SURVEY U/s.133A Legal & Practical Aspects

SURVEY U/s.133ALegal & Practical Aspects By Team SMR

Legal Aspects 2

Objectives of survey u/s.133A It is conducted to find out whether a- regular books of account (BOA)are maintained b- correct entries or made in BOA c- cash and stock tally with entries in BOA d- are there any documents indicating unaccounted purchases and sales,etc. e- there exist other valuable article/things not disclosed 3

Who can conduct Survey? Director /Commissioner of Income-tax Joint Director/ Joint commissioner Deputy / Asstt. Director / Deputy / Asstt. Commissioner (on authorized by -2) Assessing Officer (on authorized by -2) Tax Recovery Officer (authorized by -2) Inspector of Income Tax (For certain purposes only) (on authorized by -2) (later on referred as Income-tax Authority- ITA) 4

Where it can be conduct? U/s. 133A an ITA may enter : (a) Any place, falling in his territorial jurisdiction; (b) Any place, occupied by any person falling in his territorial jurisdiction; (c) Any place, in respect of which he is authorized for survey by such ITA, who is having jurisdiction in the above manner; at which a business or profession is carried on, may or may not be the principal place of business 5 Contd….

(d Any other place Under explanation to section 133A, any other place stated by the person carrying on the business, where the books of accounts, other documents, cash, stock, etc. are kept can also be surveyed. 6

When it can be conducted? • The ITA may enter any place of business or profession only when it is open for business • In respect of any other place, only after sunrise and before sunset. • The restriction is only in respect of entry. [215 ITR 275 (Mad)] 7

Powers of Survey Team ITA is empowered to • Inspect, place marks of identification on the books of account, make or cause to be made extracts or copies there-from; • Impound and retain such books of account for 10 working days after recording reasons and with approval of CCIT/ DGIT thereafter; • Make an inventory of cash, stock or other valuable article or thing verified by him; 8

Powers of Survey Team • Record statement of any person, which may be useful for proceedings under the Act. ITA is precluded The ITA shall not remove any cash, stock or any other valuable article or thing from the place of survey. 9

Sec. 133A(5)- function/ceremony/ event survey- • If ITA views lavish spending in any function or ceremony. • He can at any time thereafter, call for the information from assessee or from any other person who is likely possess information about the expenditure incurred. • ITI is also an ITA for this purpose and the statement recorded may be used as evidence in any proceedings under the Act. 10

Obligations of Assessee • To afford facility to inspect the required books of accounts or other documents available at such place • To afford facility to verify cash, stock or other valuables found therein • To furnish required information, which may be useful for any proceeding under the Act 11

Sec. 133A(6), In case of non-cooperation, S. 131(1) can be invoked • If a person under this section refuses or evades to - • Afford the facility to inspect books of accounts • Afford facility to check or verify cash, stock etc. • Furnish any information or • To have his statement recorded. The Income tax authority shall have all powers u/s 131(1) to enforce compliance. (Unitex Products Ltd. Vs. ITO (2008) 23 SOT 429 (Mum) 12

Presumption as to Ownership. s. 292C Section 292C mandates presumption regarding ownership of the assets, documents and books found in possession or control of any person in the course of a search or survey operation as belonging to him, their contents are true, they are in his handwriting and if executed and attested, it was done by him. Due to assessee’s failure to rebut the presumption addition made u/s 69 was confirmed Surendra M. Khandhar vs ACIT & Ors. (2009) 224 CTR (Bom)409- 13

Practical Aspects 2 14

What does the Survey 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 • Production and/or Sales Records • Investments • Expenditure, such as commission, etc. 15

Pre Survey Precautions Keep books of accounts at any place other than Registered Office. Share common premises- if unavoidable keep a map. Keep personal documents of workers in business premises. Do backdating and editing in books of Accounts. Keep items attracting criminal action under other laws. Keep items affecting moral dignity. Avoid to 2 16

Ensure • That person in change of business have proper knowledge of business affairs • To maintain and keep Books of Account of respective assessees for the current year at the principal place of business • To maintain and keep stock register updated • That physical cash and cash as per books matches • To prepare and keep stock inventory at regular intervals, if stock register not maintained 17 Contd….

To reconcile all records that are maintained at different levels like, gate, security guard, store keeper, etc. • That computer hard disk does not contain any irrelevant data • To prune loose papers at regular intervals • That Assessment particulars of Directors/ Partners/AOP members are readily available • That registered value of property is known to concerned persons. 18

Conduct during Survey • Politely ask for identity, if faces are unfamiliar • Be cool, co-operative and hospitable • Make up your mind to pay taxes, if required • Don’t forget ITA is a team of human beings clothed with powers; let them do their duty, don’t inject ego or emotions • Don’t drag them to your weak points through your anxiety • Never try to obstruct, hasten or snatch anything • Take care to avert sabotage of your mechanism 19 Contd…

Endeavor to withstand pressure; it is your strength • If books of accounts are not written up to date, don’t update in hurry • If records are impounded, ensure that no important paper helpful to you is left • Keep extra copy of account statements, etc. that you are delivering to the ITA • Note down all major figures while giving statement • Always put date and time while signing the statements. 20

Points to ponder while making statement Insist on choice of language if not comfortable with English. Is there any reason for surrender of additional income and whether it could lead to any inference of concealment ? Are there any discrepancies between the stock, cash found on physical verification and that as per books? Is it advisable to admit the discrepancies ? Keep the provisions of Sales tax and Excise duty, ST, IT Act in mind while making surrender? 21 Contd…

Is it safer to disclose income under the head "other sources" or “business” ? State cate-gorically the nature of income Would it be possible to declare the entire amount as current year’s income or spread over income for many years? What’s the liability of interest and penalty for concealment ? Whether a survey would result in reopening of assessments of earlier years? 22 Contd…

Is it possible to capitalize the disclosed amount? • Whether to include the stock difference in BOA or merely offer to tax ? • If the amount is surrendered to purchase peace, firmly state that the offer is subject to condition that no penalty proceedings shall be initiated. • Mere request for non-initiation / leniency in penalty is not sufficient – Arpanna Development Corpn. vs. ITO (2010) 35 SOT 135(Mum) 23

Arrange and set your records, stock, etc. in regular order, to assess importance of impounded things Apply for copy of inventory, statements, etc. drawn Meticulously check working, totals, read statements In case of inconsistencies immediately inform the ITA Separately offer the surrendered amount to tax in the Return Post Survey Watch over 24

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 Information to higher tax authorities like CBDT, CCIT, CIT, JCIT, etc. Appropriate note/ disclosure in the return of income Retraction – How, when, etc. 25

Mock Survey By independent third party, preferably professionals/ consultants Suddenly and without prior information Across all business premises Educate client and its staff About basic provisions; Rights and Duties PREPAREDNESS AND PRECAUTIONS 26

Issues • Whether premises of third parties be covered? No (Circular No. 7- D dt 3/5/1967) However, if a client states his books etc. are at some other place, it can be covered. UK Maha-patra &Co vs. ITO [2009] 308 ITR 0133 (Ori.), affirmed by Hon’ble SC [2010] 186 Taxman (181) • Whether survey team has power to break open locked premises or seal the premises? No, both are not permissible - Premises cannot be sealed - ShyamJewellers & Anr. Vs CCIT U.P (1992)196 ITR 243(All) 27 Contd…

Whether TDS survey possible?: Yes : Reckitt and Colman of India Ltd. vs. ACIT [2001] 251 ITR 306 (Cal). Whether TDS survey at a place other than the place of regular assessment is possible? Yes : Peerless General Finance & Invesment Co. Ltd. v. AO 248 ITR 113 (All). Whether a Survey Can Be Converted Into Search? There is no bar on initiating search proceedings during the course of survey and such action was confirmed in : VinodGoel & Others vs Union of India and others [2001]252 ITR 029 (P&H) 28 Contd…

Whether surrender is necessary? No, as per CBDT’s Circular No. 286/2/03- IT (Inv) dt. 10/3/03- no Confessional statement can be elicited. • What is the evidentiary value of statement recorded on oath during survey? Such statement has no evidentiary value – Paul Mathews & Sons v. CIT 263 ITR 101 (Ker); CIT v. S. Kader Khan Son 300 ITR 157. • Whether statement can be recorded an oath during survey? If Sec. 133A(6) is invoked, Yes. United Chemical Agency vs. R.K. Singh 97 ITR 14 (All.) 29 Contd…

Whether the statement recorded during survey has any value? Yes : It is an important piece of evidence and can be used against assessee – Dr. S.C. Gupta v. CIT 248 ITR 782 (All) • What is the evidentiary value of loose sheets found during survey? Loose sheets found during survey have no evidentiary value unless and until proved by some cogent material and the books of account of the assessee, which are audited, are of great evidentiary value : CIT vsDiplast Plastics Limited [2010] 186 Taxman 317 (P&H ) 30 Contd…

Whether cross examination of the person giving statement during survey is possible? There is no provision for permitting cross examination RameshwarLal Mali v. CIT [2002] 256 ITR 536(Raj) Whether confession made during survey is conclusive? No, it is not conclusive & it is open to establish otherwise by filing cogent evidences- ITO vs. Vijay Kumar Kesar (2010)231 CTR(CG)165; CIT vs. Dhingra Metal Works 236 CTR (Del) 621. However Retraction made after two months and without contemporaneous evidence of agricultural income was rejected – Bachittar Singh v. CIT (2010) 236 CTR (P&H) 587. 31 Contd…

Why copy of statement is not given during survey? There is no provision to supply such copy, however, if it is being used against assessee, it shall be given. • What would be the effect of declaration made against unaccounted expenditure, losses of undisclosed business? Unexplained expenditure u/s 69C no deduction is allowable. Losses of undisclosed business are allowable : Dr. T.A. Quereshi v. CIT 287 ITR 547 (SC). • Whether provisions of Sec 40A(3) applicable for unaccounted business transactions? Yes, CIT v. Hynoop Food & Oil P. Ltd. 290 ITR 702 (Guj) 32 Contd…

Whether ITO has power to remove cash valuables, etc.? No. However attachment of promissory notes to effect recovery upheld N.K. Mohnot v. DCIT 215 ITR 275 (Mad). • Whether A.O. can impound and retained books of account for indefinite period? No, Shubha & Prabha Builders (P) Ltd. v. ITO 318 ITR 29; Raj & Raj Investments v. ITO 293 ITR 57 (Kar). • Whether any action is possible on the basis of material illegally impounded? Yes, ITA can not be restrained from initiating proceeding on the basis of such material – United Chemical Agency v. R.K. Singh ITO 97 ITR 14 (All); CIT v. Kamal & Co. 308 ITR 129 33 Contd…

Whether stock of goods not recorded on the date of survey and failed to offer the explanation due to non availability of concerned person leads to addition? No - CIT vs. SatyanarayanAgrawal 319 ITR 396 (CG) • Can materials found in course of survey can be used in assessment u/s.153A? Sec. 153A makes it specifically clear that action u/s 132 & 132A alone is to be considered for assessment under this section. • Whether penalty is leviable on income surrendered during survey? No. CIT v. BediKirana Stores 235 ITR 0351 (P&H); Amir Chand v. ITO 48 TTJ (Del) 308. 34 Contd…

Whether penalty is leviable if return is revised at the assurance of ITA? No, Silver Palace v. ITO 68 ITD (Pune) 550. • Whether penalty is leviable on admission of non maintenance of books of account? Yes, A One Batteries (P) Ltd. v. DCIT (2011) Taxman 208 (Jharkhand) • Whether books of accounts can be rejected u/s.145(3) if difference found in cash/ stock ? Yes. DCIT vs. Premsons (2010) 130 TTJ (Mum)159 • Whether higher remuneration considering excess stock surrendered during survey is allowable in the case of a firm? Yes- Anand Electrical & Mill Stores vs. ITO – ITA No.105/Nag/2006 35

Questions ???

THANK YOU !!! -Team SMR

References : • Chaturvedi & Pithisaria’s Incometax law 5th Edition. • CTR Encyclopedia on Indian Taxes • Presentation of CA Sanjay K. Agrawal, New Survey, Search & Seizure Delhi • Presentation of CA Rohit Jain, Vaish Associates, Advocates, New Delhi made in All India CA Society 6th Annual Work Shop on Direct Taxes.

SURVEY U/s.133A Legal & Practical Aspects