaged/mutilated documents.

(m)     Particulars of complaints filed in  police, as result of any incident during the  search, which are required to be followed up.

5.02    Deposit of Cash           The cash seized is required to be  deposited in the bank in the Personal Deposit  Account of the Commissioner, at the earliest

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opportunity preferably on the next working  day. However, if due to unavoidable reasons, it  is not possible, the cash with other valuables  may be kept in the strong room of the  Commissioner or the safe deposit vault of the  bank. Where cash has been brought in sealed  packet, it is expected that the authorized  officer has already issued a letter to the  assessee requesting him to be present before  the ADIT-in-charge on the following morning  before 12 O\022 clock. Where the cash seized  relates to an assessee who is assessed in the  charge of some other Commissioner, a crossed  account payee demand draft in favour of the  concerned Commissioner should be obtained  and dispatched to him.\024

   15.     It is stated that amount has not become a part of the  Consolidated Fund of India and is deposited in separate PD  account of the concerned Commissioner and is held in the  custody till final determination of the tax liability by the  assessing officer for the relevant assessment years.        16.     On a bare reading of the Manual it is clear that the same  is relatable to cash seized and cash in bank is conceptually  different from cash in hand.        17.     In Shanti Prasad Jain v. The Director of Enforcement  (1963 (2) SCR 297) it was inter alia observed as follows:       \023Under the law the time relationship between a  Banker and a customer is that of a debtor and  creditor and that it makes no difference in that  relationship that the deposits were conditional.           xx              xx                      xx

                                 Now the law is well settled that when  moneys are deposited in a Bank, the  relationship that is constituted between the  banker and the customer is one of the debtor  and creditor and not trustee and beneficiary.  The banker is entitled to use the monies  without being called upon to account for such  user, his only liability being to return the  amount in accordance with the terms agreed  between him and the customer. And it makes  no difference in the jural relationship whether  the deposits were made by the customer  himself, or by some other persons, provided  the customer accepted them. There might be  special arrangement under which a Banker  might be constituted a trustee, but apart from  such an arrangement, his position qua Banker  is that of a debtor, and not trustee. The law  was stated in those terms in the old and well- known decision of the House of Lords in Foley  v. Hill (1848 11 H.L.C. 289 E.R. 1002) and that  has never been questioned.\024

18.     In the judgment of House of Lords in Foley v. Hill [(1843

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to 1860) All E.R. Re-print 16] referred in the aforesaid  judgment of the Constitution Bench, it was inter alia held as  under:

\023Money, when paid into a bank, ceases  altogether to be the money of the owner, it is  then the money of the banker, who is bound to  return an equivalent by paying a similar sum  to that deposited with him when he is asked  for it.  The money paid into the bankers, is  money known by the customer to be placed  there for the purpose of being under the  control of the banker; It is then the banker\022s  money; he is known to deal with it as his own;  he makes what profit on it he can, which profit  he retains to himself, paying back only the  principal, according to the custom of bankers  in some places, or the principal and a small  rate of interest, according to the custom of  bankers in other places\005. He is guilty of no  breach of trust in employing it, he is not  answerable to the customer if he puts it into  jeopardy, if he engages in a hazardous  speculation; he is not bound to keep it or deal  with it as the property of the customer, but he  is, of course, answerable for the amount  because he has contracted, having received  that money, to repay to the customer, when  demanded, a sum equivalent to that paid into  his hands. That has been the subject of  discussion in various cases, and that has been  established to be the relative situation of  banker and customer.  That being established,  to be the relative situation of banker and  customer, the banker is not an agent or factor,  but he is a debtor.\024           

19.     At this juncture, it is to be clarified about the  impermissibility to convert assets to cash and thereafter  impound the same. We need not go into the broader issue in  view of the fact that there is no challenge to the order passed  under Section 132B of the Act. But it has been stated by  learned counsel for the revenue that it is permissible to  complete the assessment by 31st March, 2008. In view of the  aforesaid scenario, we dispose of the appeal with the following  directions:       (i)     In view of the non challenge to the order  passed under Section 132B, no relief can be  granted to the appellants.  (ii)    However, it would be in the interests of the  assessee as well as the revenue if the amount  transferred to the PD account of the  Commissioner is kept in interest bearing fixed  deposit as ultimately  in the event the  assessee succeeds, would be entitled to  interest as provided in the statute.  The  assessment has to be completed on or before  31st March, 2008 i.e. within the time  statutorily provided.

20.     The appeal is dismissed subject to the aforesaid  directions. There will be no order as to costs.