The Supreme Court has raised concerns over how Income Tax authorities deal with communications between lawyers and their clients during inquiries involving alleged tax evasion.

A Bench comprising Chief Justice of India Surya Kant and Justices Joymalya Bagchi and V Mohana was examining the extent of protection available to lawyer-client communications under legal privilege.

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

During the hearing on September 24, the Bench discussed where the line should be drawn between confidential legal advice and communications that may have to be disclosed to authorities.

Justice Bagchi highlighted the issue using the example of tax-related advice. He pointed out the distinction between legitimate tax planning and 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 observed.

The Bench said there was a need to develop a workable mechanism to distinguish between communications concerning permissible tax planning, which may attract lawyer-client privilege, and advice relating to illegal tax avoidance, which may not receive such protection.

“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 added.

The discussion also focused on the protection available to communications between companies and their in-house counsel, as opposed to external lawyers engaged to provide legal advice.

Justice Bagchi noted that an in-house counsel has an employer-employee relationship with the company, unlike an external lawyer who is engaged under a professional arrangement. The Bench considered whether this distinction could affect the applicability of legal privilege to communications between companies and their in-house counsel.

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

Rohatgi also argued that the earlier judgment had not sufficiently dealt with the relevant statutory provisions, except in its operative portion.

He informed the Bench that the General Counsel’s Association has filed a review petition challenging the earlier judgment and urged the Court to examine the issue.