#TaxmannPPT | Demystifying Income Tax Search & Surveys

DEMYSTIFYING INCOME-TAX SEARCHES AND SURVEYS

DINESH C PATWARI Former Principal CCIT and DGIT

dcpatwari62@gmail.com

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Introduction

Historical perspective

• Objective behind searches and surveys

• Purpose of this webinar

• Myths relating to searches and surveys

• Intended outcomes

TOPICS FOR DISCUSSION

 Legal requirements for Income tax searches and Judicial decisions

 What can trigger income tax searches and surveys?

 How are searches conducted?

 Rights and duties of taxpayers in searches

 Dos and Don'ts for taxpayers during searches

 Disclosure of additional income U/S 132(4) of IT Act

 How to ensure smooth conduct of I T searches?

 Post search investigations and role of professionals

 Conduct of income tax surveys

Legal requirements for IT searches

 Searches can be authorized in any of the following 3 situations-

(i) failed to produce books and documents U/S 131 or 142

(ii) Will not produce books and documents U/S 131 or 142

(iii) In possession of money, bullion, jewelry or other valuables, which has been or would not be disclosed

 Search is authorized by DGIT, PDIT toAddl DIT, DDIT and ITOs

 Search can be conducted at any premise, vehicle, device at any time of any day

 Presumption U/S 132 (4A) of Income tax Act

 Satisfaction need not be produced before appellate authorities

Landmark decisions relating to Searches

 Search provisions are constitutionally held valid

Pooran Mal v. Director of Inspection, [1974] 93 ITR 505 (SC)

 Searches to be authorized based on cogent information but procedural lapses not relevant

ITO v. Seth bros, [1969] 74 ITR 836 (SC)

 Searches can’t be authorized on the basis of rumors/ Gossips

UOI v. Ajit Jain, [2003] 129 Taxman 74/260 ITR 80 (SC)

 In the case of Laljibhai Kanjibhai Mandalia v. Principal DIT (Investigation) [2019] 105 taxmann.com 260/263 Taxman 604 (Gujarat), Hon’ble Gujarat

HC held search invalid on satisfaction which was reversed by hon’ble SC reported in Principal DIT (Investigation) v.Laljibhai Kanjibhai Mandalia[2022] 140 taxmann.com 282/288 Taxman 361/446 ITR 18 (SC)

 AO was also authorized officer will not invalidate search action on bias

Union of India v. Vipin Kumar Jain [2003] 129 Taxman 59/260 ITR 1 (SC)

Landmark Decisions- continued….

 Search can not be held malafide because outsiders were involved

Hindustan Metal works v. CIT, [1968] 68 ITR 798 ( Allahabad )

 Vague allegations not enough to prove malafides

Express newspapers Pvt Ltd v. UOI, AIR 1986 SC 872

 Irregularity in searches will not vitiate the proceedings (witness)

Naraindas v. CIT [1983] 14 Taxman 447 ( M P High Court)

 Illegality of searches will not vitiate the evidences collected

Dr Partap Singh v. Director of Enforcement [1985] 22 Taxman 30 (SC)

 Allegation of bribe on I T officers will not vitiate the search

Kamal Khosla v. DIT [2002] 123 Taxman 1102 ( Delhi H C)

What can trigger I T search and survey

 Credible information of tax evasion

 Information based on assessment records

 Information received from other Govt agencies/ dept.

 Lavish spending disproportionate to income disclosed

 Manipulation of books and records

 Unexplained/ huge loans and sundry creditors

 Low income disclosed compared to peers

 Certain trade/ business with elements of on money/ unaccounted sale

 Large deals and media reporting

 Counterparty is searched or given adverse statements

 information on Possession of large cash or valuables

 Suspicious transactions

 Hawala transactions

 Large businesses but repeated non compliance

 Social media indicating unaccounted income

Conduct of Searches

 Strike at all places at the same time

 Two witnesses called for

 Warrant of authorization executed on key person

 recording of preliminary statements

 physical search of the persons and premises covered

 Valuation of jewellery by registered valuer

 Back up of computers and devices by expert team

 Final statement confronting key people with documents etc

 Preparation of Panchanama and annexures of seizure and found

Powers of tax authorities during search

 Enter and search any building or place as per warrant

 Break open locks where keys are not available

 Carry out search of the premise and also personal search

 Seize the unaccounted assets and books/ documents

 place mark of identification and take extract of books and documents

 Make inventory of cash and valuables found/ seized

 Take help of Police and other Govt officials as required

 Put assets or records under prohibitory orders U/S 132(3)

What can be seized during search and what can not be?

 Following can be seized during search:

- Unaccounted cash and jewelry

- Books of accounts and documents

- Computer hard disks and data storage devices

- Property documents etc.

 Following can not be seized during search:

- Stock in trade

- Disclosed cash , jewellery etc

- Gold up to 500gm per married lady, 250gm unmarried lady and 100gm per male member

Rights of Taxpayers during searches

 To verify the identity of search team

 To verify warrant of authorization

 To have two witnesses from the locality

 To have meal, sleep etc. in time

 To allow children to go to school after checking their bags

 To call medical practitioner in case of medical needs

 To get copy of Pachamama with annexure

 Right to answer questions in own language

 Right to continue business under supervision of IT team

Duties of Taxpayers during searches

 To provide free ingress to search team in premises

 To handover all keys including locker keys to search team

 To handover electronic devices , mobiles with passwords

 To identify and explain the ownership of assets, books etc.

 Identify every individual in the premise and explain relationship

 Not to allow/ encourage entry of unauthorized people

 Not to remove anything from its place without notice of AO

 To answer all questions truthfully

 To affix signature on Pachamama, annexures and statements etc.

DOs during searches by taxpayers

 To cooperate with the search team

 Be courteous with search team

 Narrate all facts in preliminary statement

 Be watchful during search to ensure legality of actions

 Be calm and comfortable

 Get independent witnesses from your contacts from neighborhood

 Try to help search team in discharge of their duties

 Give passwords and locker keys and explain assets found

DON’Ts during searches by taxpayers

 Do not stop or obstruct team from entering the premises

 Do not obstruct or stop team from physical search

 Do not try to hide anything as it will not be possible

 Do not annoy team or misbehave with them

 Do not panic as it does not help

 Do not make any plans till search team is there

 Do not attempt contacting CA or counsels as it is not permitted

Disclosure of additional income U/S 132(4)

 Examination on Oath by Authorized officers during search of any person found in possession or control of books, documents and valuables

 This examination can also be for any other matter relevant for any investigation under income tax act

 These statements have evidentiary value

 Undisclosed income confessed in this statement can be legally taxed even without evidences. However judicial decisions require it.

 Benefit of disclosure is in levy of penalty at lower rate

 Disclosure also reduces post search investigations

 CBDT circular no 286/2003 dated 10/03/2003 is against officers attempting disclosures without evidences

 Unbacked confessions can be retracted but within reasonable time

To Ensure Smooth Conduct of Searches

 Allow smooth entry and access to search team

 Provide access to all keys and passwords of devices

 Answer questions raised to the extent you know

 To maintain cool and not to get agitated on any issue

 To keep track of answers given by you to ensure proper recording of statements

 Treat the search team with dignity and respect

 Not to get disturbed on occasional aggression of search team

 Don’t keep unaccounted cash, jewellery and valuables

Post search investigation and role of professionals

 To prepare list of premises searched with key people involved

 Go through Panchanama’s and papers available

 Prepare details of seized assets, documents etc.

 Get inputs on statements given by key people

 Prepare list of places covered U/S 132(3)

 To assist conducting DDIT in removing prohibitory orders

 To evaluate evidences and statements and advice for disclosures

 To obtain copy of statements and documents/ books, EDs etc.

 To prepare submissions if there are violations in other laws

 Work out undisclosed income and prepare explanations for others issues

 To prepare strengths and weaknesses of various issues and guide taxpayers

Conduct of Income tax Surveys

 Surveys are conducted U/S 133A of Income tax Act

 Can enter in Business premises during business hours or after sunrise and before sunset

 Can inspect books of accounts and documents and put mark of identification on them

 Make inventory of stock, cash etc.

 Can impound books and documents but can’t seize assets

 Examine persons available but not under oath

 Approval of DGIT or Pr CCIT needed to initiate survey actions

Posers relevant to Survey action

 Can CA’s office be surveyed for client's book?

 Can combined premises used for business and residences be surveyed?

 Can shop closed during business hours be broken open for survey?

 Should survey action be closed after business hours?

 Is presumption of section 132(4A) being available in survey action?

 Can business premise be sealed under survey action?

 If valuables were found during survey action, can it be converted into search?