search and siezure by abhishek and divya

© Victor Grace & Co, Sukumar and Associates, Abhishek Murali and Divya Sukumar (2016) - Copyright

Search and Seizure of the

Income Tax Act

By Abhishek Murali

And Divya Abhishek

What is Search & Seizure – The Basics

Search means “not looking for something which is produced or Open but which is hidden, concealed or not obvious”. The word has varied meanings and it should be given the general meanings ‘to look for’ or ‘to seek’ which are well known meaning attributable to the word (Haji Assainar vs ITO, 1968)

‘Seizure” means the authority to take possession of records etcoutside the possession of the person. It is thus an expression which implies a forcible exaction or taking possession

These provisions introduced originally with a view to prevent large scale evasion have been amended later in order to plug the loopholes brought to light by judicial scrutiny and review

The authorities under the I.T. Act’ 1922 did not originally possess any powers of search and seizure. It was only after the Second World War, necessity of this provision was felt to tax the vast profits made by war profiteers


Legislative evolution of the power

Sec 37(2) was thus introduced by Finance Act 1956 to grant powers of search & seizure to the Authorities (Sec 132 of the I.T. Act’ 1961)

The introduced provision continued, till sec 30 of the Finance Act 1964 replaced section 132 by a completely new elaborately provision. This became necessary as the then existing provisions in sec 37(2) of the Income Tax Act 1922 were struck down being violative of Articles 14 and 19(1 )(g) of the Constitution

For the first time an order u/s 132 (1) could be issued only if “reason to believe” existed that books of account or documents were not produced by the person concerned in response to statutory notices issued

The Search and seizure powers were extended further by ammendments brought out in 1965 and 1975, allowing Commissioners to authorise searches to be done outside his jurisdiction and constructive possession


When can search and seizure be

conducted

Section 132(1) of the Income Tax explains the situations where search and seizure can be

conducted. It states The authorized officer who is duly empowered by the Board has in his

possession any information through which he has reason to believe that:

A person to whom a summon u/s 131(1) or a notice u/s 142(1) has been served to produce books

of accounts or other documents has failed or omitted to produce or cause to be produced the said books of accounts or other documents, or, (Sec 132(1)(a))

A person to whom a summon u/s 131(1) or a notice u/s 142(1) has been or might be issued is not

likely to produce or caused to be produced any books of account or other document which will

be useful for or relevant to any proceedings under the Act; or, (Sec 132(1)(b))

A person is in possession of money, bullion, jewellery or other valuable article or thing and such

property represents wholly or partly income or property which has not been disclosed or would not be disclosed (Sec 132(1)(c)


Why was reason to believe in bold, italic

and underlined!? Was it a typo?

‘Reason to believe’ is a very important clause in the whole Search & Seizure power. The word ‘reason’ means cause or justification and the word ‘believe’ means to accept as true or to have faith in it. The belief must be genuine and not a mere pretence and has to be held in ‘good faith’ and not a ‘reason to suspect’. It should be framed after an application of mind and the same should be apparent from the note recorded

The assessing officer must have a reason to believe that the person, whether or not a notice has been served on him, is not likely to produce his books, etc. in such a case, the basic is that the person will suppress books of account and other documents which may be useful and relevant to an income tax proceedings. Here the authorizing authority, if challenged, has to prove the basis of belief – Mamchand & Co. vs CIT (1970)

There must be information with the authorizing authority relating to two matters. One, the person should be in possession of money and secondly such money represents either wholly or partly income or property which has not been disclosed – CIT vs Ramesh Chander (1974)

Before reason to believe was inserted, the Department could have utilised the search and seizure powers at their whim and fancy. The Assam High Court however held this provision to be unconstitutional and violative of the fundamental rights (Art 14 and Art 19), hence the Income Tax Act had to be amended to include ‘Reason to believe’


What is this een-fawr-mashun? What does

information really mean?

The next question is what is the meaning and definition of ‘information’. The dictionary

defines information to be ‘intelligence given, knowledge, an accusation given to a

Magistrate or a court’. However, ‘Information’ is not defined in the Income Tax Act

However, some important judicial decisions have considered what it could mean:

In CIT vs A Raman & Co (1968) the Supreme Court observed it means instruction or knowledge

derived from an external source concerning facts or particulars

A mere possibility that the information had escaped his notice when the original assessment was

made does not justify a proceeding under the Act (Priyanand Prasad vs ITO, 1957)

In L.R. Gupta vs UOI (1992) it was held that the expression “information” must be something more

than a mere rumour or gossip or a hunch

Information may be in oral or writing. If the information is oral it must be placed on record to justify

the formation of reasonable belief on its basis (Om Prakash Jindal vs Union of India, 1976)

Any information received subsequently without any supporting objective fact in the earlier stages

would render the warrant and search invalid (Thanthi Trust vs ITO, 1973)© Victor Grace & Co, Sukumar and Associates, Abhishek Murali and Divya Sukumar (2016) - Copyright

Can anyone issue search and seizure

orders?

Authority Powers&


Who authorises the search?

What are their powers?

Enter and search any building, place, vessel, vehicle or aircraft where he has reason t0o suspect that such books of accounts, other documents, money, assets kept

Break open the lock of any door, box, locker, safe, almirah or other receptacle for exercising the powers conferred by clause (i) above where the keys thereof are not available.

Search any person who (a) has got out of, or (b) is about to get into, or (c) is in the building, place, vessel, vehicle or aircraft, if the authorized officer has reason to suspect that such person has secreted about his person any such books of account, other documents, money, bullion, jewellery or other valuable article or thing.

Require any person who is found to be in possession or control of any books of account or other documents maintained in the form of electronic records, to afford the necessary facility to the authorized officer to inspect all such books of account or other documents.

Seize any such books of account, other documents, money, bullion, jewellery or other valuable article or thing found as a result of such search. However, the authorized officer shall have no powers to seize any bullion, jewellery or other valuable article or thing being stock-in-trade of the business found as a result of search. He shall make a note or inventory of such stock-in- trade of business.

Place marks of identification on any books of account or other documents or make or cause to be made extracts or copies therefrom.

Make a note or an inventory of any such money, bullion, jewellery or other valuable article or thing

Direct General

Director

Chief Commissioner

Commissioner

Assistant Commissioner

Joint Commissioner


Did you know?

It may be presumed

a)the books of account or other documents and assets found in possession of any person in the course of a search belong to such person,

b) the contents of such books of accounts and other documents are true,

c) the signature and every other part of such books of account and other documents which purports to be in the handwriting of any particular person are in handwriting of that person (Sec 132(4A))

The authorized officer may requisition the services of any police officer or any of the officer of the Central Government or of both to assist him for all or any of the purposes specified above and it will be duty of every such officer to comply with such requirements


Important points to note in Search &

Seizure (1/2)

Can material obtained during an illegal search be utilised for ordinary assessment?

Yes, absolutely! The materials obtained during a search or seizure illegally or irregularly conducted

can nevertheless be utilized for the purpose of an ordinary assessment (Pooranmal v Director of

Inspection (investigation), income tax (1974)

Is the Department required to disclose the information used to the assesse?

Absolutely not. Disclosure of the material or the information to the person against whom the action is

taken u/s 132(1) is not mandatory, because such disclosure might affect or hamper the investigation.

Only the High Courts and the Supreme Court have the jurisdiction to call for and look into the reasons

recorded to decide whether the issue of the search warrant was called for (Southern Herbals vs DIT,

1994 and Dr.Pratap Singh vs Director of Enforcement, 1985)

© Victor Grace & Co, Sukumar

Sukumar (2016) - Copyright

Important points to note in Search &

Seizure (2/2)

What is examination on oath?

Authorized officer may, during the course of search or seizure, examine on oath any person who is found to be in possession or control of any books of accounts, documents, money, bullion, jewellery or other valuable article or thing. Any statement given by the person during the such examination maybe used as evidence for any further proceedings in the Act

Can undisclosed income found during search be subject to Service Tax?

During the course of the search, the undisclosed amount declared in the statement recorded would be liable to service tax if the same is covered under the ambit of service tax as per the provisions of the Finance Act, 1994

Interest and penalty would also be payable on amount of service tax on the undisclosed amount. However, Service Tax will not be payable if it can be proved with documentary evidence that such amount relates to some other source of income

© Victor Grace & Co, Sukumar

Sukumar (2016) - Copyright

Timelines to get certain documents back

Books of account, other documents seized shall not be

retained by the authorized officer for a period exceeding

30 days unless the reasons for retaining the same are

recorded by him in writing and the approved by Chief

Commissioner/Director/Director General

The assesse may, within 30 days from end of the month in

which asset was seized, apply for release of asset(or

remaining portion after dues) provided the AO is

satisfied(with prior approval of commissioner) with such

explanation for the nature of source of asset (Sec

132B(1)(i) - Proviso). This asset shall be released in 120

days(after adjusting against dues) irrespective of approval

from commissioner


Adjustment against dues and liabilities

The Income Tax may adjust the assets or money against any existing liability under the IT Act, Weath Tax Act, Gift Tax Act, or any liability determined by Assessment u/s 153A or Block Assessment or penalty. The assets for this purpose will be considered deemed to be under

distraint until such liability is discharged(132B(1)(i) and 132B(1)(iii)). It will also be adjusted against amount of liability arising on application made before the Settlement Commission u/s 245C(1)

Any assets or money that remains after adjustment shall be returned or paid to the person from whose custody they were taken (Sec 132(3))

The Income Tax shall pay simple interest @ 0.5% for every month on the amount and of the proceeds from the assets, which is returned(if any), after adjusting all dues.

There shall be no interest payable in case of release of assets(and not money) – Puran Mal & sons vs UOI (2009)


Timeline for completion of assessment

after Search

Assessment u/s 153A and 153C are applicable in search cases. U/s 153A, the AO is empowered to issue a notice requiring the assesse to furnish the return of income for 6 AYs immediately preceding the PY of the search

Thereafter, on scrutiny of the returns filed and the seized material, the AO commences assessment proceedings

Section 153B states that in cases where reference to the TPO is not made, the time limit is 2 years from end of the FY in which search was conducted

Section 153C is a peculiar provision which empowers the authorities to conduct proceedings even if his house wasn’t searched. When during a search at the premise of the assesse, documents were found which belong to another person, then Sec 153C maybe invoked against that person


Comparison with Survey

Search & Seizure u/s 132 Survey u/s 133A

Seizure of books of account as well

as money, jewellery, bullion and

other valuables

Impounding of books of account and

other documents

Cannot be retained for a period

exceeding 120 days

Cannot be retained for a period

exceeding 10 days(but this period can

be extended)

Statement recorded on oath can

be used for subsequent proceedings

Statements no recorded on oath and

cannot be used as evidence

Pending assessments abate Pending assessments do not abate© Victor Grace & Co, Sukumar and Associates, Abhishek Murali and Divya Sukumar (2016) - Copyright

Important Case Laws (1/2)

In K Choyi vs Syed Abdulla and Others (1980) the Supreme Court ruled that the Authorised

Officer has no power to arrest the person who is suspected or found to be in possession of

any document or money which represents income not disclosed

Exercise of power u/s 132 is a serious invasion to the Fundamental Rights, Privacy and

Freedom of the taxpayer and therefore must be exercised strictly in accordance with the

law and the conditions for exercise must be strictly followed. Otherwise the proceeding is

liable to be being quashed (ITO vs Seth Bros (1969))

Undisclosed income is to be determined only on the basis of evidence found during

search and on requisition of books, Not on the basis of best judgement of AO (CIT vs Ratan

Kumar Singh (2013))


Important Case Laws (2/2)

Anonymous petitions can be relied upon as information leading to search proceedings u/s

132. Anonymous petitions on several occasions disclose information which is crucial and

the reasons for the informant remaining so are obvious (Narayan Bandekar vs ITO (1988))

Reason to believe postulates genuine belief and existence of reasons for that belief. It

must be held in good faith and cannot be merely pretence (ITO vs Lakhmani Mewal Das

(1978))

A client of an auditor was subject to search and the audit team at the client facility had

their laptops seized. It was held that search team does not have access to all data on the

laptops of the audit team (S.R.Batliboi vs Dept of Income Tax(2009))

Assessee canot invoke RTI Act for challenging validity of search as there is an exception fo

intelligence or security organisation from providing information. However, on filing a

petition to the High Court, the HC while adjudicating the matter may ask for reasons and

this could be disclosed to the assesse – MD Overseas Limited vs DGIT (2011)


What can you do during a Search &

Seizure operation? (1/2)

Verify that the warrant has been properly signed and stamped and verify the identity of

each member of the search party. In certain cases a personal search of each member of

the search party can be done if the assesse fears ‘planting’. Two witnesses can be had by

the assesse, to observe the search

You may call your legal counsel during the course of the search. The assesse may also call

a medical practitioner for medical issues

Fully cooperate with the Income Tax authorities and provide them access to computer

records. Explain facts and circumstances to the Authorised Officer

Do NOT sign a statement which you have not given

Where you(or the assesse) are not sure of any particular fact or detail, explain to the

officer that you are unsure and will go through documents and details and then get back

The Officer asks ‘Do you have anything to say’ as the last question. Here the assesse may

explain all challenges posed by the search party to him and if his requests were denied

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What can you do during a Search & Seizure

operation? (2/2) – What cant be seized!

Immoveable assets

Stock held in business (even if its jewellery or valuables)

Assets(and cash) disclosed in Income Tax Returns and

Wealth Tax Returns

Assets as per books of account

Cash for which explanation can be provided to the

satisfaction of Authorised Officer

Gold upto 500 gm per married woman, 250 gm per

unmarried woman and 100 gm per male member of

family


Abhishek Murali is a Chartered Accountant practicing in Chennai who specialises in Companies Law, Income Tax and Business Valuation. He is also a CISA, ACMA, CGMA, DISA and secured the All India First Rank in the CIMA Enterprise Strategy paper and All India 17th Rank in the CIMA Final exam.

He has authored multiple books on Companies Act, Income Tax and Sustainable and Integrated Reporting.

Abhishek is also the youngest Elected member in the ICAI – SIRC Regional Council for the period 2016-2019

About the Authors

Divya Abhishek is a Chartered

Accountant practicing in Chennai. She

has been a prolific achiever

throughout her academic pursuits and

career. An All India Rank holder in

Chartered Accountant (CA) and

Company Secretary (CS) examinations,

She specialises in Statutory Audits and

Business Valuation.

Divya is an academician and has presented multiple

papers on a diverse range of topics to audiences of

over 2000 people in attendance. She has constantly

tutored and mentored several CA students including

illustrious Rank Holders in the profession today

Thank you

- Abhishek Murali

- Divya Abhishek

For suggestions and feedback/doubts or to discuss, contact us at:

[email protected]

[email protected]

Mobile: +91 99625 21966 | +91 98410 40010

Office: 044 28491065, 044 28497773


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