Overview of Section 138 of the Income Tax Act, 1961
The Income Tax Act, 1961, governs how taxes are assessed and collected in India. Section 138 plays a key role in regulating when and how taxpayer information may be disclosed. Within this framework, Section 138 plays a crucial role by regulating the disclosure of information obtained by the Income Tax Department in the course of its operations. While the primary duty of the tax authorities is to maintain confidentiality of taxpayers’ information, Section 138 recognizes that, in certain circumstances, public interest or the interests of justice may require limited and lawful disclosure. This section, therefore, strikes a balance between the taxpayer’s right to privacy and the State’s duty of transparency and accountability.
Scope of Section 138 of the Income Tax Act
Section 138 of the Income Tax Act empowers certain authorities to furnish information received under the Act to specified persons or bodies, under prescribed conditions. It essentially provides the legal foundation for information sharing by the Income Tax Department.
Primary Avenues for Disclosure
The section defines two primary avenues for disclosure:
Section 138(1) – Disclosure to Other Agencies (Suo Motu or on Request)
This sub-section governs the disclosure of tax information by the Income Tax Department to other government agencies.
The Board (CBDT) or any other income-tax authority specified by it may furnish information regarding any assessee to:
- Any officer, authority, or body performing functions under any law relating to the imposition of taxes, duties, or cess; or to dealings in foreign exchange.
- Such officer, authority, or body performing functions under any other law as the Central Government may, if in its opinion it is necessary so to do in the public interest, specify by notification (this covers bodies like the CBI or SEBI).
Crucially, such disclosure can be made only if the Board or specified authority is satisfied that it is necessary for the purpose of enabling the recipient authority to perform its functions under that law.
Section 138(2) – Access by General Applicants
This sub-section governs the disclosure of information to any member of the public upon request. Any person, upon making an application in the prescribed form and on payment of a prescribed fee, may seek information relating to any assessee. The Principal Chief Commissioner, Chief Commissioner, Principal Commissioner, or Commissioner may, if they are satisfied that it is in the public interest to do so, furnish the information.
Historical Background: Evolution from Section 54 (1922 Act)
Pre-1964 – Absolute Secrecy under Section 54 (ITA, 1922)
- Section 54 of the Indian Income Tax Act, 1922, imposed a strict prohibition on the disclosure of particulars contained in tax records (statements, returns, etc.) by public servants.
Section 54(2) of the 1922 Act stated, “No public servant shall disclose any particulars contained in any such statement, return, accounts, documents, evidence, affidavit, deposition or record.”
While there were some exceptions for prosecution and for officials acting in the execution of the Act, the core principle was secrecy, which hindered coordination with other law enforcement agencies like the CBI or state police in criminal cases.
The Shift – Recommendation and Enactment
- The strict secrecy was recognized as a barrier to prosecuting tax-related crimes and major economic offenses, leading to recommendations for reform.
- Section 138 was introduced in the Income-tax Act, 1961, as a replacement for the rigid secrecy provision. While the Act of 1961 was already in place, the current, more flexible version of Section 138 was enacted in 1964 (via the Finance Act, 1964, effective April 1, 1964).
- The purpose of the amendment was to create a “controlled disclosure” framework. This framework permits the CBDT or the Central Government to authorize the sharing of information with other specified authorities (like the Enforcement Directorate or police) in the public interest, thereby balancing the need for confidentiality with the needs of law enforcement.
Underlying Principles of Section 138
- Confidentiality of Tax Information: Tax returns and financial information are highly personal. Section 138 ensures that such data remains confidential unless disclosure serves a legitimate and lawful purpose.
- Public Interest Exception: The section empowers authorities to disclose information if it serves public interest – for example, in cases of fraud, corruption, or criminal investigations involving tax evasion or money laundering.
- Administrative Cooperation: Section 138 enables coordination between different government departments (such as Enforcement Directorate, CBI, or SEBI) by allowing the exchange of tax-related intelligence.
- Protection Against Misuse: The discretion to disclose information is vested only in senior officers of the Income Tax Department, and each case must be evaluated to ensure no undue harm to the taxpayer’s privacy or rights.
Procedural Safeguards
The Income-tax Rules, 1962, lay down specific procedures for implementing Section 138. Rule 113 specifies the form and fee structure for applications seeking disclosure.
Furthermore:
- Every request for disclosure must be considered individually.
- The authority must record reasons for satisfaction regarding public interest or absence of prejudice.
- Unauthorized disclosure attracts penal consequences under Section 280 of the Act and disciplinary action under service rules.
Judicial Interpretation
The judiciary has played a pivotal role in interpreting Section 138 and delineating its boundaries:
- Govind v. Union of India (1990): The court emphasized that taxpayer information is confidential and cannot be disclosed arbitrarily. Disclosure must satisfy the statutory conditions and be backed by reasons recorded in writing.
- K.V. Shankaran v. ITO (2001): It was held that the phrase “public interest” must be interpreted narrowly and not used to justify routine disclosures.
- Union of India v. R. Narayanan (2011): The Supreme Court observed that Section 138 permits information sharing between governmental agencies only when necessary for enforcing other laws, ensuring inter-departmental cooperation without breaching privacy.
Section 138 and the Right to Information Act, 2005
With the advent of the RTI Act, 2005, a new challenge arose: could tax information be accessed through RTI requests?
The Central Information Commission (CIC) and courts have clarified that income tax records are “personal information” protected under Section 8(1)(j) of the RTI Act unless disclosure serves a larger public interest. Therefore, while Section 138 allows conditional disclosure through official channels, RTI applications cannot be used as a backdoor to access confidential tax data unless a compelling public interest case is made (as established in the Girish Ramchandra Deshpande ruling).
Practical Applications of Section 138
Section 138 disclosures are commonly used in:
- Criminal Investigations: For matters such as corruption, money laundering, or benami transactions.
- Inter-departmental Coordination: With bodies like the CBI, Enforcement Directorate, or SEBI.
- International Information Exchange: Under tax treaties and Double Taxation Avoidance Agreements (DTAAs), where reciprocal confidentiality obligations exist.
Challenges and Criticisms
- Vague Definition of Public Interest: The term “public interest” lacks a precise statutory definition, leaving room for subjective interpretation and potential misuse.
- Administrative Delays: The process of obtaining authorization from higher authorities can be time-consuming, affecting the pace of investigations.
- Privacy Concerns: With increasing digitization of tax data, ensuring confidentiality and preventing data breaches has become a significant challenge.
Recent Developments
In line with international standards on information exchange and transparency, Section 138 now facilitates cooperation under:
- Automatic Exchange of Information (AEOI) agreements
- OECD’s Common Reporting Standard (CRS) framework
These provisions allow India to share and receive tax information from other jurisdictions, strengthening the fight against black money and tax evasion.
Conclusion
Section 138 of the Income Tax Act, 1961, exemplifies a delicate legislative balance between individual privacy and state transparency. While confidentiality remains the rule, exceptions exist to ensure justice and administrative efficiency.
In an era of global data exchange and financial transparency, Section 138 continues to evolve. It reinforces the principle that information is power — but that power must be exercised lawfully, judiciously, and in the public interest.
