Updated: Nov 8, 2020
An analysis of section 24(3) of the Prohibition of Benami Property Transactions Act, 1988
Published on Taxmann at
 118 taxmann.com 353 (Article)
In common parlance, a lay man might draw a distinction between words "formation of opinion" and "reasons to believe" holding that while the latter is built on solid foundation of facts, former stands on the sticky wicket of subjective satisfaction. However, this distinction fades away when these words are clothed in legislative colours, as there is little space for whims and fancies under the rule of law. The Black law Dictionary defines "Opinion" as the court's written statement explaining its decision in a given case, including statement of facts, points of law, rationale and dicta. This definition germinates the exposition that "Opinion" framed must also be justifiable and explanatory in itself.
Understandably, it seems that under the rule of law, the difference in the ordinary signification of the words "reason to believe" and "formation of opinion" is virtually diminished, yet some argue that by using different words in different situations, the legislature intends to create a slender line of difference, which primarily lies in the degree of force. The difference is predominantly created by the manner in which these words are used by the legislature. At some places the legislature expressly uses the prefix "recording" which implies an express obligation on the authority to pen down the reasons, per se section 148 of the Income Tax Act, requires the Assessing Officer to "record" reasons in writing that the assessee has escaped tax, before making assessment/ reassessment, while at other instances the legislature has simply laid down the obligation of "formation of opinion" without the additional requirement of "recording" such opinion, per se section 24(3) of Prohibition of Benami Property Transactions Act, 1988 (hereinafter referred to as 'PBPT Act'), which merely lays down the requirement of "formation of opinion", that accused Benamidar will alienate the property during the proceedings, before the property is attached by the authority. However, the key intent remains to build sufficient safeguards to prevent the harassment of the assessee from arbitrary use of power of the authorities and at the same time protect the interest of the revenue.
This Article provides an insight into laws governing the phrase "formation of opinion" as used by the legislature in Section 24(3) of the PBPT Act in the light of Principles of Administrative Law and Natural justice.
Extracts of Section 24 of the PBPT Act is reproduced as under:
(1) Where the Initiating Officer, on the basis of material in his possession, has reason to believe that any person is a benamidar in respect of a property, he may, after recording reasons in writing, issue a notice to the person to show cause within such time as may be specified in the notice why the property should not be treated asbenami property. (2) Where a notice under sub-section (1) specifies any property as being held by a benamidar referred to in that sub-section, a copy of the notice shall also be issued to the beneficial owner if his identity is known. (3) Where the Initiating Officer is of the opinion that the person in possession of the property held benami may alienate the property during the period specified in the notice, he may, with the previous approval of the Approving Authority, by order in writing, attach provisionally the property in the manner as may be prescribed, for a period not exceeding ninety days from the last day of the month in which the notice under sub-section (1) is issued from the date of issue of notice under sub-section (1). Bare reading of this section prima facia shows that while subsection (1) of section 24 expressly provides for recording of reasons in writing by the Initiating Officer (hereinafter referred to as 'IO') before issue of show cause notice, subsection (3) simply lays down the requirement of "formation of opinion" by the IO before provisionally attaching a property without any express requirement of recording reasons. Various authorities entrusted with administrative adjudicatory functions have taken refuge under this discriminatory use of the words by the legislature and have made an argument that "formation of opinion" is a mere administrative function. It is a function of their subjective satisfaction and it is not governed by the same well-established jurisprudence which governs "reasons to be recorded". They rely on the literal interpretation of the statue and the lay man's definition of the word opinion as discussed above.
Thus, the key question of concern is "Whether pursuant to section 24(3) of the PBPT Act, an IO can provisionally attach the property of alleged benamidar by merely forming his opinion and not expressly recording the reasons for formation of such opinion."
In our opinion, in consideration of the principles of administrative law, principles of natural justice and numerous judicial precedents discussed below, the distinction between duty of "recording and furnishing of reasons" and "formation of opinion", has been reduced to a mere formality. It is a settled law that if strict grammatical interpretation gives rise to absurdity or inconsistency, the court could discard such interpretation and adopt an interpretation which will give effect to the purpose of the legislature, this could be done, if necessary even by modification of the language used1. In this case the intention of the legislature cannot be such adduced so as to be against the principles of natural justice and administrative law. Hon'ble Supreme Court in the case of Bhikhubhai Vithalabhai Patel v. State of Gujarat2 has held that the expression "is of opinion", does not confer any unlimited discretion on the Government and the construction placed on the expression "reason to believe" will equally be applicable to the expression "is of opinion". Thus, the court has weighted the expressions "is satisfied", "is of the opinion" and "has reason to believe" equally while affirming that such expressions do not offer unlimited discretion to the Government.
Section 24(3) is not a mere administrative but Quasi-judicial Function
At the outset it is pertinent to highlight that section 19 of the PBPT Act vests the IO with the same powers "as vested in a civil court under the Code of Civil Procedure, 1908" which includes discovery and inspection, enforcing the attendance of any person, compelling the production of books of account and other documents, issuing commissions, receiving evidence on affidavits etc. which expounds the fact that the IO is empowered to perform quasi-judicial functions and is not restricted to perform merely administrative functions. In the case of state of Maharashtra v Marwanjee3, the court while examining whether the competitive authority, which are vested with powers akin to IO, is a quasi-judicial authority or not, noted that:
"while it is true that this vesting is restricted to summoning of witnesses and enforcing the attendance of any person and examining him on oath or requiring discovery and production of documents but that does not take away the quasi judicial nature of the proceeding as a matter of fact it lends credence to such a conclusion"
Thus, the actions of the IO are in the nature of quasi-judicial Function and not merely administrative more so, when it requires formation of opinion on analysis of facts and circumstances of each case.
Secondly, it is trite law that that when an administrative act immediately affects an individual's legal rights or the law requires that in coming to its decision an administrative authority must follow a procedure simulating the judicial process, the administrative act becomes quasi-judicial4. Section 24(3) of the PBPT Act, gives power to the Initiating officer to attach the alleged Benami property at his discretion. Such action of attachment clearly affects the legal rights of an individual as it prohibits transfer, conversion, disposition or movement of property. The exercise of power u/s 24(3) results in adversely affecting the rights of the person in relation to the property attached and hence any such action is donned in quasi-judicial colour rather than an administrative task performed.
Thirdly, section 24(3) requires previous approval of the Approving Authority. It is a settled law that sanction/ approval from any approving authority is not merely a supervisory role rather it is a quasi-judicial function to be performed after proper application of mind and duly recording the reasons for grant of such approval. In the case of Raghuram Grah (P.) Ltd. v. ITO5 while deciding on section 281B of the Income-tax Act, 1961 it was held as under;
"The department in its counter-affidavit filed in reply to the supplementary affidavit had annexed the letter of the ITO, informing that the Commissioner had been pleased to extend the provisional attachment up to 21-12-2005. It was not sufficient. The department was required to place on record before the Court the reasons recorded by the Commissioner for granting approval for extension of the order passed under section 281B. The disclosure of reasons recorded by the Commissioner would have thrown some light on the controversy, i.e., it was a case of gossip or hearsay or something more than that. An adverse inference should be drawn against the department for withholding the reasons, if any, recorded by the Commissioner."
From the same it can be inferred that not only the IO while passing order for provisional attachment has to give sufficient and conclusive reasons but even the approving authority has to accord its approval in a detailed manner. Thus, provisional attachment done by the IO is not merely an administrative function which can be undertaken arbitrarily like other administrative functions vested with him. Without prejudice, even for the sake of argument, it is assumed that the powers envisaged in section 24(3) are not quasi-judicial but administrative, it is indubitable that principals of natural justice has to be complied with irrespective of whether IO is performing administrative or quasi-judicial functions.6
It is also now well settled by a number of decisions of the Supreme Court that natural justice must be complied with, whenever an administrative authority proposes to effect an individual civil rights or to visit him with civil consequences, even if the function is discretionary7. "FORMATION OF OPINION"- SUBJECT TO PRINCIPLES OF NATURAL JUSTICE AND ADMINISTRATIVE LAW, NOT A FUNCTION OF WHIMS AND FANCIES Now that we have established that function performed u/s 24(3) of the PBPT Act, is quasi-judicial in nature, it flows as natural consequence such Acts shall adhere to the Principles of Natural Justice.
While the legislature has provided for the expression "formation of opinion" in section 24(3) of the PBPT Act, but unlike section 24(1) where reasons have to be recorded in writing, section 24(3) does not provide the manner in which such opinion has is be recorded, which gives way to arbitrary actions taken by IO on most occasions, creating dual problems. The first problem stems from the perspective of principles of natural justice. The authorities in their belief that "formation of opinion" is a subjective act, do not provide the material on which they have based their opinion and do not place such material on record. It is the right of every accused to have access to all materials based on which the case is made against him. In absence of such material on record, the accused is unable to access the material based on which the opinion is formed and is unable to make proper representation against such opinion which is a violation of accused's Right to be Heard and consequently a violation of Principles of Natural Justice. Further, it is a settled law that all materials used against the accused shall be provided to him for the above reason.
Second, it is now a well-settled law that administrative action which affects the legal rights of the individual is open to judicial review on grounds of irrationality and procedural impropriety. Absence of any physical expression of opinion along with reasons that govern the opinion so formed by the IO would create hindrances in judicial review and will allow the authorities the elbow room to manipulate the provision. A mere subjective formation of opinion is not capable of being tested on the touchstone of the tests laid in various judicial pronouncements. It is settled law that in "formation of an opinion" the administrative authority has to take into account facts of the case, surrounding circumstances, evidences available, enquiries made, application of mind by the concerned officer etc, which must be evident from the language of the order itself.
The reviewing court, in determining the question of formation of opinion, has to construe the order itself objectively and not in the light of explanation subsequently given8. In other words if it is shown that assumed circumstances do not exist or that based on prevailing circumstances, it is impossible for anyone to form opinion, such the opinion can be challenged in the court of law. The same has been reiterated in the case of Aditya Educational Society . v. Union of India .9 wherein it was held that formation of opinion must be based on objective considerations and there must exist circumstances which, in the opinion of the competent authority, suggest what has been set out in Act which the Courts are entitled to examine. If it is shown that the circumstances do not exist, or that they are such that it is impossible for anyone to form an opinion therefrom, the opinion can be challenged on the ground of non-application of mind or perversity or on the ground that it was formed on collateral grounds and was beyond the scope of the Statute. Also, in the case of Barium Chemicals Ltd. v. Company Law Board10, the Supreme Court pointed out that the expressions "is satisfied", "is of the opinion" and "has reason to believe", though are indicative of subjective satisfaction, the nature of the power has to be determined on a totality of consideration of all the relevant provisions. It was held
"If it is shown that the circumstances do not exist or that they are such that it is impossible for any one to form an opinion therefrom suggestive of the aforesaid things, the opinion is challengeable on the ground of non-application of mind or perversity or on the ground that it was formed on collateral grounds and was beyond the scope of the statute."
In the case of Tandon Brothers vs State Of West Bengal 11, Hon'ble court held that: "formation of opinion obviously is dependent upon available materials and cannot be a mere ipse-dixit of the administrative authority: Existence of justifiable reasons in the matter of formation of opinion is the principal condition and any contra action would have the effect of the same being ascribed as arbitrary exercise of power which is admittedly an antithesis of law."
In Shree Chalthan Vibhag Khand v. Deputy Commissioner of Income-tax12, "Even for formation of the opinion and/or reason to believe that any income has escaped assessment, there must be some tangible new material available with the Assessing Officer on the basis of which the reassessment proceedings are permissible." Similar ratios have been laid down in Narayan Govind Gavate v. State of Maharashtra (1977 AIR 183) and Yakub Ali Gopal Singh v. Dy. CIT  163 Taxman 526/295 ITR 129 (Raj.).
Further in the case of T.R. Thakur v. Union of India13 , Hon'ble Apex Court has held that "every state action must satisfy the rule of non-arbitrariness, the duty to record reasons may be impliedly imposed"
In consequence thereof, mere formation of opinion without any explanation and corroborative backing to support formation of such opinion falls well short of the mandate of law to abide by the principles of natural justice and such opinion vitiates the various judgements laid above which lays down the trite law that administrative adjudicatory decisions are subject to and must be capable of judicial review.
Further, the necessity to record self-explanatory opinion backed with reasons is envisaged in section 24(3) of the Act itself which requires previous approval of the Approving Authority. As stated above sanction/ approval from any approving authority is not merely a supervisory role rather it is a quasi-judicial function to be performed after proper application of mind and duly recording the reasons for grant of such approval. Thus, approval can only be granted by the approving authority when it is in agreement with the opinion framed by the IO. In absence of such self-explanatory reasons recorded for formation of opinion before obtaining sanction of the approving authority, sanction granted would considered mechanical approval and negligence to objectively consider the material on record and facts and circumstances of the case as to whether the situation is fit for provisional attachment.
Attention is also invited to section 281B of the Income Tax Act, 1961 and section 83 of the CGST Act, 2017 which are akin section 24(3) of the PBPT Act as it empowers the assessing officer to provisionally attach the property of the assessee to protect the interest of the Revenue, without expressly laying any requirement to record any opinion. The word "opinion" used in section 281B has been interpreted by the Court in the case of VLS Finance Ltd.14,wherein the Court observed that "opinion" means something more than mere retaining of gossip of hearsay; it means judgment of belief, that is, a belief or a conviction resulting from what one thinks on a particular question. If a man is to form an opinion and his opinion is to govern, he must form it himself on such reasons and grounds as seem good to him.
In Society for Integrated Development in Society for Integrated Development Urban and Rural Areas v. CIT14 and Sukh Pal Singh v. CIT15 it has been held that powers u/s 281B must be not be exercised unless there is sufficient material on record to justify the satisfaction that the assessee is about to dispose of the whole or any part of his property with a view to thwarting the ultimate collection of the demand and existence of material on which an opinion is based is a sine qua non for invoking section 281B.
In Case of Valerius Industries v. Union of India, Hon'ble Gujarat High Court16while considering provisions of section 83of the CGST Act, 2017 held that the order of provisional attachment before the assessment order is made, may be justified if the assessing authority or any other authority empowered in law is of the opinion that it is necessary to protect the interest of revenue. However, this subjective satisfaction should be based on some credible materials or information and also should be supported by supervening factor. It is not any and every material, howsoever vague and indefinite or distant remote or far-fetching, which would warrant the formation of the belief. It was further held that power conferred upon the authority for provisional attachment are very drastic and of far-reaching power and must be used sparingly and only on substantive weighty grounds and reasons and no to harass the assessee
There is a similar provision (Order 38, Rule 5) in the Civil Procedure Code, 1908 which allows for attachment of assets in order to enforce the judgement but courts have ruled in safeguards. Courts have held that such orders for attachment enable drastic powers to the authority and are to be used sparingly on analysis of facts of each case based on sufficient material. Hence, such safeguards are to be applied even for attachments u/s 24(3) and attachment made without any tangible material and profound reasons is likely to get quashed.
To conclude it is highlighted that "Formation of opinion" can effectively be challenged on three grounds. First, on the ground of malafides; Second, non application of mind and thirdly on insufficiency of material17. It is to be noted that to clear the test on these touchstones, the authorities need to furnish the "opinion so formed" before the court and before the accused in spirit of principle of natural justice. Needless to point that the burden to prove in this case is on the department that such circumstances existed which would have caused prejudice to the interest of the revenue.
Thus, in light of the above, it can be concluded that the practice of issuing non-speaking orders of attachment without providing adequate reasons and giving post-hoc rationalisations later is an anathema to the principle of constitutional governance. Duty to give reasons is an incident of the judicial process and constitutional justice should not be a matter of afterthought. Therefore, in the opinion of the authors, for the reasons specified above, the IO is duty-bound to record reasons for formation of such opinion before provisional attachment of property.
However, various authorities entrusted with administrative adjudicatory functions have refused to acknowledge this position of law. They may validly argue the intention of the legislature behind making distinction in language used in subsection (1) and (3). Subsection (1) provides for providing an opportunity of being heard to the alleged benamidar and thus recording of reasons as well as providing the same to the accused becomes inevitable so that accused can show cause why the property should not be treated as benami property. On a contrary the requirement of providing opportunity of being heard is not envisaged under subsection (3) and a mere opinion of the IO for provisional attachment of property may suffice the purpose of the department. Also some may argue that with no distinction in "recording and furnishing of reasons" and "formation of opinion", use of latter expression has been merely reduced to mere formality.
The ball now is in the court of the legislature to clear the air. ■■ 1. Union of India v. Filip Tiago De Gama of Vedem Vasco De Gama 1989 taxmann.com 52 (SC) 2. AIR 2008 SCC 1771 3. State of Maharashtra v. Marwanjee P. Desai  2 S.C.C. 318) 4. S.P. Sengupta (ed.), Durga Das Basu Administrative Law p no. 411,(Kamla Law House, Kolkata 7th edition/2015) 5.  281 ITR 147/152 Taxman 448 (All.) 6. State of U.P. v. Renusgar Power Co. AIR 1988 SC 1737. 7. S.P. Sengupta (ed.), Durga Das Basu Administrative Law p no. 411,(Kamla Law House, Kolkata 7th edition/2015) 8. S.P. Sengupta (ed.), Durga Das Basu Administrative Law p no. 360,(Kamla Law House, Kolkata 7th edition/2015) 9. Writ Petition No. 27112 of 2013, dated 3-1-2014 10. AIR 1967 SC 295 11. 2001 (2) SCR 960 12.  60 taxmann.com 450 (Guj.) 13. T.R. Thakur v. Union of India AIR 1996 SC 1643 14.  252 ITR 642/119 Taxman 289 (AP) 15.  156 ITR 480/21 Taxman 249 (Punj. & Har.) 16.  109 taxmann.com 218 (Guj.) 17. Narayan Govind Gavate v. State of Maharashtra (AIR 1977 SC 183)