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All India Chartered Accountants Society 6 th Annual Workshop on Direct Taxes

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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All India Chartered Accountants Society 6 th Annual Workshop on Direct Taxes

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  1. All India Chartered Accountants Society 6th Annual Workshop on Direct Taxes SEARCH, SEIZURE & SURVEY CA Rohit Jain Vaish Associates, Advocates

  2. 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

  3. 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

  4. Stage - I Pre – search enquiries and authorization

  5. 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

  6. 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 ]

  7. 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.)

  8. 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

  9. 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)

  10. ‘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

  11. 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.)]

  12. 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

  13. 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)]

  14. 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.)

  15. STAGE 2 ACTUAL CONDUCT OF SEARCH PROCEEDINGS

  16. 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))

  17. 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.

  18. 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.)

  19. 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))

  20. 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

  21. 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

  22. 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

  23. 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.)

  24. 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’

  25. ‘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

  26. ‘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]

  27. 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.)

  28. 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)

  29. 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

  30. 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

  31. 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;

  32. 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

  33. 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

  34. 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

  35. STAGE 3 Post Search Assessment of income

  36. 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

  37. 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]

  38. 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

  39. 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)

  40. 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

  41. 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

  42. 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’?

  43. 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

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

  45. 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’

  46. 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.”

  47. 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].”

  48. 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)).

  49. 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

  50. 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

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