Need to determine which lawyer-client communications are protected during tax probes: Supreme Court

The Supreme Court recently raised concerns over the manner in which Income Tax authorities treat communications between lawyers and clients during inquiries proceedings with a tax evasion element.

A Bench of Chief Justice of India (CJI) Surya Kant and Justices Joymalya Bagchi and V Mohana said that the extent to which such communications are protected by lawyer-client privilege.

The Court was hearing a suo motu case concerning summons issued by investigating agencies to advocates who give legal opinions or represent parties during criminal investigations.

On September 24, the Court mulled over where the line should be drawn between confidential legal advice and lawyer-client communications that should be disclosed to the authorities.

Justice Bagchi illustrated the issue through a tax-related example. He observed that there is a distinction between communications that constitute legitimate tax planning and communications that amount to impermissible tax avoidance.

“Let us say, (a lawyer who is questioned) says, ‘No, no, this is not tax avoidance. This is tax planning.’ Then that exchange will become protected. The problem is how the Income Tax authorities are looking at it,” Justice Bagchi said.

The Court stressed that there is a need to evolve a mechanism to differentiate between communications that amount to permissible tax planning (confidential and protected by lawyer-client privilege) and illegal tax avoidance (not protected by privilege).

“We have to see a way which is workable,” CJI Surya Kant said.

“Absolutely right. But not the way the Income Tax authorities are looking at it,” Justice Bagchi weighed in.

The exchange took place while the Bench was examining protections available to communications involving in-house counsel and clients, as opposed to external legal advisers who may advise a company.

Justice Bagchi observed that an in-house counsel has an employer-employee relationship with the company, unlike external lawyers engaged under a professional arrangement.

The Bench discussed whether communications between an employer and its in-house counsel could consequently stand on a different footing from communications with an external legal adviser for the purpose of legal privilege.

Senior Advocate Mukul Rohatgi pointed to difficulties arising from an earlier Supreme Court judgment on the issue. He submitted that the judgment does not adequately address lawyers who independently advise companies without being employed as in-house counsel.

The earlier judgment also did not sufficiently deal with the relevant statutory provisions except in its operative portion, Rohatgi said.

Rohatgi further informed the Court that the General Counsel’s Association has filed a review petition against the earlier judgment and requested the Bench to examine it.

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