The Delhi High Court has allowed an appeal filed by the Income Tax Department and restored the Look-Out Circular (LOC) issued against businessman holding that courts cannot sit in appeal over the subjective satisfaction of the executive authorities or independently assess whether the material available with them was sufficient to justify an LOC issued on the ground that the person’s departure could be detrimental to the economic interests of India.
The Bench of Justice C. Hari Shankar and Justice Om Prakash Shukla has observed that it had examined the official file and found that its contents supported the assertions made in the authorities’ counter-affidavit. On that basis, the Bench held that, if the Income Tax authorities had formed the view that allowing the businessman to leave the country could be detrimental to India’s economic interests, it could not be said that the decision had been based on irrelevant, inadmissible or insubstantial material.
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The case arose from an Income Tax Department search conducted at the premises of Chaudhary between February 6 and February 9, 2019, following a warrant issued under Section 132(1) of the Income Tax Act, 1961. A subsequent search of his locker resulted in seizure of jewellery valued at approximately ₹1.0067 crore.
Chaudhary, who was a director in Nautilus Metal Crafts Pvt. Ltd. and Aastha Apparels Pvt. Ltd., was involved in the export of garments to the United States, Europe, South America, the United Kingdom and the United Arab Emirates. Following the searches, the Ministry of Home Affairs issued an LOC against him on February 25, 2019, at the instance of the Income Tax Department, restraining him from leaving India.
The authorities cited allegations concerning undisclosed foreign assets and interests in foreign entities. The allegations were stated to potentially attract proceedings under the Income Tax Act, the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, and the Prevention of Money Laundering Act, 2002.
Two assessment orders were subsequently passed on July 5, 2021, assessing additional undisclosed income of approximately ₹21.4 crore in the case of Chaudhary.
The Single Judge had examined whether the LOC could be sustained under the 2017 amendment to the Ministry of Home Affairs guidelines, particularly the provision permitting an LOC in exceptional cases where allowing a person to leave India could be detrimental to the country’s economic interests.
The Single Judge had accepted the Department’s position on several preliminary issues, including that the LOC could be judicially reviewed, that the 2017 Office Memorandum could be relied upon, and that the LOC had been renewed from time to time. However, the crucial fourth issue—whether the material justified restricting Chaudhary’s travel on the ground of detriment to India’s economic interests—was decided in his favour.
The Single Judge had noted that the LOC had remained in force for almost three years without prosecution under the Income Tax Act, Black Money Act or PMLA. The court also noted that Chaudhary had appeared before the Income Tax authorities on 19 occasions. On that basis, the Single Judge concluded that the allegations remained at the level of suspicion and that continuation of the LOC had become disproportionate.
The Single Judge had further considered the impact of the LOC on Chaudhary’s right to travel and livelihood under Article 21, particularly because overseas travel was integral to his garment-export business.
The Division Bench disagreed with the extent to which the Single Judge had scrutinised the material supporting the LOC.
The Bench held that judicial review of an LOC decision is not completely barred, but the court cannot itself determine whether the evidence or intelligence available to the executive was quantitatively or qualitatively sufficient to warrant issuance of the LOC.
According to the Division Bench, the sufficiency of the material must fundamentally remain within the province of the authority issuing the LOC. The court cannot assume the role of a “super-executive authority” and substitute its own assessment for that of the competent executive authority.
The Bench clarified that judicial review remains available where the decision is legally vulnerable—for example, where there is effectively no material, or where the decision is so shockingly disproportionate to the material relied upon that judicial intervention becomes warranted. But courts cannot undertake their own assessment of the sufficiency of the material merely because they may have reached a different conclusion.
The Court noted that under the 2010 Office Memorandum, an LOC was principally contemplated in cases involving cognizable offences under the IPC or other penal laws. Where no cognizable offence existed, the individual generally could not be prevented from leaving India.
The 2017 Office Memorandum substantially widened the residuary provision. It permitted an LOC in exceptional circumstances where the departure of a person could be considered detrimental to India’s sovereignty, security, integrity, bilateral relations, strategy or economic interests, or where other specified public-interest considerations were involved.
The Division Bench emphasised that the amended provision deliberately expanded the scope of the executive power to include situations involving potential detriment to India’s economic interests. The relevant satisfaction is that of the authority issuing the LOC, based on the inputs available to it.
One of the Department’s principal arguments was that the absence of an FIR could not by itself invalidate the LOC.
The Income Tax Department contended that economic investigations do not necessarily commence with registration of an FIR and may proceed through complaints and other investigative mechanisms. It also argued that the 2017 guidelines deliberately relaxed the earlier requirement of a cognizable offence and substituted it with the broader criterion of a prima facie detriment to the economic interests of India.
The Division Bench’s reasoning consequently rejected the approach of treating the absence of an FIR or criminal prosecution as determinative of whether the LOC was justified.
The Department relied on a range of material gathered during the investigation.
According to the material placed before the Court, companies controlled by Chaudhary were alleged to have been involved in bogus purchases amounting to approximately ₹1,153 crore. The Department also relied on allegations concerning over-invoiced exports to Dubai and fraudulent export incentives estimated at approximately ₹170 crore. Information concerning these allegations had also been shared with the Directorate of Revenue Intelligence and the Directorate General of GST Intelligence.
The Department further relied upon transactions involving companies connected with Manoj Garg. The material referred to receipts aggregating approximately ₹260.58 crore in relation to purchases shown to have been made by Maximus International General Trading LLC.
Another important allegation concerned a draft agreement found in digital evidence relating to Centurion International Limited, a company registered in Dubai’s Jebel Ali Free Zone. The Department alleged that a 10% shareholding valued at AED 16.5 million, or approximately ₹30 crore, had been acquired in the company in the name of Chaudhary’s daughter.
The authorities also alleged that these transactions and foreign interests had not been disclosed to the statutory authorities and that, if substantiated, they could reveal substantial tax evasion and offences under the Income Tax Act, Black Money Act and PMLA.
A significant factor in the Division Bench’s conclusion was its examination of the official file produced by the authorities in a sealed cover.
The Bench clarified that it was not adjudicating the merits or truth of the allegations. It observed that the eventual outcome of the ongoing investigations remained uncertain. The narrow question before the Court was whether the material was such that the decision to issue the LOC could be said to be legally unsustainable.
The judgment also contains an extensive discussion on judicial restraint in economic and fiscal matters.
The Division Bench held that while constitutional courts have a duty to protect fundamental rights, judicial review cannot become judicial substitution of executive decision-making. Courts must examine whether executive action remains within constitutionally and legally permissible limits, but they should defer to executive expertise in areas that fall within the executive domain, particularly economic and fiscal matters.
The Court stressed that this principle does not mean that judicial review disappears. Rather, courts must strike a balance between protecting individual rights and respecting legitimate executive discretion. The judiciary cannot simply replace the executive’s assessment with its own merely because another view is possible.
The case involved an important tension between the individual’s right to travel abroad and the executive’s responsibility to protect the country’s economic interests.
The Division Bench acknowledged that an LOC curtails a citizen’s freedom to travel and is a serious measure. However, it held that the seriousness of the restriction does not authorise the court to independently determine whether the evidence supporting the executive decision was sufficient.
The Bench specifically held that the court cannot “sit in appeal” over the subjective satisfaction of the LOC-originating authority. At the same time, it preserved judicial scrutiny in cases where the material is merely speculative or amounts to virtually no material at all.
Ultimately, the Division Bench concluded that the circumstances did not justify quashing the LOC.
The Court held that the Single Judge had gone too far in assessing the sufficiency and magnitude of the material available to the Income Tax authorities. Since the official record contained material capable of supporting the authorities’ assessment that Chaudhary’s departure could be detrimental to India’s economic interests, judicial interference was not warranted.
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