Section 131(1A) Notices Post-Search – Allahabad High Court settles the issue

 

Pramod Swarup Agarwal & Sneh Lata Agarwal vs. Principal Director of Income Tax (Investigation) & Others

Citation: 2025: AHC-LKO:34257-DB

Writ Tax Nos.: 30 & 31 of 2025

Facts:

1.  Dr. Pramod Swarup Agarwal and Smt. Sneh Lata Agarwal, promoter shareholders of India Pesticides Limited, exited via an Offer for Sale (OFS) in July 2021, just prior to listing.

2.  The controversy arose from a statutory vacuum- Section 55(2)(ac) required adoption of FMV as on 31 January 2018. However, no computation mechanism existed for unlisted shares and shares sold via OFS prior to listing.

3.  The taxpayers filed return for AY 2022–23 offering no capital gains, sought refund of advance tax and disclosed their position upfront to the AO (Jan 2023).

4.  The Finance Act, 2024 retrospectively amended Section 55(2)(ac) (w.e.f. 01.04.2018), plugging the computational gap.

5.  The Department conducted search under Section 132 (Dec 2024) and issued Section 131(1A) notice (Jan 2025).

Hon Allahabad HC held as below:

1.  “Reason to Believe” must pre-exist – cannot be post-facto manufactured. The satisfaction note was fundamentally deficient.

2.  No material showed prior non-compliance or likelihood of non-cooperation.

3.  Material gathered after search cannot justify the search itself. This strikes at the root of jurisdiction under Section 132.

4.  Once powers under Section 132(1)(i)–(v) are exercised, the officer cannot revert to Section 131(1A). The scheme is sequential, not overlapping.

5.  The State may cure legislative gaps retrospectively, but it cannot cure weak jurisdictional foundations of a search.

The copy of the order is as under:

WTAX(L)_30_2025