How to face efficiently Income Tax Search & Seizure
1. We should understand that the sole objective of income tax raid is to unearth tax avoidance. Generally it leads to chaos and vacuity as it is incredulous and any unexpected encounter with IT sleuths. Every assessee should understand very well the rights, duties and normal care during search and seizure. It will comfort you.
2. By studying the guidelines one can understand how to Prevent or minimize the risk of income tax Raid
a. Compliance with Summon and Notices u/s 131(1), 142(1) and other relevant sections in due time.
b. The Summons or notice calls for the books of account or other documents to be produced before the authorized officer well within the time.
c. It is always better to make a full disclosure of one’s income, whether taxable fully or partially exempt, in the Income Tax Return filed. Also the Income Tax return or reply should be thoroughly discussed with your CA or tax consultant before furnishing with the income tax office. One should keep habit to read properly the income tax return and reply to be submitted and ask the questions to your consultant if you feel some thing is missing.
d. One should ensure that accounts books are always updated. Accounts books means not only of your business but also of personal books. If your accountant is not keeping the accounts updated better to give warning and strict thereupon. It is always better to keep the accountant who is punctual as otherwise it will cost you to the extent which even you may have not think off. So better to have strict and close monitoring on accountant.
e. Keep your habit to check almost weekly the tables, almirah and recks of your staff and your self, your house, wife and family members for destroy of loose papers. You should also not to keep unnecessary files on computers containing various calculations and datas. Tell your auditor or CA to report on monthly / weekly basis on loose papers or computer also. Also every year keep habit to change the hard dick of computer on which the accounts are maintained. It cost very minimum. Avoid to send account or their data through email. Though your loose papers may be for accounted money but you will find in catch with the tax clutch as most of the time you will not be able to explain each paper and also it will be very costly affair for your CA to prepare reply on each page seized. I enriched with my long practice that usually tax payer has to pay huge tax and even had reason to wipe off their capital of whole business due to this mistake. So be careful on this issue. Once a person face this situation makes this habit to even out the employee on this ground. So you are advised to very strict on this issue.
f. Your should understand the basic thing that what is unaccounted income/assets. Those income or assets are not accounted for or those liabilities are not properly explainable are your unaccounted income. The limitation is also that one has to explain the income / assets earned or created during the current financial year or of during last 6 previous years. So if you can explain that a particular income / assets beyond this period then it will not be included in your income. So one should keep the proof of these types of income and assets. Lot of clients ask me whether they need to keep the records of beyond 6 years. I always tell them keep the bill and source of payment of all your assets existed during last 6 previous years or during the current financial year.
g. One should also keep the audit reports, balance sheet, Profit & Loss A/c, Tax returns, proof of payment of taxes or demands even of last 40 years. Recently my client got notice for demand raised in 1981-82. There is no limitation of time for demand raised by the department.
h. If you are associated with any person, firm or company as partner, joint venture or director or any other interest and at one stage you find that now the interest is over then quit immediately. If due to any reason if raid on that party then you shall be covered in raid so be alert to quit promptly.
i. You should not keep any Alchoholic Drugs or any illegal things like blue film, etc in Home or office without permit
3. Your Rights
a. When Income Tax Search Party visits, you can check their search warrant and also note the date, address and authorization etc.. You can also ask for the identification of each member of the raid team and note down their name and designation.
b. You have the right to personally search every member of raid team to avoid any planting of evidence.
c. Women can be checked only by lady members of raid team.
d. Women may not come forward if their religious belief do not allow them to appear in public.
e. In case of any health related emergency you have the right to call a doctor of your choice. You also have the right to have your meals at proper time.
f. Children can go to school and after clearance.
g. It has been held by Hon’ble High Court of Pat. That due regard to human dignity and value cannot be ignored in the case of Chief Commissioner of Income-tax (CCA) v. State of Bihar Through The Chief Secretary, [2012] 18 taxmann.com 70 (Pat.):
h. In case of difficulty in seizure of jewellary or other valuable articles (except stock in trade) the department may leave such items after necessary sealing etc. in the custody of assessee. Jewellery up to a specified limit (e.g. 500 grams per married lady, 250 grams per unmarried lady and 100 grams per male member of the family) is generally accepted. If it is a survey and not a search (the warrant will specify that), the raid team does not have the powers to seize or take away any valuables. They can only take away documents, files etc.
i. Whatever is being seized, make sure they are being properly listed and described. Please also have two of your neighbors stand witness to the same.
j. If any valuables do not belong to you, make that known upfront and also provide the name, address and other details of the owner.
k. The raids can only start between sunrise and sunset.
l. You can place your own seal on the package in which seized stuff is stored.
m. You are also entitled to a copy of panchanama, books of accounts and documents.
n. Instruction No. 1916 dated 11.5.1994 Issued by CBDT is very important and relevant also.
Subject: Guidelines for seizure of jewellery and ornaments in course of search.
Instances of seizure of jewellery of small quantity in course of operations under section 132 have come to the notice of the Board. The question of a common approach to situations where search parties come across items of jewellery, has been examined by the Board and following guidelines are issued for strict compliance.
(i) In the case of a wealth-tax assessee, gold jewellery and ornaments found in excess of the gross weight declared in the wealth-tax return only need be seized.
(ii) In the case of a person not assessed to wealth-tax gold jewellery and ornaments to the extent of 500 gms. per married lady, 250 gms. per unmarried lady and 100 gms per male member of the family need not be seized.
(iii The authorised officer may, having regard to the status of the family, and the custom and practices of the community to which the family belongs and other circumstances of the case, decide to exclude a larger quantity of jewellery and ornaments from seizure. This should be reported to the Director of Income-tax/Commissioner authorising the search at the time of furnishing the search report.
(iv) In all cases, a detailed inventory of the jewellery and ornaments found must be prepared to be used for assessment purposes.
These guidelines may please be brought to the notice of the officers in your region.
Yours faithfully,
Sd/-
Siddhartha Mukherjee Secretary (CBDT)
[F. No. 286/63/93-IT(Inv.II) dt. 11-05-1994 from CBDT, New Delhi]
a. You can also call your C.A or lawyer. He may not have the right to explain things on your behalf but he will ensure the raid team acts within their limits.
4. Your Responsibilities
a. You should allow free and unhindered ingress into the premises.
b. You should identify all receptacles in which assets or books of account and documents are kept and to hand over keys to such receptacles.
c. You should identify and explain the ownership of the assets, books of account and documents found in the premises.
d. You should identify every individual in the premises and to explain their relationships to the person being searched. You should not mislead them by impersonation. It is an offence punishable u/s 416 of the IPC.
e. You should not allow or encourage the entry of any unauthorized person into the premises
f. You should not remove any article from its place without the notice or knowledge of raid team. If you destroy any document with the intention of preventing the same from being produced or used as evidence before the court or public servant, you shall be punishable with imprisonment or fine or both, in accordance with section 204 of the IPC.
g. You should answer all queries truthfully and to the best of your knowledge. You should not allow any third party to either interfere or prompt while your statement is being recorded by the officer. In doing so, you should keep in mind that –
i. If you refuse to answer a question on a subject relevant to the search operation, you shall be punishable with imprisonment or fine or both, u/s 179 of the IPC.
ii. Being legally bound by an oath or affirmation to state the truth, if you make a false statement, you shall be punishable by imprisonment or fine or both u/s 181 of the IPC.
iii. Similarly, if you provide evidence which is false and which you know or believes to be false, you shall be liable to be punished u/s 191 of the IPC.
h. You should affix your signature on the recorded statement, inventories and the panchanama.
i. You should ensure that peace is maintained throughout the duration of the search and to cooperate with the search party in all respects so that the search action is concluded at the earliest and in a peaceful manner.
j. Cooperation should also be extended even after the search action is over, so as to enable the authorized officer to complete necessary follow-up investigations.
5. Options of Assessee After the Raid –
a. If you feel that the action of the department is unfair, you can file a writ petition before the High Court challenging the raid.
b. Another option is to challenge the assessment before the Commissioner of Income Tax (Appeal).
6. Law After the Raid
a. The Department will issue notice to assessee to furnish a return of income for six previous years preceding previous year in which search is initiated. As per section 147, action for the assessment can be taken within six years from end of assessment year. So at any time, assessment for preceding seven years can be reopened. However, the preceding seventh year is omitted u/s 153A. It has been held in case of Ramballah Gupta v. Asst. CIT (288 ITR 347) (MP) that when search takes place, the action for such year can be taken u/s 147 and for other years u/s 153A. Assessment or reassessment for past six years will have to be completed by AO within twenty months from the end of the financial year in which last of the authorization has been executed. The assessment of search year shall have to be completed as per above time limit. This time limit can be extended in case of special audit, stay of court etc. There is no time limit for issue of notice for past six years; only time limit for completion of assessment.
b. If any books of accounts, documents, assets found or seized belong to any other person, the concerned AO shall proceed against other person as provided u/s 153A and 153B. The assessment u/s 153C should also be completed with twenty one months from the end of the financial year when the search was conducted like assessment u/s 153A.
c. The provision of section 234A and 234B or levy of interest shall be applicable. The penalty for concealment can be escaped if disclosure is made in the statement during search for the years for which the due date for filing return of income has not expired in respect of search initiated before 01.06.2007. When source of income declared u/s 132(4) is not questioned in the statement, the immunity cannot be denied on the ground that assessee did not indicate the source of deriving undisclosed income. (CIT v. Radha Krishan (278 ITR 454) (All).
d. The Explanation 5 to section 271(1)(c) is not applicable in case of search initiated on or after 01.07.2007. So deeming provision of concealment shall no longer apply in new searches. In order to get immunity, only requirement is that assessee should disclose additional income in the original income field.
e. The condition is that this return of income should have been filed before due date of filing return of income.
7. Other Provisions
a. The authorized officer can not seize stock in trade of a business. However, restriction on seizure of stock in trade applies only to valuables and not cash.
b. Power to arrest assessee is not entrusted to the department.
c. The department cannot withdraw cash from bank a/c or encash fixed deposits without assessment as a result of search operations.
d. Section 133A does not permit sealing of business premises.
5. It has been instructed by CBDT vide letter dated 10.03.2003 that while recording statement during the course of search and seizures and survey operations, no attempt should be made to obtain confession as to the undisclosed income. It has been advised that there should be focus and concentration on collection of evidence for undisclosed income.
8. Assets which cannot be seized –
a. Immovable assets
b. Stock held in business
c. Assets disclosed in Income Tax and Wealth Tax return.
d. Assets appearing in books of account
e. Cash for which explanation can be given
f. Jewellary mentioned in wealth tax return
g. Gold up to 500 gm per married lady, 250 gm per unmarried woman and 100 gm per male member of the family.
h. Jewellary as per the status of the family if so appear to the investigating officer.
9. Assets which can be seized –
a. Unaccounted cash, jewellary, gold, bullion, lockers, promissory notes, cheques, drafts.
b. Books of accounts, chits, diaries, etc.
c. Computer hard disks and other data storage devices
d. Documents of property, title deeds, etc.