Demystifying Income Tax Searches and Surveys

Table of Contents

1. Legal Requirements for Income Tax Searches
2. Landmark Decisions Relating to Searches
3. What can Trigger Income Tax Searches and Surveys?
4. Conduct of Searches
5. Powers of Tax Authorities During Search
6. What can be Seized During Search and What can not be?
7. Rights of Taxpayers During Searches
8. Duties of Taxpayers during searches
9. Dos During Searches by Taxpayers
10. Dont’s During Searches by Taxpayers
11. Disclosure of Additional Income u/s 132(4)
12. To Ensure Smooth Conduct of Searches
13. Post Search Investigation and Role of Professionals
14. Conduct of Income Tax Surveys
15. Posers Relevant to Survey Action

1. Legal Requirements for Income Tax Searches

• Searches can be authorized in any of the following 3 situations:

(i) failed to produce books and documents u/s 131 or 142

(ii) Will not produce books and documents u/s 131 or 142

(iii) In possession of money, bullion, jewelry or other valuables, which has been or would not be disclosed

• Search is authorized by DGIT, PDIT to Addl DIT, DDIT and ITOs
• Search can be conducted at any premise, vehicle, device at any time of any day
• Presumption u/s 132 (4A) of Income Tax Act
• Satisfaction need not be produced before appellate authorities

2. Landmark Decisions Relating to Searches

• Search provisions are constitutionally held valid Pooran Mal v. Director of Inspection, [1974] 93 ITR 505 (SC)
• Searches to be authorized based on cogent information but procedural lapses not relevant ITO v. Seth Bros, [1969] 74 ITR 836 (SC)
• Searches can’t be authorized on the basis of rumours/Gossips UOI v. Ajit Jain, [2003] 129 Taxman 74/260 ITR 80 (SC)
• In the case of Laljibhai Kanjibhai Mandalia v. Principal DIT (Investigation) [2019] 105 taxmann.com 260/263 Taxman 604 (Gujarat), Hon’ble Gujarat HC held search invalid on satisfaction which was reversed by Hon’ble SC reported in Principal DIT (Investigation) v. Laljibhai Kanjibhai Mandalia [2022] 140 taxmann.com 282/288 Taxman 361/446 ITR 18 (SC)
• AO was also authorized officer will not invalidate search action on bias Union of India v. Vipin Kumar Jain [2003] 129 Taxman 59/260 ITR 1 (SC)
• Search can not be held malafide because outsiders were involved Hindustan Metal works v. CIT, [1968] 68 ITR 798 ( Allahabad )
• Vague allegations not enough to prove malafides Express newspapers Pvt Ltd v. UOI, AIR 1986 SC 872
• Irregularity in searches will not vitiate the proceedings (witness) Naraindas v. CIT [1983] 14 Taxman 447 ( MP High Court)
• Illegality of searches will not vitiate the evidences collected Dr Partap Singh v. Director of Enforcement [1985] 22 Taxman 30 (SC)
• Allegation of bribe on IT officers will not vitiate the search Kamal Khosla v. DIT [2002] 123 Taxman 1102 ( Delhi H C)

3. What can Trigger Income Tax Searches and Survey

• Credible information of tax evasion
• Information based on assessment records
• Information received from other Govt agencies/department
• Lavish spending disproportionate to income disclosed
• Manipulation of books and records
• Unexplained/huge loans and sundry creditors
• Low income disclosed compared to peers
• Certain trade/business with elements of on money/unaccounted sale
• Large deals and media reporting
• Counter party is searched or given adverse statements
• Information on Possession of large cash or valuables
• Suspicious transactions
• Hawala transactions
• Large businesses but repeated non compliance
• Social media indicating unaccounted income

4. Conduct of Searches

• Strike at all places at the same time
• Two witnesses called for
• Warrant of authorization executed on key person
• recording of preliminary statements
• physical search of the persons and premises covered
• Valuation of jewellery by registered valuer
• Back up of computers and devices by expert team
• Final statement confronting key people with documents etc
• Preparation of Panchanama and annexures of seizure and found

5. Powers of Tax Authorities During Search

• Enter and search any building or place as per warrant
• Break open locks where keys are not available
• Carry out search of the premise and also personal search
• Seize the unaccounted assets and books/documents
• place mark of identification and take extract of books and documents
• Make inventory of cash and valuables found/seized
• Take help of Police and other Govt officials as required
• Put assets or records under prohibitory orders u/s 132(3)

6. What can be Seized During Search and What can not be?

• Following can be seized during search:

1. 1. Unaccounted cash and jewelry
   2. Books of accounts and documents
   3. Computer hard disks and data storage devices
   4. Property documents etc.

• Following can not be seized during search:

1. 1. Stock in trade
   2. Disclosed cash , jewellery etc
   3. Gold up to 500gm per married lady, 250gm unmarried lady and 100gm per male member

7. Rights of Taxpayers During Searches

• To verify the identity of search team
• To verify warrant of authorization
• To have two witnesses from the locality
• To have meal, sleep etc. in time
• To allow children to go to school after checking their bags
• To call medical practitioner in case of medical needs
• To get copy of Pachamama with annexure
• Right to answer questions in own language
• Right to continue business under supervision of IT team

8. Duties of Taxpayers during searches

• To provide free ingress to search team in premises
• To handover all keys including locker keys to search team
• To handover electronic devices, mobiles with passwords
• To identify and explain the ownership of assets, books etc.
• Identify every individual in the premise and explain relationship
• Not to allow/ encourage entry of unauthorized people
• Not to remove anything from its place without notice of AO
• To answer all questions truthfully
• To affix signature on Pachamama, annexures and statements etc.

9. Dos During Searches by Taxpayers

• To cooperate with the search team
• Be courteous with search team
• Narrate all facts in preliminary statement
• Be watchful during search to ensure legality of actions
• Be calm and comfortable
• Get independent witnesses from your contacts from neighborhood
• Try to help search team in discharge of their duties
• Give passwords and locker keys and explain assets found

10. Dont’s During Searches by Taxpayers

• Do not stop or obstruct team from entering the premises
• Do not obstruct or stop team from physical search
• Do not try to hide anything as it will not be possible
• Do not annoy team or misbehave with them
• Do not panic as it does not help
• Do not make any plans till search team is there
• Do not attempt contacting CA or counsels as it is not permitted

11. Disclosure of Additional Income u/s 132(4)

• Examination on Oath by Authorized officers during search of any person found in possession or control of books, documents and valuables
• This examination can also be for any other matter relevant for any investigation under income tax act
• These statements have evidentiary value
• Undisclosed income confessed in this statement can be legally taxed even without evidences. However judicial decisions require it.
• Benefit of disclosure is in levy of penalty at lower rate
• Disclosure also reduces post search investigations
• CBDT circular no 286/2003 dated 10/03/2003 is against officers attempting disclosures without evidences
• Unbacked confessions can be retracted but within reasonable time

12. To Ensure Smooth Conduct of Searches

• Allow smooth entry and access to search team
• Provide access to all keys and passwords of devices
• Answer questions raised to the extent you know
• To maintain cool and not to get agitated on any issue
• To keep track of answers given by you to ensure proper recording of statements
• Treat the search team with dignity and respect
• Not to get disturbed on occasional aggression of search team
• Don’t keep unaccounted cash, jewellery and valuables

13. Post Search Investigation and Role of Professionals

• To prepare list of premises searched with key people involved
• Go through Panchanama’s and papers available
• Prepare details of seized assets, documents etc.
• Get inputs on statements given by key people
• Prepare list of places covered u/s 132(3)
• To assist conducting DDIT in removing prohibitory orders
• To evaluate evidences and statements and advice for disclosures
• To obtain copy of statements and documents/books, EDs etc.
• To prepare submissions if there are violations in other laws
• Work out undisclosed income and prepare explanations for others issues
• To prepare strengths and weaknesses of various issues and guide taxpayers

14. Conduct of Income Tax Surveys

• Surveys are conducted u/s 133A of Income Tax Act
• Can enter in Business premises during business hours or after sunrise and before sunset
• Can inspect books of accounts and documents and put mark of identification on them
• Make inventory of stock, cash etc.
• Can impound books and documents but can’t seize assets
• Examine persons available but not under oath
• Approval of DGIT or Pr CCIT needed to initiate survey actions

15. Posers Relevant to Survey Action

• Can CA’s office be surveyed for client’s book?
• Can combined premises used for business and residences be surveyed?
• Can shop closed during business hours be broken open for survey?
• Should survey action be closed after business hours?
• Is presumption of section 132(4A) being available in survey action?
• Can business premise be sealed under survey action?
• If valuables were found during survey action, can it be converted into search?