InCivil Writ Petition No. 10226/2021 -RAJ HC- Rajasthan High Court clarifies that tax department cannot seize stock-in-trade; orders release of seized gold bullion
Justice Ganesh Ram Meena [05-10-2023]

Read Order:M/s Bhagwati Jewellers and Ors v. Directorate of Enforcement and Ors

Chahat Varma

New Delhi, October 10, 2023: The Rajasthan High Court has directed the tax department to release 3773.52 grams of gold bullion that was seized during a search of M/s Bhagwati Jewellers (petitioners), a business engaged in the gold bullion trade.

Briefly stated, the petitioners, had filed the present writ petition, seeking the release of 3773.52 grams of gold bullion, that was seized during a tax department search. They argued that the seized gold was part of their stock in trade and should not have been confiscated. Despite their requests and representations to the tax department, no action was taken. The petitioners sought a court order for the release of the seized gold bullion.

In response to the writ petition, the department raised a preliminary issue, pointing to Section 16 of the Foreign Exchange Management Act, 1999 (FEMA), which outlines the adjudication process for disputes by the Adjudicating Authority. Additionally, Section 19 of the FEMA allows for an appeal to the Appellate Tribunal. The department denied the allegations made in the petition and asserted that all seizure procedures were conducted in accordance with the established legal procedures.

The single-judge bench of Justice Ganesh Ram Meena considered the argument presented by the counsel for the petitioners, which emphasized that the tax department should have first addressed the petitioners' representation. If the petitioners provided a satisfactory explanation, the seized gold bullion should have been released, and the department could have subsequently pursued any necessary action for contravention and penalties under FEMA, following the prescribed legal procedures. Consequently, the bench rejected the preliminary objections regarding the availability of an alternative remedy, raised by the Additional Solicitor General representing the department, deeming it unsustainable.

The bench highlighted that the provisions of Section 37 of FEMA, read with Sections 132 and 132B of the Income Tax Act, along with their proviso clauses, clearly specify that when bullion, jewellery, or other valuable articles or items constitute the stock-in-trade of a business and are discovered during a search, they shall not be seized. Instead, the authorized officer must create a note or inventory of such stock-in-trade. Additionally, if the person concerned submits an application to the Assessing Officer within thirty days from the end of the month in which the asset was seized and provides a satisfactory explanation regarding the nature and source of acquisition of the asset, the Assessing Officer may recover any existing liability from the asset and release the remaining portion, subject to the prior approval of certain designated authorities.

The bench emphasized that, in accordance with the provisions of Section 132B of the Income Tax Act, the tax department was obligated to examine the application and representation submitted by the petitioners on 19.02.2020. These documents contained information about the credentials of the petitioners and explained that the seized gold bullion was part of their stock-in-trade, duly accounted for in their books of accounts. However, the department failed to consider the representation and the accompanying documents provided by the petitioners, and consequently, failed to determine that the seized gold bullion was indeed stock-in-trade.

As a result, the court ordered the department to promptly return the seized gold bullion, which was confiscated during the search.