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Tuesday, August 15, 2017

Analysis of the Amendment to the Search and Seizure provision of the Income Tax Act, 1961


Articles 226 and 227 of the Indian Constitution provides for citizens to approach the High Court when their fundamental rights are violated or when powers are exercised in a manner not authorised by law. Search and seizure is an invasion of a person’s private.  However, Section 132 of the Income Tax Act allows such an action to be undertaken against 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 or property which has not been disclosed or would not be disclosed for the purpose of this Act (i.e to unearth undisclosed income or property).

The search and seizure action can also be taken when there is failure to produce books of accounts, documents etc. in respect of summons issued or notice issued under section 143(2). Article 265 of the Constitution of India provides that  “no tax shall be levied or collected except authority of law”. It is a very important provision because it gives the government to collect tax in its name, thereby de-legitimising any other authority or entity.


Section 132 and the Finance Bill 2017
According to Section 132 of the Income tax, following are the circumstances under which a 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.

The persons who can be searched under this Section 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. 

However, 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.
The Parliament passes the Finance Bill every year immediately after the presentation of the General Budget to give effect to the financial proposals of the Government of India for the following financial year. The Finance Minister Arun Jaitley, on March 7, 2017 in a press conference said that the Finance Bill 2017 will be passed by the end of the month.[1]

Reduction of Time Limit for Completion of Search Assessment

Since the Finance Bill of 2017 proposed to rationalise the time limit for completion of assessment under Section 153, consequently it was thought prudent to rationalise the time limit for completion under Section 153A.

The existing provisions of section 153B provide for the time limit for completion of assessment under section 153A. In the official memo to the Union Budget 2017-18[2], it is proposed that this will be done by amending subsection (1) of the said section to provide that for search and seizure cases conducted in the financial year 2018-19, the time limit for making an assessment order under section 153A shall be reduced from existing twenty-one months to eighteen months from the end of the financial year in which the last of the authorisations for search under section 132 or for requisition under section 132A was executed. 

It has been further proposed to amend sub-section (1) of the said section to further reduce the time limit to twelve months for search and seizure cases conducted in the financial year 2019-20 and onwards.

Reason to believe to conduct a search, etc. not to be disclosed

Sub-section (1) and (1A) of Section 132 allows the authority mentioned therein to authorise an authority specified to carry out search and seizure when it has ‘reason to believe’ or ‘reason to suspect’ of circumstances referred to in the sub-sections based on the information it has in possession. Certain judicial pronouncements have created ambiguity in respect of the disclosure of ‘reason to believe’ or ‘reason to suspect’ as recorded by the authority to conduct a search under Section 132. This has led to the violation of confidentiality and sensitivity, which are most essential to conduct proceedings under Section 132.

Therefore, it has been proposed to insert an Explanation to sub-section (1) and (1A) of Section 132 to declare that the ‘reason to believe’ or ‘reason to suspect’ may not be disclosed to any person or any authority or the Appellate Tribunal. This amendment nullifies the judicial pronouncements which asked for the disclosure. This amendment will take effect retrospectively from April 1, 1962, the date of commencement of the Income Tax Act, 1961.

This proposed amendment has become especially controversial because it raises the scary prospect that tax sleuths could raid assessees based on a rumour, canard, whim or unsubstantiated suspicion without having to disclose to anyone the source or the basis of the information on which the operation was ordered. It effectively removes all fetters on the taxman and makes him unaccountable to any court or appellate tribunal to explain whether he possessed credible information to order the raid.

Justice B. Kirpal and A. Kumar of Delhi High Court had handed down a verdict in November 1991 that has been cited by counsel for several tax assessees when challenging the action taken by IT authorities.

The judges said: "The expression 'information' must be something more than mere rumour or a gossip or a hunch. There must be some material, which can be regarded as information, which must exist on the file on the basis of which the authorising officer can have reason to believe that action under Section 132 is called for."

But the judges admitted that the opinion whether the action was justified on the basis of information that the taxmen had in their hands was "subjective" and, therefore, "the jurisdiction of the court to interfere is very limited". It added that the court would be acting within its jurisdiction to see "whether the act of issuance of an authorisation under section 132 is arbitrary or mala fide."

"If the information or the reason has no nexus with the belief or there is no material or tangible information for the formation of the belief, then in such a case action taken under Section 132 would be regarded as bad in law," Justices Kirpal and Kumar had ruled.

The legislative change could have big implications for legal disputes over search and seizure operations carried out by tax authorities to unearth concealed incomes and hidden assets by undermining an argument that several assessees have used to delay verdicts in tax cases.

Power of Provisional Attachment

It has been proposed to add sub-sections (9B) and (9C) to the said Section to protect the interest of revenue and safeguard recovery in search cases. These sub-section provide that during the course of a search or seizure or within a period of sixty days from the date in which the last of the authorisations for search was executed, the authorised officer has the authority to provisionally attach and property belonging to the assessee with the prior approval of higher authority. This can be done only when the officer is satisfied that the action requires to be taken to protect the interest of revenue.  

It has also been proposed to amend Explanation 1 to Section 132, so as to provide that for the purposes of sub-section 9A, 9B and 9D, with respect to “execution of an authorisation for search” under the provision of sub-section (2) of Section 153B shall apply.

Conclusion

In a country where just about one percent[3] of the population pays taxes, these amendments have been felt to be necessary to increase revenue to grease the wheels of the development story of India. However, it goes without saying that the means employed to increase revenue shouldn’t constitute what has been called ‘tax-terrorism’ time and again. This requires a patient approach of the government, supplemented by an efficient mechanism with the cooperation of the tax-payer.



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