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Legality of Income Tax Department's Claim to Currency Notes Seized by Police

The crux of the issue lies in determining the rightful custodian of currency seized by the police from individuals during investigations. The question arises whether the Income Tax Department can claim custody of this seized currency for the purpose of verification and assessment of potential tax liabilities. This matter, due to conflicting precedents established in the cases of Union of India v. State of Kerala and Another (2022) 443 ITR 117 and R. Ravirajan and Others v. State of Kerala (2023 SCC Online Ker. 8444), was referred to a Division Bench of the Kerala High Court for a definitive and binding ruling to resolve the ambiguity and establish a clear legal framework.

Code of Criminal Procedure, 1973 (CrPC):

The Code of Criminal Procedure, 1973 (CrPC), specifically Sections 451 and 457, address the temporary custody of property during legal proceedings. Section 451 grants Magistrates the authority to issue directives concerning the safekeeping and management of property while a trial is underway. This includes making decisions about its location, who is responsible for it, and how it should be handled. Meanwhile, Section 457 empowers Magistrates to determine the rightful claimant for the temporary possession of property seized by law enforcement. This process ensures that the property is held securely and appropriately managed until the final determination of ownership or disposition during the trial.

Income Tax Act, 1960:

Section 132A of the Income Tax Act, 1960, grants the Income Tax Department the authority to seize assets in specific circumstances to facilitate the assessment and collection of taxes. This provision empowers the department to compel taxpayers to provide access to their assets, such as properties, bank accounts, and financial records, for the purpose of verifying income and calculating tax liability. This requisition of assets serves to ensure that individuals and businesses comply with their tax obligations and provide accurate information to the department, ultimately contributing to the efficient administration of the tax system.

Conflicting Judicial Views:
  1. In the landmark case of Union of India v. State of Kerala and Another (2022) 443 ITR 117, the court ruled that the Magistrate must release seized currency notes to the Income Tax Department. This release allows the department to conduct essential procedures under Sections 132A, 132B, or 153A of the Income Tax Act, 1960. These sections empower the department to investigate the source and nature of the currency, determine if it is taxable income, and initiate appropriate legal action if necessary. By mandating the release of seized funds to the Income Tax Department, the court ensures that the department can effectively combat tax evasion and promote compliance with tax laws.
  2. Conversely, the Kerala High Court in R. Ravirajan and Others v. State of Kerala (2023 SCC Online Ker. 8444) ruled that Section 132A of the Income Tax Act does not grant the Income Tax Department the authority to make a requisition for currency notes from the Magistrate under Section 451 of the Criminal Procedure Code (CrPC). The court clarified that the revenue department could only seek custody of currency notes to satisfy the tax dues of an assessee. This decision emphasizes the limitations of the department's powers in requisitioning currency notes and ensures that the department's actions remain within the scope of its statutory authority.

Legal Analysis:
  • Jurisdiction and Authority of the Magistrate:
    • Under Sections 451 and 457 of the CrPC, the Magistrate's primary responsibility is to safeguard the property in question and designate an interim custodian. This process does not involve settling ownership disputes; rather, the Magistrate's role is to determine the most appropriate temporary guardian for the property until the rightful owner can be definitively established.
  • Income Tax Department's Claim:
    • While the Income Tax Department's requisition under Section 132A is intended for tax assessment and recovery, it must be carefully balanced with the provisions of the Criminal Procedure Code regarding interim custody to ensure that the legal rights of individuals are not violated.
  • Conflicting Judicial Interpretations:
    • The divergent interpretations of the Income Tax Act and the CrPC by the coordinate Benches reveal the challenge in harmonizing the two. While the decision in Union of India v. State of Kerala emphasizes the tax authority's need for currency during assessment, the ruling in R. Ravirajan and Others highlights the limitations of the Income Tax Department's requisition powers under Section 132A, creating a legal ambiguity in this area.
The conflicting decisions surrounding the interim custody of seized currency warrant referral to the Division Bench for a comprehensive and authoritative resolution. This referral is crucial to ensure a consistent and just application of the law.

The Division Bench should carefully consider the dual objectives at play: facilitating tax assessments while safeguarding the rights of individuals whose currency has been seized. This involves analysing the primary purpose of interim custody provisions under the CrPC and the specific powers granted to the Income Tax Department under Section 132A of the Income Tax Act.

The Division Bench's verdict will provide a much-needed clarification of the legal framework, ensuring uniformity in the application of the law. Until such a pronouncement is made, Magistrates are advised to carefully assess each case's individual circumstances, balancing the need to preserve the property with the requisition needs of the Income Tax Department. This approach will help ensure a just and fair administration of justice.

Written By: Md.Imran Wahab, IPS, IGP, Provisioning, West Bengal
Email: [email protected], Ph no: 9836576565

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