Virtual Digital Space' Under The Income-Tax (No. 2) Bill, 2025: Another Onslaught On The Right To Privacy?

1. INTRODUCTION

1.1 The Government has, over the years, attempted to revamp the domestic tax law framework. The Direct Taxes Code Bill was proposed in 2010 to consolidate and integrate all the direct tax laws, and replace both the Income Tax Act, 1961 (“Act”) and the Wealth Tax Act, 1957 by a single legislation.¹ One of the main purpose was to simplify the language and structure of direct tax laws which had undergone several amendments over the years, especially due to technological advancement, changing commercial realities and globalisation.² In July 2024, the Finance Minister announced³ in her budget speech to undertake a comprehensive review of the Act. Subsequently, the Income-tax Bill, 2025 was introduced in the Lok Sabha on February 13, 2025⁴ to make the Act “concise, lucid, easy to read and understand” ⁵ . A Parliamentary Select Committee was formed with Mr. Baijayant Panda as the Chairperson to examine the draft bill. A report prepared by the Select Committee was to be then presented before the Parliament during the Monsoon Session (“Select Committee Report”).⁶ The Select Committee Report was presented before the Lok Sabha on July 21, 2025 and the initial draft bill was withdrawn on August 8, 2025 considering the suggestions therein. Subsequently, the Income-tax (No. 2) Bill, 2025 (“Bill”)⁷ was introduced and simultaneously passed by the Lok Sabha on August 11, 20258 and the Rajya Sabha on the following day.

1.2 This ambitious target of conducting a complete review of the extant income tax law within a 6 (six) month deadline (July 2024 - February 2025) follows similar, although much lengthier initiatives undertaken by other jurisdictions, notably the Tax Law Rewrite project in the United Kingdom (1996 - 2010)⁹ and Australia's simplification of its tax law (1994 - 1997).¹⁰ It is interesting to note that while these other reforms in the UK and Australia have resulted in lengthier tax statutes, the Indian exercise has considerably reduced the size of the extant Act by removing about 1200 provisos and 900 explanations.

1.3 Despite the apparent realisation of the above targets, the Bill has been criticised for affording overreaching powers to the tax authorities and infringing on assessees' right to privacy by introducing the concept of ‘virtual digital space' under the Act's search and seizure provisions. This article aims to (a) highlight the powers of tax authorities under the search and seizure provisions in the Act, and (b) analyse the tax and privacy implications vis-à-vis the introduction of ‘virtual digital space' under the Bill.

2. POWERS OF TAX AUTHORITIES UNDER THE ACT

2.1 The Indian tax authorities have been given powers of search and seizure under Section 132 of the Act. This provision is derived from Section 37(2) of the Income Tax Act, 1922 and was introduced by the Finance Act, 1956 on the recommendations of the Taxation Enquiry Commission set up by the Central Government in 1956.¹² Section 132 allows the authorised officer to enter and search any building, place, vessel, vehicle or aircraft where the authorising officer has reason to believe that such books of account, documents, money, bullion, jewellery or other valuable articles or things are kept. The officer can also break open the lock of any door, box, locker, safe, almirah or other receptacle for exercising such powers where keys are not available and search a person who has/ is about to access the mentioned place. Further, the authorised officer can cause such person to allow inspection of any books of accounts/ documents/ electronic records found in his possession; seize any such books of account, documents, money, bullion, jewellery or other valuable article; place identification marks; and prepare an inventory of the seized articles. Given that the powers of tax authorities as mentioned above are wide, the law also prescribes certain guardrails within the tax law framework and other statutes to protect the interests of the person searched, as is elaborated in the ensuing section.

3. PROCEDURE OF SEARCH AND SEIZURE, AND SAFEGUARDS PRESENTLY AVAILABLE

3.1 The Information Technology Act, 2000 and the Bharatiya Sakshya Adhiniyam, 2023:

In 2000, the definition of a ‘document'¹³ under the Act was clarified to include ‘electronic record' in consonance with the Information Technology Act, 2000 (“Technology Act”). These electronic records could be produced as evidence at the trial proceedings when accompanied by a certificate under Section 65B of the erstwhile Indian Evidence Act, 1872. Sections 61 to 63 of the Bharatiya Sakshya Adhiniyam, 2023 (“BSA”) now correspond to these provisions and have clarified the scope of what is considered as electronic record to capture all modes of storing, recording or copying information in ‘any' electronic form, server or cloud storage. Section 63(1) deems any information “otherwise stored, recorded or copied in any electronic form (hereinafter referred to as the computer output)” as ‘document' for the purpose of evidence of the original or of any text/ facts stated therein subject to other conditions (like production of a certificate by a person in charge of the computer/ communication device as well as a certificate of an expert). A Schedule to Section 63(4)(c) [Part B - Expert Certificate] of the BSA has been introduced which also specifically lists the sources, including data servers and cloud, from where digital records can be supplied by an expert. Thus, the BSA clarifies the scope of information stored/ recorded/ copied on servers and cloud as electronic evidence. 

3.2 Guidance by the Income Tax Department:

In 2014, the Central Board of Direct Taxes (“CBDT”) published a Digital Evidence Investigation Manual (“2014 Manual”)¹⁴. The 2014 Manual highlights the Income Tax Department's (“Department”) guidance to its field officers for extraction, preservation, analysis, reporting findings and presentation of digital evidence or information stored on cloud data servers, hard disks, computer networks, etcetera, for the purpose of digital forensics. Although only a guidance tool, the 2014 Manual delineates the procedure/ best practice guidelines to be followed by the Department to extract information stored digitally during the search and seizure process.

3.3 Power to order search warrants under the Indian tax law:

It is important to note the various safeguards in place before/ while undertaking a search and seizure process under Section 132 of the Act. Rule 112 of the Income Tax Rules, 1962 (“Rules”) provides for the exercise of powers laid down in Section 132 by issuing a warrant of authorization. Rule 112A relates to the enquiry under Section 132(5) and Rule 112B states that post-enquiry, if required, the seized assets or a part thereof shall be delivered to the person from whose custody they were seized. The power to order a search warrant is vested only with the highest tax officials and the authorisation is to be provided for specific purposes enumerated in Sections 132(1)(a), (b) and (c). It is also settled in law that search warrants cannot be issued merely for making a roving or fishing enquiry.¹⁵

3.4 Rights of Persons Searched:

The Charter of Rights and Duties of Persons Searched¹⁶ further enlists rights of the person searched, inter-alia, to see the valid warrant of authorisation signed and sealed by issuing authority, verify the identity of search party members, have two respectable residents of locality as witnesses, ensure that facts stated upon examination under Section 132(4) have been correctly recorded and have a copy of the statement used against them as well as that of the panchanama along with all annexures. CBDT circular (F. No. 286/2/2003-IT [Inv] dated March 10, 2003) also directs officers carrying out search to desist from recording confessional statements of assesses containing information about income.

3.5 The Bharatiya Nagarik Suraksha Sanhita, 2023:

Since the provisions regarding search and seizure under the Bharatiya Nagarik Suraksha Sanhita, 2023 or the erstwhile Code of Criminal Procedure, 1973 are applicable, so far as may be, to the Act and the Bill, additional safeguards with regards to the established jurisprudence on ‘reason to believe' as having a rational connection¹⁷ to the facts of the case are applicable. The search is valid if the authorising authority (i) has reasonable ground for believing that a search was necessary; (ii) believes that the required object cannot otherwise be obtained without undue delay; and (iii) records reasons in writing.¹⁸ Therefore, the authorising officer is mandated to show application of mind and formation of opinion in her satisfaction note ordering the search.¹⁹

The constitutionality of Section 132 has previously been challenged, especially in Pooran Mal²⁰ case on the grounds of it violating Articles 14, 19(1)(f), (g) and 31. While upholding the constitutional vires of search and seizure provisions, the Apex Court held that the safeguards provided under the provisions of the Act and the Rules were “adequate to render the provisions of search and seizure as less onerous and restrictive as is possible under the circumstances”.²¹ It was also observed that the Director of Inspection (authorising authority) was capable of forming a ‘reasonable belief' to authorise her officers under Section 132(1) to carry out the search and seizure process.²²

4. PROPOSED SCOPE OF POWERS OF TAX AUTHORITIES VIS-À-VIS SEARCH AND SEIZURE UNDER THE BILL

4.1 Clause 247 of the Bill which corresponds to Section 132 of the Act introduces the term ‘virtual digital space' within the overall scope of the search and seizure process. Sub-clause (1)(b)(iii) provides that when the competent authority based on its information has reason to believe that any person holds any asset or information which represents either wholly or partly undisclosed income/ property as per the Bill and relevant statutes, then the approving authority may authorise the authorised officer to “break open the lock of any door, box, locker, safe,… or override the access code to any computer system for exercising the powers conferred by clause (i) where the keys thereof are, or the access to such building, place, etc., or the access code to such computer system, as the case may be, is not available”.

4.2 Clause 261(e) of the Bill defines ‘computer system' and includes the remote server or cloud server or virtual digital space. Clause 261(j) further defines ‘virtual digital space' to mean the environment/realm which allows users to “interact, communicate and perform activities using computer systems, computer networks, computer resources, communication devices, cyberspace, internet, worldwide web and emerging technologies, using data and information in the electronic form for creation or storage or exchange and includes– (i) email servers; (ii) social media account; (iii) online investment account, trading account, banking account, etc.; (iv) any website used for storing details of ownership of any asset; (v) remote server or cloud servers; (vi) digital application platforms; and (vii) any other space of similar nature.”

4.3 The proposed language of these provisions gives rise to the debate regarding the increased powers granted to tax authorities to access individuals' personal data stored over cloud servers, online trading/ investment and social media accounts due to explicit inclusion in the text of the law. The moot questions remain— whether the scope of search and seizure provisions have in fact increased, and whether the tax authorities have unfettered power, which is tantamount to infringing on the ‘right to privacy' of the person searched.

4.4 From the comprehensive statutory analysis in the previous section, it can be understood that (a) statutory amendments have been made across various legislations to keep abreast of technological advancement, and (b) several safeguards are in place to protect the rights of persons searched. Firstly, the scope of digital evidence has increased under the BSA to capture all other non-traditional modes of storing, recording or copying information in ‘any' electronic form, such as server or cloud storage, as also mentioned in the expert's certificate in the Schedule to Section 63(4)(c). Secondly, as per the 2014 Manual, the Department has provided guidelines to its field officers to extract, analyse and report information from data servers for digital forensics. Thirdly, only a specified list of ‘approving authority' and ‘competent authority' can order search warrants under specific provisions of tax law. Fourthly, the authorising officer is mandated to apply her mind and provide ‘reasons to believe' why the search is necessary in her satisfaction note ordering search. Fifthly, it follows from tax jurisprudence that no fishing expedition is permissible under Section 132 of the Act.

5. PRIVACY IMPLICATIONS

5.1 The right to privacy was held to be a fundamental right of individuals protected under Article 21²³ of the Constitution of India by a nine-judge bench of the Supreme Court of India (“Supreme Court”) in the case of Justice Puttaswamy and Ors. v. Union of India²⁴ (“Puttaswamy Judgement”). The Puttaswamy Judgement overruled the judgement in M.P. Sharma v. Satish Chandra, District Magistrate²⁵ (eight-judge bench of the Supreme Court) to hold that the right to privacy falls within the existing constitutional framework in India. It relied on judgements like District Registrar and Collector, Hyderabad v. Canara Bank²⁶ (“Canara Bank Judgement”) which specifically dealt with search and seizure by state organs, with the Supreme Court observing that the right to privacy even when the power of inspection and search is validly exercisable by an organ of the state, is subject to necessary safeguards to ensure that the information does not travel to unauthorised private hands. Subsequent judgements of the Supreme Court cited the Canara Bank Judgement to conclude that the right to privacy is crucial in instances of search and seizure and imposes a requirement of capturing the reasons for conducting of search and seizures in writing, prior to carrying them out.

5.2 The Supreme Court also observed that the state too had the right to conduct search and seizures. This right of the state must however be balanced against the interests of the individual and be subject to procedural safeguards (such as by way of recording of reasons in writing, and that “such information cannot be disseminated to anyone else, save on compelling grounds of public interest” ²⁷). With respect to taxation laws, it was specifically observed that while these laws require furnishing information and thus impinge upon privacy of individuals, most of the taxation laws have concomitant provisions which “prohibit the dissemination of such information to others except under specified circumstances which have relation to some legitimate or important State or societal interest.”²⁸ Accordingly, given that the right to privacy has been incorporated within the scope of right to life and personal liberty under Article 21 of the Indian Constitution, limitations which operate on the right to personal liberty would continue to operate on the right to privacy, and any such limitations would have to take place under a regime of law which must be fair, just and reasonable, subject to constitutional safeguards. The search and seizure provisions conferred under the Bill which extend to the virtual digital space, would be subject to the tests of fairness and reasonability, and constitutional safeguards as applied by constitutional courts in the context of protecting the right to life, when such search and seizure impacts individuals. 

6. CONCLUSION

6.1 It is trite that search and seizure procedure under Section 132 of the Act is a code in itself²⁹, and tax statutes must be strictly construed. Thus, it logically follows that although Clause 261 of the Bill introduces the concept of ‘virtual digital space' under search and seizure procedure (i.e., Clause 247 of the Bill which is pari materia with Section 132 of the Act), it is likely to be understood as continuing the Departmental practice in line with the extant provisions under BSA and Technology Act whilst potentially providing adequate safeguards to deter unnecessary infringement of the right to privacy of the searched. In relation to search and seizures specifically impacting individuals, flowing from the Puttaswamy Judgement, it is clear that by way of specifically incorporating the right to privacy within the scope of right to life, any curtailing of this right (including by way of search and seizure) must necessarily meet the principles of fairness and reasonableness and can be subject to constitutional challenges if not in line with such principles.

6.2 The protracted nature of judicial relief along with the aggressive nature of law enforcement authorities in relation to search and seizure has been a consistent challenge in giving meaningful effect to this right to privacy, despite legal protections. Accordingly, adequate protections to individual persons who are subject to such search and seizure can only be extended where courts understand the importance of expediting legal processes balanced with more measured investigations undertaken by law enforcement to ensure meaningful practice of the right to privacy. This is especially pertinent now considering that laws such as the Bill seek to extend the powers of search and seizure specifically to the ‘virtual digital space'. The protection of this space is even more critical given the array of data that enforcement agencies can access through it. Therefore, in consonance with the legislative intent of ensuring fair investigation, the powers given to the tax authorities under the Bill vis-à-vis the search and seizure procedure, must be exercised with adequate precaution in line with the above provisions/ guidelines, with effective oversight by courts/ tribunals, including where relevant, constitutional courts.

Footnotes

1 49th Standing Committee Report, Department of Revenue, Ministry of Finance, Government of India, The Direct Taxes Code Bill, 2010 (2011-12) https://prsindia.org/files/bills_acts/bills_parliament/2010/SCR_DTC_Bill_2010.pdf, p.8. 

2 Ibid, p. 12.

3 Dipak Mondal, ‘Income Tax Bill to make rules simpler, easy to read' (New Economic Times, 9 February 2025) https://www.newindianexpress.com/business/2025/Feb/09/income-tax-bill-to-make-rules-simpler-easy-toread#:~:text=It%20is%20proposed%20to%20be,it%20can%20be%20rolled%20out.

4 ‘The Income-tax Bill, 2025' (PRS Legislative Research) https://prsindia.org/billtrack/the-income-tax-bill2025#:~:text=The%20Income%2DTax%20Bill%2C%202025%20was%20introduced%20in%20Lok%20Sabha ,language%20and%20remove%20redundant%20provisions.

5 Income Tax Department, Ministry of Finance, Government of India, Broad Scope of New Income-tax Bill: FAQs https://incometaxindia.gov.in/Documents/income-tax-bill-2025/faq_income-tax-bill-general.pdf, p.2.

6 ‘The Income-Tax Bill, 2025' (Digital Sansad) https://sansad.in/getFile/LSSCOMMITTEE/Select%20Committee%20of%20Lok%20Sabha%20to%20Examine% 20the%20Income-Tax%20Bill%202025/Introduction/Introduction_for_Webpage.pdf?source=loksabhadocs.

7 The Income-tax (No. 2) Bill, 2025, Bill No. 104 of 2025 (India) https://prsindia.org/files/bills_acts/bills_parliament/2025/Bill_Text-Income-tax(No.2)_Bill_2025.pdf.

8 PTI, ‘Monsoon session: Lok Sabha passes two tax bills amid din, without debate' (Business Standard, 11 August 2025) https://www.business-standard.com/finance/news/monsoon-session-lok-sabha-passes-two-tax-billsamid-din-without-debate-125081101178_1.html. 

9 Ipsos MORI Social Research Institute, Review of Rewritten Income Tax Legislation: Final Report (Research Report No. 104, HMRC 2011) https://assets.publishing.service.gov.uk/media/5a7e0300e5274a2e8ab45439/report104.pdf. 

10 Parliament of Australia, Tax Law Improvement Bill 1997, Explanatory Memorandum, General Outline and Financial Impact https://www.ato.gov.au/law/view/document?DocID=NEM%2FEM97016%2FNAT%2FATO%2F00001; see also, Joint Committee on Taxation, Text of JCT Tax Simplification Report Available (JCS-3-01 Vol. I TaxNotes 25 April 2001) https://www.taxnotes.com/research/federal/legislative-documents/congressional-joint-committeeprints/text-of-jct-tax-simplification-report-available-volume-i-part/104hc. 

11 Income Tax Department, Ministry of Finance, Government of India, Broad Scope of New Income-tax Bill: FAQs https://incometaxindia.gov.in/Documents/income-tax-bill-2025/faq_income-tax-bill-general.pdf, p.6.

12 Chaturvedi and Pithisaria, ‘Section 132' in Income Tax Act (6th edn, 5 LexisNexis 2014).

13 Section 2(22AA), Act, inserted by Finance Act, 2001, Act 14 of 2001, S. 3 (w.e.f. 1-6-2001).

14 Income Tax Department, CBDT, Department of Revenue, Government of India, Digital Evidence Investigation Manual (2014).

15 Balwant Singh v. R.D. Shah, (1969) 71 ITR 550, 572-3 (Delhi); Bharati Pr. Ltd. v. R.S. Chadda, (1973) 89 ITR 108 (Cal); I. Devarajan v. Tamil Nadu Farmers Service Co-operative Federation, (1981) 131 ITR 506, 535 (Mad).

16 Directorate of Income Tax, CBDT, Department of Revenue, Government of India, Manual of Office Procedure (Vol III Misc February 2003, [1994] 208 ITR (St.) 5) p. 52-3.

17 Pratap Singh v. E.D., 1985 (3) SCC 72.

18 Chiranji Lal v. CIT, (1982) 135 ITR 530, 533 (Del); CCT v. Ramkishan Shrikishan Jhaver, (1967) 66 ITR 664 (SC).

19 L.R. Gupta v. Union of India, 1991 SCC OnLine Del 584, ¶ 40; Income Tax Officer v. Seth Brothers, [1969] 74 ITR 836 SC.

20 Pooran Mal v. Director of Inspection, (1974) 1 SCC 345, [1974] 93 ITR 505 (SC).

21 Ibid, ¶ 11.

22 Ibid, ¶ 13.

23 Article 21 deals with the right to Life conferred on individuals which could be curtailed only through ‘procedure established by law'.

24 (2017) 10 SCC 1.

25 1954 SCR 1077, AIR 1954 SC 300.

26 MANU/SC/0935/2004, (2005) 1 SCC 496.

27 Puttaswamy Judgement, ¶ 343.

28 Puttaswamy Judgement, ¶ 336.

29 Joginder Singh v. CIT, (1981) 128 ITR 14, 25-26 (Punj); Mamchand & Co. v. CIT, (1968) 69 ITR 631 (Cal).

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