Unresolved Issues in Searches & Seizures, and Search Assessments and
Surveys
K. Sampath, Advocate
The proposed subject is vast. It
encompasses a
wide array of principles, a range of possibilities, and
a variety of occurrences. Unresolved issues in
search & seizure, unresolved issues in search
assessments and unresolved issues in surveys
constitute separate and distinct topics with some
common current running through them. Each is a
subject in itself, and requires serious and deep
consideration and meticulous handling.
2. Since the subject by itself is vast and
unwieldy, the author may be excused for not being
able to go in depth on all the facets as are
adumbrated hereafter on each one of the above
subjects. Only a few points are taken up for
exposure and discussion.
Searches
3. Let the case of searches and seizures be taken
up first. The death blow to the taxpayers’ attempt to
cull searches and seizures and the arbitrary exercise
of such power, and the provisions themselves as a
colourable device was set to naught by a
constitution bench of the Supreme Court in 1967 in
the case of Ramkishan Shrikishan Jhaver [66 ITR
664]. The court opined that to check evasion of tax,
provision for search and seizure in taxing statutes
were necessary. Since the powers were braided with
adequate safeguards in terms of section 165 of the
Code of Criminal Procedure being made applicable,
they could not be considered as conferring an
arbitrary power on the State. The court opined that
the government would see that officers of proper
status were empowered to authorise searches. The
court further elucidated, that since the sales tax
provisions warranted that, (i) the officer should
record his reasons in writing, which has to be done
before the accounts are seized, (ii) the dealer should
be given a receipt of the seizure, (iii) the accounts,
etc. seized, should be retained only so long as may
be necessary for their examination and for any
enquiry or proceeding under the Act, and (iv) that
such accounts should not be kept for a period of
more than 30 days at a time, except with the
permission of the higher authorities, there were
indeed sufficient safeguards, and that they were in
sync. with Article 19(3) of the Constitution which
did provide reasonable restrictions on the right to
hold property and the right to carry on trade.
4. As is generally
fashionable to refer to foreign
precedents, the bench did not pause to consider any
such. Before handing out the verdict the fact as to
whether such provisions or restrictions or the
invasion of the basic rights of the citizens were
permitted in other countries and if so to what
extent was not gone into. On such an issue which
fundamentally affects the rudimentary rights of the
citizens of a much-touted democratic set-up, the
court did not consider whether other democracies
have permitted similar obnoxious excursions or
despicable outrages in fiscal administration. The
court perhaps forgot Lord Jesus invitation to throw
the first stone on the alleged adulteress who himself
had committed no sin ever in life. The court also
did not consider the adequacy or practical
limitation of the so-called safeguards. The court did
not at all go into the aspect of the matter as to how
far it was justified for the executive to utilise
powers under the Criminal Procedure Code with
regard to issues which are purely civilian and
definitely non-criminal.
5. We talk of equality before law, and equal
treatment for all before it. Should that not envisage
that if there has to be a search for recovering from
some person undisclosed income or evidence
representing such income, then such should be
done with regard to all those at the same time who
are known to be harbouring such income/assets or
evidence. There cannot be a pick and choose option
causing discrimination in the process and letting
the executive go after the job at its sole,
questionable discretion. Courts ought to be wary of
the future application of laws on the principles
propound by them. Indeed much later, in the case
of Podar Cement (1997) 226 ITR 625, the Supreme
Court itself recognised this principle when it said
that the application and utility of a law under
challenge is required to be projected into the future
and considered with relevance thereto also. In 1969,
the Commissioner of Income-Tax was indeed the
senior-most field officer. Does that situation obtain
today? No!. The Commissioner of Income-Tax is very much of a subordinate to the Chief
Commissioner. The Chief Commissioner himself
reports to the Member assigned to the area. The
Commissioner is not the principal officer in the
field any longer. What the court thought then as a
power being safe if vested in the ultimate repository of the
administration, viz., the Commissioner, is no
longer true today. The provisions were amended to
provide similar powers for the Chief Commissioner.
While doing so, the legislature did not bear in
mind, that the Supreme Court while testing the
laws validity, had vested such powers with the
supreme authority in the executive, and by that
logic, instead of providing for the concurrent
exercise of the power by the Chief Commissioner
and also the Commissioner, it ought to have stated
that with the creation of the institution of the Chief
Commissioner, the power would hereafter be vested
only in the Chief Commissioner alone. Doing it that
way would have meant not only showing respect to
the pronouncement of the Supreme Court, but also
would have meant solemnly abiding by its esteemed
dictat. Despite that not being done, no court in the
country has come forward to rule that the
provisions are now basically flawed because of a
dilution of this kind and, therefore, are vitiated and
unenforceable. Notwithstanding the citations in 207
ITR 055 (KAR), 195 ITR 582 (KAR), 224 ITR 614
(SC), 260 ITR 067 (CAL), 276 ITR 456 (SIK), 278
ITR 036 (BOM), 194 ITR 032 (DEL), and a host of
others. And that is how these retrograde provisions
have come to stay.
6. It requires notice that many High Courts and
apex Courts’ decisions have said that they would
reject the challenge to the vires of the search
provisions only because they were intended to be
administered against persons with a peculiar .bent
of mind and those who would not abide by the law.
They are not meant for general application as a
routine exercise. All that the court had said was
virtually set to nought by the Finance Minister in
1995 when he openly declared in the budget speech
“that the searches conducted by the Income-tax
Department are important means of unearthing
black monies.” When one recounts that the vires of
the search provision are upheld only on the basis of
the reasonable restrictions clause contained in
Article 19(3) unqualified statement of the type as
just cited would have at least caused court
approvals to get inhibited and become infrequent,
but alas that is not to be!
7. On the aspect of safeguards, it was none
other than the Prime Minister of India, Mr. Rajiv
Gandhi, who interceded through the issuance of a
circular, for the so-called safeguarding the interests
of the victims of a search. This happened at a time
when his Finance Minister was going whole-hog
against the industry, and highly respectable
personages from the reputed industrial houses were
publically humiliated through searches.
8. Those provisions were just like a prologue to
a novel. It marked just a beginning requiring further
fortification. That never happened. Instead what happened was that a
Department which itself did
not know what to do published a Tax Payer’s
charter. The divine rule is first introspect and that
practice is better than precept. But who says that
administrative deeds are divine?
9. What do you say of a situation where the
authorized officers are there to do search under the
protection of policemen. The instructions to the
policemen are clear and curt. They are there for the
protection of the authorized officers and to help
them in the discharge of their official duties. They
are there to ensure the successful completion of the
search which the authorized officers are to carry
out. There is not one instance of the victim of a
search getting any relief or protection from the
police force. The police is there to help the
oppressor and the presence of the police is nothing
but undiluted coercion and intimidation. It is
unfortunate that even the apex court refused to
purchase this argument in Seth Bros. 74 ITR 836.
10. On the question of safeguards, the apex court
thought that recording of reasons prior to the search
and its authorization by the Commissioner backed
by a timely real guard action ensuring for timely
release of the seizure was adequate. The recording
of reasons has always been shrouded in secrecy.
There is perhaps a valid reason for doing so for the
Department would be morally bound to veil its
informer. But not all searches are initiated on the
basis of information put in by an informer. In the
class of cases where informers are not involved, at
least after the search there should be no hesitation
on the part of the department to provide the
information leading to the reason to believe that
there is undisclosed income and/or assets. For long
nobody ever asked for the reasons and when it was
indeed asked for in the case of H. L. Sibal by the
High Court (see 101 ITR 181), privilege was claimed
stating that the information is based on classified
documents containing official secrets. The Punjab
High Court was at pains to point out that at the
level of Commissioners, immunity to produce the
documents after a Court-call would not be available
for the Commissioner was not such high an official
as would enjoy the privilege of exemption on
grounds of public policy. When the recorded reason
was finally produced the Court found that the
records had been interpolated. That appeared
perhaps as the very reason for claiming immunity
so as to hide the obnoxious fact of the tampering of
records. What the court did thereafter to the
Commissioner is now a part of the law reports (see
103 ITR 606). Should a clue not have been taken
out of this instance? No one did. Little it was
realized that searches are numerous though post
search challenges are few. Court interventions are
even fewer. That one case ought to have been an
eye opener. Even today when we have the Right to Information Act any
requisition or a copy of the
warrant is met with strong resistance leave aside
the objections to the supply of reasons. Reluctance
is palpably perceptible whenever such points arise.
The so called safeguards by way of recorded
reasons before the action is in practical terms and
practice, no viable safeguards at all.
11. During the course of the search whom should
the victim approach in case of difficulty? The
Commissioner is authorizing the search so he would
have an abiding interest in the success of the
search. His minions who carry out his bidding are
the authorized officers being his sub-ordinates.
They would leave no stone unturned to ensure that
the Commissioners dictate is not dissipated. It is
this pursuit with misplaced enthusiasm that causes
untold problems and immeasurable difficulties at
the point of time when the search is taking place.
There is no independent authority or agency to
which the search victim can turn to and in the
absence of such a facility the entire exercise is just
without any safeguard worth the name. Even the
panchas are not appointed with the choice or on
the selection of the person searched. There is thus
no independent witness to recount the happenings
in the event of a challenge as to their regularity and
propriety.
Seizures
12. There is an ancient German belief that if lie
is repeated and repeated again and again, that lie
after a time sounds like the whole truth. Could the
ratio be extended to the search operations? An
optimal answer would be definitely no! But the
hard fact, however, is that it is certainly a yes! Take
the power of seizure, for example. Section 132(1)
provides in the operative part, for seizing any such
books of account, other documents, valuable article
or thing found as a result of search of such assets.
What is the meaning and significance of word
‘such’ used in the said phrase? This word ‘such’
refers to the anterior part of section where
analogous terms are used in the context of clause
(c) of sub-section (1) of section 132 where it says
“any person who is in possession of any money,
bullion, jewellery or other valuable article or thing
and such money, bullion, jewellery or other
valuable article or thing represents either wholly or
partly income of the property which has not been
or would not be disclosed for the purpose of this
Act. The word obviously qualifies the nature of
money, bullion, jewellery or other valuable article
or thing and that it is only those items of income or
property which have not or would not be disclosed
for the purposes of the Act. Put simply such refers
to income and assets undisclosed.
13. To put more explicitly, it covers only such
assets which will not or which would not be declared to the Department.
They must be the
concealed income or assets. Practical experience,
however, shows that there is hardly any panchnama
drawn by the Department during all these years
where disclosed assets have not been seized.
Wherefrom does the authorized Officer derive the
power to seize declared assets? From nowhere and
yet it is endemic if a Government authority
commits an excess and contravenes the provisions
of the law of which he himself is a creature, should
it not be for his Department to provide deterrent
punishment. This error has been committed so
many times without number that even Gobbles
would put humbled for his dictum being done one
better. None is bothered especially after the seizure
is made. Justice Krishna Iyer interdict in Ajit Mills
Ltd. 40 STC 597 that quote, “certainly, the fiscal
minions of the Government, if they blatantly misuse
power and overtax to bring discredit to a benignant
state, must be publicly punished since respect for
the law is not a one way street” must not go always
unheeded. It is only the hapless assessee who is left
running from pillar to post. Even if one were to
concede that within the limited time that is
available for conducting the search, it may not be
possible to address the aspect of every income and
asset having been disclosed or not, the question that
immediately arises thereafter is as to in how many
cases as per the roster of the Department after the
initial seizure, there have been releases on the
disclosed assets wrongly seized in search. As long
as it stood on the statute section 132(5) of the Act
was a dead letter and the cap of section 132(ii)
made the situation no better.
14. Section 132B clearly provides for the retention of seized assets only
against demand arising out of search or any other pending demand. It is
legion for the Department to create fresh demands and retain seized assets
thereafter on that alibi. It is not as if the appeals have not gone to the
administrative and/or appellate authorities on this point. None of them has
to play a constructive or redemptory role in such situations. This has
happened when the right to property fundamental. This is happening even when
the right to property is reduced to a statutory right. Put differently
whether the right to property is fundamental or statutory, it makes no
difference to the action of the Department to seize explained assets and
retain them without any plausible cause. Article 14 clearly provides for
non-arbitrariness in the administration. Should that not apply to
misdemeanours of this nature? Should a person or an authority entrusted with
proper and efficient administration of the Act not take cognizance and work
out an appropriate relief in such situations. The taxpayer is waiting and
waiting and just waiting for more than four decades for a proper answer to
this rudimentary query. The day it is decided that any authorized official
if in his misplaced enthusiasm seizes any disclosed assets, then
departmental action against him will be taken by the Government, this
problem will solve itself and with it the need of the search itself may also
vanish.
15. Often the authorized
officers accompanying the search party are found to be blissfully unaware of
the search provisions and its modalities. In the case of Mr. L. R. Gupta
(194 ITR 32), the authorized officer threatened to arrest Mr. Gupta. The
Delhi High Court had to tell Department that they have no power to arrest in
a tax search. It is pity that despite the fact that the department has no
trained manpower for the purpose of handling searches in a legally valid
manner incidents such as in Mr Gupta’s case are not uncommon while the
searches continue unabated. The courts have opined that in the atmosphere of
tension and agitation some latitude will have to be provided to the
Department if it errs in some respects but that perhaps is not in conformity
with the concept that the intrusion into the solemnly rights of the
individual should be least obtrusive. Especially when we say that we are in
a society run on egalitarian lines are the largest democracy the citizens
cannot be made hapless victims of the ignorance and harassment of the
bureaucracy and if this aspect of the matter is given due weightage, then
the searches should be down and out. Assessments after searches
16. The assessments after
search have always remained an enigma. Previously the searches were followed
with reassessment notices. The assessments were made u/s 143(3) of the
Income-tax Act, 1961 on the basis of return tendered after section 148
notices. This practice held the field until 1995. But by then the insatiable
thirst of the Department to obtain surrenders had mucked up the whole
scheme. The Finance Act, 1995 introduced a new Chapter XIV-B proposing block
assessment at 60% tax. The concept of 10 years / 6 years period comprising
the block and undisclosed income alone being the subject matter of treatment
in such block for assessment and further that such assessment ought to be
framed on the basis of material recovered during search was devised. It
began with the Department being provided with a definition of undisclosed
income which would even include the moon. Ultimately it came to the
Department being stranded with some loose papers whose relevance and
implications was also left for it to prove, and substantiate for purposes of
assessment. It began with no penalty or interest for the 60% tax was thought
as sufficient to cover all that. But subsequent changes made for levy of
interest and imposition of penalty sullied the situation. Even these
provisions became impalatable to the Government after a series of decisions
from different Tribunals and the courts which found fault with the
methodology generally adopted by the department for assessment of block
cases, the concept of block assessment was ousted in 2003. Once again a
return to the old format of a requisition for return after search of the
parties covered by a search was proposed. The operative provisions are
contained in sections 153A to 153D for the searches taking place after
1-6-2003. These frenetic movements of the Department with regard to the
assessment of search cases would leave no informed person in any doubt that
there is no clear concept on the method of completing assessment in search
cases and the Department is just shuffling the available options as it
pleases without the legislature sounding any warning. The law is well known
that if the computation provision fails the law itself fails. No law which
is arbitrary or imbalanced can survive for long. Equity and good conscience
are at the base of every law and unless these fundamental principles are
strictly adhered to no format will be either successful or durable.
17. When the harsh decision to
launch a search has been taken and the search has been executed, then, why
should thereafter sentimental considerations be allowed their play? One
Direct Taxes Enquiry Committee had noted that such considerations are in
place in order to facilitate and expedite the departmental investigative
process, and also as a tool to arrive at other defaulters deploying the
similar stratagems. So it was with this dubious objective in view, that
Explanation 5 to section 271(1)(c) was inserted by the Taxation Laws
(Amendment) Act, 1984, with effect from 1st October, 1984. This provided for
a statement during the search or for making of entries in the books of
account of the unexplained transactions. It also provided for making a
declaration of the undisclosed income before the Commissioner. The
Explanation provides that, if the victim of a search were to do that, then,
such amounts as are declared would not be reckoned for the purposes of
penalty under section 271(1)(c) of the Act as concealed income. During the
search, authorized officials would take it upon themselves to inform the
Assessee as to the existence of this provision. Having brought the assessee
to notice this provision, they would thereafter goad the assessee to make
the declaration on the promise of exemption from penalty. Before any
declaration would be made, the authorized officers would themselves get into
the act of bargaining, little realising as to how arduous and complex it
will be to bargain with those whose very vocation it is to bargain for even
to make their living. Normally, these deals are struck at the point of time
when the rope itself is about to snap. The verbal assurances as given are
rarely recorded. Then, the next exercise is to go about collecting tax on
this income socalled ‘voluntarily declared’. Eventually, by the time
assessment approaches, the declaration so made stands like a pigmy in face
of the staggering total income which the tax assessor has magically
construed up. The common practice at the basis of such exaggerated
assessment would be that the assessee has declared this much, the documents
say this much more, and the assessee’s normal income as per record is this
much, and so, the total income would be the aggregate of the three. This
provision caused so much of tension, ill-will, and a ignominy, that it was
not only officially withdrawn, but the authorised officers were even warned
vide letter dated 11-3-2003 that adverse view will be taken of their efforts
if it comes to knowledge that officers have forced a declaration. But no one
ever bothered, because in our system, accountability is something which is
just unknown. We just believe in collecting. The means deployed are
irrelevant. The maxim that means justify the ends died with the father of
the nation. Though with the advent of the block assessment concept,
Explanation 5 temporarily received a quietus during searches, yet, it has
once again now been revived through the Finance Act 2005 with a new number,
viz. 271- AAA. Now it is said that exemption from penalty would be available
not only if it is declared, but also the manner of earning the undisclosed
income would now have to be declared with proof. In other words, the
provision is now grossly arbitrary and is amenable to widespread misuse on
mere subjective considerations. No wonder this law is dead before it is
born! Surveys
18. Survey emerged in the tax
scene as a highly diluted form of search. It required no recording of
reasons for the belief as to existence of undisclosed assets etc. The middle
level officers of the department viz. the IACs were empowered to order a
survey. It did not originally provide for the impounding of books of
accounts, documents and valuables etc. It was limited to only the business
place and entry had to be before sun set. It was not necessary to record the
statement of the owner of the business alone. The statement of any other
person present at the premises at the time of the survey operation would
have sufficed. With efflux of time, all these limitations have been
systematically undone one by one. Now it is possible to impound and retain
the books of account and other documents. Of course, the power of seizure of
valuables is not still available. Further, the bar on surveys at the
residential premises continues.
19. What, however, is
intriguing in survey is the manner of taking the physical inventory of
stock. Generally the disputes pertained to the discrepancies in the stock
count. The department to arrive at the stock-in-hand on a certain date
adopts an average GP rate in the middle of a year paying little heed to the
fact that the average so applied is average for the year and not a few
months of a year. Everyone proceeds on that basis to ascertain the accuracy
of the stocks held. It is realized that the accuracy of stock-in-hand as
computed on the basis of presumptive GP rate is bound to be flawed. Many a
times, serious mistakes are made by the departmental officials in taking
inventory either because they are not familiar with the items or even
because the items are too numerous or are too bulky. The onus of proving the
correctness of the inventory prepared by the department is always wrongly
placed on the assessee. There are hardly any cases from the facts of which
it should be culled out that the department was put to task of verifying the
correctness of the inventory which it had itself drawn. Nobody ever asks for
the departmental working papers which form the basis of such tabulation.
Another practice which is rampant is to obtain surrenders during surveys.
Surrenders are known to be obtained for items which exist and also for those
which do not. There are numerous cases where with regard to stock
discrepancy as noticed even if the assessee has compromised on those and
returned it as part of its return voluntarily the penalties for concealment
are initiated or levied. The fact that the time period for filing of the
return was after to the date of survey and that the return as filed contains
such declaration of mistake (if any) is completely side tracked. Pervisity
at its best is the unfailing syndrome in most surveys assessments. How does
one resolve these issues?. Such is possible only if equity and rationality
take the front seat and the craze to collect more and more is relegated to
the background. Conclusion 20. As pointed out above, with regard to surveys,
seizures assessments after search and surveys and the assessments after
surveys there are several unresolved issues. Well it is true that for
checking tax evasion, the department must have wide powers, yet if the
powers are so assumed as would cause prejudice to well accepted cannons of
social justice and equity then they are required to be abandoned. Resumption
can always take place after proper methods and viable remedies are thought
of. Till then let these provisions rest if not laid to rest.
Source : Published in 14th
National Convention held on 7th, 8th & 9th December, 2007 at New Delhi.
