tl;dr
Tax laws have traditionally granted search and seizure powers over physical documents premised on the suspicion of undisclosed income. As our lives have shifted to the digital sphere, the Income Tax Bill, 2025 proposes to extend these powers to digital spaces. This shift, while appearing incremental, represents a dramatic expansion with troubling implications for individual liberty, business autonomy, and constitutional rights.
What is the Income Tax Bill, 2025?
The Income Tax Bill, 2025, introduced in Lok Sabha on February 13, 2025, aims to replace the Income Tax Act, 1961, retaining many original provisions while simplifying processes. It introduces explicit provisions empowering authorities to access and seize virtual digital spaces and expands "undisclosed income" to cover virtual digital assets. The Income Tax Bill, 2025 has been referred to the Select Committee of Lok Sabha to Examine the Income Tax Bill, 2025, headed by Shri Baijayant Panda.
How we got here: traditional search and seizure powers
Under Section 132 of the existing Income Tax Act, 1961, tax authorities can conduct searches when there is a “reason to believe” that income is hidden. Practically, this process involves an investigative officer preparing a "Satisfaction Note," securing administrative approval [DGIT (Investigation)], and executing a search warrant. Subsequently, authorities document the seized items through a Panchnama. Historically, this provision has focused primarily on physical evidence: cash, jewellery, documents, and similar tangible items. The section does include limited references to electronic records (under the Information Technology Act, 2000), but it never explicitly authorised comprehensive digital searches, let alone the overriding of encrypted passwords or the wholesale seizure of devices and data.
This absence of clarity has led to contested interpretations in courtrooms, with judgments such as S.R. Batliboi & Co. v. Department of Income Tax (2009) where the High Court of Delhi heard a petition by an audit firm challenging the seizure of two of their laptops by the tax authorities. While the Court held that, “sub-section 132 (1)(iib) casts a compulsion on the owner of the laptops to provide the Department with the password to the computer to enable inspection of the Books of Account”, it stated that the exercise of the power in the instance case constituted a roving inquiry and hence, “The Respondents [tax authorities] are directed to forthwith return the laptops to the Petitioner.” It was held that searches and seizures must be limited, specific, and directly related to the assessee named in the search warrant.
What are the new powers under the Income Tax Bill, 2025?
The proposed Income Tax Bill, 2025, explicitly inserts the powers of search and seizure over “virtual digital spaces” through Clause 247. It represents a clear break from past ambiguity, significantly expanding the authority of tax officials in four key ways:
- Expanded Authority to Search Digital Spaces: Clause 247(1)(i) explicitly empowers officers to inspect "any building, place, vessel, vehicle, or aircraft" if they suspect digital data relevant to a tax inquiry is stored there. This includes servers and cloud platforms separate from the taxpayer's physical location—dramatically expanding the geographical and conceptual scope of searches.
- Obligation to Disclose Passwords: Clause 247(1)(ii) mandates individuals and businesses to reveal passwords and digital credentials upon request. Previously, enforcement often demanded these credentials informally. Now, refusal constitutes direct non-compliance with the law. Moreover, it is not understood how zero knowledge systems (such as those which may use end to end encryption) will be treated under this provision.
- Power to Override Encryption: Clause 247(1)(iii) authorises forced access—effectively digital "lock-breaking"—if passwords or access codes are withheld or unavailable. Practically, this enables officers to forcibly enter encrypted communications, cloud services, or personal digital vaults without cooperation.
- Explicit Authority for Device Seizure: Clause 247(1)(vii) clearly empowers seizure of devices like computers, laptops, servers, and storage devices—formalising an invasive measure previously pursued without clear statutory backing.
What is a “Virtual Digital Space”?
This Income Tax Bill, 2025 goes further by defining "virtual digital space" expansively (Clause 261(e)–(i)). It is important to note that Clause 261(e) defines “computer system” to include virtual digital space. Therefore, the provisions of search and seizure concerning the treatment of “computer system” without mention of virtual digital space will also apply to virtual digital space. Under this broad umbrella fall:
- Personal communications platforms (WhatsApp, Telegram, emails);
- Professional and social media accounts;
- Financial and investment accounts (digital wallets, demat accounts);
- Remote and cloud servers;
- Shared collaboration tools and messaging services;
- Even newer technologies like IoT, encrypted networks, AI-driven platforms, and online collaboration tools.
The implications are concerning. There is no escape for a shared virtual digital space (like online collaborative tools, data storage services, shared printers, group messaging services, connected devices) from such search and seizure operations. Therefore, virtual digital space of a person/business not related to the search operation can also be affected without providing a reasonable opportunity to such person/business.
The direct implication of the above is by virtue of the above mentioned coverage is three-fold:
- First, an obligation to disclose the access codes and passwords to the above virtual digital spaces as and when demanded during the search operations;
- Second, officers are empowered to gain access (against consent of the user or the assessee) to such virtual digital spaces by overriding the access codes where access code is not available;
- Third, the threat of such virtual digital space being seized by the officers.
What about our constitutional rights?
While historically, it could be argued that due to rulings like Pooran Mal v. Director of Inspection (1974) and earlier decisions like M.P. Sharma v. Satish Chandra (1954) — search and seizure did not violate fundamental rights, given that privacy itself was not expressly recognised this position cannot be argued any longer. These judgements are to be reconciled with the unambiguous reaffirmation of the fundamental right to privacy by the Supreme Court in Justice K.S. Puttaswamy v. Union of India (2017). It requires the provisions on digital search and seizures under the Income Tax Bill, 2025 to be within the bounds of the "proportionality test," stating clearly that any state infringement on privacy must be justifiable, necessary, and minimally invasive raising the following questions as to the lack of safeguards within Clause 247:
- Is mere suspicion of undisclosed income sufficient to justify intrusive digital searches?
- Are less invasive investigative methods sufficient and proportionate?
- Should not the phrase “reason to suspect,” as now extended digitally, be narrowly interpreted under constitutional safeguards?
IFF writes to the Select Committee on the Income Tax Bill, 2025
IFF has written to the Chairperson and the other members of the Select Committee of Lok Sabha to Examine the Income Tax Bill, 2025, requesting them for a review of provisions specifically Clauses 247, 249 and 261 to place the following safeguards:
- Express language on proportionality: The clauses need to incorporate the Puttaswamy safeguards by inserting the proportionality standard, for instance requiring express language to adopt the least invasive methods and alternate language or clearer limitation by incorporating judicial precedent (such as the Supreme Court decision in Pr. DIT (Inv) v. Laljibhai Kanjibhai Mandalia (2022)) and defining what constitutes, “reasons to believe”.
- Independent Judicial Oversight: Currently, internal departmental approvals suffice without the need for approval from a judicial magistrate. However, as noted in Supreme Court judgments like DGIT v. Spacewood Furnishers Pvt Ltd (2015), search powers must not be arbitrary. Introducing judicial warrants, akin to U.S. or EU practices, could significantly bolster fairness and accountability.
- Applicability of Bharatiya Nagarik Suraksha Sanhita (“BNSS”), 2023: Clause 249(10) provides that provisions of BNSS, 2023 relating to search and seizure shall apply. One safeguard of a court authorized warrant can be borrowed from BNSS, 2023. Section 94 of the BNSS, 2023, allows the court or the police officer in charge to produce a written order summoning digital evidence required for an investigation as evidence
- Transparency and Right to Challenge: Clause 249 prevents disclosure of the investigative reasons behind searches, hindering taxpayers' ability to challenge them effectively. Courts have expressed discomfort with complete secrecy; as noted in judgments such as Ajit Jain v. Union of India (2000), some transparency is vital to meaningful judicial review.
- Requirement for Digital Evidence Integrity: Neither the current law nor the proposed Income Tax Bill requires authorities to preserve digital evidence securely, such as through hash-value validation. Instituting clear technical and legal guidelines for handling digital data is imperative and is even being litigated by the Foundation for Media Professionals in the Supreme Court.
Tax law is a specialised area of practice and we acknowledge the assistance and expert inputs provided by Deepak Joshi, Advocate-on-Record for this explainer. We are grateful to a wide community of volunteers such as Deepak that continues to power IFF’s work!
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