Search and seizure under the Income Tax Act, 1961

HISTORY AND INTRODUCTION

“Search and Seizure”, the origin of these provisions will in a few years celebrate its golden jubilee. It was since 1956 that the provisions of search and seizure made its first entry into the Income Tax Act. Section 132 was totally substituted by the Finance Act, 1964. After section 132 underwent a through overhaul in the year 1976, to committees had made certain recommendations on search and seizure provisions (i) The Raja Chellaiah Committee and, (ii) The Kelkar Committee. It is seen that the recommendations affecting the substantive law have been given effect to in respect of majority of such recommendations; the assessee friendly measures recommended by these committees have not been given any serious considerations.

Who is the authorized officer to issue order for search and seizure?

a)   the Director General of Income Tax, or

b)   the Director of Income Tax, or

c)   the Chief Commissioner of Income Tax, or

d)   the Commissioner of Income Tax, or

e) any such Joint Director or Joint Commissioner of Income Tax as may be empowered by the Board.

The Director General or Director or the Chief Commissioner or Commissioner or Joint Commissioner or Joint Director who have been empowered by the Board can authorize any officer subordinate to him not below the rank of Income Tax Officer to conduct search. The officer so authorized is referred as Authorized officer and the authorization is done by issuing a search warrant in Form 45.

What are the circumstances in which search and seizure can be conducted?

132(1)

The authorized officer who is duly empowered by the Board has in his possession any information through which he has reason to believe that –

132(1 )(a)

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,

132(1 )(b)

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

132(1) (c)

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.

Who are the Persons to be searched: From the above it is clear that the persons to be searched are persons:

(a)   who have books of account or documents which have not been produced or are not likely to be produced in response to notices or / summons, or

(b) persons who are likely to be in possession of undisclosed income or property. What are the basis for search and seizure?

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 AND CO v CIT (1970) 76 ITR 217 (CAL)

KUSUM LATAv CIT (1989) 180 ITR365 (RAJ)

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 v RAMESH CHANDER (1974) 93 ITR 450 (PUN)

Is the assessee entitled to a copy of reasons recorded for issuing a search warrant?

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 (SOUTHERN HERBALS LTD v DIT (INVESTIGATIONS) (1994) 207 ITR 55 (KAR). 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. (Dr. PRATAP SINGH v DIRECTOR OF ENFORCEMENT (1985) 155 ITR 166 (SC)

Can material obtained during illegal search be utilized for the purpose of an ordinary assessment?

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) 97 ITR 505 (SC)

Can search be authorized by an authorized by an authority other than jurisdictional authority?

The Chief Commissioner/Commissioner of Income Tax has the power to authorize a search of any building, place, vessel, vehicle or aircraft of a person which is under his jurisdiction and also in cases where such building, place, vessel, vehicle or aircraft is in his area of jurisdiction but he has no jurisdiction over the persons concerned, if he has reason to believe that any delay in obtaining authorization from the Commissioner having jurisdiction over the person would be prejudicial to the interests of revenue. Such authorization shall be given in Form 45A.

Where a search for any books of account or other documents or assets has been authorized by any authority who is competent to do so, and some other Chief Commissioner/Commissioner in consequence of information in his possession has reason to suspect that such books of account or other documents and assets etc, of the assessee are kept in any building, place, vessel or aircraft not specified in the search warrant issued by such authority, he may authorize the Authorised Officer to search such other building, place, vessel, vehicle or aircraft. Such authorization shall be given in Form 45B.

What are the powers of the officer to whom authority is given for search and seizure?

a)      enter and search any building, place, vessel, vehicle or aircraft where he has reason t0o suspect that such books of accounts, other documents, money, bullion, jewellery or other valuable article or thing are kept.

b)      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.

c)   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.

d)      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.

e)   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, w.e.f. 1-6-2003, 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.

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

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

What are the additional powers of the authorized officer?

a) Deemed Seizure 132(1) : Where it is not possible or practicable to take physical possession of any valuable article or thing and remove it to a safe place due to its volume, weight or other physical characteristics or due to it being of a dangerous nature, the authorized officer may serve an order on the owner or the person who is in immediate possession thereof that he shall not remove, part with or otherwise deal with it except with the previous permission of such authorized officer and such action of the authorized officer shall be deemed to be seizure of such valuable article or thing.

b) Restraint Order 132(3) with explanation and section 132(8A) : where it is not possible or practicable to seize any (a) books of accounts, or other documents, or (b) money, bullion jewellery or other valuable articles or things for reasons other than those mentioned , the authorized officer may serve an order on the owner or a person who is in immediate possession or control thereof that he shall not part with or otherwise deal with it except with the previous permission of such officer and such officer may take steps as may be necessary for compliance.

c) Power to requisition service of a police officer or officer of the Central Government sec 132(2): 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.

d) Examination of any person on oath sec 132(4) with explanation: the 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 and any statement made by such person during such examination may thereafter be used in evidence in any proceeding under the I.T.Act,1 961. The statement can be recorded during the course of search and seizure or when it is over. Further, an explanation has been added to provide that the examination of any person may be not merely be in respect of any books of account, other documents or assets found as a result of the search, but also in respect of all matters relevant for the purposes of any investigation connected with any proceedings under the Income Tax Act,1 961.

e) Presumption of ownership of books of accounts and assets and its truthfulness sec 132 (4A): 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 or which may reasonably be assumed to have signed or written the books of accounts or other documents are in that person’s handwriting. In case of documents stamped, executed or attested that it was duly stamped and executed or attested by the person by whom it purports to have been so executed or attested.

Amendment made in the budget:

-It is proposed to amend section 292C of the I.T.Act, so as to extend this presumption also to books of account, other documents, money, bullion, jewellery or other valuable article or thing found in the possession or control of any person in the course of a search u/s 132.

-Further, it is proposed to amend the said section so as to extend this presumption also to books of account, other documents etc, found in the possession or control of any person in the course of a survey operation. This amendment will take effect retrospectively from ₁st June’2002.

– It is also proposed to amend section 42D of the Wealth Tax Act to extend this presumption to books of account, other documents or assets which have been delivered to the requisitioning officer in accordance with the provisions of section 37B of the Wealth Tax Act. This amendment will take effect retrospectively from 1^st October,1975.

f) Retention of books of account and other documents 132(8): the books of account or other documents seized shall not be retained by the authorized officer (if he is himself an assessing officer) for a period exceeding 30 days from the date of the order of assessment u/s 153A or 158BC unless the reasons for retaining the same are recorded by him in writing and the approval of the Chief Commissioner, Commissioner, Director General or Director for such retention is obtained. The following conditions must be fulfilled before the retention of books for the extended period: a) the authorized officer or the concerned assessing officer seeking the commissioner’s approval should record the reasons for retaining the books in writing. b) He should obtain the approval of CIT for the extended period.

g) Copies of extract of books of account and documents sec 132(9): the person from whose custody any books of accounts or documents are seized may make copies or take extracts therefrom in the presence of authorized officer or any person empowered by him in his behalf, at such place an time as the authorized officer may appoint in this behalf.

h) Handling over of seized books and assets to assessing officer sec 132(9A): such handling over is done within the period of 60 days from the date on which the last of the authorization for search was executed.

Seizure of jewellery:

a)        In the case of wealth tax assessee, gold, jewellery and ornaments found in excess of gross weight disclosed in the wealth disclosed in the wealth tax return only need to be seized.

b)        in case of person not assessee to wealth tax, gold jewellery and ornaments to the extent of 500gms per married lady, 250 gms per unmarried lady and 100 gms per male member of the family, need not be seized. The same is treated as explained and no addition can be made under sec 69. the said guidelines would apply to block assessment.

Explain the powers, procedures followed by the authorized officer with regards to requisition of books of accounts ?(sec 132)

a) Requisition of books of account, etc taken into custody under any other law:

Section 132A provides that in case where any books of account or other documents and assets have been taken into custody by the Officer or authority under any law e.g by the Collector of Customs, the Sales Tax Commissioner, etc, the Director General or Director or the Chief Commissioner or Commissioner of Income Tax may, in such circumstances as are covered by section 132 for search and seizure, authorize in Form No 45C and Deputy Director, Assistant Commissioner, Assistant Director or the Assessing Officer (Requisitioning Officer) to require such officer or authority to deliver to him such books of account or other documents and assets. This section however does not empower to take under requisition assets and documents which are in the custody of court.

b) When such power be invoked (Rule 112D)

When the Director General or Chief Commissioner or Commissioner has reason to believe that

i)        any person to whom summons u/s 131(1) or a notice u/s 142(1) was issued to produce, or cause to be produced, any books of account or other documents has omitted or failed to produce, or cause to be produced, such books of account or other documents, as required by such summons or notice and the said books of accounts or other documents have been taken into custody by any officer or authority under any other law for the time being in force, or

ii)     any books of account or other documents will be useful for, or relevant to, any proceedings under the Act and any person to whom summons or notices as aforesaid has been or might be issued will not, or would not, produce or cause to be produced, such books of account or other documents on the return of such books of accounts or other documents by any officer or authority by whom or which such books of account or other documents have been taken into custody under any other law for the time being in force, or

iii) any assets represent either wholly or partly income or property which has not been, or would not have been disclosed for the purposes of the Act, by any person from whose possession or control such assets have been taken into custody by any officer or authority under any other law for the time being in force.

c) Application of seized or requisitioned assets (Sec 132B)

-) the assets seized shall be dealt with in the following manner

i) Seized assets may be applied towards existing and future liability (sec 132B(1)(i)

ii) Release of seized asset after meeting existing liabilities in certain cases 132B(1)(ii)

iii) Money seized may be applied for discharging the liabilities (sec 132B(1)(ii)

iv) Assets other than money may also be applied to discharge liabilities (sec 132B (1)(iii) -) return of excess assets seized (section 132B(3)

-) interest to be paid at the rate of 1/2% p.m. or part of the month non seized money (section 132B(4) on the aggregate sum of a) the money seized u/s 132 or requisition u/s 132A as reduced by the amount of money if any released , and, b) the proceeds of assets sold towards the discharge of existing liability in sec 132B(1)(i).

the interest shall be payable from the expiry of the period of 120 days from the execution of the last of the authorizations for search till the date of completion of assessment under section 153A or block assessment.

CURRENT POSITION:

The Finance Act, 2003 has changed the method of assessment of income in respect of search & requisition cases, & the new method of assessment is made applicable to searches initiated, or requisitions made after 31/5/03. The new procedure for assessment is laid down in the three sections, viz. Sections 153A, 153B, and 153C, inserted by the Finance Act, 2003 with effect from 1.6.03.

The Amended provisions in details of the newly inserted sections are as follows:

Sections 153A, 153B and 153C deal with search and seizure they can be explained as under:

“SECTION: 153 A”

The Assessing Officer under section 153A (a) would issue a notice to furnish returns of income for each of immediately six proceeding years within specified time limit. Therefore, if the search is initiated on 1/12/2007, the assessee can be called upto to file returns for the A. Y 2002-03 to 2007-2008. (i.e. previous years 1/4/2001 to 31/3/2007). Thereby the assessee will have to file separate returns for each of the years in the prescribed form within the time limit specified in the notice. Further there is no provision for giving any maximum time limit for filing the returns.

The notice issued under provision 153A can be issued even if the conditions laid down in sections 147 to 149,151 and 153 are not satisfied. We can interpret then ,that even if 4 years from the end of the assessment year, for which sections 143(3) has been made, had expired and the assessee had disclosed all material facts at the original assessment for the year, notice u/s 153A can be issued for that year. In normal circumstances such notice for reassessment cannot be issued u/s 148 in view of the provision to section 147.

With regards to the year(s) in respect of which the assessment or re-assessment is pending, as per the second proviso to section 153A (b), the same shall abate. In other words, the assessment or re-assessment shall not be made by regular assessment under section 143(3) or re-assessment under section 143, but it shall be under section 153A(b). If the returns are filled, the Assessing Officer shall re-assess the income under section 153A

(b) in respect of the year(s) in respect of which the assessment is complete. Thus, the assessee will have to include the income already assessee earlier or income declared in the returns for which assessments are pending in the respective years while filing returns for the above 6 years for which notice u/s 153A is issued. If no returns are filed, the Assessing Officer shall proceed to make assessment under section 144.

Amendments:

i)      If any proceeding initiated u/s 153A or any order of assessment or reassessment made under subsection (1) of this section has been annulled in any appeal or other legal proceeding, the abated assessment or reassessment relating to any assessment year shall stand revived and if such order of annulment is set aside, such revival shall cease to have effect.

ii)    that time limit for completion of such assessment or assessment shall be one year from the end of the month in which the abated assessment revives or within the period already specified in section 153 or in sub section (1) of section 153B, whichever is later.

iii) the period commencing from the date of annulment of a proceedings or order of assessment or reassessment referred to in sub section (2) of section 153A till the date of the receipt of the order setting aside the order of such annulments by the Commissioner, shall be excluded in computing the period of limitation for the purposes of this section.

Assessment in case of search or requisition [(section 1 53A(b)]

Notice for filing return [(section 1 53A(a)]

Separate assessment of six assessment year [proviso 1 to section 1 53A]

“SECTION: 153 B”

Under section 153B the assessment proceeding shall be completed within a period of two years from end of the financial year in which last of the authorization of the search was executed. Provisions have been made for extending this time limit where special tax audit u/s 142(2A) has been ordered or where stay order by court has been issued or in similar circumstances.

Time limit of completion of assessment of 6 assessment year [section 153B (1)(a)]

Time limit of completion of assessment year relevant to the previous year in which search is conducted , or requisition is made [sec 153B (1)(b)]

Time limit for completion of assessment of other person referred to in section 153C [proviso to section 153B(1)]

“SECTION: 153 C”

Sections 153C states that, if during the course of the search it is noticed that any books of accounts, documents, assets etc: are found or seized belonging to any other person, the Assessing Officer shall transfer the same to the officer who has jurisdiction over that other person and then officer shall proceed against that other person as provided in section 153A and 153B.

“SECTION : 234 A AND 234 B”

The provisions of section 234A and 234B for levy of interest on the demand raised under the above proceedings will apply. Therefore, the assessee who is subjected to assessment or reassessment u/s 153A, 153B and 153C will have to pay interest for the delay in filing the return of income and short fall in payment of advance tax at the applicable rates for each of the above six years.

“SECTION : 271”

With regards to the provisions of section 271 for the levy of penalty for concealment of income will also apply and penalty will range between 100% to 300% of tax which can also be levied.

SECTION 271AAA

Where search has been initiated u/s 132 on or after the 1^st day of June, 2007, the assessee shall pay by way of penalty, in addition to tax, if any payable by him, a sum computed at the rate of 10% of the undisclosed income of the specified previous year.

Penalty u/s 271AAA shall not be levied in the following case (section 271AAA(2))

Where the assessed,

i)    In the course of the search, I n a statement u/s 132(4), admits the undisclosed income and specifies the manner in which such income has been derived.

ii) substantiates the manner in which the undisclosed income was derived, and iii) pays the tax, together with interest, if any, in respect of the undisclosed incomes.

“SECTION : 276 CC”

It should be noted here that the provisions for prosecution u/s 276CC will be applicable when the assessments are made u/s 153A, 153B and 153C.

“SECTION : 246A”

The Finance Act, 2003 has amended section 246A so that the assessee can file an appeal to the C1T (A) against the order of assessment or re-assessment under the above section. Further an appeal to the ITA Tribunal can also be filed against the order of CIT (A). Also appeals to High Court on substantial question of law can also be filed.

“POINTS TO REMEMBER”

The assessment officer is bound to issue notice for all the assessment years including the assessment years for which nothing is found and nothing is likely to be assessee as additional income over and above the income already disclosed by the assessee. Thus, in this case, even though there cannot be any assessment, the Assessing officer is bound to pass an order of assessment or reassessment as the case may be.

The assessing officer would be in a position to make a fresh assessment even though an assessment or reassessment has been made and which is not likely to be disturbed on account of the search.

Section 132 has been amended with effect from 1/6/03 to provide that any bullion, jewellery, or other valuable article or thing being stock in trade shall not be seized or put under prohibitory orders in search proceedings.

The assessing officer would be in a position to make an assessment even in respect of time-barred assessment. In other words, he would get fresh limitation period in respect of those assessment years.

It is to be noted that any income of any assessment year can be assessee only once. This principle being accepted and disputed has to be kept in mind for common assessment years. For Instance a search is carried on March 15, 2007 and concluded, lets assume on July 10, 2007. In that case, the specified period would be assessment years 2002-03 to 2007-08 and 1-4-2007 to 8-7-2007. Thus, the common assessment years are 2002-03 to 2005-06.

JUDICIAL POSITION IN OUR COURTS”

Search does not get invalidated on allegation of bribery as affirmed in Kamal Khosla v Director of Income Tax (Investigation) 258 ITR 43

> In case where the search officers dump documents and articles in particular place and seal it, so that they could examine whether they could seize it or not at their leisure, they may not be within their rights as held in Dr. C. Balakrishnan Nair v CIT 237 ITR 70

>  Where the CIT had authorised a search merely on an intimation from CBI without any effort to ascertain the correctness of the allegation of money or other assets or primary verification the court held the search was invalid, Ajit Jain Vs Union of India 242 ITR 302

>  In Ram Kumar Dhanuka v Union of India 252 ITR 205, the court has held that non­residents are not immune from the reach of powers of search and seizure.

>  Constitutional validity affirmed in Pooran Mal v. Director of Inspection 93 ITR 505,  C. Venkata Reddy V ITO 66 ITR 212

>  Power to arrest denied in L.R.Gupta v  Union of India 194 ITR 32

> Interpretative clause cannot be invoked for the purposes of authorization of search held in Dr. Nalini Mahajan v Director of Income Tax 2571TR 123

> Just because cash was initially seized by the police, there could not be action under section 482 of the Criminal Procedure Code, 1973, when the cash seized had meanwhile become the subject matter of an other search. Kushi Ram v Hashim, AIR 1959 SC 542.

> It would not be correct for the search officers to seize assets not belonging to the assessee where there was explanation as to the ownership of such assessee as held in Alleppey Financial Services V ADIT 236 ITR 562.

> Immovable property cannot be seized held in Bapurao v ADI 247 ITR 98, followed Sardar Parduman Singh v Union of India 166 ITR 115.