Whether when a central agency is engaged in combating money laundering, Income tax search based on inputs from such an agency would be against national interests - YES: HC

THE issues before the Bench are - Whether in a case of search & seizure, the Revenue can claim privilege for not disclosing the satisfaction note prepared on the basis of inputs received from the FIU; Whether disclosure of sources of such information would jeopardise public interest and Whether when a central agency is engaged in combating money laundering, income tax search based on inputs from such an agency would be against national interests. And the assessee's writ dismissed.

Facts of the case

Assessee, a company, had challenged the search and seizure operations u/s 132 and prayed for reliefs regarding the quashing of such search & seizure action. After exchange of affidavits the writ petition was heard by a Division Bench of HC, which had concluded certain issues, against which the IT Department had filed a Civil Appeal No.7840 of 2011 (Director General of Income Tax, North & others vs. M.D. Overseas Ltd). The writ petition was kept pending with liberty to the department to claim privilege for disclosing the source of information under Section 123 or Section 124 of the Evidence Act. It was stated by the Division Bench of HC that there were other points in the writ petition, which were not considered at that stage and would be taken care of subsequently. An application no.115800 dated 13.4.2011 was filed by the assessee with prayers to all the issues raised in the writ petitions, except the right of the petitioners to look into the records related to authorization of search on the ground that there were other points, which were not argued and were not decided by the Court. The application was dismissed by the Division Bench. From the order dated 31.2.2013, quoted as above it was clear that no other point, except the liberty given to the department to file an application claiming privilege u/s 123 or 124 of the Evidence Act from disclosing the information on the basis of which the authorisation was prepared, was pending for consideration of the Court. An application had been filed by the department on 4.8.2011, supported by the affidavit of DDIT(Investigation),NOIDA claiming privilege for the unpublished material in public interest u/s 123, 124 and 125 of the Evidence Act, 1872. In order to meet the objections, that the affidavit had not been filed by the Head of Department, who had formed the opinion for claiming privilege, a supplementary affidavit of DGIT(Investigation) UP & Uttrakhand at Lucknow had been filed, reiterating the averments in the affidavit of DDIT(I) NOIDA on which the privilege had been claimed.

Before the court, the Revenue’s counsel, on the basis of SC judgments, had submitted that the disclosure of information, on the basis of which satisfaction note was prepared, would be against larger public interest as the method of collection of information by the Financial Intelligence Unit (FIU), MOF, Govt. of India, which was a Central National Agency for receiving, processing, analyzing and disseminating information relating to suspected financial transactions, and it was also responsible for coordinating and strengthening the efforts of national and international agencies, investigation in pursuing the global efforts against money laundering, terrorist financing and related crimes, would jeopardize the public interest. It was submitted that large amount of cash was deposited in the bank account of the petitioner company and its sister concern M/s Kanak Exports on regular basis. The Financial Intelligence Unit-IND acts as the central reception point for receiving Cash Transaction Reports (CTRs) and Suspicious Transaction Reports (STRs) from various reporting entries. The disclosure of the information received from the FIU were unpublished records, and the same could not be disclosed to any individual including the petitioner and his counsel inasmuch as it was against the public interest. It was further submitted that the department had least objection in showing the satisfaction note to the HC, rather it had already been produced before the Court in a sealed envelop and can be produced again, if so desired.

On the other hand, the assessee’s counsel had submitted that the information was relevant to the petitioner on which the search and seizure operations were carried out. The confidentiality of information was not a ground on which the privilege can be claimed under Sections 123 and 124 of the Evidence Act. It was submitted that block assessments had been made after the search operations in which only a small addition were made and in respect of which an appeal was pending. The petitioners may not be concerned with the source and method of collecting the information but they had a right to examine the satisfaction note to assail the validity and bonafides of the search and seizure operations. It was submitted that the company had been preparing accounts regularly and had been subjected to income tax assessments. The department, with an object to unearth undisclosed income or the income which may have escaped assessment, cannot resort to a harsh and punitive action like search and seizure on the basis of information, which was not relevant. It was further submitted that the disclosure of satisfaction note will demonstrate that the entire action was malafide and that the petitioner was not the target of either collecting the information or the result arising therefrom.

Held that,

++ the grounds, on which the privilege has been claimed under Sections 123 and 124 of the Evidence Act, are relevant for the purpose and object of claiming privilege. It is in public interest not to disclose the satisfaction note to the petitioner. The privilege may not only be claimed for the information collected, gathered or processed but may also be claimed for the method and manner of collecting such information, the disclosure of which will be against the public interest. It cannot be denied that the FIU, a Central National Agency reporting directly to the FM, is responsible for receiving, processing, analyzing and disseminating information related to suspected financial transactions. It is also responsible for coordinating and strengthening the efforts of national and international agencies, investigation in pursuance to global efforts against money laundering, terrorist financing and related crimes. The source, method and manner in collecting the information may be relevant for the security of organisation and the personnel involved and the methods adopted by them for collecting and processing the information. The preparation of the satisfaction note on such information could thus be treated as unpublished documents for which the Head of the Department namely the Director General of Income Tax (Investigation), UP and Uttrakhand has validly claimed privilege under Sections 123 and 124 of the Evidence Act. We do not find that claim of privilege is not for bonafide purpose;

++ the balance sheet of the M.D. Overseas Ltd for financial affairs of the Company dealing in import of bullion including gold and platinum bars discloses Short Term loans from banks of Rs.1066,185,849.00 from overseas branch of Indian Bank, as buyers credit facilities. The entire bullion imported is sold by petitioner Company in cash. With an issued subscribed and paid up capital of Rs.9,66,200/- only and the net profit of only Rs. 13 crores. The information of large amount of cash transactions in foreign bank may have generally raised doubts in bonafide manner on the nature of transactions. A large amount of accounted black money is floating in the market which poses a serious threat to the national economy. The Government of India has adopted several methods to discouraging the parallel economy being run by unscrupulous persons. The Financial Intelligence Unit (FIU), Ministry of Finance, Government of India is engaged in collecting such information against the money laundering, terrorist financing and related crimes. The sources and methods of the organisation collecting and processing such sensitive information cannot be subjected to public scrutiny to jeopardize the interest of the organisation and national interest. For the aforesaid reasons, relying upon well-established principles of claiming privilege under Sections 123 and 124 of the Evidence Act in the judgments cited as above, we allow the application filed by the Income Tax department;

++ we do not find that anything more requires to be decided in these writ petitions. All other points have been decided and that the complaint of the petitioner that some other points were argued, which were not considered, has also been negatived by the bench presided by one of the Judges, who had passed the order dated 4.2.2011. The review application on such ground was rejected on 31.7.2013.