Indirect TaxationInterplay of Right to Privacy and Search and Seizure under Indirect Tax Laws

INTRODUCTION

The recognition of Right to Privacy as a fundamental right protected by the Constitution of India was a watershed moment in the Indian legal history, with bearings on every aspect of law. With its contours still undefined, Right to Privacy has opened a Pandora’s Box, making it possible to challenge any and every State action on the touchstone of violation of privacy.

Hereunder, we seek to analyse the interplay between the ‘Right to Privacy’ and the ‘Search and Seizure’ provisions under indirect tax laws in force in India. Herein below we have also made an attempt to determine if, and the extent to which, Right to Privacy, as it presently stands, yields to powers of Tax Authorities to conduct search and seizures.

OVERVIEW OF SEARCH AND SEIZURE PROVISIONS UNDER INDIRECT TAX LAWS

The main indirect taxes in operation in India are goods and services tax (GST), central excise duty, and customs duty. The statutes dealing with these taxes empower officials and authorities under them to carry out search and seizure.

Under the Central Goods and Services Act, 2017 (CGST Act), Section 67(2) empowers an Officer not below the rank of a Joint Commissioner to carry out search proceeding, if he/she has a reason to believe as a result of an inspection carried out under Section 67(1) or otherwise, that any goods liable to be confiscated or any documents or books relevant for proceedings under the CGST Act are secreted at any space, to conduct search and seize such relevant materials and goods.

The Officer is also empowered to authorise any other officer of central tax to conduct such search and seizure in writing in Form GST INS-01 for search, and GST INS-02 for seizure.

The Customs Act, 1962 (Customs Act) deals with search and seizure under its Chapter XIII, entitled ‘Searches, seizure and arrest’. Section 105 of the Customs Act is similar to Section 67(2) of the CGST Act, with the only material difference being that in the authority empowered to authorise or conduct the search and seizure.

Under the Customs Act, the empowered authority is the Assistant Commissioner of Customs or Deputy Commissioner of Customs or an Officer of Customs especially empowered in this regard.

Section 12F of the Central Excise Act, 1944 (Excise Act) empowers the Joint Commissioner of Central Excise or Additional Commissioner of Central Excise or any other Officer of Central Excise specifically empowered in this regard, to carry out search and seizure. The rest of the provision is materially similar to the aforementioned sections of the CGST Act and the Customs Act.

The common threads that run between these provisions under the three distinct statutes are that:

1. The provisions permit search and seizure only when the relevant empowered authority has reasons to believe that the goods, documents, books, etc. for which the search and seizure is to be done, is relevant to the proceeding under the statute and are secreted at a place.
2. The provisions make applicable Section 165 of the Code of Criminal Procedure, 1973 (CrPC) to search and seizure carried out under the statute, with the sole modification that ‘Magistrate’ under Section 165 of CrPC is substituted for the Relevant Authority under the concerned statute.

These two common threads act as internal safeguards to ensure that the tax authorities do not conduct search and seizure at their whims or go overboard while exercising their powers of search and seizure.

‘Reason to believe’ does not have any statutory definition under tax laws, but has been defined under Section 26 of the Indian Penal Code (IPC) and interpreted by the Courts in a series of precedents. It has been defined, under IPC, as “A person is said to have “reason to believe” a thing, if he has sufficient cause to believe that thing but not otherwise.” Such ‘belief’ should be honest and reasonable.

In ITO v. Lakhmani Mewal Das [AIR 1976 SC 1753], the Supreme Court, while interpreting ‘reason to believe’ under Section 147 of the Income Tax Act, 1961 (IT Act), observed as under:

“…the reasons for the formation of the belief must have a rational connection with or relevant bearing on the formation of the belief. Rational connection postulates that there must be a direct nexus or live link between the material coming to the notice… and the formation of… belief… The reason for the formation of the belief must be held in good faith and should not be a mere pretence.” [Emphasis supplied]

Further, while interpreting the term ‘secreted’ as under Section 105 of the Customs Act, in Gian Chand v. State of Punjab [1983 (13) ELT 1365 (SC)], the Supreme Court observed that ‘secreted’ does not necessarily imply ‘hidden’ or ‘concealed’, stating, it means:

“…not kept in the ‘normal or usual place’ or it may even mean… ‘likely to be secreted’; in other words documents or things which a person is likely to keep out of the way or put in a place where the officer of the law cannot find it.” [Emphasis supplied]

Additionally, Section 165 of the CrPC provides the basic procedure for conducting a search, and acts as a procedural safeguard in this regard, ensuring procedural due process.

VIOLATION OF PRIVACY THROUGH SEARCH AND SEIZURE

Even though, as previously discussed, there are internal safeguards in the statutory provisions for search and seizure under various indirect tax laws, the heavy-handed practices in search and seizure carried out by tax authorities remain commonplace.

Courts, too, have taken note of the same and looked down upon them. Recently, in M/S Bhumi Associate v. Union of India [SCA No. 3196, 2426, 2515 and 2618 of 2021], a division bench of the Gujarat High Court, in its order dated 18.02.2021, while dealing with complaints against tax authorities for undue harassment, coercion, physical violence and torture, observed that the tax authorities and officers “…should act and perform their duties within the four corners of law… It is open for the officers to conduct the search proceedings under Section 67 (of the CGST Act), but, strictly in accordance with law.”

It is settled that search and seizure powers under indirect tax laws have to be exercised within the bounds of law, however, with respect to Right to Privacy, the bounds itself are not well-defined.

In Justice K.S. Puttaswamy (Retd.) and Anr. v. Union of India and Ors. [(2017) 10 SCC 1], the 9-judge bench of the Supreme Court recognised Right to Privacy as an extension of the fundamental rights under Article 19 and Article 21 of the Constitution of India, and advised the Government to make a legal framework for data privacy.

Instead, every action alleged to be a violation of Right to Privacy would be judged upon the anvil of the three-fold test of legality, necessity and proportionality. The practical implication of this with respect to search and seizure under indirect tax laws is that in the absence of any clear guidelines, precedents or laws regarding the legally permissible extent of infraction upon the Right to Privacy in the course of search and seizure, the acts and conduct of the tax authorities alleged to be violative of Right to Privacy will be put to the three-fold test.

The major impediment in Right to Privacy finding its ground amidst search and seizure is the fact that evidence that has been obtained through illegal means and improper procedure is admissible in the Indian Courts, if the Courts find the same relevant.

There is a line of judicial precedents that bar the application of the ‘Fruit of the Poisonous Tree’ doctrine in India, usually citing the absence of an express provision in this regard in the Indian Evidence Act, 1872 and the Constitution of India.

In case when Right to Privacy is to be protected in search and seizure, it will effectively be a futile exercise as the evidence obtained in a search which violates the Right to Privacy, will still be admissible in the Courts.

That being said, there is a very less number of judicial precedents that exclude admissibility of illegally obtained evidence, particularly in situations where admissibility of such evidence would be unconstitutional.

In Selvi v. State of Karnataka [(2010) 7 SCC 263], the Supreme Court noted that reliance on involuntary statements by way of polygraph tests and narco-analysis was likely to push investigators to compel such statements through coercion, threats, inducement or deception, which would be against the constitutional right against self-incrimination.

A parallel may be drawn here insofar as now since the Right to Privacy has been recognised as a fundamental right and any violation of it is likely to be seen with stricter scrutiny as compared to other legal rights.

 Hence, it may be argued that evidence obtained through search and seizures carried out in a manner which is violative of the Right to Privacy might not be admissible in the Court of law.

KEY JUDICIAL PRECEDENTS

Any discussion regarding the Right to Privacy and its effect on investigative powers of Government Authorities in general, and the search and seizure powers of Indirect Tax Authorities in specific, is incomplete without mentioning the evolution of judicial precedents in this regard.

In M.P. Sharma v. Satish Chandra [1954 SCR 1077] (the M.P. Sharma judgment), the Supreme Court, while adjudicating whether seizure of incriminatory documents by the Government Authorities amounted to a violation of the fundamental right against self-incrimination, observed that:

“A power of search and seizure is in any system of jurisprudence an overriding power of the State for the protection of social security and that power is necessarily regulated by law. When the Constitution makers have thought fit not to subject such regulation to constitutional limitations by recognition of a fundamental right to privacy… we have no justification to import it...”.

Before the recognition of the Right to Privacy, this judgment served as the leading authority to deny Right to Privacy with respect to searches and seizures.

In Shri Ramkishan Srikishan Jhever v. Commissioner of Commerical Taxes [1965 16 STC 708 Mad], a division bench of the Madras High Court, while determining the validity of search and seizure under the Madras Sales Tax Act, 1959 without a warrant, observed that when there is a clash between fundamental rights of a citizen and the interests of the State

“…to what extent the fundamental right should yield to State necessity or public interest or to what extent the law should prevail over it is a question of nicety and difficulty which had to be resolved having regard to several factors…” because ultimately “…law enforcement depends on legally sanctioned interference with individual rights.”

In this judgment, the Right to Privacy was contended as one of the grounds for invalidating search and seizure without warrant, however, the Madras High Court rejected the same, in light of the M.P. Sharma judgment and other precedents along similar lines.

The Puttaswamy judgment unequivocally strikes down the decision in the case of M.P. Sharma, so far as the latter held that the Right to Privacy was not protected under the Constitution of India.

Recognition of the Right to Privacy as a fundamental right provides a significant constitutional impediment for the State to contend that its powers of search and seizure override on the previously unrecognised Right to Privacy, and can only be regulated through statutes citing the M.P. Sharma judgment.

The Puttaswamy judgment also specifically talks about informational and intellectual privacy, and that the Constitution allows us to “…be secure in (our) persons, houses, papers and effects…”, totalling to a very strong notion of privacy.

If the Right to Privacy is, in effect, protected and implemented in the way as postulated under the Puttaswamy judgment, contraventions to it by way of violative search and seizures is ultra-vires the Constitution.

AMLEGALS Remarks

The foregoing makes it clear that the statutory provisions on search and seizure under the indirect tax laws contain internal safeguards which try to protect individual rights and liberties from unwarranted State action.

However, these have time and again proven to be ineffective in practicality. The Right to Privacy can certainly be used an additional safeguard against illegal searches and seizures to bolster the interests of individuals over interests of the State when exercised in a manner not stipulated by law.

But recognition of the Right to Privacy with respect to searches and seizures is not likely to bear results if evidence obtained through illegal searches and seizures are continued to be admitted in the Courts of law.

While the Right to Privacy cannot be regarded as an absolute right which overrides all else, it must not be watered down to something which does not have any practical implications.

-Team AMLEGALS, assisted by Ms. Gazal Sancheti (Intern)

For any queries or feedback, please feel free to get in touch with chaitali.sadayet@amlegals.com or aditi.tiwari@amlegals.com.