Court holds seized cash cannot be retained post-assessment of searched person and orders refund after adjusting tax liabilities; interest dispute referred to Larger Bench
In a significant judgment dated August 19, 2026, delivered by a Division Bench of the Delhi High Court comprising Justices Dinesh Mehta and Rajneesh Kumar Gupta, the court dealt with the contentious issue of retention of seized cash by the Income Tax Department under Section 132B of the Income Tax Act, 1961. The appeal arose from a dispute between the Pr. Commissioner of Income Tax (Appellant) and Kapoor Industries Limited (Respondent) concerning the status of Rs. 17.66 crore seized from lockers of individuals named Shakun Tamang and Ashish Kapoor, and its subsequent treatment as self-assessment tax by Kapoor Industries.
The Department contended that the seized cash could not be claimed as self-assessment tax by Kapoor Industries since the assessment proceedings of the searched person, Ashish Kapoor, were pending at the time the return was filed. According to the Department, under Section 132B, such seized amounts could be retained until completion of the searched person's assessment to adjust against any tax demand. They further argued that even after assessment completion, the initiation of reassessment proceedings under Section 148 against Kapoor Industries justified retaining the amount.
On the contrary, Kapoor Industries, represented by Senior Counsel Sachit Jolly, submitted that Ashish Kapoor had explicitly informed the Assessing Officer (AO) that the seized cash belonged to Kapoor Industries and requested it be treated as the latter's self-assessment tax. Kapoor Industries declared the amount as self-assessment tax in its return for AY 2024-25, which was accepted by the AO under Section 143(1)(a). The respondent argued that once the searched person's assessment was completed with no demand raised against the seized amount, the Department's charge over the cash ceased. Therefore, the Department was obligated to refund the excess amount after adjusting any pending tax liabilities.
The Court noted that the assessment of the searched person, Ashish Kapoor, was completed on March 27, 2026, extinguishing the Department's charge under Section 132B. The fact that reassessment proceedings under Section 148 were initiated against Kapoor Industries subsequent to this date did not justify continued retention of the seized cash. The AO had accepted Kapoor Industries' return where the cash was shown as cash sales and claimed as self-assessment tax. The court emphasized that the Department could not withhold the amount for proceedings against a non-searched person.
Consequently, the court rejected the Department's plea for a stay on refund and directed the AO to pay Rs. 17.66 crore to Kapoor Industries within 30 days after adjusting the admitted tax liability of Rs. 3.74 crore. The AO was also directed to calculate the applicable interest on the refunded amount and communicate the same to the assessee. However, the court refrained from ordering immediate payment of interest, observing that the question of entitlement to interest on excess self-assessment tax payment is pending before a Larger Bench. The calculated interest amount was ordered to be deposited with the Registrar General of the Delhi High Court in an interest-bearing fixed deposit until the Larger Bench delivers its verdict.
The court admitted the appeal on two substantial questions of law:
(i) Whether Kapoor Industries could validly claim adjustment of the seized amount, which belonged to searched persons, as its self-assessment tax?
(ii) Whether the Income Tax Appellate Tribunal was justified in directing refund when the AO had not accepted the searched person's request to treat the seized cash as income of Kapoor Industries by the time the return was filed?
The matter was listed for further hearing, leaving open the broader legal issues raised.
This ruling clarifies the limits of the Department's power to retain seized cash under Section 132B post-assessment and reinforces the principle that once the searched person's assessment is complete without any demand against the seized amount, the cash belongs to the assessee who has claimed it as self-assessment tax. The decision also highlights procedural safeguards ensuring refunds and interest are dealt with fairly pending final resolution of interest entitlement issues.
Bottom Line:
Income Tax - Seized cash cannot be retained by the Department under Section 132B of the Income Tax Act, 1961, once the assessment of the searched person is completed, and no demand is raised against the amount. The Department must refund the amount to the assessee after adjusting any pending tax liability.
Statutory provision(s):
Income Tax Act, 1961 - Sections 132B, 143(1)(a), 148; Limitation Act, 1963 - Section 5
