MOHAMMED SALIH VS. ASSISTANT COMMISSIONER OF INCOME TAX

Author: Samparna Mishra, Xavier Law School, XIM University

BENCH: Mr. Justice Sathish Ninan, Mrs. Justice Shoba Annamma Eapen

CITATION: W.A Nos. 1413, 1435 of 2024

DATE: 27-01-2025

PARTIES:

For Petitioner: Mohammed Salih, Shabeer Ali, Manager, Canara Bank, Sub treasury Officer, State of Kerala.

For Respondent: Assistant Commissioner of Income Tax, Principal Commissioner of Income Tax, Income tax department.

LAWS AND RULES INVOLVED:

Income Tax Act 1961

Code of Civil Procedure 1908 CPC

Code of Criminal Procedure 1973 Cr.P.C

Bharatiya Nagarik Suraksha Sanhita, 2023 (New Criminal Law Code replacing Cr.P.C.)

Background of the Case

The Case of the Seized Cash: A Legal Battle Unfolds

It was the afternoon of April 12, 2022, when the Kerala police, during a routine check, intercepted a car traveling through Kozhikode. What seemed like a regular stop turned into a high-stakes legal battle when officers discovered a staggering ₹1.56 crores in cash inside the vehicle. The two occupants of the car, Mohammed Salih and Shabeer Ali, were unable to provide a satisfactory explanation for the source of the money. Given the unusual circumstances, the police seized the cash and presented it before the Judicial First Class Magistrate's Court.

As the investigation unfolded, the Income Tax Department took a keen interest in the case. Suspecting that the money was unaccounted for and possibly linked to tax evasion, the Department swiftly moved under Section 132A of the Income Tax Act that allows them to claim custody of such assets. The Magistrate’s Court granted their request, and the cash was handed over to the Department for further inquiry.

However, Salih and Ali were not ready to back down. Arguing that the money was legally theirs, they approached the Kerala High Court, filing Criminal Miscellaneous Cases (Crl.M.C. Nos. 5605/2022 and 5591/2022). After months of legal proceedings, the High Court on December 21, 2023, ordered the release of the money back to them—provided they furnished a bond as security. This decision came as a major setback to the Income Tax Department, which had been hoping to retain control of the funds until a proper assessment was made.

Undeterred, the Department intensified its investigation. After examining financial records and statements, they found no proper accounting for the seized cash. Convinced that income chargeable to tax had escaped assessment, the authorities issued a notice under Section 148 of the Income Tax Act, signalling the start of a formal inquiry into possible tax evasion.

As the investigation deepened, the Department estimated that the potential tax demand, along with penalties, would exceed ₹2 crores. Fearing that the individuals in question might move their money out of reach to avoid payment, the authorities decided to take pre-emptive action. In a bold move, they issued provisional attachment orders (Exts.P7 and P8) under Section 281B of the Act, freezing the bank accounts of Salih, Ali, and others linked to the case.

This action sparked another legal battle. Outraged by the attachment, the respondents took the matter back to the High Court, filing a writ petition (WP(C) No. 9607 of 2024). The Single Judge of the Kerala High Court, ruling in their favor on August 13, 2024, quashed the attachment orders.

This was yet another blow to the tax authorities. But they were not willing to give up. Determined to uphold their stance, they filed Writ Appeals (WA Nos. 1413 and 1435 of 2024), challenging the Single Judge’s ruling. The case reached a crucial turning point on January 27, 2025, when a Division Bench of the Kerala High Court heard the matter.

With this ruling, the Income Tax Department secured a major victory. The respondents, however, have not given up the fight—they have already filed an appeal against the tax assessment, and the legal battle is far from over.

Contentions

The key legal contentions can be categorized into arguments made by the Income Tax Department (Appellants) and the Respondents (Assesses).

Contentions of Income Tax Department (Appellant)

The Income Tax Department justified the provisional attachment of bank accounts and opposed the quashing of the attachment orders by the Single Judge.

(A) Bank Accounts Are "Property" Under Section 281B

The Department argued that money in a bank account qualifies as "property" under Section 281B of the Income Tax Act and is therefore subject to attachment. Section 281B (1) permits the attachment of "any property" of the assessee. The use of the term "any property" suggests an expansive definition, which can include both movable and immovable assets. The Kerala High Court’s interpretation of Section 60 of the Code of Civil Procedure (CPC) supports this view, as it explicitly states that money is attachable property unless otherwise exempted. Therefore, bank deposits should be treated as attachable property under Section 281B.

(B) Security Before Magistrate’s Court Is Not Sufficient to Protect Revenue’s Interest

The Department contended that the bond furnished before the Judicial Magistrate’s Court (as security for the seized cash) did not secure the revenue’s interests for tax assessment purposes. As Section 451 of the Code of Criminal Procedure (Cr.P.C.) allows interim custody of property but does not provide a guarantee for tax liabilities and The primary purpose of security before the Magistrate was only to ensure production of money in the criminal proceedings it was not intended to cover tax liabilities. The Department cited Section 226(4) of the Income Tax Act, which allows tax authorities to claim money in judicial custody for tax recovery, but only after assessment.

The Department maintained that they had a reasonable apprehension that the respondents would evade tax payments once assessed. Section 281B permits provisional attachment when there is a likelihood of tax evasion. The expected tax liability exceeded ₹2 crores, necessitating urgent action to prevent the respondents from transferring funds. Given that the source of the ₹1.56 crores remained unexplained, the Department had adequate material to form an opinion under Section 281B.

2. Contentions of Respondent (Assesses)

The respondent’s primary contentions were:

(A) Bank Accounts Cannot Be Attached Under Section 281B

The respondents argued that a bank account does not constitute "property" under Section 281B. The term "property" in Section 281B must be interpreted narrowly, considering the context of the Income Tax Act. Sub-sections (3) and (4) of Section 281B discuss property valuation and the option to furnish a bank guarantee, which suggests that the law primarily envisions attachment of immovable property.

(B) Magistrate’s Court Security Was Sufficient

Since they had already furnished security before the Magistrate’s Court, the Income Tax Department had no reason to attach their bank accounts. The High Court’s Criminal Miscellaneous Order dated December 21, 2023, which directed the release of cash upon furnishing a bond, ensured that the money would be available if needed. Section 451 Cr.P.C. ensures that property released on bond can be recovered later. The Department could have invoked Section 226(4) of the Income Tax Act to claim the amount instead of resorting to bank attachment.

The respondents challenged the validity of the attachment order, arguing that the Department had not followed due procedure. The assessment was not yet finalized at the time of attachment, meaning the Department could not prove that tax had "escaped assessment". The Department’s approval documents did not provide detailed reasoning for attachment, indicating that it was done in a mechanical manner.

Judgement

The Division Bench of the Kerala High Court, delivered the final judgment on January 27, 2025, in Writ Appeals Nos. 1413 and 1435 of 2024. The case involved the provisional attachment of bank accounts under Section 281B of the Income Tax Act, 1961, following the seizure of ₹1.56 crores in cash from the respondents.

Key Findings:

1. Bank Accounts are “Property” Under Section 281B: The Single Judge had ruled that a bank account is not property under Section 281B, meaning it could not be provisionally attached. The Division Bench disagreed stating that a bank account is attachable property under Section 281B.

2. Security Before Magistrate’s Court is NOT Sufficient to Protect Revenue Interests The respondents argued that they had already furnished security before the Magistrate’s Court, which should be sufficient to secure the tax liability. The court rejected this argument stating Security before the Magistrate’s Court does not substitute for tax security, and the bank attachment was valid.

3. Department Followed Due Process in Issuing Attachment Orders The Single Judge had ruled that the Income Tax Department failed to apply its mind while issuing the attachment orders. The Division Bench disagreed, stating the Department’s attachment order was lawful and based on due diligence.

4. Provisional Attachment Should Be Proportionate to Tax Liability The court emphasized that provisional attachment should not be excessive. The attachment should preferably target immovable assets, and freezing bank accounts should be a last resort unless necessary. The court reminded the Department to ensure that the attachment amount does not exceed the estimated tax liability.

The Division Bench set aside the Single Judge's ruling and allowed the Income Tax Department’s writ appeals. The bank attachment was upheld, and the respondents could not access their accounts until the tax assessment was resolved. The court reaffirmed that Section 281B permits attachment of bank accounts, but such attachment should be reasonable and proportionate.

What were the case laws referred in this case?

The Kerala High Court’s judgment referred to several case laws to support its conclusions.

Jilubhai Nanbhai Khachar & Ors. Vs State of Gujarat & Ors. (AIR 1995 SC 142) the case Defined "property" in a broad legal sense, including tangible and intangible assets. It was held that "property" extends to all valuable rights and interests, including money in bank accounts.
V.Prakashan Vs K.P Pankajakshan & Another (1985 CriLJ 951) It defined the scope of interim custody orders under Section 451 of the Criminal Procedure Code (Cr.P.C.). It was held that an order for interim release of property does not settle ownership rights and is not final.
Radha Krishnan Industries Vs. State of Himanchal Pradesh (2021 SCC 771) It was held that provisional attachment is a "draconian" measure and must be based on tangible material and due process. Tax authorities must justify attachment with sufficient reasons.
Gandhi trading Vs. Assistant commissioner of Income Tax & Ors. (1999 SCC Online 967) It was held that attachment under Section 281B should be exercised with extreme care and caution. The court discouraged blanket attachment orders and stated that bank accounts should be attached only as a last resort.

CONCLUSTION

This judgment is significant as it clarifies three key legal principles i.e. Bank accounts are attachable property under Section 281B of the Income Tax Act, Security before a criminal court does not automatically secure tax liabilities and Provisional attachment must be proportionate to the expected tax liability and not arbitrary.

The case reinforces the Income Tax Department’s power to attach bank accounts when unaccounted money is found, ensuring that tax evaders cannot escape liability by moving assets. However, it also emphasizes judicial scrutiny to prevent excessive or unjustified attachments.

The current status of the case is that the respondents have appealed the tax assessment, meaning the case is still not fully resolved. However, for now, the Department retains control over the attached bank accounts pending the outcome of the tax proceedings.