Tax assessments and raids conducted by the Income Tax Department often come under scrutiny for fairness. Understanding the process of tax assessment, powers of income tax officers, and the necessity of evidence is crucial. This article explains complexities surrounding tax assessments and explores a recent case to shed light on fairness concerns.
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What is tax assessment?
After a taxpayer submits their income tax return, the Income Tax Department takes over for processing. Nowadays, the department utilizes artificial intelligence and machine learning techniques to assess returns, a process commonly referred to as Income Tax Assessment. Here, every detail provided by the taxpayer undergoes meticulous analysis.
During this assessment, the total income of the taxpayer is determined. They subtract any Tax Deducted at Source (TDS), Tax collected at source(TCS) and Advance Tax from this total to ascertain the tax payable. If there’s still tax owed, it’s termed as self-assessment tax, which the taxpayer must settle before filing their return.
Income Tax Assessment encompasses various types: Self, Summary, Regular, Scrutiny, Best Judgment, and Income Escaping. Depending on the type, taxpayers might receive different notices requesting specific documents for the assessment process.
I was doing my research on this topic and an interesting case of Raid or also we can say search came in front of me, It is The Case of The ITAT Surat Bench Acit v. Shanker Nebhumal Uttamchandani IT Appeal No. 321 (SRT) of 2022 [Assessment Year 2020-21] February 28, 2024
What is Raid or search as per Income tax act?
Search operations are investigative measures conducted by the income tax department based on information to uncover undisclosed income and assets among taxpayers who haven’t accurately reported their financial status for tax purposes.
Section 132 of Income tax – Search or Raid
Whereas seizure involves taking control of assets that haven’t been disclosed to the Income-tax Department, including accounts, documents, and papers containing information about undisclosed wealth or income. Consequently, search and seizure represent potent tools in the income tax department’s arsenal to expose concealed income or assets and deter tax evasion, thus curbing the proliferation of black money.
Powers of income tax officer in Raid
Authorized officers have the power to enter and search any building, place, vessel, vehicle, or aircraft where they have reason to suspect that books of account, documents, money, bullion, jewelry, or other valuable items may be kept.
They are permitted to break open the lock of any door, box, locker, safe, almirah, or other container if the keys are not available.
If there is reason to suspect that a person entering or exiting the premises or vehicle may be concealing books of account, documents, money, bullion, jewelry, or other valuables, the authorized officer can search that person.
Any person found in possession or control of electronic records in the form of books of account or documents must provide the necessary assistance to the authorized officer for inspection.
The authorized officer can seize any books of account, documents, money, bullion, jewelry, or other valuable items discovered during the search.
They are allowed to mark identification on books of account or documents and make extracts or copies from them.
An inventory of any money, bullion, jewellery, or other valuable items found may be made by the authorized officer.
The authorized officer has the authority to examine, under oath, any person found in possession or control of books of account, documents, money, bullion, jewellery, or other valuable items. Any statement made during such examination can be used as evidence in any legal proceeding. The examination may cover not only the items found during the search but also any relevant matters connected to the investigation.
Sometimes, we must agree that in following up of rules of taxation, fairness and accuracy are important. Assessing Officers have a significant power in determining the tax liabilities of individuals and entities. However, this power must be exercised judiciously, backed by solid evidence and adherence to legal procedures. A recent case before the Income Tax Appellate Tribunal in Surat serves as a great example of the importance of a proper evidence and due process in tax assessments.
Like for example I am owner of AR ventures a fictitious organisation, and what I did is I taught my brother accounts using name of own AR ventures itself in his rough copy, depicting sales as 500 crores, that might also be taken by Income tax department as evidence in case of Raid or search.
In the case of ACIT v. Shanker Nebhumal Uttamchandani, The AO added extra money of Rupees 52.95 crore to what the taxpayer had to pay based on evidence found in a search. But when looked at closely by the Income tax appellate tribunal, they found out that there wasn’t enough proof or legal reasons for these extra charges.
The Commissioner of Income Tax (Appeals) also deleted all the additions, citing lack of corroborative evidence. One specific ground of appeal relates to the deletion of an addition of Rs. 24,70,787, comprising unexplained income and undisclosed interest. The revenue contends that the seized digital image from the assessee’s mobile phone indicated unrecorded transactions of loan advances and interest earned, and thus, the additions were justified. However, the assessee argued that the image was inconclusive, lacking details such as the identity of the parties involved, transaction nature, or signatures. The Commissioner of Income Tax (Appeals) accepted the assessee’s argument and deleted the additions.
The AO had relied on an image found on the taxpayer’s iPhone, alleging it to be evidence of unexplained money and interest income. However, crucial details such as whether the image was sent or received by the taxpayer, and whether it was confronted to them during the search, were not recorded. Lacking corroborative evidence, the ITAT ruled in favor of the taxpayer, emphasizing the necessity of substantiated claims in tax assessments.
Another addition was made based on an image retrieved from a digital device found in the premises of a third party. The lack of correlation between the principal amount and interest, coupled with the absence of any material suggesting confrontation with the third party, led the ITAT to annul this addition. This underscores the principle that tax assessments must be grounded in verifiable facts, not speculative assumptions.
In this, the AO had added the value of jewellery found during the search, disregarding the fact that it belonged to female family members and was duly declared in wealth tax returns and before the Settlement Commission. The ITAT rightly concluded that since the jewellery was accounted for and within the declared limits, there was no basis for the addition.
An addition was made based on an image depicting a transaction related to furniture. However, the lack of corroboration and uncertainty regarding the actual purchase led the ITAT to dismiss this addition. This highlights the importance of concrete evidence to substantiate claims of undisclosed expenditure.
The AO had sought to make an addition based on a loose paper allegedly showing a land transaction. However, the absence of any direct evidence linking the taxpayer to the transaction, combined with the questionable authenticity of the document, led to the deletion of the addition. This reinforces the principle that additions must be supported by credible evidence, not mere conjecture.
In conclusion, the case of Shanker Nebhumal Uttamchandani v. ACIT underscores the necessity of adherence to due process and the requirement for corroborative evidence in tax assessments. AOs must exercise their authority responsibly, ensuring that assessments are grounded in facts and legal principles. Upholding fairness and transparency in tax administration is essential for fostering trust and compliance within the taxpayer community.
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