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All India Chartered Accountants Society 6 th Annual Workshop on Direct Taxes. SEARCH, SEIZURE & SURVEY . CA Rohit Jain Vaish Associates, Advocates. SEARCH, SEIZURE AND SURVEY A WALKTHROUGH. Search - Stages in search proceedings Stage 1 : Authorization of search

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slide1

All India Chartered Accountants Society

6th Annual Workshop on Direct Taxes

SEARCH, SEIZURE & SURVEY

CA Rohit Jain

Vaish Associates, Advocates

search seizure and survey a walkthrough
SEARCH, SEIZURE AND SURVEYA WALKTHROUGH
  • Search - Stages in search proceedings

Stage 1 : Authorization of search

Stage 2 : Actual conduct of Search Proceedings

Stage 3 : Post Search Proceedings/ Assessment

  • Practical aspects of search
  • Penalty in search cases
  • Survey Proceedings
slide3

SEARCH - AN INTRODUCTION

  • Means to ‘look for’ or ‘seek out’
  • Mechanism for gathering evidence regarding evasion of tax and for unearthing black money
  • Invading the personal/ office premises of any taxable person by surprise
  • THREE STAGES OF SEARCH UNDER SECTION 132
  • Pre-search enquiries and authorization;
  • Actual conduct of search;
  • Post Search - Assessment of income
stage i
Stage - I

Pre – search enquiries

and authorization

slide5

Pre-search enquiries/ information

      • Summons u/s 131(1A)
      • Annual Information u/s 285BA read with Rule 114E
      • Private Sources/ Informers
      • Pre- search investigations
  • Authorization for search can be issued only:
      • by a Competent Authority; and
      • after satisfying prerequisite conditions prescribed under section 132
slide6

Competent Authority

  • Director General
  • Director
  • Chief Commissioner
  • Commissioner
  • Additional Director/ Commissioner
  • Joint Director/ Commissioner

May Authorize

May Authorize

  • Assistant Director/ Commissioner
  • Deputy Director/ Commissioner
  • Income Tax Officer

Note: Addl. Director, Joint Director are also empowered by CBDT to issue authorization u/s 132 (1) [refer Proviso to section 132(1) read with Notification No. SO 2879(E), dated 11-11-2009 ]

slide7

Notes / Observations

  • Additional Director/ Commissioner have been authorized by retrospective amendment in section 132 w.r.e.f. 1.10.1998
  • To overcome following judicial precedents holding that such authorities did not have authority to authorize search:-
  • Dr. Nalini Mahajan vs. DIT (E): 257 ITR 123 (Del.)
  • Pawan Kumar Garg : 178 Taxman 491 (Del.)
  • Capital Power Systems Ltd.: 222 CTR 47 (Del.)
  • Raghuraj Pratap Singh vs. ACIT: 179 Taxman 73 (All.)
slide8

Notes / Observations

  • Vide Instruction No. 7/2003 dated 30.07.2003, Board has issued following guidelines:

(a) Searches shall be authorized only by DGIT (Inv.) and search to be carried out in cases where:

(i) substantial unaccounted income/ assets involved

(ii) expected concealment is in excess of Rs. 1 crore

(b) Tax payers who are professionals of excellence should not be searched without there being compelling reasons

slide9

Pre-requisite Conditions to authorize search

  • ‘Competent Authority’ has,
  • in consequence of information in his possession,
  • ‘reason to believe’ that either of the three conditions contained in clauses (a), (b) and(c) of section 132 are satisfied, which are:
    • (a) Where any person was summoned u/s 131 or was issued notice u/s 142(1) to produce books or other documents and has failed to do so (refers to facts which actually exist)
    • (b) Where any person will not, if summoned or notice issued, comply with the same (refers to belief likely to take place)
    • (c) Where any person is in possession of any money, bullion, jewellery or any other valuable article or thing which he has either failed to disclose or is not likely to be disclosed to the Income Tax Authorities (refers to undisclosed moveable property)
slide10

‘Information’

    • Must be something more than just rumor or a gossip or a hunch;
    • Some valid, definite information and not any imaginary or invalid information
    • Must be authentic
  • ‘Reason to believe’ has been analyzed in various decisions to mean:-
    • Belief of a reasonable man formed in good faith and must not be mere pretence
    • There must be application of mind by the competent authority
    • Nexus between information/ material or reason and belief formed
slide11

Following have been held to be invalid basis:

    • Mere knowledge about huge investment in house or expenditure on lavish marriage/functions [refer L.R. Gupta: 194 ITR 32(Del.) SLP dismissed CA 891/ 93 dated 10.8.98]
    • Report about roaring practice or charging high rates from customers and about standard of living [refer Dr. Nand Lal Tahiliani: 170 ITR 592 (All.) SLP dismissed 172 ITR 627 and 260 ITR 67 (Cal.)]
slide12

Following have been held to be invalid basis:

  • Mere information from CBI/Police that assessee possess money [refer Ajit Jain: 242 ITR 302 (Del) affirmed in 260 ITR 80 (SC)]
  • Post search material cannot justify search [refer Dr. Anita Sahai : 266 ITR 597 (All.), Smt. Kavita Aggarwal vs. DIT (E) :264 ITR 472 (All.)]
  • What are the primary contents of a Search Warrant?

Ans. Refer Rule 112 - Form No. 45

  • Specifies ‘Person’
    • Specifies ‘Premises’
    • Identifies the condition on the basis of which search is authorized
    • Identifies the officers authorized to conduct search
slide13

Issues:

  • What is the remedy if it is felt that search has not been properly authorized?

Ans. To file writ petition challenging the validity of search proceedings. Appellate Authorities have no power to adjudicate validity of the search proceedings

    • M.B. Lal V. CIT: 279 ITR 298/ 199 CTR 571 (Del.)
    • Gaya Prasad Pathak vs. ACIT: 162 Taxman 307 (MP)
    • C. Ramaiah Reddy V. ACIT: 87 ITD 439 (Bang) (SB)
    • Promain Ltd V. DCIT: 95 ITD 489 (Del) (SB)
    • Contra:
    • CIT vs. Smt. Chitra Devi Soni: 313 ITR 174 (Raj.)
  • Once search takes place, whether legal or illegal, evidence collected can be used - [refer Pooran Mal vs. DI : 93 ITR 505 (SC)]
slide14

Issues:

  • Whether search is assessee specific or premises specific?
  • Ans. Search is assessee specific and not premises specific.
  • Refer:
    • Nenmal Shankarlal Parmer V. CIT: 195 ITR 582 (Kar.)
    • Mrs. Dhiraj Suri: 98 ITD 187(Del.)
    • Dr. Mrs. Surjit Tosaria V. JCIT: 92 TTJ 338 (Del.)
stage 2
STAGE 2

ACTUAL CONDUCT

OF

SEARCH

PROCEEDINGS

slide16

Powers of authorized officer

    • To enter and search the place (section 132(1)(i))
    • To break open locks where key not available (section 132(1)(ii));
    • Search any person who is to get in or to go out (section 132(1)(iia))
    • To direct facility to inspect books or other documents (section 132(1)(iib))
slide17

Powers of authorized officer

    • Make inventory and/or place marks of identification on books of account/ documents or make extracts or copies therefrom(section 132(1)(iv) & (v))
    • Seek police assistance (section 132 (2))
    • Record statement under sub-section (4)
    • ‘Seize’ any such books of accounts, documents, money, bullion, etc (section 132(1)(iii))*.
    • Pass a `restraint order’ or ‘prohibitory order’
    • *w.e.f. 1.06.2003, ‘stock in trade’ cannot be seized at the time of search.
slide18

RIGHTS OF SEARCHED PERSON

    • To see warrant of authorization: following particulars must be checked -
      • Companies/ Directors named in the warrant;
      • Premises specified;
      • Designation of Competent Authority;
      • Reason for search;
      • Authorized Officers
    • In case search warrant does not contain the requisite particulars, search can be resisted.
    • Aforesaid facts must be recorded somewhere for future reference.
  • Searched person has a right to continue business as usual
  • L. R. Gupta: 194 ITR 32 (Del.)
slide19

Rights recognized by Taxpayer’s Charter issued by CBDT

  • [208 ITR (St.) 5]
    • To see the warrant duly signed and stamped
    • To verify the identity of each member search party
    • To make personal search of all members of search party
    • To insist on personal search of ladies by ladies only
    • To have two witnesses (refer Rule 112 (6) and (7))
slide20

Rights recognized by Taxpayer’s Charter issued by CBDT

  • [208 ITR (St.) 5]
    • Allow children to go to schools
    • To seek medical help, if required.
    • To have the facility of having meals at the normal time.
    • To have copy of Panchnama together with annexures
    • To have copy of any statement used against the person
slide21

Duties of Person Searched recognized by Taxpayer’s Charter issued by CBDT - [208 ITR (St.) 5]

  • To allow free and unhindered entry to the search party
  • To see the warrant and sign the same
  • To identify and explain ownership of assets or books of account/ documents
  • To identify every individual in the searched premises
slide22

Duties of Person Searched recognized by Taxpayer’s Charter issued by CBDT - [208 ITR (St.) 5]

  • To answer queries to the best of his knowledge
  • To affix his signatures on statements, inventories and Panchnama
  • To ensure that peace is maintained through the duration of search
  • Not to remove any article from its place without prior knowledge of the authorized officer
slide23

SEIZURE

  • `Seizure’ means forcibly taking over possession from the owner or person who has possession and who is unwilling to part with possession [refer Tarsem Kumar: 161 ITR 505 (SC)];
  • Only an `undisclosed asset’ could be subjected to seizure [section 132(iii)]
  • Refer:
    • L.R. Gupta: 194 ITR 32 (Del.)
    • Om Prakash Jindal: 104 ITR 389 (P&H)
    • Indiscriminate search and seizure of third party books/ assets not permissible:-
    • H.L. Sibal vs. CIT : 101 ITR 112 (P&H)
    • S.R. Batliboi & Co. vs. DIT (Inv.): 224 CTR 369 (Del.)
slide24

Modes of Seizure:

    • Actual Seizure
    • `Deemed Seizure’/`Restraint order’
    • (second proviso to section 132(1))
      • Due to physical attributes, possession of any valuable article or thing not possible or practicable; then
      • order served on the person in possession of such article or thing; and
      • person directed not to part/ deal with the article or thing
      • Such action is termed as ‘deemed seizure’
slide25

‘PROHIBITORY ORDER’ (SECTION 132(3))

    • Where its not practicable to ‘seize’ any
    • books of accounts/ others documents,
    • money, bullion, jewellery,
    • other valuable article or thing
    • order served on person in possession of above; and
    • such person is directed not to part or otherwise deal with same
slide26

‘PROHIBITORY ORDER’ (SECTION 132(3))

    • Does not amount to deemed seizure
    • Search concludes when prohibitory order is lifted and Panchnama is prepared therefor
    • Such order is valid for 60 days [sub-section (8A) power to extend the period has been taken away, w.e.f. 1.06.2002]
slide27

PROHIBITORY ORDERS

  • Articles or things referred to in sub-section (3) of section 132 are those which the authorized officer was empowered to search for and seized and no other. An asset which is already known cannot be subject to search and seizure and consequently, cannot be subject of an order under section 132(3) of the Act:
    • Ramesh Chander vs. CIT: ITR 244 (P&H)
    • Moti Lal: 80 ITR 418 (All)
    • Sardar Praduman Singh Vs. UOI and Ors: 166 ITR 115 (Del.)
slide28

PROHIBITORY ORDERS

  • No order can be passed u/s 132(3) where authorized officer is in doubt whether the asset is disclosed or undisclosed:
      • Om Prakash Jindal Vs. UOI: 104 ITR 389 (P&H)
slide29

Certain assets cannot be seized

  • ‘Stock-in-trade’ of the business cannot be seized
  • [Section 132(1) - 3rd Proviso]
  • Following Jewellery cannot be seized [Instruction no. 1916 dated 11.05.94]
    • Jewellery declared in Wealth Tax
    • 500 gms. per married lady
    • 250 gms. per unmarried lady
    • 100 gms. per male member
slide30

STATEMENT DURING SEARCH - Section 132 (4)

  • Authorized officer may examine any person on oath during course of search
  • If such person is found to be in possession of books of accounts, documents, money, etc.;
  • Statement can be used as an evidence in any proceedings
  • Recording of Statement
    • Questions are normally put in order to gain further evidence to support the findings in the search;
    • Correct facts must be stated or time may be sought
    • Such examination may be in respect of all matters relevant for investigation connected with any proceedings under the I.T. Act
slide31

STATEMENT DURING SEARCH (contd.)

  • No obligation to make a surrender (Vide F.No. 286/ 2/ 2003 dated 10th March, 2003 Board has advised search teams not obtain confessions of surrenders)
  • Statements must be availed as an opportunity to:
  • (a) explain disclosed assets to avoid seizure
  • (b) avail benefits of immunity from penalty
  • Right to ensure correct statement has been recorded;
slide32

STATEMENT DURING SEARCH (contd.)

  • Post Recording:
    • Copy of statement not made available by the Department
    • Record the contents/ statement for future reference
    • To ensure correct statement has been recorded before signing the same
slide33

CONCLUSION OF SEARCH

  • Right to obtain a copy of Panchnama
  • Must ensure that it correctly states:
    • Company subjected to search
    • Premises searched
    • Documents/ Books found and seized
    • Cash seized and balance Found, seized and balance handed over
    • Jewellery/ Ornaments, etc
slide34

CONCLUSION OF SEARCH

  • Must ensure that it correctly states:
    • Factum of personal search of search party
    • Factum of closure of search
    • Names of persons of whom statements were recorded
    • Factum of assessee claiming immunity from penalty
    • Factum of prohibitory orders passed
stage 3
STAGE 3

Post Search

Assessment of income

slide36

Section 132

  • Right to obtain photocopies of the various books of accounts and records seized by the search party [sub-section (9)]
  • Seized Assets to be handed over to AO having jurisdiction over the person within 60 days of last authorization [refer sub-section (9A)];
    • Practically an Appraisal Report is prepared by Investigation Wing
slide37

Section 132

  • Seized books of accounts or other documents can be retained up to 30 days of the assessment order passed [or upto 30 days of all the proceedings]
    • Earlier power to retain books up to 180 days from the date of seizure
    • If the person legally entitled to the books of accounts and records, objects to the seizure, he may make an application to the Board for return of books of account and records [sub-section (10)]
    • For release of disclosed assets, application for release to be filed with 30 days of seizure [refer 132 B]
slide38

Post-Search Assessment

  • Change in the procedure for assessment of search cases
      • `Block Assessment’ under Chapter XIV-B applicable for searches after 1.7.95 and up to 31.05.2003
      • Section 153A to section 153C applicable for searches on or after 1.06.2003
  • `Block Assessment’
    • Introduced by the Finance Act, 1995 for searches on or after 1.07.95
slide39

Block Assessment’

    • For the purpose of assessment, block period* comprised of :
      • 10 years in the case where search is made before 1.06.2001
      • 6 years in the case where search is made after 1.06.01 but upto 31.05.03
      • *(block period includes period upto the date of search of the relevant previous year)
  • Example
  • Search conducted on 8.10.2002

Block Period : A.Y.’s 1997-98 to 2002-03 and partly A.Y. 2003-04

( 1.04.1996 to 31.03.2002 and 1.04.2002 to 8.10.2002)

slide40

Salient Features of Block Assessment

    • Parallel Block and Regular Assessment
    • Assessment of ‘undisclosed income’ on the basis of `evidence found as result of search’
    • Section 158BC – Block Assessment of person searched
    • Section 158BD/BC– Block Assessment of any other person based on satisfaction of AO of person searched that any ‘undisclosed income’ belong to that person
slide41

Salient Features of Block Assessment

    • Taxation at Special Rate of 60% u/s 113
    • Separate provision for imposition of interest and penalty u/s 158BFA
    • No penalty where income disclosed in ‘block return’ and tax paid thereon
slide42

Withdrawl of Block Assessment

  • Block Assessment gave rise to numerous litigation on:
    • Whether two separate and parallel assessments can be done?
    • Whether income was `undisclosed income’ or not?
    • Whether income to be assessed as normal income or `undisclosed income’?
slide43

Block Assessment was dispensed with by the Finance Bill, 2003 for the following reasons:

    • Scheme failed in its objective of early resolution
    • Procedure spawned fresh stream of litigation
    • Scheme postulated two parallel assessment
slide44

Section 153A to 153C

  • Under the present scheme four sections have been inserted:
    • Section 153A
    • Section 153B
    • Section 153C
    • Section 153D
slide45

Section 153A – Salient Features

  • Overrides sections 139, 147, 148, 149, 151and 153
  • AO shall issue notice to the person searched to file ROI for 6 assessment years preceding the year of search
  • ROI filed is treated as return u/s 139
  • AO to assess/ reassess total income for six assessment years
  • Assessment/ reassessment in relation to any assessment year :-
  • falling within the period of such six assessment years
  • pending on the date of initiation of search
  • shall `abate’
slide46

ABATE’ - Meaning

Black’s Law Dictionary defines the term as under:

“To throw down, to beat down, destroy, quash. To do away with or nullify or lessen or diminish. To bring entirely down or demolish, to put an end, to do away with, to nullify, to make void.”

slide47

ABATE’ - Meaning

 K J Aiyar’s Judicial Dictionary, 12th Edition, defines the term `abate’ as under:

“ “Abate” is a generic term derived from French word “Abatre” and signifies to quash, to beat down or destroy. “Abate” means to throw down, to beat down, destroy or quash (Black’s Law Dictionary, Fifty Ed.).

To diminish or take away, to prostrate, to beat down remove or destroy; also to let down or cheapen the price in buying or selling. [Encyc. L., Stroud, p.5].”

slide48

ABATE’ – Meaning

  • In civil law, an abatement of a suit is a complete termination of it. To abate a suit is to put an end to its existence. (refer Srinibas Jena vs. Janardan Jena, (1980) 50 Cut LT 337 (DB)).
slide49

EXAMPLE:

Date of Search – 2.07.2010

Assessments in progress – A.Y. 2008-09 u/s 143(3)

A.Y. 2006-07 u/s 147

Pending Appeals – A.Y. 2005-06 – ITAT

A.Y. 2007-08 – CIT(A)

Effect of Search

Proceedings u/s 153A – A.Y. 2005-06 to 2010-11 [ 6 yrs.]

Abated Proceedings – A.Y. 2006-07 and A.Y. 2008-09

Appellate Proceedings – No effect

slide50

SECTION 153B

  • Limitation for assessment u/s 153A and 153C

21 months from the end of the F.Y. in which last authorization was executed

Searched Person

21 months from the end of the F.Y. in which last authorization was executed

Others

Later of

9 months from the end of the F.Y. in which books handed over u/s 153C

slide51

Section 153C

  • Assessment of income of any other person
  • Overrides sections 139, 147, 148, 149, 151and 153
  • Where AO of the person searched is satisfied that any money, bullion, jewellery or other valuable article or thing or books of accounts or documents seized belong to some other person
  • AO shall hand over the aforesaid assets/ documents to AO of such other person;
  • AO of such other person shall proceed u/s 153A
  • Reference to date of search u/s153A construed as reference to date of receipt of aforesaid assets/ documents
slide52

PREREQUISITE OF SECTION 153C

  • Seizure of books of account or documents or undisclosed asset “belonging” to assessee is sine qua non for assumption of valid jurisdiction under section 153C
    • Vijaybhai N. Chandrani V. ACIT: 231 CTR 474 (Guj.)
    • P. Srinivas Naik vs. ACIT: 117 ITD 20 (Bang.)
slide53

PRE - REQUISITE OF SECTION 153C

  • Meaning of `belonging’ to
  • As per Compact Oxford Dictionary, the term “belong” means as under:

“belong” -

  • be rightly put into a particular position or class.
  • fit or be acceptable in a particular place or situation.
  • (belong to) be a member of.
  • (belong to) be the property of”
slide54

PRE - REQUISITE OF SECTION 153C

  • As per Black’s Law Dictionary – Sixth Edition, the term “belong” means as under:

“Belong. To appertain to; to be the property of; to be a member of; to be appropriate; to be own”

  • Reference to the name of the assessee or casual connection in the seized documents does not mean that documents belong to the assessee [refer Vijaybhai Chandrani (supra) and P. Srinivas Naik (supra)]
slide55

Sections 153A to 153C

OTHER SALIENT FEATURES:

  • Assessment to be completed as per normal provisions
  • Taxation of income (including undisclosed income) at normal rates
  • Assessment to be completed with prior approval of Joint Commissioner [section 153D]
  • Abated proceedings revive if assessment u/s 153A is annulled [section 153A(2)]
  • Penalty governed by section 271AAA and 271(1)(c)
slide56

SECTION 153A TO 153C - Issue

  • It is no longer required that addition/ disallowance must be made only on the basis of any evidence found as a result of search as held in the following cases:
    • Harvey Heart Hospital Ltd. v. ACIT: (2010) 36 DTR (Chennai) (Tri.) 201
    • Shyam Lata Kaushik v. ACIT: 114 TTJ 940 (Del)
    • Shivnath Rai Harnarain (India) Ltd v. DCIT: 117 TTJ 480 (Del)

Contra:

    • LMJ International Limited vs. DCIT: (2008) 22 SOT 315
    • Anil Kumar Bhatia v. ACIT: ITA No. 2660-2665/D/2009
slide57

Presumption regarding documents found during search

  • Section 292C presumes that if books of accounts, documents or any other valuable assets is found from the possession or control of a person during the course of search or survey then:
    • such books or assets are presumed to belong to that person;
    • contents of such books or documents are presumed to be correct;
    • signature and contents purportedly in handwriting of a particular person are presumed to be so;
    • in any proceedings under the I.T. Act.
slide58

Presumption regarding documents found during search

Comments/ Observations:

  • Presumption is rebuttable presumption [refer CIT V. SMS Investment Corporation: 207 ITR 364 (Raj.)] and onus to dislodge same shall be on the person from whose possession such seized documents/valuables are found
  • Section 292C was inserted to overcome Supreme Court decision in the case of P.R. Metrani vs. CIT: 287 ITR 209 wherein the Court held that the identical presumptions in section 132(4A) are not applicable to regular assessment and are restricted to provisional assessment made earlier under section 132(5).
slide59

Section 132B

Application of seized assets

  • Seized assets to be dealt with as under
    • Any Existing liability
    • Liability determined on completion of the post search assessment
  • Where any disclosed asset has been seized:
    • Application must be filed within 30 days of seizure for release explaining the same
slide60

Section 132B

Application of seized assets

  • On such application such asset is to be released within 180 days of execution of last authorization
  • Any assets or proceeds thereof which remain after meeting the aforesaid liabilities shall be handed over to the person from whose custody the assets were seized.
slide61

PRACTICAL ASPECTS

OF

SEARCH & SEIZURE

slide62

Difficulties faced during Search

  • Lack of awareness about legal provisions/exemptions
  • Lack of awareness about legal rights and duties
  • Lack of awareness about practical do’s and don’t
  • Improper accounts and/ or accounting system
  • Non availability of important documents
slide63

Important aspects of a Search

  • Covers all the business premises (all offices, factories, etc.)
  • Also covers residential premises of key persons like partners, directors, finance heads and key employees
  • In case of individual/ firm - May also cover residential premises of close relatives, friends, business associates, etc.
  • Search operations may commence on any day including Sundays/ holidays
  • Search may continue for days
slide64

On initiation of Search - the assessee should

  • Maintain cool and remain composed
  • Check the following facts stated in search warrant:-
      • Searched Person named in the warrant (i.e. Individual/ Companies/ Directors, etc);
      • Premises specified;
      • Designation of Competent Authority;
      • Reason for search;
      • Authorized Officers;
      • Date of Authorization
      • Whether warrant completely filled up
    • Aforesaid facts must be recorded for future reference
slide65

On initiation of Search - the assessee should

    • In case Authorization is found to be illegal - Search should be resisted
    • Verify identity of Search Party and Witnesses
  • Avoid discussing irrelevant issues.
slide66

What does the Search Party Generally Look out for?

  • Loose Papers including diaries, note books/ pads
  • Any Documents containing financial data
  • Emails, including Provisional Financial Data, MIS Reports, etc.
  • Account books
  • Discrepancy in Cash
  • Discrepancy in Stock
slide67

What does the Search Party Generally Look out for?

  • Production and/or Sales Records
  • Investments
  • Expenditure, particularly commission
  • Discrepancy in Jewellery
  • Details of household expenses
  • Lockers
slide68

Loose papers/ Documents

Third Party papers:

  • Must be clarified during statement or otherwise
  • Particulars of the such third party may be given

Provisional/ Rough Documents:

  • Factum of Provisional data must be clarified
  • Nature of noting must be clarified
slide69

Precautions:

  • Document/ Paper must contain appropriate indication of its nature like Provisional, Estimate, Rough, Projections, etc.
  • Working Notes/ Provisional Data should be periodically reviewed
  • Periodical review and cleansing of irrelevant papers/ documents
  • Irrelevant emails should be deleted from the system
  • Data on digital diaries, pen drives, etc., should be reviewed periodically
  • Loose sheets or papers should be dispensed with
  • Unnecessary working papers/ documents should not be retained
slide70

Account Books and Cash in Hand

  • Books of accounts should be updated regularly
  • Nature/ Sources of unrecorded transaction should be explained like investment, gift, personal transaction, etc.
  • Old Books should be updated with final audited accounts
  • Proper reconciliation of cash found should be given to avoid seizure
  • Nature of un-reconciled cash should be stated like Third Party, Advances, etc.
slide71

Stock in trade

  • Initially assessee asked to furnish details of Stock like shares, etc.
  • Item wise physical verification is carried out
  • Inventory of Stock in trade is prepared
  • Exemption from the seizure:

(a) Irrespective of nature of business

(b) Even if unexplained

Precautions:

  • Periodical physical verification of stock and reconciliation with the books
  • Identification of Stock in trade to avoid seizure
slide72

Stock in trade

Precautions:

  • Carefully oversee/ watch procedure followed by Search Party to ensure that:
  • Stock found is normally valued on the basis of the purchase bills produced.
  • Method of valuation
  • Quantity
  • Rates applied for valuation
  • Arithmetical accuracy
  • Error must be immediately brought to the notice of the Search Party
slide73

Jewellery

  • Weighment and Valuation usually by accompanying Valuers
  • Carefully oversee/ watch procedure followed by Search Party

Precautions

  • Following Jewellery must be identified to the Search party
      • Stock in trade
      • Disclosed in the wealth tax return
  • Wealth tax return disclosing jewellery should be readily available
  • Copies of bills and source of purchases should be readily available
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Jewellery

Precautions

  • Critically check the report prepared by the valuer
  • Jewellery received as gift on occasions must be specified
  • Request for exemption of following jewellery where wealth tax return not filed:
      • 500 gms. per married lady;
      • 250 gms. per unmarried lady; and
      • 100 gms. per male member of the family
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Statement u/s 132(4)

Statement – Whose, When and Why?

  • Whose - All key persons like proprietor, partner, director, finance employees
  • When – On commencement, during search and before conclusion
  • Why – To gather further evidence

Precautions

  • Remain cool and composed during statement
  • Insist on choice of language if not comfortable in English
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Statement u/s 132(4)

Precautions

  • Request for assistance of consultant
  • Avoid wrong answers - seek time, if required
  • Opportunity to explain disclosed assets to avoid seizure
  • Before signing the statement
  • Check its correctness
  • Mention date and time
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Retraction of Statement

  • Assessee entitled to retract from admission and explain the incorrect statement made:
      • Pullangode Rubber Produce Co. Ltd V. State of Kerala: 91 ITR 18 (SC)
      • K.T. M. S. Mohd. V. UOI: 197 ITR 196 (SC) 
  • Evidence brought by confession, if successfully retracted, must be corroborated by independent and cogent evidences:
      • Vinod Solanki: 2009 (233) ELT 157 (SC)
      • K.T. M. S. Mohd. V. UOI: 197 ITR 196 (SC)
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Retraction – How, when, etc.

  • No specific form - Affidavit, letter, etc.
  • Earliest Opportunity – minimum time gap
  • Reasons for retraction like knowledge of incorrect facts
  • Circumstances leading to retraction must be specified like inducement/ threat/ coercion, etc. with evidence
  • Documents/ Evidence in support of retraction like VDIS certificate, confirmations, etc.
  • Information to Higher Tax Authorities like CBDT, DGIT, DIT, etc.
  • Appropriate note/ disclosure in the return of income
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Penalty in Search cases

Applicable Provisions:-

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IMMUNITY FROM PENALTY

Eligible Undisclosed Income:-

  • income not disclosed
  • expense found to be false

Eligible previous year

  • Year of search
  • Year preceeding the search, if:-

(i) due date of filling of ROI u/s 139 (1) not expired; and

(ii) ROI not filed by the assessee

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Conditions for claiming immunity

[section 271AAA (2)]

(a) Undisclosed income is admitted in statement u/s 132(4); and

(b) Manner of deriving undisclosed income specified and substantiated; and

(c) Tax along with interest is paid

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SURVEY

SECTION 133A

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SURVEY – SECTION 133A

  • Survey can be conducted by jurisdictional
    • Commissioner
    • Director
    • Joint Commissioner
    • Joint Director
    • Deputy Director
    • Assistant Director
    • Assessing Officer
    • Tax Recovery Officer
    • Inspector (only for inspection of books)

After approval of Joint Director/ Commissioner

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Survey can be conducted

    • Only at business premises; and
    • Any other place where assessee states that books/ cash/ stock/ valuable article or thing of business are or is kept
  • Survey team can enter
    • Business premises : During business hours
    • Any other place : After sunrise and before sunset
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Survey team can

    • Inspect books/ other documents, place marks of identification and/ or make copies thereof
    • Impound, after recording reasons, such books/ other documents for 10 days (excl. holidays) [period can be extended by Chief Commissioner/ Director General];
    • Verify and make inventory of cash/ stock/ other valuable article/thing [cannot remove them];
    • Record statement of any person (not on oath);
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`IMPOUND’ – MEANING

Black’s Law Dictionary defines `impound’ as under:

  • “impound, vb. 1. To place (something, such as a car or other personal property) in the custody of the police or the court, often with the understanding that it will be returned intact at the end of the proceeding.
  • 2. To take and retain possession of (something, such as a forged document to be produced as evidence) in preparation for a criminal prosecution”
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Issues:

    • Whether any time limitation for exit of the Survey Team?
  • Ans. No.
  • refer N.K. Mohnot: 215 ITR 275 (Mad.)
    • Whether statement recorded during has evidentiary value?
  • Ans. No
  • refer : S. Kader Khan Sons: 300 ITR 157 (Mad.)
  • Paul Mathews & Sons: 263 ITR 101 (Ker.)
  • Ashok Manilal Thakkar vs. ACIT : 279 ITR 143 (AT) (Ahd.)
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Issues:

  • Survey of premises of lawyer/ CA not permissible unless the client whose premises is surveyed states that his books of accounts/ documents and records are kept in office of lawyer/ CA
    • U.K. Mahapatra & Co.: 308 ITR 133 (Ori.)
  • Bar on removal of cash, stock or other valuable thing/ article under section 133A(4) is absolute

- CIT V. Mool Chand Salecha: 256 ITR 730 (Raj.)

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Issues

  • Whether records, documents pertaining to third parties (say A, B, C, etc) found in possession of X (another third party), who is subjected to search and seizure operation under section 132 in connection with search on Y (searched party) be seized by the Search Party?
  • Whether search/ survey can be carried out at the premises of Chartered Accountant/ Lawyer, etc.?
  • S.R. Batliboi & Co. vs. DIT (Inv.): 224 CTR 369 (Del.)
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Penalty - Issue

  • Non-mentioning of manner of earning income is not fatal to claim of immunity. It is incumbent upon the Authorised officer to put a specific question with regard to the manner in which income has been derived and it is not expected from the person to suo-moto make a statement in this regard.
      • CIT v. Sri Radha Kishan Goel: 200 CTR 300 (All.)
      • CIT vs Manmohan Goel: 149 Taxman 578 (All.)
      • CIT vs Nem Kumar Jain: 151 Taxman 187 (All.)
      • ACIT V. Smt. Lad Devi Kothari: 97 TTJ 421 (Jaipur)
      • DCIT V. Sunil Tolaram: 90 TTJ 48 (Mum.)
      • Dy. CIT vs Sunder Lal: 24 DTC 174 (Del.)
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ORGANISATION PREPAREDNESS AND PRECAUTIONS

  • Mock Search
    • By independent third party, preferably professionals/ consultants
    • Suddenly without prior information
    • Across all business premises
  • Educate client and its staff
    • About basic provisions;
    • Rights and Duties
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ORGANISATION PREPAREDNESS AND PRECAUTIONS

  • Specific allocation of area in common premises to separate entities
  • Regular and timely filing of income tax and wealth tax return
  • Display charter of rights and duties of searched party at prominent place
  • Inculcate discipline in maintaining records in:
    • Management
    • Employees
    • Business Associates
  • Make proper disclosure of all transactions to Tax Authorities
  • Due compliance of summons/ notices received from Tax Department