The Lok Sabha has passed the New Income Tax Act, 2025 (“IT Act, 2025”), which introduces substantial changes to the concepts of financial and assessment year, tax regimes, tax recovery and much more. However, there lies a privacy concern as well, particularly over Section 247 of the IT Act, 2025. This provision enables the assessing officer to search and seize in the ‘virtual digital space’ (“VDS”) of the Assessee, which includes personal emails, social media accounts and bank accounts, etc., to combat tax evasion.
With the integration of technology, financial transactions are completed within the blink of an eye. Digital wallets and payment systems further expedite the transfer of funds across jurisdictions, but with less traceability, making the transaction susceptible to tax evasion. Section 247 seeks to strengthen the enforcement by amplifying search and seizure in the digital domain, underscoring the urgent need to balance technological advancement, effective tax collection and protection of individual privacy.
Although India has adopted a five-pronged proportionality test to evaluate any implications on the right to privacy under the scope of Article 21, Section 247, appears to fail this constitutional standard. The provision grants broad powers to access taxpayers’ digital information without clearly delineating the boundaries of such access or prescribing adequate procedural safeguards against misuse, thereby rendering it overbroad and disproportionate. In the absence of narrowly tailored limits and institutional checks, the measure risks authorising intrusive state action beyond what is necessary to achieve its objective. This blog article therefore examines the constitutionality of Section 247 through the lens of the proportionality test and supplements the analysis with a comparative assessment of legal frameworks in the United States and Canada governing the reporting of taxable digital transactions.
Section 247: the Uncheckered Provision
Section 247 empowers the Assessing Officers to gain access to any computer system, by overriding the code, to investigate and track hidden and undisclosed financial assets or income.
With the increasing online financial activities, such as digital banking, online transactions, cryptocurrency, trading and investment, e-commerce, etc., the provision aims to stipulate modern tax implementation and accountability on taxpayers.
The provision extends the scope of Section 132 of the Income Tax Act, 1961, into the digital realm, enabling the Tax Officer to search and seize assets. Section 132 authorised Tax Authorities to conduct a physical search and seizure on ‘reasonable belief’, when:
- An Assessee failed to produce books of account or documents after a notice/ summon was served,
- Assessee is likely to conceal the concerned books of account or documents if notice/ summon been served.
- An Assessee is in possession of the undisclosed income, serving a notice will rather act counterproductively and will give opportunity to assesee to hide or move the asset.
It empowered the Tax Authorities to enter and search any building; to break locks if the keys are unavailable; to inspect electronic financial records; and to seize books of account, documents, money, jewellery, or other valuables. This enables the Tax Officer to conduct raids to gather information about hidden or concealed assets, or any information connected to those assets within the assessee’s physical premises.
Similarly, Section 247 emphasises VDS, which is defined under Section 261(j) of the IT Act, 2025, However, this definition is overbroad, encompassing email, social media accounts, online investment, trading and banking accounts, any website used for storing ownership details, a remote or cloud server, digital application, or any other digital spaces. Moreover, the provision permits authorities to access a wider ambit of user personal information and data based on mere suspicion of tax evasion. However, a conflict of interest emerges between an individual’s right to privacy and the Assessing Officer’s powers to detect, combat financial crime and tax evasion.
Test of Proportionality
The Test of Proportionality embodies the principle that any limitations brought by State action on the fundamental right must bear a proportionate relationship with the objective sought to be achieved. It ensures that State action does not impose excessive restrictions on citizens right by subjecting such limitations to rigorous judicial scrutiny. The doctrine essentially requires that the greater the limitation imposed on rights, the stronger the justification and reasoning be offered by the State.[1]
The doctrine has sporadically developed in India through the rulings of the Court. While recognising privacy as a fundamental right under Article 21 of the Indian Constitution, the Supreme Court in KS Puttaswamy v. Union of India established a four-pronged Proportionality Test. First, a state must pursue a legitimate aim, requiring it to specify the concrete purpose of the impugned measure to evaluate its requirement. Second, suitability stage examines that the means proposed to advance a legitimate aim have a rational nexus with the objective sought to be achieved. Third, necessity stage requires the State to employ the least restrictive means to achieve its legitimate goal. Lord Diplock in R v. Goldstien cautioned, one must not use a “steam hammer to crack a nut,” underscoring restriction on fundamental right must be narrowly tailored.[2] Finally at the balancing stage, two competing rights are weighed to ensure that the State’s actions do not disproportionately affect the rights of individuals. This stage evaluates which of the two values at stake should take priority over the other.
The doctrine was affirmed for the first time in India in Modern Dental v. State of Madhya Pradesh, wherein Madhya Pradesh Niji Vyavasayik Shikshan Sanstha (Pravesh Ka Viniyaman Avam Shulk Ka Nirdharan) Adhiniyam, 2007 (Act of 2007) was upheld as reasonable restriction on private unaided universities under Article 19(1)(g)of India Constitution and qualified the four-pronged Proportionality Test.
Furthermore, KS Puttaswamy cemented the use of the doctrine and read down the provision of the Aadhaar (Targeted Delivery of Financial and Other Subsidies, Benefits and Services) Act, 2016, contradicting the right to privacy of users. The proportionality test was reiterated in Anuradha Basin v. Union of India, wherein the deliberate and state-sanctioned suspension of internet services in the State of Jammu and Kashmir dehors the test of proportionality. The latest version of the test has a fifth prong, i.e., sufficient safeguard which inspects whether adequate safeguards exist against potential abuse of the State’s action. It was introduced in Gujarat Mazdoor Kisan Sabha v. State of Gujarat, which is reaffirmed in Kunal Kamra v. Union of India, where the Fact Checking Unit was declared unconstitutional under Rule 3(b)(v) of The Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021 for abridging freedom of speech and expression under Article 19(1)(a) of Constitution of India and for failing the test of proportionality.
Proportionality Analysis of Section 247 of the IT Act, 2025
Section 247 does not pass the muster of the proportionality test. The comprehensive analysis of its five prongs is provided below:
- Legitimate aim
The main purpose of introducing the Income Tax Act, 2025, is to simplify the language and remove redundant and outdated provisions which are no longer in use. Nirmala Sitaram, Minister of Finance, while tabling the Income Tax Bill, 2025, in Lok Sabha, expounded that the aim of Section 247 is to curtail tax evasions, reduce the instances of undisclosed taxable income, etc., in the digital realm.
- Suitability
Union Finance Minister attempted to establish a rational nexus between the enhanced power of tax officers, to access passwords of taxpayers, given the incorporation of financial transactions in the digital sphere, with the interest of the public in curbing financial crime online, which justifies its suitability.
The Court in Ritesh Sinha v State of Uttar Pradesh held that the Fundamental Right to Privacy is not absolute and is subject to compelling public interest. However, the Supreme Court in Chintaman Rao v State of Madhya Pradesh ruled that “[T]he limitation imposed on a person in enjoyment of the right should not be arbitrary or of an excessive nature, beyond what is required in the interests of the public.” Accordingly, while interpreting the extensive powers vested in tax authorities, courts must maintain a careful balance between state interest in tax enforcement and individual privacy. The reliance on mere presumption fails to establish a reasonable nexus with the objective sought to be achieved and risks rendering such intrusion disproportionate.
- Necessity
The tax officials are vested with overriding power of ‘reason to believe’. This exceeds what is necessary to achieve the legitimate aim in a least restrictive manner because it concentrates significant authority in a single official without adequate checks.
Moreover, VDS encompasses a broad category of means of electronic communication. Notably, Institute of Chartered Accountants of India (“ICAI”), in its pre-Budget memorandum to the finance ministry, recommended that the provision be amended to restrict officials to accessing only the official email account of individuals, instead of a permitting access to a broad range of electronical communication, thereby narrowly tailoring the overbreadth definition of VDS and eliminating disproportionate intrusion into informational privacy.
In contrast, under Section 132 of IT Act,1961, prior authorization from a senior tax official is mandatory before conducting search and seizure, demonstrating a more balance approach that mitigates the potential arbitrariness while still enabling effective enforcement.
The Supreme Court of the United States of America, in Katz v United States, recognised an individual’s reasonable expectation of privacy. The Court underscored the requirement of a judicially sanctioned warrant, that is to be obtained for government searches that vitiate reasonable expectation of privacy. Until there is material evidence that strongly suggests that information in the computer system can constitute a ‘reasonable belief’, gaining access or decrypting the passwords of the taxpayers is overarching and violates the reasonable expectation of the Assessee’s privacy.
- Balancing
The overriding powers of accessing the data of tax payer, on mere suspicion, disproportionately hamper the Fundamental Right to Privacy under Article 21. The State justifies such action when a taxpayer is non-cooperative and denies access to their computer system during the search and seizure process on the basis of ‘reason to believe’. However, in situations where no material evidence is found on the computer source from which the tax officer has obtained passwords, it amounts to an excessive use of power by the tax authority, raising serious privacy concerns and implications for individual autonomy.
- Sufficient Safeguards
The Supreme Court of Canada, in R v Ahmad, recognises the qualitative difference between surveillance of virtual spaces and public spaces. It emphasises that the degree of intrusion possible in virtual spaces is greater than in physical spaces, thereby heightening the risk of innocent individuals being targeted, and therefore recommends delineating virtual spaces with precision. Moreover, in R v Reeves, the Court mandated prior judicial authorisation for conducting searches and seizures of computers. When State action intrudes upon an individual’s private life, the potential for harm is manifold, making it imperative to establish additional procedural safeguards.
Section 247 enables a Tax Officer to access VDS and does not impose any penalty on the Officer who can act deterrently in case of abuse of their powers; without any sufficient cause, they can decrypt or access codes. Prior judicial authorization acts as a safeguard by verifying the legitimacy of the purpose for collecting financial data from VDS and by confining the scope of the search strictly to that authorized purpose.
Comparative Analysis
In the United States, the Internal Revenue Service requires taxpayers to report digital-asset transactions on their annual returns and obliges brokers to file matching reports, enabling verification. In case of non- reporting, penalties are imposed on both taxpayers and brokers. The emphasis is on the third-party verification rather than directly breaking into the assessee’s computer system.
Meanwhile, in Canada, Section 231.2 of the Income Tax Act, 1985 limits the Canada Revenue Authority to consider tax-relevant information only. Section 231.3 requires a judicial warrant for any search and seizure against the person, and any information extracted from an unnamed person must be ascertainable in the warrant. This framework prevents random ‘fishing’ of data where tax authorities seek large amount of information without a specific, identifiable suspicion or relevance to a particular taxpayer or transaction, with a view to uncover a possible violation, as highlighted by Ministry of National Revenue v Shopify Inc) (2025).
Conclusion
It is vital to bring measures that curb tax evasion or tax the hidden income online of an individual for furthering public welfare. This calls for a delicate interplay between the individual digital space and the extent to which the state can access it is, such that the state does not excessively harness the individual data and raises privacy concerns.
Internet Freedom Foundation in its submission to the Select Committee of Lok Sabha to Examine the Income Tax Bill, 2025 recommended that the Section 247 be reviewed on the grounds of proportionality so that it expressly adopts least invasive measure and incorporate deterrent measure against misuse. A plain reading of the provision appears to vest authorities with unchecked powers that may erode civil liberties, infringe citizens’ privacy, and foster a surveillance regime. The recommendation emphasises eliminating the overbreadth definition of VDS and establishes a surveillance regime.
[1] Aharon Barak, Constitutional Rights and Their Limits (CUP 2012).
[2] R v. Goldstein [1983] 1 WLR 151.
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