Facts of the Case

The Petitioner, Khem Chand Mukim, proprietor of M/s Shrimati Gems and Jewels, was engaged in the business of jewellery trading. He travelled to Guwahati to participate in a jewellery exhibition and was intercepted at IGI Airport, Delhi while returning.

During interception:

  • Jewellery worth approximately ₹1.58 crore was found and seized.
  • The Income Tax Department conducted search and seizure under Section 132.
  • The Petitioner claimed that the jewellery was stock-in-trade used for exhibition.
  • Despite submitting documents and repeated representations, the jewellery was not released.

Aggrieved by the action, the Petitioner filed a writ petition challenging:

  • Legality of search
  • Validity of seizure
  • Non-release of stock-in-trade

Issues Involved

  1. Whether the search and seizure under Section 132 was valid without proper “reason to believe”?
  2. Whether stock-in-trade jewellery can be seized under Section 132?
  3. Whether post-facto recording of reasons satisfies legal requirements?
  4. Whether the Department violated statutory safeguards and procedural mandates?

Petitioner’s Arguments

  • No valid “reason to believe” existed before conducting search.
  • Jewellery was legitimate stock-in-trade, supported by books and documents.
  • As per proviso to Section 132(1)(iii), stock-in-trade cannot be seized.
  • Seizure was illegal and arbitrary, affecting livelihood.
  • Relied on case law:
    • Puspa Ranajan Sahoo vs ADIT (2012)

Respondent’s Arguments

  • The Department had credible information suggesting undisclosed income.
  • Proper reason to believe was formed under Section 132(1)(c).
  • Petitioner failed to produce:
    • Stock register
    • Delivery challans
  • Hence, jewellery was treated as undisclosed income.
  • Release not allowed under Section 132B due to failure to explain source.

Court’s Findings / Analysis

The Delhi High Court made critical observations:

1. Mandatory Requirement of “Reason to Believe”

  • Search under Section 132 requires pre-existing, recorded reasons.
  • “Reason to believe” ≠ “Reason to suspect”.

2. Post-Facto Authorization is Illegal

  • The Court found that:
    • Search was conducted before recording reasons.
    • Satisfaction note was prepared after the search.
  • This renders the entire action invalid and unlawful.

3. Stock-in-Trade Cannot Be Seized

  • As per statutory proviso:
    • Jewellery forming part of stock-in-trade cannot be seized.
    • Only inventory should be prepared.

4. Absence of Tangible Material

  • No concrete material linking jewellery to undisclosed income.
  • Mere possession of jewellery is not sufficient.

5. Violation of Legal Safeguards

  • Section 132 is a serious invasion of privacy.
  • Authorities must strictly comply with:
    • Procedural safeguards
    • Statutory conditions

Court Order / Judgment

  • The search and seizure action was held illegal and unsustainable in law.
  • The Court concluded:
    • Lack of valid “reason to believe”
    • Improper exercise of power
    • Violation of statutory provisions

Important Clarifications by Court

  • “Reason to believe” must be:
    • Based on credible material
    • Recorded before search
  • Stock-in-trade:
    • Cannot be seized under Section 132
    • Only inventory is permissible
  • Search powers cannot be used for:
    • Fishing or roving inquiries
  • Distinction clarified:
    • Reason to suspect ≠ Reason to believe

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2020:DHC:140-DB/SVN09012020CW53432019_150900.pd 

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