Seminar on Search & Seizure and Survey

Transcription

1 Seminar on Search & Seizure and Survey AFTERMATH OF SURVEY & SEARCH BY SUNIL H. TALATI M.COM., L.L.B., FCA., PAST PRESIDENT OF ICAI 7 th December,

2 1. Important points to be considered at the commencement of Search 2. Statements recorded during search / post search Action 3. Confessions in statements 4. Retraction of Confessions in Statements 5. Imposition / Revocation of Prohibitory Orders 6. Other Aspects Relating to Search and Seizure 2

3 Important points to be considered at commencement of search: See that the warrant is duly signed and stamped Verify the identity of each member of the search party Carry out personal search of all members of the search party (to guard against Planting ) Insist upon personal search of ladies by ladies only Have two witnesses (Panchas) (Refer Rule 112 (6) and (7)) (Refer: 208 ITR (St.) 5) 3

4 Process of Search: Verify name and address mentioned in search warrant Ensure that only officers authorised for the purpose come into the premises being searched Authorised officer can ask for any other officers for assistance after complying with procedure but statements can be recorded only by the authorised officer. 4

5 Precautions to be taken with reference to Search Warrant: 1. There may be a situation where in the same premises two or more persons have similar names as mentioned in Search Warrant. e.g. Search Warrant is issued in the name of Mr. S. J. Patel living in Flat no. 109 of a building and Income Tax Department searched Flat No. 78 of another Mr. S. J. Patel of the same building. In this case Department has no jurisdiction to search Flat no

6 Sl. No. Subject What to do and Why? 1 Be Vigilant While attending to and serving the large search team be careful and vigilant. 2 Call your Doctor 3 Call your Key Personnel 4 Have medicines in time 5 Call your Counsel Assessee may call medical practitioner if he is not well or an emergency. Assessee may seek permission to call his key personnel to assist him during the course of search. Yes Assessee may call his legal advisor during the search. However, at initial stage of search, presence of counsel is not allowed because of the fact that the search party is fact finding authority. 6

7 Sl. No. Subject What to do and Why? 6 Co-operate Fully cooperate with search party and let them do their job 7 Records on Computer Provide all necessary facilities to inspect and copy records Call the concerned person 8 Be assertive Explain the facts and circumstances assertively, but not aggressively Don t loose patience If not 100% certain than tell that we shall reply after accessing data. Remain calm, cool and pleasant Do not sign statement which you have not given 9 Don t react but respond Be receptive Keep track of your reactions and even body language Attack the problem, not the officer 7

8 Sl. No. Subject What to do and why? 10 Whether surrender is needed? It is strategic decision and depends upon facts and circumstances of each case It can be done till the last warrant is executed and the sealed premises, locker etc. are opened. 8

9 2. There may also be a situation where search warrant is issued for one particular premises and search is conducted at another premises of the same person. 9

10 Statements recorded during search / post search Action : 1. Evidentiary Value of a Statement recorded u/s 132(4) at an assessee s premises subjected to search 2. Evidentiary Value of a Statement recorded u/s 133A at the assessee s other premises subjected to Survey (simultaneously with Search at the other premises) 3. Importance of Disclosing / Substantiating the manner of earning undisclosed income - with reference to : (a) Assessment Proceedings (b) Penalty Proceedings (c) Application for Settlement before Settlement Commission 10

11 Statement Recorded u/s 132(4): Statement u/s 132(4) is recorded on oath and its evidentiary value is high and it can be used in any proceedings under the Act Investigating officer normally puts questions in order to gain support for the findings in search; Correct facts must be stated or time may be sought Such examination may be in respect of all matters relevant for investigation connected with any proceeding under the I. T. Act Recording of statement is not a memory test 11

12 Statement Recorded u/s 132(4): Vide Instruction F. No. 286/2/2003-IT (Inv).II dated 10/03/03, CBDT has advised search parties not to obtain confessions by adopting coercive means. However, in practice, in almost all the cases search parties insist upon getting confessions Statements must be availed as an opportunity to: (a) explain disclosed assets to avoid seizure (b) avail benefits of immunity from penalty Whether practice of disclosing income in the hands of group or individual person is advisable it depends upon facts of each case 12

13 Sl. No. Subject What to do and why? 1 Statement of oath It is a double edged weapon, if admitted on the basis of evidence 2 Tips and Traps Understand the queries carefully Seek clarity by asking counter questions Don t answer the questions recklessly in a rash manner. Take it as an opportunity explaining several items of assets found during the search and not as a trap 13

14 Sl. No. Subject What to do and why? 2 (ctd..) Important Points Take help of the books of account and other documents and give all the possible information, which is readily available If it is not possible to remember certain facts with accuracy, particularly those of several past years, but NEVER give inaccurate detail. Just tell I should refer and tell you. 3 Take rest Assessee may insist that he will give statement only after taking proper rest (say till early hours of the next day). One should not get nervous. 14

15 Sl. No. Subject What to do and Why? 4 Note down points 5 Last question in the statement Do you want to say Anything? Note the proceedings, questions and answers at the time of recording of a statement Say everything you consider necessary e.g., object of any books of account, documents, assets etc are brought from other places Your request to call your accountant, computer operator was not acceded The facts which are not brought on record inspite of your explaining the same, may be stated correctly in this reply. 15

16 Sl. No. Subject What to do and Why? 6 Verify the correctness Ensure that the facts stated have been recorded correctly. Object to the irregularity in the conduct of the search, if any, and record such objection in writing. 7 Points to be taken care of Never lie to mislead (IPC sec. 416) Not to remove or destroy any article from the place being searched (IPC 204). Never refuse to answer. You may request to refer matter to accounts. Reply exactly what is asked. 16

17 Whether a letter written by a partner of a firm after conclusion of a search admitting undisclosed income can be regarded as statement u/s 132(4)? Ans: NO. CIT v. Pampapathi (2009) 310 ITR 64 (Kar) However, such letter given before conclusion of search accompanied by its reference in a subsequent statement u/s 131(1A) MAY BE considered as a binding confession made in statement u/s 132(4). 17

18 Should disclosure of income be made under the head Income from Other Sources or Profits and Gains of Business or Profession? Ans: This depends upon the facts of each case However, it is advisable to disclose the income under the head Profits and Gains of Business or Profession as such disclosure may save the assessee from the rigours of Section 115BBE It is also necessary to substantiate the manner of deriving such income to restrict the penalty to 10% u/s 271AAB 18

19 Brief Comparison between Search u/s 132 and Survey u/s 133A Search Proceedings u/s 132 Seizure of Books of account as well as money, jewellery, bullion and other valuable article Retention - Not exceeding 60 Days [As per Section139(9A)* Statement recorded on oath and used as evidence in subsequent proceedings Retraction- Possible Pending Assessments - Abate Statement u/s 131(1A) - Can be recorded * Books of accounts or documents shall not be retained by the A.O. for a period exceeding thirty days from the date of the order of asst. u/s 153A Survey Proceedings u/s 133A Impounding of only Books of account and other documents Retention- Not exceeding 10 Days [As per section 133A(3)(ia)]** Statement not recorded on oath and hence, in the absence of incriminating material, no evidentiary value Retraction Easier - As no evidentiary value Not applicable Statement u/s 131(1A)- Can be recorded **It can be extended with prior approval of CCIT or DGIT as the case may be. 19

20 Income Tax Department has conducted search in the case of Mr. A at his residence and survey was carried out at the premises of the company in which Mr. A is a director Mr. A admitted at the surveyed premises (in the statement recorded under Section 133A) unaccounted income of Rs 50 crore in the hands of the Company as pertaining to the specified year Under this scenario whether immunity from penalty can be sought for disclosure made in statement u/s 133A, at the surveyed business premises? Cont. 20

21 Cont. Ans: Yes, as the search was not in the case of the Company in whose hands the income was disclosed Relevant extracts of Section 271AAB Penalty where search has been initiated. (1), in a case where search has been initiated under section 132. the assessee shall pay by way of penalty, in addition to tax, if any, payable by him, (a) a sum computed at the rate of ten per cent of the undisclosed income of the specified previous year, if such assessee (i) in the course of the search, in a statement under subsection (4) of section 132, admits the undisclosed income and specifies the manner in which such income has been derived; 21

22 A search in the case of Mr. X was carried at his residence and survey was also carried out at his business premises Mr. X admitted unaccounted income at the surveyed premises for Rs 50 crore pertaining to the specified year in the statement recorded under Section 133A Under this scenario whether immunity from penalty can be sought for disclosure made in the statement u/s 133A, at the surveyed business premises? 22

23 Ans: Yes (Seriously debatable) Relevant extracts of Section 271AAB Penalty where search has been initiated. (1), in a case where search has been initiated under section 132. the assessee shall pay by way of penalty, in addition to tax, if any, payable by him, (a) a sum computed at the rate of ten per cent of the undisclosed income of the specified previous year, if such assessee (i) in the course of the search, in a statement under subsection (4) of section 132, admits the undisclosed income and specifies the manner in which such income has been derived; 23

24 Importance of Disclosing/Substantiating the manner of earning undisclosed income in following proceedings : (a) (b) Assessment Proceedings Penalty Proceedings (c) Application for Settlement before Settlement Commission 24

25 The meaning of Substantiate : Refer: Hon ble ITAT, Ahmedabad in Gujarat Credit Corporation Ltd. v. ACIT [113 ITD 133 (Ahd)(SB)] NOT ABLE TO SUBSTANTIATE DOES NOT MEAN NOT ACCEPTED BY THE AUTHORITY CONCERNED BUT NOT SHOWING A SUBSTANCE IN THE CLAIM MADE BY THE ASSESSEE. THE WORD SUBSTANTIATE IS OPPOSITE TO THE WORDS VAGUE OR FANCIFUL, OR WITHOUT ANY FOUNDATION OR BASIS. 25

26 Importance of Substantiating the manner of earning undisclosed income - In assessment proceedings (a) To avail the benefit of telescoping e. g. in the case of unexplained jewellery and notings of unaccounted sales, the Assessee can take a stand that jewellery was acquired out of income from unaccounted sales. By doing so: Source of jewellery is explained Penalty may be 10% as against 20% u/s 271AAB. 26

27 For making Settlement Application - Disclosure of Manner of earning income is sine qua non - For making application u/s 245C the manner of earning income should be explained in the Statement of Facts of the application for settlement and it is not necessary that such manner is explained in statement u/s 132(4)/131 of the Act Failure to disclose manner of earning income in the Statement of Facts of the application for settlement (even where otherwise full and true disclosure of income is made) would result in rejection of application for settlement even at the stage of section 245D(1). Refer: Vishnubhai Mafatlal Patel v/s Assistant Commissioner of Income-tax [2013] 31 taxmann.com 99 (GUJ.) 27

28 The Commission might, at any stage till it passed a final order under Section 245D(4), examine the issues and if there was sufficient material on record, determine the question of full and true disclosure and the manner in which the undisclosed income was derived and, depending on such a decision, the applications might be thrown out or they might be proceeded with further. CIT V. INCOME TAX SETTLEMENT COMMISSION [2013] 35 taxmann.com 56 (Delhi) 28

29 Retraction of Confession made in Statement (1) It is completely factual and differs from case to case (2) It should be as early as possible after confession (3) It should be made in an affidavit and backed by corroborative evidences justifying the retraction (4) As discussed earlier, statement given u/s 132(4) is on oath and u/s 133A is not on oath and therefore it is difficult to retract the disclosure made in the statement u/s132(4) as compared to the disclosure made in the statement made u/s 133A 29

30 Cont. (1) Can a confession u/s 132(4) be retracted even though it is made on oath? (a) Though difficult, can be retracted (b) In the absence of any corroborative evidence, Assessing Officer cannot make addition on properly retracted statement Refer: In Kailashben Manharlal Choksi v. CIT [2008] 14 DTR 257 (Guj ), it has been held that statement recorded at odd hours cannot be considered to be a voluntary statement and if it is subsequently retracted and necessary evidence contrary to such admission is led, the admission will not be binding 30

31 Cont. Further attention is also invited to the CBDT s circular No. 286/2/2003-IT (Inv.), dt. 10th March, 2003 which reads as under:- Instances have come to the notice of the Board where assessees have claimed that they have been forced to confess the undisclosed income during the course of the search and seizure and survey operations. Such confessions, if not based upon credible evidence, are later retracted by the concerned assessees while filing returns of income. In these circumstances, confessions during the course of search and seizure and survey operations do not serve any useful purpose. 31

32 Vinod Solanki v. Union of India (SC) (Civil Appeal No of 2008 dated : 18/12/2008) Effect of retraction of statement of confession Evidence in the form of confession can be dislodged (by making retraction) only by cogent evidence Initial burden to show that confession was voluntary and not obtained by resorting to coercive means is on the Department Also Refer: CIT v. O. Abdul Razak 350 ITR 71 (KER.) 32

33 PROHIBITORY ORDER (SECTION 132(3)) Where it is not practicable to seize any books of account/ other documents, money, bullion, jewellery, other valuable article or thing order is served on the person in possession of the above; and such person is directed not to part or otherwise deal with the same 33

34 Does not amount to deemed seizure Search concludes when prohibitory order is lifted and Panchnama of the valuables etc. in question is prepared Such order is valid for 60 days [sub-section (8A) - power to extend its period has been taken away w.e.f ] 34

35 Can a prohibitory order u/s 132(3) be issued in respect of Banking Accounts of the searched person even though they are admittedly his regular accounts appearing in his books of account? Ans: No Refer: MAA VAISHNAVI SPONGE LTD. V. DGIT (INVESTIGATION) [2011]339 ITR 0413 (ORI). 35

36 Is a Prohibitory order issued under subsection (3) of Section 132 of the Act in respect of Current Account of the searched person without any material showing that amount deposited therein is his undisclosed income sustainable in law? Ans: No Refer: M/s VISA COMTRADE LIMITED Vs UNION OF INDIA AND OTHERS [2011] 201 TAXMAN 413 (ORISSA)/[2011] 338 ITR 343 (ORISSA)/[2011] 243 CTR 348 (ORISSA) 36

37 Can cash seized by the Department be treated as amounting to payment of tax? Section 132B states that Seized Cash can be adjusted against any existing income tax and wealth tax liability It can also be adjusted against tax liability determined on completion of assessment u/s 153A. Where an application to the A.O. is made for release of asset within 30 days from the end of the month in which asset was seized and if nature & source of such asset is explained to the satisfaction of the A.O. the amount of any existing liability may be recovered out of such asset and remaining portion if any of the asset may be released with the prior approval of CIT or CCIT. Contd... 37

38 Cont... After the amendment made by the Finance Act, 2013 w.e.f , seized cash cannot be adjusted against liability for payment of advance tax Before the above amendment, the assessees used to request in writing for adjustment of seized cash against liability for payment of advance tax and courts had taken the view that seized cash should be applied towards such liability. Refer Shri Ram S. Sarda v DCIT (ITA no. 1172/Rjt/2010 dated 02/11/2011) Shreeji prints Pvt. Ltd. v. ACIT (ITA no. 359/Ahd/2012 dated 20/04/2012) 38

39 Existing Tax Liability A view may be taken that, after the amendment of Section 132B by the Finance Act, 2013, adjustment of seized cash is available only on completion of assessment, since tax liability is determined at that point of time But where, the Assessee himself offers the seized cash as undisclosed income in his Return of Income, a view can be taken that the liability is created on the filing of the Return and accordingly, the seized cash must be adjusted against his self assessment tax liability. Under this scenario it is advisable to file a letter seeking adjustment of seized cash against the self assessment tax liability. Cont... 39

40 However Department may take a view that, existing tax liability is determined only when Return of Income is processed u/s 143(1) and in such situation the following consequences may arise: Return of income may be considered as defective and may be considered as non est Immunity from penalty u/s 271AAB may not be available Application for settlement may be rejected as the payment of additional tax is a pre condition for a valid petition [Section 245C(1)(ii)] Assessee may be treated as Assessee in default u/s 140A(3) for non payment of Tax 40

41 Instruction No.11 of 2006, of 1st Dec., 2006 regarding release of seized cash deposited in PD Account :- Where an application is made in accordance with first proviso to section 132B(1)(i) for release of seized cash and the nature and acquisition of such cash is explained to the satisfaction of the Assessing Officer, the seized cash should be released within the time-limit provided under that section after adjustment of any existing liability. Where seized cash or part thereof was not released under first proviso section 132B(1)(i), the amount lying in PD Account should be released within one month of passing the (search and seizure) assessment order after 41

42 Cont (i) (ii) adjusting the seized cash against any existing liability and the amount of liability determined on completion of the search and seizure assessment; and in cases where penalty proceedings, connected with such assessment, have been initiated, retaining out of the balance an amount to meet the expected liability on account of the penalty imposable 42

43 Cont At the time of giving effect to the order of the CIT (Appeals). Only such amount thereof should be retained which is sufficient to meet the expected amount of penalty imposable on the assessment as revised in appeal effect. The balance should be released within one month from the order under section 250, after recovery of any existing demand at that time. The amount, which was retained after the assessment order or the order of the CIT(Appeals) for the amount of penalty imposable, should be released within one month from passing of the penalty order, after recovery of demand arising out of the penalty order and any other demand existing at that time 43

44 Is the amendment to section 132B made by the Finance Act 2013, retrospective? Ans: No. Explanation 2 to section 132B was inserted by the Finance Act, 2013 with effect from to clarify that existing liability would not include advance tax liability so that cash seized during search cannot be adjusted towards advance tax liability. Since the Legislature has, by express words, made Explanation 2 to operate prospectively, no retrospective effect can be given to it Refer: Kanishka Prints (P.) Ltd. V/s ACIT [2013] 34 taxmann.com 307 (Ahmedabad - Trib.) 44

45 Other Aspects Relating to Search and Seizure Release of Seized Assets other than Cash- Can seized assets be released on payment of equivalent amount of cash in PD Account? Ans : Yes, Provided at any time with the approval of CIT or CCIT, the assessee accepts unconditionally the ownership of the seized assets and also the valuation of the seized assets, determined at the time of search and seizure operation; makes a request in writing requesting release of seized assets against equivalent amount of cash to be provided by him; pays to the CIT a draft of an amount equal to the value of the seized assets; and Cont 45

46 Cont agrees in writing that the amount may be deposited in the PD account and may be used for adjustment against tax liability in accordance with the provision of Section 132B of the Act. The seized assets can also be released at any time, with the approval of the Commissioner of Income Tax or Chief Commissioner of Income Tax, provided: he assessee unconditionally accepts the ownership and the valuation of the seized assets determined at the time of search and seizure operation; and makes a written request to release the seized assets and provides unconditional and irrevocable bank guarantee to the extent of the value of assets seized. Ref : Release of Seized Assets other than Cash Instruction no. F. No. 286/6/2008 dated 21 st January

47 Other Aspects Relating to Search and Seizure Where the Authorised officer is not the assessing officer As per Provision of Section 132(9A): The Authorised officer shall handover all material found as result of search to the Assessing officer having jurisdiction over the person searched within a period of 60 days from the date on which last of authorizations of search was executed. Explanation 1 to section 132(14) : that for the purpose of section 9A execution of authorization for search shall have the same meaning as assigned in Expl. 2 to S. 158 BE which is as under that in the case of search : on the conclusion of the search as recorded in last panchnama drawn in relation to any person in whose case the warrant of authorisation has been issued. 47

48 Can the Authorised Officer call for explanation regarding the seized material after the expiry of 60 days from the conclusion of search? Ans Since the jurisdiction after the expiry of 60days from the last authorisation vests with Assessing Officer, information/ details can be called only by issuing summons under Section 131 of the Act. Also it is advisable to file an application under the RTI act with the Assessing Officer and CIT ( NOT DI and DG) to know as to whether the seized material and statements have been transferred. 48

49 Precautions to be taken during stock taking by search party: Carefully oversee/ watch procedure followed by Search Party to ensure that: Stock found is normally valued on the basis of the purchase bills produced. Method of valuation Quantity Rates applied for valuation Arithmetical accuracy Error must be immediately brought to the notice of the Search Party EITHER THROUGH AFFADAVIT OR THROUGH SEPARATE COMMUNCATION. 49

50 Precautions to be taken while explaining Jewellery : Valuation should be supported by Valuer s Report Carefully observe procedure followed by Search Party Following Jewellery must be identified to the Search party - Stock in trade and Disclosed in the wealth tax return Wealth tax return disclosing jewellery should be readily available Copies of bills and source of purchases should be readily available 50

51 Precautions to be taken while explaining Jewellery : At the time of explaining jewellery, it should be categorically explained that though the jewellery found from the locker of one person or room it belongs to other family members, if living in joint family. It is always advisable to state that, the jewellery belongs to family as a whole, so as to take maximum benefit of the of the CBDT Instruction no can be availed. 51

52 Whether jewellery in excess of 500 gm in case of married women having marriage life of more than (generally) 25 years can be considered as reasonable and explained? Ans: Refer: Yes. Reasonableness needs to be viewed considering Social Status, Customs and traditions of the family Ashok Chadda v/s. Income tax Officer [2011] 202 TAXMAN 395 (DELHI) Jayshree T. Patwa ITAT. no. 599/Ahd/2011 of Ahd I.T.A.T. - dated 01 st March,

53 Cont. Details of enquiries made before authorizing search, records examined, statement recorded, local enquiries made and results thereof, discussion and meetings held with Reference to search with other officers (seniors or subordinates) Details of correspondence and discussion between investigation wing and Assessing Officer in respect of assessment in search cases Details of correspondence and discussion between the Income tax Department and third parties 53

54 Practical Aspects in Assessment of Search Cases 54

55 Section 153A Salient Features Overrides sections 139, 147, 148, 149, 151and 153 AO shall issue notice to the person searched to file Return of Income for six Assessment Years immediately preceding the year in which the search is conducted. 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 55

56 When the commencement and conclusion of search falls in two different financial year, which six assessment years are covered in notice under section 153A? e.g. If the search is commenced as on 15th March, 2011 and concluded on 30th April, Ans - In this case the search is conducted in A.Y (i.e. F.Y ). Notices under section 153A are required to be issued for A.Y to Cont 56

57 Cont What is material for issuance of notice under Section 153A is the CONDUCT of search and not the date on which the search concludes The process of conduct of search is commenced with the entry and ingress by the authorised officer in the premises to be searched after getting the search warrant signed 57

58 Latest Position as per decision of Pratibha Industries Limited and PACL India Limited (after considering the decision of All Cargo Global Logistic Limited and Anil Kumar Bhatia) Search u/s A for six Preceding Assessment Years Abated Assessments Vide Jurisdiction (1) 153A r.w.s 143(3) be framed as per the provisions Completed Assessment. (2) Material found (2A) Assessment to be framed : assessing income unearthed in search + originally assessed income Assessment : 153A/143(3) Material not found (2B) Assessment u/s 153A to be framed only as per original assessment whether u/s 143(1) or 143(3) 58

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