2. www.raseshca.com Practical Aspects of Survey, Search & and Seizure By CA Rasesh Shah

3. www.raseshca.com Introduction Power to carry out search under section 132 and survey under section 133A are important tools in the armoury of the Income–tax department for detecting and preventing tax evasion. Though the need to have such tools cannot be grudged, the department has to use it sparingly and in deserving cases and after complying with necessary guidelines and safeguards.

4. www.raseshca.com Powers of Survey Books of Accounts and other Documents- Inspection, Marks of Identification, Making Extracts, Impounding and Making Inventory Cash, stock, or other valuable article/thing- Checking/Verifying and Making Inventory Seeking Information Recording of Statement Invocation of sec. 131 in case of non co- operation Survey of other places

5. www.raseshca.com Obligations of Assessee To afford facility to inspect required books of accounts or other documents To afford facility to check or verify cash stock or other valuable article/thing found To furnish required Information

6. www.raseshca.com Time of Survey During working hours in case of place of business or profession. In case of other place, after sunrise and before sunset No prescribed time for suspenstion/exit

7. www.raseshca.com Large-scale Expenditure The object is to detect the unaccounted expenditure incurred in relation to function, ceremony or event –By seeking information –By recording of Statement –The above power of survey is available u/s 133A(5)

8. www.raseshca.com Amendments in Provision By Finance Act, 2002, powers were vested with income-tax authority to impound books of accounts in course of survey. However, no power is vested in regard to seizure of any asset in course of survey. Authorisation is needed w.e.f. 1/6/2003 by income-tax authority from Joint/Additional Commissioner to conduct survey.

9. www.raseshca.com Scope of Survey Presence of the Asst. CIT who authorised survey at the place of survey should not vitiate survey operation. Omission to give opportunity of cross- examination to the assessee while recording statements of his workers and salesman, shall also not vitiate survey proceeding. Section 133A does not permit sealing of business premises. The survey u/s 133A can be conducted for the purpose of collection/recovery of TDS or Tax.

10. www.raseshca.com Search & Seizure The search and seizure measures are very stringent measures than measure of survey. ‘Search’ means a thorough inspection of the building, place, vehicle, vessel, aircraft and of the person. ‘Seizure’ means taking possession under the authority of law.

11. www.raseshca.com Powers in Search Enter and search building, place etc; Break open the locks; Carry out personal search of the person; Seize books of accounts/documents and valuables; Place marks of identification on books/documents and take copies or extracts; Make an inventory of items found/seized; To put items in deemed seizure or prohibitory order

12. www.raseshca.com Limitations on Powers of Search W.E.F. 1/6/2003, the law has been amended by Finance Act, 2003, where authorised officer cannot seize stock in trade of a business. However, restriction on seizure of stock in trade applies only to valuables and not cash. No power to arrest assessee for any kind of offence is available under provisions of survey or search. The department cannot withdraw cash from bank a/c or encash fixed deposits without assessment as a result of search operation. (Jagdishprasad M. Joshi v. Dy. CIT) (273 ITR 296) (Bom).

13. www.raseshca.com When search is exercised? When person has omitted or failed to produce books or documents when required, When person would not produce books or documents if required, When person is in possession of undisclosed asset which has not been disclosed or would not be disclosed.

14. www.raseshca.com Authority/Execution of Search The authorisation to carry out the search can be given by the Director General, Director of Income Tax, Chief Commissioner of Income Tax and Commissioner of Income Tax only. However, the search warrant can be executed by a Joint Director, Assistant Director or Deputy Director, Joint Commissioner, Assistant Commissioner or Deputy Commissioner or Income-tax Officer.

15. www.raseshca.com Seizure of Ornaments The CBDT has vide instruction No. 1916 dated 11 th May, 1994 issued guidelines for seizure of ornaments in course of search. In case of wealth-tax assessee, only seizure in excess of gross weight declared can be made. In other cases, no seizure of gold ornaments to the extent of 500 gms. per married lady, 250 gms. per unmarried lady and 100 gms. per male member. Exclusion of larger quantity having regard to the status of the family and custom and practices of the community.

16. www.raseshca.com Statement during search Statement recorded u/s 132(4) during search can be used as evidence and so it carries evidentiary value. The statement recorded at the time of search is considered to be spontaneous statement made without any preparation and so much weight can be attached to this statement by assessee in his favour and revenue against assessee. The explanation given after search is considered to be after thought unless assessee proves that he gave wrong statement under bona fide circumstances.

17. www.raseshca.com Confessional Statement It has been instructed by CBDT vide letter dated 10/3/2003 that while recording statement during the course of search & 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. However, confession may be useful to the person searched in order to escape penalty u/s 271(1)(c).

18. www.raseshca.com Assessment u/s 153A In case of action on or after 1/6/2003, AO shall issue notice to assessee to furnish a return of income for six previous years preceding previous year in which search is initiated. The notice can be issued even if the conditions laid down in other sections are not satisfied. No minimum time for filing return. All pending assessments shall abate. All other provisions of the Act and relevant rate of tax shall be applicable.

19. www.raseshca.com Reopening u/s 147 As per section 147, action for the assessment or reassessment 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.

20. www.raseshca.com Time Limit of search assessment Assessment or reassessment for past six years will have to be completed by AO within twenty months from the end of financial year in which last of the authorisation 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.

21. www.raseshca.com Assessment of other person If any books of accounts, documents, assets found or seized belong to other person, the concerned AO shall proceed against other person as provided u/s 153A and 153B. The date of transfer shall be taken as date of initiation of search. In case of delay in case of transfer, the action for search year can also be taken as per sec. 153A. The assessment u/s 153C should also be completed with twenty one months from the end of financial year when the search was conducted like assessment u/s 153A.

22. www.raseshca.com Presumption of Ownership In case of person searched, the material recovered from his possession shall be presumed to be owned by him and in his handwriting/signature. However, above presumption is rebuttable and assessee can lead evidence that material does not belong to him. In case of dump document where only figure or quantity is mentioned without narration, assessee cannot be called upon to explain and no addition can be made on such basis of such dump documents.

23. www.raseshca.com Application of seized assets The assets seized may be adjusted against exiting liability and liability arising out of search assessments including liability for interest and penalty. Before completion of search assessments, the full or part of assets may be released if assessee is able to explain nature & source of seized assets after satisfaction of exiting liability.

24. www.raseshca.com Liability of Interest and Penalty The provisions of section 234A and 234B for 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 of filing return of income has not expired in respect of search initiated before 1/6/2007. 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.(CITv.Radha Kishan (278 ITR 454) (All)

25. www.raseshca.com Position on or after 1/6/2007 The Explanation 5 to section 271(1)(c) is not applicable in case of search initiated on or after 1/7/2007. 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 filed. The condition is that this return of income should have been filed before due date of filing return of income.

26. www.raseshca.com Retraction in Survey Only occasion when the assessee’s own statement can be used as an evidence against himself is the statement recorded under section 132(4) during the course of search and seizure operations, and by virtue of specific legal provision to this effect in section 132(4) itself. The general rule of evidence is that no person can be forced to be a witness against himself. Case Laws: Asst CIT v. Satya Narayan (255 ITR 69) (AT) (Cal) Paul Mathews & Sons v. CIT (263 ITR 101) (Ker) Ashok Manilal v. Asst. CIT (279 ITR 143) (AT) (Ahd)

27. www.raseshca.com Retraction in Search Assessee should prove that he has given wrong statement under peculiar circumstances. So it is in his interest that he retract the statement by filing affidavit as soon as possible. The delay of retraction should be explained by him. Case Laws: Greenview Restaurant v. Asst. CIT (263 ITR 169) (Gau) Dy CIT v. Bhogilal Mulchnad (96 ITD 344) (Ahd)

28. www.raseshca.com Effect of Section 69C As per proviso to section 69C, the deemed expenditure taxed under this section is not allowable as deduction. So question arises when excess stock in trade is declared, it is allowable as deduction? What would be effect, if declaration is made for unaccounted expenditure in case of builder/contractor? Case Laws: Fakir Mohhammed v. CIT (247 ITR 290) (Guj) Dr. T. A. Quershi v. CIT (287 ITR 547) (SC) CIT v. Star Builders (294 ITR 338) (Guj)

29. www.raseshca.com Effect of Section 40A(3) When stock is surrendered in course of survey or search or if there are unaccounted transactions of expenditure, whether section 40A(3) for disallowance of expenditure in cash could be applied? It has been held by Gujarat High Court in case of CIT v. Hynoop Food & Oil P. Ltd (290 ITR 702) that section 40A(3) is applicable in case of unaccounted business transactions also.

30. www.raseshca.com Case of Whiteline Chemicals When gross profit is low in survey/search year compared to last year, the decision of Ahemedabad Tribunal in case of Whiteline Chemicals is applied and profit is estimated as per last year and declaration is separately taxed in addition to estimate of profit. Whether action of department is valid? It should be claimed by assessee before revenue that the lowness of gross profit of pre-survey period should be telescoped with the declaration made.

31. www.raseshca.com Documents to be read as whole In case of seized materials, it should be considered as whole. The department cannot pick and choose entries favourable to it for the purpose of determination of undisclosed income. If the expenses are noted in materials, it should be given as deduction from unrecorded receipts. There are decisions of courts and tribunals in support of this proposition.

32. www.raseshca.com Thanks The above presentation is available on internet site at www.raseshca.com It can be downloaded from Knowledge Area of the URL.www.raseshca.com