P.N.BHAGWATI, J. - (1.) THESE petitions raise a question as to the constitutional validity of sub -sections (1) (c) (iii) and (5) of section 132 of the Income -tax Act, 1961. To determine this question it is not necessary to refer to any facts and, therefore, we would have ordinarily refrained from reciting the facts giving rise to these petitions but there is also a subsidiary point raised by the petitioners and that calls for a statement of the facts. The facts of both the petitions are identical and we may, therefore, conveniently narrate the facts with reference to the first petition, namely, Special Civil Application No. 163 of 1970. One Amirbhai Alibhai was the owner of a shop situate in an important business locality in Ahmedabad. The petitioner, according to his case as set out in the petition, was carrying on business in gold and silver coated cotton threads as a licensee in this shop. On 22nd August, 1968, the officers of the Central Excise Department raided this shop and, as a result of the search made by them, seized primary gold weighing 40 grammes, one gold bar bearing foreign marks and weighting 10 tolas which was lying beneath a brick under the floor, two British guineas contained in an envelope kept under charcoal. 76 grammes of gold ornaments, Rs. 15,280 in currency notes from the counter of the shop and currency notes of Rs. 3,480 lying in a handkerchief near the table. One Krishnala Meghraj who is the petitioner in the other petition was present in the shop at the time and on making search of his person, currency notes of Rs. 15,597 were found from him and they were also seized by the Central Excise Officers. Amirbhai Alibhai, the owner of the shop, was not available at the time of the search but on his return his statement was recorded by the Superintendent, Central Excise. His disowned ownership as well as possession of the gold, jewellery and currency notes seized by the Central Excise, Officers but admitted that some profit was being given to him in gold and silver business by the petitioner and Krishnalal Meghraj. The petitioner also gave a statement and in this statement he admitted that gold ornaments which were seized were received by him in the course of his money -lending business but denied that the primary gold and the gold bar belonged to him. So far as the sum of Rs. 16,280 seized from the shop was concerned the petitioner claimed to be the owner of the same and stated that currency notes of Rs. 12,000 forming part of this sum had been given to him by his sister Ram Laxmi, for purchase of silver. Krishnalal Meghraj in his statement claimed that out of the money seized for him, currency notes of Rs. 15,000 had been given to him by Navnitlal, the brother of one Ambalal Namdar, for being kept with him. The petitioner by his subsequent letters dated 5th September, 1968, and 17th October, 1968, declared that out of the sum of Rs. 15,280 seized from the counter of the shop, currency notes of Rs. 12,000 had been given to him by his sister, Ram Laxmi, while the remaining currency notes of Rs. 3,280 were his personal moneys. So far as the currency notes of Rs. 3,480 lying in the handkerchief near the table were concerned, the petitioner explained that they belonged to one Babulal Gandhi who had given the them to Krishnalal Meghraj for being handed over to the petitioner for redeeming his ornaments which were lying mortgaged with Bhailal Dahyalal and Company. The statements of Ram Laxmi and Babulal Gandhi were then recorded by the Central Excise Officers. After the preliminary inquiry was over, a show cause notice dated 20th February, 1969, was issued by the Deputy Collector of Central Excise calling upon the petitioner, Krishnalal Meghraj and Amirbhai Alibhai to show cause why the gold bar and two British Guineas and currency notes aggregating to Rs. 34,358 should not be confiscated and penalty should not be imposed for contravention of the relevant provisions of the Customs Act, 1962, and the Foreign Exchange Regulation Act, 1947. All three of them filed written statements and contested the show cause notice and after hearing them the Deputy Collector passed an order dated 20th December, 1969, holding that the gold bar bearing foreign marks was found from the premises of Amirbhai Alibhai and must, therefore, be held to be in his possession and directed that the same be confiscated and a penalty of Rs. 1,000 imposed on Amirbhai Alibhai. So far as the currency notes were concerned, the Deputy Collector held that there was no conclusive evidence on record to show that the amount of the currency notes represented sales proceeds of smuggled gold or smuggled gold or that the petitioner and Krishnalal Meghraj were in league with Amirbhai Alibhai in dealing in smuggled gold and he accordingly gave the benefit of doubt to the petitioner and Krishnalal Meghraj and ordered release of the currency notes to the owners. Pursuant to this order, the Assistant Collector of Central Excise addressed a letter asking the petitioner, Krishnalal Meghraj and Amirbhai Alibhai to attend his office on 5th January, 1970, for taking delivery of the currency notes which were ordered to be released. This instruction was, however, countermanded by the Assistant Collector by a subsequent letter dated 2nd January, 1970. This countermanding presumably took place because in the meantime information about the seized currency notes was given by the Central Excise authorities to the Commissioner of Income -tax and at the request of the Commissioner of Income -tax, the record of the inquiry held by the Central Excise authorities was made available to him and he was examining the question whether any action was called for in the matter from his end. Ultimately, the commissioner of Income -tax, after perusing the record of the inquiry papers, came to the conclusion that, in the circumstances, there was reason to believe that the seized currency notes lying with the Central Excise authorities represented undisclosed income of one or more of the three persons, namely, the petitioner, Krishnalal Meghraj and Amirbhai Alibhai. He, therefore, proceeded to take action under section 132(1)(c)(iii) and after recording his reasons as required by rule 112A, he issued three authorisations on 3rd January, 1970, authorizing respondents Nos. 1 -B and 1 -C to search the office of the Assistant Collector of Central Excise and seize therefrom any books of account, documents, money, bullion, jewellery or other valuable article or thing belonging to the petitioner, Krishnalal Meghraj and Amirbhai Alibhai which may be found as a result of the search and take possession of the same. Pursuant to these authorisations, respondents Nos. 1 -B and 1 -C search the officer of the Assistant Collector of Central Excise and seized, inter alia, three packets containing currency notes of Rs. 15,597, Rs. 15,281 and Rs. 3,480 aggregating to Rs. 34,358 on 9th January, 1970. The first respondent who is the Income -tax Officer having jurisdiction to assess the petitioner thereafter issued a notice dated 5th January, 1970, to the petitioner under section 132(5) read with rule 112A stating that, in the course of search under section 132(1), currency notes of Rs. 34,358 were seized from the possession of the petitioner on 5th January, 1970, and calling upon the petitioner to attend his office on 2nd February, 1970, to explain or to produce or cause to be produced evidence on which the petitioner might rely for explaining the nature of the possession and the source of acquisition of these assets. The petitioner thereupon filed Special Civil Application No. 163 of 1970 challenging the legality of the seizure and the validity of the show cause notice on various grounds to which we shall presently refer. Since this notice proceeded on the basis that the entire amount of Rs. 34,358 was seized from the possession of the petitioner and belonged to him, Krishnalal Meghraj who claimed to be the owner of a part of his amount, namely, Rs. 15,598, also in his turn filed Special Civil Application No. 164 of 1970, challenging the validity of the seizure and of the show cause notice on the same grounds on which the petition in Special Civil Application No. 163 of 1970 was founded.
(2.) THE main ground on which the legality of the seizure and the validity of the show cause notice was challenged on behalf of the petitioners was that sub -sections (1) (c) (iii) and (5) of section 132 are violative of articles 14 and 19(1)(f) of the Constitution and are accordingly null and void and no action can be taken under those provisions. This ground was divided under several heads and each head was pressed as a separate and independent argument : (A) Sub -sections (1) (c) (iii) and (5) of section 132 are violative of articles 19(1)(f) of the Constitution since the restrictions they impose on the right of a citizen to hold and enjoy property are unreasonable in the following respects : (i) These provisions are directed against all who are in possession of undisclosed income irrespective of whether they are responsible for evading tax on such income or are in possession of it with knowledge that it represents concealed income. (ii) The power conferred under these provisions is not confined to concealed income which has escaped tax but also extends to income which has not been factually disclosed by reason of not being eligible to tax. (iii) The time limited by section 132, sub -section (5), for making an order under that sub -section is too short to permit a proper and satisfactory inquiry to be made for the purpose of clauses (i) and (ii) and the estimate of undisclosed income and the calculation of tax on it which constitute the justification for retention of undisclosed income or property would, therefore, be based on perfunctory and insufficient inquiry and the citizen would be kept out of his property on the basis of such tax calculation. (iv) There is no time limit provided in the section within which regular assessment or reassessment must be completed after the making of an order under section 132, sub -section (5), with the result that the property of a citizen may be retained with the revenue for an unduly long period which may, in cases falling with section 147, clause (a), extend to twelve years or even twenty years according as the income which has escaped tax is less than Rs. 50,000 or more and such retention would take place on a mere 'reason to believe' and an estimate of undisclosed income on a summary inquiry. (v) There is no provision for an appeal to a quasi -judicial authority against an order under section 132, sub -section (5), the only remedy provided is an application to an administrative authority. (vi) The section does not contain any machinery for investigation of claims which may be made by a third party to the ownership of the assets seized with the result that his assets will remain detained by the revenue until he gets his claim adjudicated by filing a civil suit in an appropriate court of law. (vii) Even after regular assessment or reassessment is made and it is found that the assets seized were in excess of the true liability, the balance is not returned only with interest from the expiration of six months from the date of the order under section 132, sub -section (5), the citizen is thus deprived of the use of the balance of the assets which were seized in excess of the requirement, without payment of interest for a period of nine months. (B) The power conferred under section 132, sub -sections (1) (c) (iii) and (5), is unfettered and uncanalised; there is nothing to guide or control the exercise of the power; the sub -sections, therefore, render possible arbitrary and unreasonable exercise of power and leave it open to the officers to discriminate unjustly between one possessor of undisclosed income or property and another and they are accordingly violative of articles 14 and 19(1)(g). (C) Section 132, sub -sections (1) (c) (iii) and (5), are violative of article 14 of the Constitution also on the ground that : (i) they make unjust discrimination between evaders of tax who are in possession of undisclosed income or property and evaders of tax who are not in such possession; (ii) they deal with the same class of evaders of tax who are within the ambit of section 147 and impose the drastic procedure on some out of them leaving the rest to be governed by the less onerous provisions of section 147 and thus discriminate between evaders of tax falling within the same class. The petitioners also urged in the alternative that even if the challenge to the validity of section 132, sub -sections (1) (c) (iii) and (5), was not sustainable and these sub -sections were valid, the search and seizure effected by respondents Nos. 1 -A and 1 -B pursuant to the authorisations issued by the Commissioner of Income -tax were illegal and invalid inasmuch as there were no grounds before the Commissioner of Income -tax on the basis of which he could have reason to believe that the petitioner was in possession of undisclosed income or property and the authorisations issued by the Commissioner of Income -tax were in colourable exercise of power under section 132(1). We shall now proceed to examine these grounds in the order in which we have set them out above. Let us first analyse the provisions of sections 132 and 132A, for a proper understanding of these provisions would furnish an answer to may of the arguments advanced on behalf of the petitioners. It would also be convenient while examining these provisions to deal with some of the arguments advanced on behalf of the parties in relation to the construction of these provisions. Sub -section (1) (c) (iii) of section 132 provides, inter alia, that where the Director of Inspection or the Commissioner, in consequence of information in his possession, has reason to believe that any person is in possession of money, bullion, jewellery or other valuable article or thing representing either wholly or partly income or property which though required to be disclosed has not been disclosed for the purpose of the Income -tax Act, he may authorise any Deputy Director of Inspection, Inspecting Assistant Commissioner, Assistant Director of Inspection or Income -tax Officer to enter and search any building or place and seize any money, bullion, jewellery or other valuable article or thing found as a result of such search. It is apparent that search and seizure can be effected by an officer under sub -sections (1) (c) (iii) only if he is authorised to do so by the Director of Inspection or the Commissioner, and the Director of Inspection or the Commissioner can authorise search and seizure only if he has in consequence of information in his possession reason to believe that any person is in possession of money, bullion, jewellery or other valuable article or thing which represents undisclosed income or property. The condition precedent to the exercise of the power to issue authorization for search and seizure is that the Director of Inspection or the Commissioner must have the requisite reason to believe in consequence of information in his possession. The power to authorize search and seizure is hedged in by the requirements of this conditions precedent and it is only if this condition is fulfilled that the power can be exercised. Of course, it is for the Director of Inspection or the Commissioner to be satisfied that there is reason to believe and the court cannot sit in appeal over the decision of the Director of Inspection or the Commissioner regarding the existence of the reason to believe nor can the court examine the adequacy of the grounds on which the reason to believe entertained by such officer is based. But there is a limited area within which the reason to believe entertained by the Director of Inspection or the Commissioner, can be scrutinised by the court. This area now stands clearly demarcated by several decisions of the Supreme Court and its extent and limit are no longer open to doubt or controversy. The Supreme Court, while dealing with the same expression as used in section 34 of the old Income -tax Act, pointed out in S. Narayanappa v. Commissioner of Income -tax : 'Again the expression 'reason to believe' in section 34 of the Income -tax Act does not mean a purely subjective satisfaction on the part of the Income -tax Officer. The belief must be held in good faith : it cannot be merely a pretence. To put it differently it is open to the court to examine the question whether the reasons for the belief have a rational connection or a relevant bearing to the formation of the belief and are not extraneous or irrelevant to the purpose of the section. To this limited extent, the action of the Income -tax Officer in starting proceeding under section 34 of the Act is open to challenge in a court of law'.
(3.) HIDAYATULLAH J., as then was, also said much to the same effect in Barium Chemicals Ltd. v. Company Law Board. 'No doubt the formation of opinion is subjective but the existence of circumstances relevant to the inference as the sine qua non for action must be demonstrable. If the action is questioned on the ground that no circumstances leading to an inference of the kind contemplated by the section exist, the action might be exposed to interference unless the existence of the circumstances is made out..... Since the existence of 'circumstances' is a conditions fundamental to the making of an opinion, the existence of the circumstances, if questioned, has to be proved at least prima facie. It is not sufficient to assert that the circumstances exist and give no clue to what they are, because the circumstances must be such as to lead to conclusions of certain definiteness.' ;