3 days ago
The Income Tax Bill does not award arbitrary power to the state by allowing digital search and seizure. Here's why
On July 21, the Parliamentary Select Committee tabled in Parliament its report on the Income Tax Bill, 2025, aimed at simplifying and reforming the country's primary legislation on income tax. The Bill was introduced in the Lower House of Parliament in February this year, and the Select Committee was tasked to sift through the text of the Bill, clause by clause, to ensure that its objects and purposes are clearly and adequately spelt out. Importantly, the Committee has retained — and rightly so — the controversial provisions dealing with powers and procedures relating to digital search and seizure.
The digital search and seizure powers are contained in Clause 247 of the Bill, which empowers the tax authority to enter and search any place where an electronic media or computer system (used to store relevant information or evidence) is suspected to have been kept. Clause 261(e) seeks to define 'computer system' to include virtual digital space, that is, personal and professional communications platforms and social media accounts, among other things. The power of the tax authority to enter and search a taxpayer's digital space has been criticised on the ground that wide search and seizure powers arbitrarily infringe upon the taxpayer's fundamental right to privacy guaranteed under Article 21 of the Indian Constitution.
The Income Tax Act, as it currently stands, was introduced in 1961, and came into force in 1962. Section 132 of the 1961 Act — which corresponds to Clause 247 of the Bill — has always vested wide search and seizure powers in the tax authority. The Finance Act, 2001 inserted Section 2(12A) into the Act to extend legal recognition to books of account maintained on computers, and Section 2(22AA) was inserted to include 'electronic record' within the meaning of the word 'document' defined under the Act. Subsequently, the Finance Act, 2002 inserted Section 132(1)(iib) facilitating access to electronic devices. Finally, Section 275B made it a punishable offence to refuse cooperation with the tax authority in this regard. The power to conduct digital search and seizure, therefore, has always been available with the tax authority. In defining the term 'virtual digital space', the new Bill simply makes explicit what was already implicit in the law.
Not only that, search and seizure powers have survived judicial review and scrutiny of the Supreme Court. In 1973, the constitutionality of Section 132 of the 1961 Act was unsuccessfully challenged before a five-judge Bench of the Supreme Court in Pooran Mal vs Director of Inspection. There, the Court categorically held that the tax authority must possess the power to conduct search and seizure to combat tax evasion. There is no reason why the underlying legal reasoning should not extend to digital search and seizure. Of course, our jurisprudential understanding of the right to privacy has since changed, especially after 2017, when a nine-judge bench of the Supreme Court in K Puttaswamy vs Union of India recognised the right to privacy as part of the fundamental right to life and liberty under Article 21 of the Indian Constitution. The right to privacy, however, is not absolute and, even if we were to apply Puttaswamy principles, search and seizure powers would still survive the scrutiny of our constitutional courts.
Importantly, Clause 247 of the Bill (much like Section 132 of the 1961 Act) has sufficient safeguards in place and satisfies the Puttaswamy test of proportionality. For instance, the law requires the tax authority to record reasons before initiating a search and seizure action, and sanction must be obtained from, and granted by, the appropriate authority. Moreover, the powers so exercised would be subject to judicial review and a constitutional court may call upon the tax authority to disclose the reasons behind the search and seizure operation and may even examine the circumstances based on which sanction was obtained and granted. In fact, in a recent decision in the case of Principal Director of Income Tax vs Laljibhai Kanjibhai Mandalia (2022), the Supreme Court applied the Wednesbury principle to allow for search powers by deferring to the wisdom of the tax authority.
In the past decade, Parliament has incorporated several changes in the tax law to keep pace with the digital transformation of the society. For instance, the concept of significant economic presence was incorporated in the income tax law to tax business profits of foreign companies deriving income without having any physical presence in India. Likewise, a digital services tax was enacted (now withdrawn) to tax revenues generated from digital services offered in India by foreign digital platforms. India is also actively participating in the Pillar One tax project spearheaded by the OECD to address tax challenges posed by digitalisation. Digital search and seizure powers contained in the Bill, which facilitate recovery of incriminating digital data, have a similar objective.
The writer is an advocate in the Bombay High Court. Views are personal
