Gujarat High Court on Attorney-Client Privilege in context of search and seizure operations under tax laws

The doctrine of attorney-client privilege and its applicability in a search and seizure operation conducted by a government agency in a lawyer’s offices, while much debated in jurisdictions like USA, Canada and UK, is a developing area of Indian jurisprudence.

Attorney-client privilege is an old concept under common law and the same is codified under Sections 126 and 129 of the Indian Evidence Act, 1872 – the key aspects of which are encapsulated below:

(i) Unless a client specifically permits, a lawyer can neither disclose any communication made to him or any advice given by him to the client in the course of his employment as a lawyer nor can he disclose the contents or condition of any document that he has become acquainted with in the course of and for the purpose of his employment as a lawyer for the said client.

Similarly, a client shall not be compelled to disclose to a court/ comparable authority, any confidential communication which has taken place between such client and his lawyer.

(ii) However, there are two prominent exceptions to the foregoing:

(a) any communication made “in furtherance of any illegal purpose”, and

(b) any fact observed by such lawyer “in the course of his employment as such, showing that any crime or fraud has been committed since the commencement of his employment.”

These fundamental principles protecting professional communications are reflected in CBDT’s instruction no. 7 dated July 30, 2003 which provides guidelines for search operations carried out by income tax authorities. The guidelines inter alia stipulate that “taxpayers who are professionals of excellence need not be searched without there being compelling evidence and confirmation of substantial tax evasion."

In a recent judgment [Maulikkumar Satishbhai Sheth Versus Income Tax Officer Assessment Unit 4(2)(6), Ahmedabad and Others, SCA/20187/2023], a Division Bench of the Gujarat High Court examined the doctrine of attorney-client privilege in the context of search and seizure operations by income tax authorities in a lawyer’s offices and whether documents seized during the search could be utilized against third parties.

It is pertinent to note that while this case was in the specific factual context of a search and seizure operation conducted under Income Tax laws, the search and seizure-related provisions are broadly comparable under GST and customs laws as well and thus these conclusions of the Gujarat High Court would be relevant even under GST and customs laws.

The facts of the case and the key conclusions are briefly summarized below:

Factual backdrop:

1. The petitioner is an advocate whose residence and office premises in Ahmedabad were subject to a search and seizure by income tax officials as a part of a larger State-wide search and seizure operation between November 3-6, 2023. The petitioner raised several allegations of abuse of power in the course of the said search including restrictions on movements of the family members and colleagues of the petitioner, coercive behavior, ‘house-arrest’ like scenarios for the three days of the search, switching off the CCTV cameras during search and indiscriminate seizure of documents/ information pertaining to several clients of the petitioner.

2. The petitioner challenged the validity of the search carried out by way of writ proceedings before the Gujarat High Court. The petitioner sought declarations from the High Court that the search and seizure  was illegal and for directions to return documents and digital data (and cash) seized during the search and destruction of any copies of such data with the Income Tax department and a direction to the Income Tax department not to use/ rely upon any material collected in the said search and seizure in any proceeding against the petitioner or any other taxpayer.

   In this context, one of the key arguments relied upon by the petitioner was that of attorney-client privilege as most of the data/ documents seized during the search belonged to the petitioner’s clients, which were prepared by the petitioner in his professional capacity as a lawyer and thus, the same would be covered under attorney-client privilege.

Key conclusions of the Gujarat High Court:

1. The High Court noted that the constitutional validity of search provisions under Income tax laws were upheld by a five-judge bench of the Supreme Court in Pooran Mal v Director of Inspection (Investigation), New Delhi, (1974) 1 SCC 345. Thus, the only issue that the High Court was required to examine in the context of legality of a search is whether the ‘satisfaction’ recorded by the relevant Income tax authority for the initiation of the search proceedings was justified. In the specific facts of this case, based on copies of the ‘satisfaction note’ as was prepared prior to the search by the authorizing senior income tax officer as well as copies of the seized materials/ documents from the petitioner’s premises, the Court concluded that it “is satisfied for the satisfaction recorded by the respondent authority for initiation of the search against the petitioner” and thus, the legality of the search was upheld.

2. The Court deprecated the high-handed and aggressive manner in which the search was conducted, especially the coercive manner in which the income tax authorities conducted themselves vis-à-vis a female colleague of the petitioner which came in for severe criticism from the court. However, the Court did not pass any specific directions in this regard “except a caution to the respondent authority to take care in future if such a situation arises” and directed the income tax authorities to send an apology letter to the said female colleague of the petitioner.

3. Having upheld the legality of the search, the Court held that attorney-client privilege will not apply in the present facts against seizure of documents/ data from the petitioner’s premises in light of clear legal provisions pertaining to search entitling the tax authorities to seize the materials available during the search.

4. However, as regards usage of the materials/ data so seized by tax authorities against third persons/ clients, the Court deliberated upon the nature and extent of the protection available under attorney-client privilege and held the following:

   a. The Court held that tax authorities are entitled to use such material (if found incriminating) so far as it refers to the petitioner, as the petitioner, in the facts of this case, was searched as a taxpayer himself with potentially undisclosed income.

   b. The Court took into account Supreme Court judgments in District Registrar and Collector, Hyderabad v. Canara Bank [(2005) 1 SCC 496], Department of Income Tax v. S.R. Batliboi & Co. [(2009) 17 SCC 767] in the context of search proceedings and noted that the question of law as to whether material seized from a professional during the course of search can be utilised against a third party has been left open by the Supreme Court in Batliboi (supra) and went on to answer the question of law as follows :-

   • The doctrine of attorney-client privilege “is required to be applied to the facts of the case from the point of view of the petitioner and not from the point of view of the clients of the petitioner whom the petitioner wants to protect by preferring this petition."

   • The protection of attorney-client privilege will be available to the documents/ data seized from the petitioner, subject to the exceptions to attorney-client privilege such as communications in furtherance of illegal purposes, etc.

   • In order to ascertain which documents/ data will fall under the exception, the Court accepted the suggestion of the tax authorities that the tax authorities would  bifurcate the seized documents/ data into  incriminating and non-incriminating and save the documents/ data on two separate hard discs. The tax authorities agreed that the non-incriminating data will be “permanently sealed and shall not be accessed thereafter by the Income-tax Department." The tax authorities requested four weeks’ time to complete this entire exercise.

   • As regards the incriminating documents/ data, further bifurcation would be made based on the illustrations appended to Section 126 of the Evidence Act. In essence:

      -        “Where the petitioner is found to be in possession of any document of his clients which, according to the respondents are incriminating prior to the employment of the petitioner in his legal capacity, then no action can be taken against such documents.”

     -        “Whereas, if it is found by the respondent authorities that the petitioner has come to the knowledge of fraud or illegal activity, if any, to be committed by the client during the course of his engagement as illustrated by Illustrations (b) and (c) to Section 126,” appropriate action can be taken by tax authorities against such third parties/ clients.

   • The Court initially suggested the appointment of an independent agency for the above exercise which was vehemently opposed by the tax authorities (on the apprehension that it will set a wrong precedent prone to misuse). The Court ultimately decided to repose faith that the senior tax officers on whom the discretion has been placed to undertake the aforementioned exercise of bifurcation of the seized data would exercise their discretion judiciously, with the hope that “no further litigation would arise in the case of third parties whose documents were found during the course of the search."

   • The Court went on to clarify that “it will be open for such third parties to raise all the contentions available under the law and observations made by this Court in the facts of the present case would not come in way if any action is taken by the respondent authorities against such third parties." Thus, the defence of attorney-client privilege may still be available to third parties/ clients of the petitioner if any action is initiated by the tax authorities based on data/ documents seized from the petitioner.

Comments:

The approach of the Gujarat High Court in the present case is significant as the Court has given detailed conclusions on the availability of attorney client privilege in the context of search and seizure activity carried out by income tax authorities in a lawyer’s office, and whether documents seized during such search can be used by income tax authorities against third parties. This was the question of law before the Supreme Court in SR Batliboi (supra), which was left open.

It will be important for taxpayers as well as lawyers to take into account the conclusions of this judgment to understand the true scope and extent of attorney-client privilege in their specific facts.

About the author: Sudipta Bhattacharjee is Partner at Khaitan & Co.

The views of the author in this article are personal and do not constitute legal / professional advice of Khaitan & Co.