Historical & Legislative Background provisions governing initiation of Search & Seizure proceedings By: CA Dilip M Shah
History - Search and Seizure Since 1956 in the Income Tax Act. Section 132 was totally substituted by the Finance Act, 1964. Section 132 thoroughly overhaul in 1976 Recommendations on search and seizure provisions (i) The Raja Chellaiah Committee and, (ii) The Kelkar Committee. It is seen that the recommendations affecting the substantive law have been given effect to in respect of majority of such recommendations
Search & Seizure The Finance Act, 2003 has changed the method of assessment of income in respect of search & requisition cases, & the new method of assessment is made applicable to searches initiated, or requisitions made after 31/5/03. The new procedure for assessment is laid down in the three sections, viz. Sections 153A, 153B, and 153C, inserted by the Finance Act, 2003 with effect from 1.6.03.
Preliminary - Survey The relevant provisions are contained in section 133A of the Income-tax Act. The Income-tax Department may take recourse to these provisions to verify whether the Income-tax returns filed/to be filed by an assessee are inconsistent with the books, documents, cash, stocks or other assets in physical possession of with the assessee. For example, the assessee may be in possession of stocks which is far in excess of stocks disclosed in the last return of income even after making adjustments for purchases and sales during the intervening period. This may be on account of under reporting of inventories and consequently income chargeable to tax. This would be detected during the process of survey.
Preliminary - Survey It may be noted that unlike section 132, for taking action under these provisions, it is not necessary that the Income-tax Authorities should have any information to the effect that an assessee is in possession of undisclosed assets, etc.
Authorities Survey The powers of survey are with Income-tax authority, meaning Chief Commissioner, Joint Commissioner, Director and Joint Director. Also the powers may be exercised by Assistant Director, Deputy Director, Assessing Officer and Tax Recovery Officer, and for specified provisions, also Inspector of Incometax, after taking approval of Joint Director/Joint Commissioner. Normally the decision to conduct a survey is taken by Assessing Officer who is also involved in actual conduct of survey
Jurisdiction - Survey For the purposes of survey, an income-tax authority may exercise powers : Within area assigned to him, even if jurisdiction over the case is with another officer, and also Over place occupied by a person over whom he has jurisdiction, even if outside the area assigned to him. He may also delegate necessary powers to another Income-tax authority for the purpose of these provisions
Time & place - Survey The powers are given to conduct survey at a place at which business (including profession) is carried on, which need not be the Principal place, as also other place at which books of account, documents, cash, stock or other valuable article relating to business are stated to be kept. Hence, while survey cannot be done at residential premises, such premises will get covered if books etc. relating to business are stated to be kept there. The Income-tax authority can enter a place of business for this purpose only during hours at which such place is open for conduct of business. As regards the other place at which books, etc. are stated to be kept, the entry can be only after sunrise and before sunset. Once the Income-tax authority enters the place, there is no restriction regarding the time by which the proceedings need to be completed. Proceedings are normally contemplated at the place where business of the assessee is conducted and not at his residence or business places of his consultants (Circular dated 3rd May, 1967).
Power of Tax Authority - Survey The Income-tax authority is entitled to: Inspect books of account/documents, place identification marks thereon, get copies thereof, or, after recording reasons for doing so, impound them. However, they cannot be retained by him for more than 10 days unless necessary approval is obtained from Chief Commissioner/Director General. Verify cash, stock or other valuable article or thing and make inventory thereof. These assets cannot be seized. Seek information or record statement relating to matters relevant to any proceedings (including proceedings which are pending/completed or may be commenced) under the Income-tax Act.
Expenditure on function/ceremony or event - Survey If Income-tax authority considers it necessary having regard to nature and scale of expenditure in connection with a function, ceremony or event, it may, after the function, ceremony or event, it may seek information from or record statement of any person likely to possess necessary information in relation thereto
Other Aspects - Survey Assessee should verify the identity of the Income-tax Authority and during the process of survey, needs to be vigilant to ensure that the Income-tax authority does not make an inventory or record statement which are incorrect and detrimental to the interests of the assessee. The assessee is expected to co-operate and allow the Income-tax authority the facility to carry out their duties. However, acts of the following nature, by the Income-tax Authority, may be considered high-handed and unauthorized: Sealing of premises or enforcing stoppage of business Preventing movement of persons to/from the place being surveyed. Forcing disclosure of unaccounted income. Taking control of the telephone and not allowing making or receiving of telephone calls.
Other Aspects - Survey Information obtained during survey may lead to search and seizure under section 132 only if the conditions of that section are satisfied. Cases in which survey is conducted, are normally selected for scrutiny and the information gathered as a result of the survey is used for making assessments. Unlike action under section 132, Explanation 5 to section 271(1)(c) does not operate. Hence, in case any unaccounted assets are found during survey, but later disclosed in return of income, penalty is not leviable merely because these were found during survey.
Preliminary Search & Seizure The relevant provisions are contained in section 132 of the Incometax Act. Search and seizure proceedings amount to serious invasion of right to privacy and right to possess property. Hence, it is necessary that these proceedings are carried out strictly within the framework of the relevant provisions. The prerequisite for action under this section is that the concerned authority has information which provide a reason to believe that: A person has failed or will fail to produce books of account or documents required from him by issue of summons under section 131/notice under section 142 or A person possesses money, bullion, jewellery or other valuable asset which represent income or property which he has not disclosed or will not disclose for the purposes of the Income-tax Act (undisclosed income or property)
Preliminary Search & Seizure Information to the effect that a person possesses large amount of cash would not suffice in absence of information to the effect that it is not disclosed or will not be disclosed. Also the information should exist when the authorization is issued and authorization cannot be justified with reference to findings in search. Reference may be made to decision of Delhi High Court in case of Ajit Jain vs. Union of India (159 CTR 204, 242 ITR 305), decision of Bombay High Court in case of Diamondstar Exports Limited vs. Director General of Income-tax (143 Taxman 16) and of Allahabad High Court in case of Suresh Chand Agarwal vs. Director General of Incometax (269 ITR 22).
Authorities - Search The powers under the section are vested in Director General, Director, Commissioner or Chief Commissioner or Joint Director or Joint Commissioner empowered by the Board. These authorities may authorize Assistant Director, Deputy Director, Assistant Commissioner or Deputy Commissioner to conduct the search and seizure operations. Further, the Director General, Director, Commissioner or Chief Commissioner may also authorize Joint Director or Joint Commissioner or Addl Director, Addl Commissioner or Asstt Director or Deputy Director or Asstt Commissioner, Deputy Commissioner or Income Tax Officer for this purpose. (Authorised persons referred to as Authorised Officer).
Jurisdiction - Search Action under the section is to be taken by the Commissioner/Chief Commissioner who has jurisdiction over the concerned person. In case books, assets etc. relating to such person are kept in a building, place, vessel, or vehicle located within the area of jurisdiction of another Commissioner/Chief Commissioner, the proper procedure would be to grant necessary authorization to the other Commissioner/Chief Commissioner. However, the other Commissioner/Chief Commissioner is entitled to act even without such authorization if he has reason to believe that delay in getting authorisation may be prejudicial to the interests of the revenue
Jurisdiction - Search Commissioner/Chief Commissioner who has information to suspect that any books/documents/undisclosed income or property are kept in building, vessel, vehicle or aircraft not mentioned in authorization issued by another Incometax Authority, he may issue authorization in respect of such building, vessel, vehicle or aircraft.
Powers of the Authorized Officers - Search Unlike action under section 133A which is generally restricted to business place, action under section 132 can cover any building, including residential buildings, place, vessel, vehicle or aircraft. The action can commence at any time of day or night. If keys are not available, authorised officer may break open lock of door, box, locker, safe, almirah or other receptacle. He may also search a person who has got out of or about to get into the building, or is in possession of books of accounts, tangibles etc. He may inspect books of account or documents including electronic record.
Powers of the Authorized Officers - Search He may seize books of account, documents, money, bullion, jewellery or valuable article or thing, other than stock-in-trade of business. However, he would not be justified in seizing assets which are disclosed to the Income-tax Department. Reference may be made to decision of Guwahati High Court in case of Rajesh Sharma vs. ACIT (168 CTR 231). The seized items are to be handed over to the Assessing Officer having jurisdiction over the assessee within 60 days from the date of last authorization. Immovable property cannot be seized-reference-decision of M.P. High Court in case of Bapurao vs. ADIT (247 ITR 98). The books and documents are not to be retained beyond 30 days from the date of relative assessment order unless reasons are recorded and approval is taken from Commissioner/Chief Commissioner/Director/Director General. Authorized officer is to allow assessee to take copies thereof.
Powers of the Authorized Officers - Search In case it is not practicable to seize books, documents, money, bullion, jewellery or valuable article or thing, the Authorized Officer may serve a prohibitory order to the effect that such asset (other than stock in trade) shall not be removed or dealt with without his permission. Except as regards valuable article or thing not seized on account of their physical characteristics, the order shall not be considered as seizure and shall be in force for up to 60 days.
Powers of the Authorized Officers - Search He may place marks of identification on books or documents or get copies thereof and also make inventory of money, bullion, jewellery or valuable article or thing. The Authorized Officer may requisition services of police or other officer for this purpose. He may examine on oath any person found in possession of books, documents, money, bullion, jewellery or valuable article or thing. There is rebuttable presumption that these assets belong to him and that contents of the books/documents are true.
Application of seized/requisitioned assets This is dealt with in section 132B. Application may be made to Assessing Officer within 30 days of the end of the month of seizure for release of assets and the assets may be released with the approval of Commissioner/Chief Commissioner if Assessing Officer is satisfied regarding the nature and source of acquisition thereof, after recovery of any existing tax liability. The release should be within 120 days from the date of execution of last authorisation. Remaining assets are to be forthwith released after recovery of existing liability under Income-tax Act, Wealth-tax Act, etc. as also liability for tax, interest and penalty arising on completion of assessments made in consequence of the search.
Application of seized/requisitioned assets Assessing Officer may recover tax demands out of cash seized or sale of assets. Interest at 6% is payable on excess of money seized (less amount released) and sale price of assets sold over the amount of liability after exclusion of period of 120 days. Assets cannot be retained for meeting potential liabilities. Reference may be made to decision of Calcutta High Court in case of Mukundrai Shah (269 ITR 529)
Assessments - Search Sections 153A/153B/153C deal with assessments in pursuance of search. Irrespective of findings in search and irrespective of whether assessments are already made for these years, there will be fresh assessments in pursuance of search for six assessment years preceding the assessment year relevant to the previous year of search. Assessments pending on the date of initiation of search shall abate. Notice will be issued by Assessing Officer to the person in whose case the search is carried out, requiring him to furnish returns for these years.
Assessments - Search Assessments shall be made within 2 years from the end of the year of execution of last authorization subject to extended limitation applicable in cases of stay by a court/audit under section 142/fresh opportunity of hearing under section 129/applications to settlement commission or Authority for Advance Ruling. If Assessing Officer is satisfied that the seized items belong to another person, the relative items shall be handed over to Assessing Officer having jurisdiction over the other person and he shall undergo similar proceedings. In his case, assessments pending on date of receipt of relative items by his Assessing Officer shall abate. Extended limitation for assessment shall apply in his case.
Other Matters - Search Assessees are entitled to verify identity of the search party and search them and also verify search warrant. Proceedings are to be conducted in the presence of two witnesses and copy of Panchnama is to be given to assessee. The provisions do not contain power to make arrest. Children are allowed to go to school after search of their bags. Courts have frowned upon practice not to allow doctors to attend to emergencies. Medical attention and meals are to be allowed to assessee or his family members. Assessee needs to be vigilant to ensure that the Incometax authority does not make an inventory or record statement which are incorrect and detrimental to the interests of the assessee
Other Matters - Search Assessee may request for release of assets after furnishing bank guarantee or making payment of tax demands, specially in cases of assets which assessee wants to sell to take advantage of good market price or in cases of financial assets which have matured. Action under section 132 cannot be stopped by Civil Court. Ornaments weighing up to 500 grams per married female member, 250 grams per unmarried female member and 100 grams per male member are not seized by executive instructions, even if assessee is not able to furnish any evidence regarding nature and source of acquisition. Similarly, ornaments up to gross weight declared in wealth-tax return should not be seized. Material found during search may be used by Department although search is held to be illegal.
Satisfaction & Issue of warrant Identity card of officers Sometimes the authorised officers or the person accompanying them do not possess the identity card. As an alternative, they should carry and produce some other documents to prove their identity, e.g, a certificate attesting their signatures, The certificate should be issued by a senior officer in charge of the search or by an immediate superior. In a case where there is no proof of identity, the assessee would be within his right to refuse the ingress.
Satisfaction & Issue of warrant Warrant of authorization is meant and addressed to the authorized officer and it has to be executed by him. It is an instrument to arm him with the authority to search. After execution of the warrant, it is to be returned to the issuing authority. The assessee is, however, entitled to go through the warrant. In fact, the authorized officer is duty bound to produce it and in evidence of production thereof, he may obtain the signatures of the assessee or his representative along with the signatures of two witnesses.
Satisfaction & Issue of warrant The assessee should inspect it carefully to see that: (a) it is not blank; (b) irrelevant portions are struck off, etc. If these defects are found, he should bring them on record by filing a letter before the authorized officer. If the warrant is blank and the name and address is not correctly recorded, he may as well not allow the ingress. In case of other defects, question of challenging the validity under article 226 may be considered.
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