What leads to income tax raids, searches and seizures?
The main reasons are non-compliance with summons under Section 131(1) of the Income Tax Act, 1961, (hereinafter referred to as the Act) or a notice under Section 142(1) of the Act (described in Chapter VII, infra), likely non-compliance with such summons or notice, or the possession of undisclosed property or income. It is therefore absolutely necessary for a current income tax assessee or a likely income tax assessee to comply with the summons or notice issued by the Assessing Officer, or any other such authorised person.
The summons or notice calls for the books of account or other documents to be produced before the authorised officer. If, for some reason it is not possible to submit the documents on the appointed date and time, the authority concerned should be informed in advance and a suitable alternate date sought. If a person thus cooperates with the tax authorities there would be no occasion for them to conduct tax raid against him on these grounds.
Similarly, one should not keep any unaccounted or undisclosed money, property or income popularly known as black money. All unaccounted income, should be declared. If such a disclosure is made before its detection by the Income Tax Department, the chances of being trapped in a tax raid are minimised. A tax raid may also be conducted against a person in possession of undisclosed income or property not belonging to him but to someone else. It is therefore important for a person who is in possession or in custody of someone else’s jewellery or other valuables, etc. to ensure that they are duly accounted for.
1. Make correct disclosure of income and wealth in returns
It is always better to make a full and true disclosure of one’s income, whether taxable or fully or partially exempt, in the income tax return filed. This ensures compliance with the statutory provisions of the Income Tax Law. Similarly, a person’s wealth should be properly disclosed to the Wealth Tax Officer. It is advisable to disclose all items of wealth, taxable as well as non-taxable, so that the Assessing Officer is in possession of the information. These measures go a long way in preventing a tax raid.
2. Comply with summons or notices to prevent a tax raid
As stated earlier, non-compliance with the summons issued under Section 142(1) by the Assessing Officer for the production of books of account or other documents might result in an income tax raid. It is, therefore, absolutely necessary to fairly and properly comply with the summons. Wherever this is not possible, proper adjournment should be sought. Similarly, a written summons or notice has been wrongly issued or addressed, the recipient should promptly inform the Assessing Officer about the correct state of affairs. Such co-operation on the part of a person, whether he is an income tax assessee or not, will ensure prevention of a raid.
3. How to declare exempted or non-taxable income and wealth
There is, frequently, confusion about the declaration of exempted income or wealth. It is advisable for an assessee to declare the nature and source of such non-taxable income or other receipts in the income tax and wealth tax returns, or in a statement enclosed with the returns. When the entire picture is placed before the Assessing Officer, there is little scope or raid on the grounds of possessing undisclosed income. In view of the relaxed wealth tax exemption limit, many will now be outside the wealth tax net, hence they may enclose their statement of wealth with the income tax return.
Under the instructions dated 11 May, 1994, issued by the Central Board of Direct Taxes, 500 gms. of gold jewellery and ornaments per married lady, 250 gms. per unmarried lady, & 100 gms. per male member of the family were directed not to be seized. These instructions could only be retrospective in the sense that even if a seizure is made subsequently, irrespective of the date of acquisition of gold jewellery, the benefit has to be given to that extent, as held by the Karnataka High Court in Smt. Pati Devi v. ITO  240 ITR 727.
4. Preserve important vouchers and other documentary evidence for the acquisition of assets
It is vital to preserve important vouchers and/or other documentary evidence as proof for their acquisition. All vouchers of movable and immovable assets in excess of Rs. 1,000 per item must be preserved. Similarly, all bills or memos for items of precious stones, new or old jewellery or gold ornaments, etc. purchased from the market or from another person, should be obtained and preserved after paying the proper sales-tax or any other tax to avoid risk of their being seized. Where gold ornaments or jewellery have not been purchased by the owner but have been acquired by way of a gift on some ceremonial occasion or otherwise it is advisable that certificates carefully preserved. This is necessary to prove the acquisition of such assets in case an inadvertent income tax raid takes place and the assessee is called upon to prove the nature and source of acquisition.
5. How to prevent an income tax raid on lockers, and safe deposit vaults
Income tax raids are often conducted to seize bank lockers, safe deposit vaults and other lockers. It is generally believed that unaccounted property, income or wealth is kept in such lockers or safe deposit vaults. It is necessary to declare the lockers in the income tax statements and ensure that no unaccounted income, property or wealth is kept in them. In case of any doubts regarding the taxability of the contents kept in the lockers it is advisable to declare them in the income tax return. If all lockers are duly declared there is no risk of a raid. The owner of a locker, should maintain a register recording its contents for disclosure if called upon by the income tax authorities.
Sometimes a person is not the owner of any bullion, jewellery, precious stones or any other article or books of account in his possession but merely a custodian of a friend or relative’s property. In such cases it is always better for the custodian to get a declaration from the owner regarding the nature and source of the articles to satisfy himself that they do not represent any undisclosed income or property. In that case the custodian would not land himself in trouble in case an enquiry or tax raid is conducted against him. If, however, an income tax warrant is issued against him, he should make a true disclosure about the ownership of the alleged undisclosed property or goods by producing the necessary receipt or proof showing that he was merely the custodian, not the real owner.
Identify the income tax personnel authorised to conduct the raid
Sometimes instances are reported in the media of harassment caused by unauthorised persons entering the premises in the name of an income tax raid and taking away valuables. It is, therefore, very important to verify the identity of the persons executing the alleged warrant. The income tax consultant or legal adviser should be immediately notified. The assistance of neighbours can also be sought for the purpose. Once a search or seizure should be allowed only when their proper identity is established.
It is useful to know the income tax authorities involved, both in the matter of authorisation and the actual conduct of the search or seizure. These authorities and their powers are briefly described:
(A) The Central Board of Direct Taxes (CBDT)
This is the highest executive constituted by the Central Board of Revenue Act, 1963, with effect from 1.January 1964. It has the power to make rules for the implementation of this Act. This is also known as the “Board.”
(B) Directors-General, Directors of Inspection (DG & DI) & Joint Directors
The Government of India may appoint as many Directors- General of Income Tax (DG) or Directors of Income Tax (DIT), as it thinks fit. They shall perform such functions as may be assigned to them by the Board. They are generally in charge of search, vigilance, inspection, investigation, etc. A DG or DIT is a competent to authorise a lower authority to conduct an income tax raid or search and seizure under Section 132(1). A Joint Director may be authorised by the Board to issue a warrant of authorisation under Section 132(1). Likewise, a Joint Director can also be authorised to conduct a search and seizure.
(C) Chief Commissioners of Income Tax (CCIT) or Commissioners of Income Tax (CIT) or Joint CITs.
The Central Government may appoint as many Chief Commissioners of Income Tax or Commissioners of Income Tax, or Additional CITs as it thinks fit. Their functions pertain to person(s), incomes or cases as directed by the Board. Generally, a Commissioner of Income Tax (CIT) is in charge of a particular specified geographical area e.g., the Commissioner of Income Tax, Delhi, VII. They perform certain judicial functions under Sections 263 and 264. They can also exercise the functions of DGs in certain circumstances. A CCIT or CIT, like a DG or DIT, is also competent under Section 132(1) to issue a warrant of authorisation for search or seizure. Joint CITs may also be authorised by the Board to issue a warrant of authorisation under Section 132(1). Joint CITs may also be authorised to conduct a search and seizure.
(D) Deputy Commissioners of Income Tax (DC)
Deputy Commissioners of Income Tax (DCs) are also appointed by the Central Government. They are directly under the control of the Chief Commissioner or the CIT and perform such functions of Income Tax Officers or Assistant Commissioners of Income Tax (AC), as may be assigned to them. They can also be empowered by the Chief Commissioner or CIT to exercise the powers of an Asstt. CIT. A DC can be authorised by a DI or CIT to conduct an income tax search or seizure under Section 132 (1).
(E) Deputy Directors of Inspection and Assistant Directors of Inspection (DDI or ADI)
Deputy Directors of Inspection (DDI) and Assistant Directors of Inspection (ADI) are also appointed by the Central Government. A DDI is equal in rank to the DC and an ADI to that of an AC or an Income Tax Officer. They can be authorised to conduct search and seizure under Section 132(1) by the DG, DIT, CCIT, or CIT. Besides, in special cases, the Board can empower any DDI to authorise any ADI or AC or ITO to conduct a raid under Section 132(1).
(F) Assistant Commissioner (A.C.) or Income Tax Officer (ITO)
An Assistant Commissioner of Income Tax is equivalent to senior Class I, Income Tax Officer (ITO). Income Tax Officers are of two types: Class I and Class II. Class I ITOs are appointed by the Central Government while the Class II ITOs are appointed by the Chief Commissioner of Income Tax or CIT subject to the Central Government rules. An ITO is the most important official of the Department. He is the actual assessor who initiates assessment, calls for a return from the assessees within his jurisdiction, makes the assessment, collects revenue and makes the refunds. Vast powers of search and seizure of documents, books of account, bullion, money and jewellery, etc. have now been conferred upon the ACs and ITOs under Sections 132, 132A and 132B as is described later.
(G) Inspectors of Income Tax (IIT)
Inspectors of Income Tax (IITs) are appointed by the Chief Commissioner of Income Tax or Commissioner of Income Tax. They perform such functions in the execution of the Income Tax Act as are assigned to them by the ITO or by any other proper authority under whom they are appointed to work. Their help can be taken by an ITO, AC, DC, ADI or DDI in conducting an income tax search or seizure under Section 132.
Who is entitled to represent a person before the IT authorities in search and seizure matters?
Except when a person is required to be personally present before any income tax authority, he has the right, under Section 288, to be represented by an “authorised representative”. This could be any person authorised by him in writing to appear on his behalf:
(i) A relative; or
(ii) A person regularly employed by him; or
(iii) Any officer of a Scheduled Bank with which the assessee maintains a current account or has other regular dealings; or
(vi) Any legal practitioner who is entitled to practise in any civil court in India; or
(v) Any Chartered Accountant, or any auditor within the ambit of Section 226 of the Companies Act 1956; or
(vi) Any person who has a National Diploma in Commerce (with Advanced Accountancy and Auditing) awarded by the All India Council of Technical Education, or a Government Diploma in Company Secretaryship awarded by the Department of Company Law Affairs or the final examination of the Institute of Costs and Works Accountants of India; or
(vii) Any person who, before the coming into force of this Act in the Union Territory of Dadra and Nagar Haveli, Goa, Daman and Diu, or Pondicherry, attended before an income tax authority on behalf of any assessee other than in the capacity of an employee or relative in that territory; or
(vii) Any person who has acquired a degree in Commerce or Law from any Indian, Pakistan, Rangoon and certain English, Irish, and Scottish University; or (ix) Any Income Tax Practitioner practising before 1 April 1962.
The Article was First Published on 20.03.2009