practical issues - search seizure survey

ICAI B'lore- Study Circle

May 16, 2012

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PRACTICAL ISSUES - SEARCH, SEIZURE & SURVEY

Prashanth G S, FCA

Chartered Accountant

Bangalore

Introduction

Search - Stages in search proceedings

Stage 1 : Authorization of search

Stage 2 : Actual conduct of Search Proceedings

Stage 3 : Post Search Proceedings/ Assessment

Practical aspects of search

Penalty in search cases

Survey Proceedings

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Introduction

Search:

Means to ‘look for’ or ‘seek out’

Mechanism for gathering evidence regarding evasion of

tax and for unearthing black money

Invading the personal/ office premises of any person by

surprise

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Introduction

Three Stages of Search Under Section 132

Pre-search enquiries and authorization;

Actual conduct of search;

Post Search - Assessment of income

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Pre-Search Enquiries/Information

Pre-Search Enquiries/Information :

Summons u/s 131(1A)

Annual Information u/s 285BA read with Rule 114E

Private Sources/ Informers

Pre- search investigations

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Pre-Search Enquiries/Information Contd…

Authorization for search can be issued only:

by a Competent Authority; and

after satisfying prerequisite conditions prescribed under

section 132

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Board Guidelines

Instruction No. 7/2003 dated 30.07.2003:

Searches shall be authorized only by DGIT (Inv.) and

search to be carried out in cases where:

• substantial unaccounted income/ assets involved

• expected concealment is in excess of Rs. 1 crore

Tax payers who are professionals of excellence should not be searched without there being compelling reasons

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Pre-requisite Conditions to Authorize Search Competent Authority

in consequence of information in his possession,

‘reason to believe’ that either of the three conditions contained in clauses

(a), (b) and(c) of section 132 are satisfied, which are:

Where any person was summoned u/s 131 or was issued notice u/s 142(1)

to produce books or other documents and has failed to do so (refers to facts

which actually exist)

Where any person will not, if summoned or notice issued, comply with the

same (refers to belief likely to take place)

Where any person is in possession of any money, bullion, jewellery or any

other valuable article or thing which he has either failed to disclose or is not

likely to be disclosed to the Income Tax Authorities (refers to undisclosed

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‘Information’

Information:

Must be something more than just rumour or a gossip or

a hunch;

Some valid, definite information and not any imaginary

or invalid information

Must be authentic

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‘Information’

Reason To Believe has been analysed in various decisions to mean:-

Belief of a reasonable man formed in good faith and must

not be mere pretence

There must be application of mind by the competent

authority

Nexus between information/ material or reason and belief

formed

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Information :

Mere knowledge about huge investment in house or expenditure on lavish marriage/functions

[refer L.R. Gupta: 194 ITR 32(Del.) SLP dismissed CA 891/

93 dated 10.8.98]

Report about roaring practice or charging high rates from customers and about standard of living

[refer Dr. Nand Lal Tahiliani: 170 ITR 592 (All.) SLP

dismissed 172 ITR 627 and 260 ITR 67 (Cal.)]

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Information

Mere information from CBI/Police that assessee possess

money

[refer Ajit Jain: 260 ITR 80 (SC)]

Post search material cannot justify search

[refer Dr. Anita Sahai : 266 ITR 597 (All.), Smt. Kavita

Aggarwal vs. DIT (E) :264 ITR 472 (All.)]

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Search Warrant

Primary contents of a Search Warrant

Refer Rule 112 - Form No. 45

Specifies ‘Person’

Specifies ‘Premises’

Identifies the condition on the basis of which search

is authorized

Identifies the officers authorized to conduct search

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Validity of search

To challenge the validity –

To file writ petition challenging the validity of search

proceedings.

Appellate Authorities have power to adjudicate validity of the

search proceedings

C. Ramaiah Reddy V. ACIT: 339 ITR 210 – Kar High Court

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Validity of search

Once search takes place, whether legal or illegal, evidence collected can be used

- [refer Pooran Mal vs. DI : 93 ITR 505 (SC)]

Search is assessee specific and not premises specific.

Nenmal Shankarlal Parmer V. CIT: 195 ITR 582 (Kar.)

Mrs. Dhiraj Suri: 98 ITD 187(Del.)

Dr. Mrs. Surjit Tosaria V. JCIT: 92 TTJ 338 (Del.)

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Powers of Authorized Officer

To enter and search the place (section 132(1)(i))

To break open locks where key not available (section

132(1)(ii));

Search any person who is to get in or to go out (section

132(1)(iia))

To direct facility to inspect books or other documents

(section 132(1)(iib))

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Powers - Contd…

Make inventory and/or place marks of identification on books of

account/ documents or make extracts or copies therefrom(section

132(1)(iv) & (v))

Seek police assistance (section 132 (2))

Record statement under sub-section (4)

‘Seize’ any such books of accounts, documents, money, bullion,

etc (section 132(1)(iii))

Pass a `restraint order’ or ‘prohibitory order’

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Taxpayer’s Charter issued by CBDT [208 ITR (St.) 5]

To see the warrant duly signed and stamped

To verify the identity of each member search party

To make personal search of all members of search party

To insist on personal search of ladies by ladies only

To have two witnesses (refer Rule 112 (6) and (7))

Allow children to go to schools

To seek medical help, if required.

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Taxpayer’s Charter Contd…

To have the facility of having meals at the normal time.

To have copy of Panchnama together with annexures

To have copy of any statement used against the person.

To allow free and unhindered entry to the search party

To see the warrant and sign the same

To identify and explain ownership of assets or books of account/

documents

To identify every individual in the searched premises

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Taxpayer’s Charter Contd…

To answer queries to the best of his knowledge

To affix his signatures on statements, inventories and

Panchnama

To ensure that peace is maintained through the duration of

search

Not to remove any article from its place without prior

knowledge of the authorized officer

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Seizure

`Seizure’ means forcibly taking over possession from the owner

or person who has possession and who is unwilling to part

with possession

[refer Tarsem Kumar: 161 ITR 505 (SC)];

Only an `undisclosed asset’ could be subjected to seizure

[section 132(iii)]

Refer:

L.R. Gupta: 194 ITR 32 (Del.)

Om Prakash Jindal: 104 ITR 389 (P&H)

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Seizure Contd…

Indiscriminate search and seizure of third party books /

assets not permissible:-

H.L. Sibal vs. CIT : 101 ITR 112 (P&H)

S.R. Batliboi & Co. vs. DIT (Inv.): 224 CTR 369

(Del.)

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Modes of Seizure:

Actual Seizure

`Deemed Seizure’/`Restraint order’

(second proviso to section 132(1))

Due to physical attributes, possession of any valuable article

or thing not possible or practicable; then

order served on the person in possession of such article or

thing; and

person directed not to part/ deal with the article or thing

Such action is termed as ‘deemed seizure’

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Prohibitory Order - Section 132(3)

Where its not practicable to ‘seize’ any

books of accounts/ others documents, money, bullion,

jewellery, other valuable article or thing

order served on person in possession of above; and

such person is directed not to part or otherwise deal with

same

Does not amount to deemed seizure

Search concludes when prohibitory order is lifted and

Panchnama is prepared therefor

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‘Prohibitory Order’ Contd…

An asset which is already known cannot be subject to search

and seizure and consequently, cannot be subject of an order

under section 132(3) of the Act:

Ramesh Chander vs. CIT: 93 ITR 244 (P&H)

Moti Lal: 80 ITR 418 (All)

Sardar Praduman Singh Vs. UOI and Ors: 166 ITR 115 (Del.)

No order can be passed u/s 132(3) where authorized officer is

in doubt whether the asset is disclosed or undisclosed - Om

Prakash Jindal Vs. UOI: 104 ITR 389 (P&H)

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Certain Assets Cannot be Seized

Stock-in-trade’ of the business cannot be seized

[Section 132(1) - 3rd Proviso]

Following Jewellery cannot be seized [Instruction no.

1916 dated 11.05.94]

Jewellery declared in Wealth Tax ; 500 gms. per married

lady ; 250 gms. per unmarried lady ; 100 gms. per male

member

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Statement During Search – Section 132 (4)

Authorized officer may examine any person on oath during

course of search

If such person is found to be in possession of books of

accounts, documents, money, etc.;

Statement can be used as an evidence in any proceedings

Such examination may be in respect of all matters relevant for

investigation connected with any proceedings under the Act

No obligation to make a surrender (Vide F.No. 286/ 2/ 2003

dated 10th March, 2003 )

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Sec 132(4) contd …

Post Recording:

Copy of statement not made available by the Department

Record the contents/ statement for future reference

To ensure correct statement has been recorded before

signing the same

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Conclusion of Search

Right to obtain a copy of Panchnama

Right to obtain photocopies of the various books of accounts and

records seized by the search party

Must ensure that it correctly states:

Assessee subjected to search

Premises searched

Documents/ Books found and seized

Jewellery/ Ornaments, etc

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Change in the procedure for assessment of search cases

`Block Assessment’ under Chapter XIV-B applicable for searches after 1.7.95 and up to 31.05.2003

Section 153A to section 153C applicable for searches on or after 1.06.2003

Block Assessment

Introduced by the Finance Act, 1995 for searches on or after 1.07.95

Post-Search Assessment

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Overrides sections 139, 147, 148, 149, 151and 153

AO shall issue notice to the person searched to file ROI for 6

assessment years preceding the year of search

ROI filed is treated as return u/s 139

AO to assess/ reassess total income for six assessment years

Assessment/ reassessment in relation to any assessment year :-

falling within the period of such six assessment years

pending on the date of initiation of search shall `abate’

Section 153A

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Black’s Law Dictionary defines the term as under:

“To throw down, to beat down, destroy, quash. To do

away with or nullify or lessen or diminish. To bring

entirely down or demolish, to put an end, to do away

with, to nullify, to make void.”

Abate - Meaning

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To diminish or take away, to prostrate, to beat down

remove or destroy; also to let down or cheapen the price

in buying or selling.

In civil law, an abatement of a suit is a complete

termination of it. To abate a suit is to put an end to its

existence. - Srinibas Jena vs. Janardan Jena, AIR 1981 Ori 1.

Abate – Meaning

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Assessment of income of any other person

Overrides sections 139, 147, 148, 149, 151and 153

Where AO of the person searched is satisfied that any money,

bullion, jewellery or other valuable article or thing or books

of accounts or documents seized belong to some other person

Section 153C

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AO shall hand over the aforesaid assets/ documents to AO of

such other person;

AO of such other person shall proceed u/s 153A

Reference to date of search u/s153A construed as reference to

date of receipt of aforesaid assets/ documents

Section 153C

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Seizure of books of account or documents or undisclosed

asset “belonging” to assessee is sine qua non for

assumption of valid jurisdiction under section 153C

Vijaybhai N. Chandrani V. ACIT: 231 CTR 474 (Guj.)

P. Srinivas Naik vs. ACIT: 117 ITD 20 (Bang.)

Pre-requisite - Section 153C

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As per Black’s Law Dictionary –the term “belong” means

as under:

“Belong to; appertain to; to be the property of; to be a

member of; to be appropriate; to be own”

Reference to the name of the assessee or casual connection

in the seized documents does not mean that documents

belong to the assessee

[refer Vijaybhai Chandrani (supra) and P. Srinivas Naik (supra)]

Pre - Requisite - Section 153C

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Assessment to be completed with prior approval of Joint Commissioner [section 153D]

Abated proceedings revive if assessment u/s 153A is

annulled [section 153A(2)] Penalty governed by section 271AAA and 271(1)(c)

Sections 153A to 153C Contd…

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It is no longer required that addition/ disallowance must be

made only on the basis of any evidence found as a result of

search as held in the following cases:

Harvey Heart Hospital Ltd. v. ACIT: (2010) 36 DTR (Chennai) (Tri.) 201

Shyam Lata Kaushik v. ACIT: 114 TTJ 940 (Del)

Shivnath Rai Harnarain (India) Ltd v. DCIT: 117 TTJ 480 (Del)

Contra:

LMJ International Limited vs. DCIT: (2008) 22 SOT 315

Anil Kumar Bhatia v. ACIT: 1 ITR (Trib) 484 -Del

Sections 153A to 153C - Issues

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Section 292C presumes that if books of accounts, documents or

any other valuable assets is found from the possession or control

of a person during the course of search or survey then:

such books or assets are presumed to belong to that person;

contents of such books or documents are presumed to be correct;

signature and contents purportedly in handwriting of a particular

person are presumed to be so;

in any proceedings under the I.T. Act.

Presumption regarding documents found during search

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Comments/ Observations:

Presumption is rebuttable presumption [refer CIT V. SMS

Investment Corporation: 207 ITR 364 (Raj.)] and onus to

dislodge same shall be on the person from whose possession

such seized documents/valuables are found .

Presumption Regarding Documents Found During Search

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Application of seized assets

Seized assets to be dealt with as under

Any Existing liability

Liability determined on completion of the post search

assessment

Where any disclosed asset has been seized:

Application must be filed within 30 days of seizure for

release explaining the same

Section 132B

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Application of seized assets

On such application such asset is to be released within

180 days of execution of last authorization

Any assets or proceeds thereof which remain after

meeting the aforesaid liabilities shall be handed over to the

person from whose custody the assets were seized.

Section 132B Contd…

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Assessee entitled to retract from admission and explain the

incorrect statement made:

Pullangode Rubber Produce Co. Ltd V. State of Kerala: 91

ITR 18 (SC)

K.T. M. S. Mohd. V. UOI: 197 ITR 196 (SC)

Evidence brought by confession, if successfully retracted,

must be corroborated by independent and cogent evidences:

Vinod Solanki: 233 ELT 157 (SC)

K.T. M. S. Mohd. V. UOI: 197 ITR 196 (SC)

Retraction of Statement

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Undisclosed income is admitted in statement u/s

132(4); and

Manner of deriving undisclosed income specified and

substantiated; and

Tax along with interest is paid

Conditions For Claiming Immunity [Section 271AAA (2)]

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Survey can be conducted by jurisdictional

Commissioner

Director

Joint Commissioner

Joint Director

Deputy Director

Assistant Director

Assessing Officer

Tax Recovery Officer

Inspector (only for inspection of books)

After approval of Joint Director/

Commissioner

Survey – Section 133A

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Survey can be conducted

Only at business premises; and

Any other place where assessee states that books/ cash/

stock/ valuable article or thing of business are or is kept

Survey team can enter

Business premises : During business hours

Any other place : After sunrise and before sunset

Survey – Section 133A contd..

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Survey team can Inspect books/ other documents, place

marks of identification and/ or make copies thereof;

Impound, after recording reasons, such books/ other

documents for 10 days (excl. holidays) [period can be extended

by Chief Commissioner/ Director General];

Verify and make inventory of cash/ stock/ other valuable

article/thing [cannot remove them];

Record statement of any person (not on oath)

On initiation of Search - the Survey – Section 133A Contd…

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Black’s Law Dictionary defines `impound’ as under:

To place (something, such as a car or other personal

property) in the custody of the police or the court, often

with the understanding that it will be returned intact at

the end of the proceeding.

To take and retain possession of (something, such as a

forged document to be produced as evidence) in

preparation for a criminal prosecution”

‘Impound’ – Meaning

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Time limitation for exit of the Survey Team –

N.K. Mohnot: 215 ITR 275 (Mad.)

Evidentiary value for statement recorded –

S. Kader Khan Sons: 300 ITR 157 (Mad.)

Paul Mathews & Sons: 263 ITR 101 (Ker.)

Ashok Manilal Thakkar vs. ACIT : 279 ITR 143 (AT) (Ahd.)]

Others

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Survey of premises of lawyer/ CA not permissible unless the

client whose premises is surveyed states that his books of

accounts/ documents and records are kept in office of lawyer/

CA - U.K. Mahapatra & Co.: 308 ITR 133 (Ori.)

Bar on removal of cash, stock or other valuable thing/ article

under section 133A(4) is absolute - CIT V. Mool Chand

Salecha: 256 ITR 730 (Raj.)

Others

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