IT dept. can raid if income likely to escape tax in absence of prompt action

The income-tax department has the right to carry out a raid and attach property, if it has reason to suspect that income is likely to escape tax net in absence of prompt action, a division bench of the Bombay High Court has ruled.

The division bench, comprising Justice Ranajana Desai and Justice JP Deodhar, passed the order on May 7, 2009, on a writ filed by Mumbai-based Genom Biotech, which is run by a non-resident Indian, Binod Kumar.

The company had challenged the search carried out by the department on its premises in May 2008, and the subsequent attachment order. It argued that there was no clear reason for the I-T department to carry out the raid because the three conditions that justify a tax raid did not exist in this case.

The I-T Act lists three conditions for such a search: failure of the person to produce the required information even after summon was issued, likelihood of a person failing in furnishing the required details, or a person, who is in possession of money, jewellery or any valuable articles, which represent the income not disclosed to the department.

The division bench dismissed the company’s contention saying that the department has furnished to the court the confidential information it had received before the raid and the `satisfaction note’ it received before sanctioning the raid. Satisfaction note is a document prepared by the investigation wing of the I-T department, which contains the reasons that justify a raid.

The division bench also dismissed the argument that failure of the department to furnish a copy of the satisfaction note is a reason to hold the search invalid.

The bench observed that the information received by the department was that a sum of Rs 170 crore paid by Genom Biotech to the UK/Cyprus-based companies purportedly for marketing expenses had actually been deposited in the private accounts of Mr Kumar.

The department also had information on fake bills and invoices fabricated by the company to facilitate the transfer of this amount. On the basis of this information, the department was right in presuming that the tax payer would not divulge the details of the undisclosed income. The division bench accepted the department’s view that satisfaction note contains confidential information including the name of the informer, and disclosing the name would seriously prejudice the investigation.

The court also pointed out that the I-T laws do not provide for disclosing the reasons recorded by the designated authority be disclosed to the tax payer.