Search and seizure assessments - Income Tax - F. No. 286/ 161/2006-IT (Inv. II)

F. No. 286/ 161/2006-IT (Inv. II) Date of Issue : 22.12.2006 Search and Seizure Assessments : The board has examined the existing mechanism followed in assessments relating to search and seizure cases and has decided to frame general guidelines which would enable Assessing Officers to enhance the quality of such assessments and bring uniformity in the work relating thereto. The guideline, which is elaborated in the following paragraphs, is aimed at laying down prescribed time bound action at various stages in the assessment proceedings. 1. First Stage: From receipt of Appraisal Report to filing of Return. 1.1 It is necessary in search assessments that the Assessing Officer is acquainted with the appraisal report and the seized material before he takes up the assessments of the case. 1.2 The appraisal report is expected to be received within 6O days of the search. Any delay in receipt of the appraisal report must be brought to the notice of the concerned CIT(Central) by the Assessing Officer who may pursue the case with the DlT(lnv.) concerned. The DDIT(Inv.)/ ADIT(lnv.) should hand over the seized material to the Assessing Officer (before whom the cases get centralised) within a week of sending the Appraisal Report. 1.3 On receipt of the appraisal report and seized material, the Assessing Officer and Range Head should jointly scrutinize the appraisal report and seized material and prepare an Examination Note to decide: i. Cases where notices u/s 153A of the Income- tax Act, 1961 (the Act) are required to be issued. ii. Cases where notices u/s 153C of the Act are required to be issued. iii. Cases where notices u/s 148 of the Act are required to be issued. iv. Cases where seized material pertains to persons other than those whose cases have been centralised. 1.4 If necessary, confirmation may be obtained from the investigation wing for matching the names of entities as appearing in the warrant of authorisation as against the names appearing in the Panchnama prepared at the time of conclusion of search. 1.5 An action note, based on a comprehensive and methodical examination of seized material, in addition to the comments available in the appraisal report, must be prepared within 90 days to receipt of the seized material (this time limit may be extended where such action note becomes due between September and December of the calendar year due to pation with limitation matters). The action note must cover the gamut of the case and should contain inter alia: Proposal for special audil u/s 142(2A) of the Act, if necessary. In cases where special audil u/s 142(2A). is proposed to be resorted to, care must be taken to ensure that the principles laid down in this regard by the Supreme Court in the case of Rajesh Kumar and Others v. Deputy Commissioner of Income Tax and others 287 ITR 91 are adhered to; Identification of further cases for centralization along with reasons thereof; Identification of cases and corresponding assessing officer where documents seized belong to persons whose cases have not been centralised; Identification of the third -parties in respect of whom enquiries have to be carried out; Report on opening of all hard disks seized and print outs obtained therefrom; Identification of evidence including ascertaining of handwriting on loose papers seized and statements recorded u/s 132(4). 1.6 The Assessing Officer should ensure that the assessee has been provided an inspection of the seized material and copies thereof as requested by him. If possible, a certificate in this regard may be obtained from the assessee. 1.7 As far as possible, the assessments should be taken up group-wise to ensure a holistic approach as well as to ensure that no income remains un-assessed due to anv confusion or doubt regarding the hands in which it is to be assessed. A copy of this Action Note should be sent to the CIT (Central) through the Addl./Joint CIT as part of a compliance report to enable proper supervision by him. 1.8 Statutory notices u/s 153A, 153C or 148 of the Act, as the case may be, should thereafter be issued. Proper satisfaction should be recorded before the issue of notice u/s 153C or u/s 148 as the case may be. Range heads may ensure proper action in this regard. The Assessing Officers must note that satisfaction to be recorded u/s 153C is very different from that recorded u/s 148. Under Section 153C, the satisfaction that any money, bullion, jewellery or other valuable article or thing or books of account or documents seized or requisitioned belongs or belong to the person subjected to provisions of sec. 153C is sufficient. Sections 153A 153C are applicable for six financial years proceeding the year of search. Notice for the year of search is to be issued u/s 143(2)/ 142(1) of the Act. 1.9 The Assessing Officer should also explore the possibility of invoking the provisions of section 28lB of the Act so as to protect the interest of Revenue. This provision is applicable only during the pendency of the proceedings for assessment. After completion of assessment appropriate action for recovery must be taken. 1.10 Where, in the opinion of the Assessing Officer, any further enquiry by the Investigation Wing is to be carried out in respect of certain third parties, the same should be brought to the knowledge of the CIT (Central), who may, thereafter request the DlT(Inv.) for carrying out such enquiries. The DIT(lnv.) should, thereafter, carry out the necessary enquiries and inform the concerned Assessing officers of these third parties for taking appropriate action. Timelines should be clearly set out for completion of these enquiries. 1.11 Where the Assessing Officer is of the opinion that the case has implications involving enquiry by other agencies, references to such agencies should be made by the Assessing Officer, after seeking the approval of the ClT(Central). 2. Second Stage : After Filing of return 2.1 For any assessment proceeding, it is necessary to identify the evidence that exists on record that would be required for making the additions and then develop the strategy to collect further evidence if required, so that the assessee can be confronted with the same. 2.2 A detailed questionnaire should be prepared mentioning details of the Annexures relating to the seized material and the assessee s explanation sought on the entries therein. The questionnaire should also contain the queries on the basis of documents attached with the return. If considered necessary, directions under section 144A of the Act should be given by the Range head. 2.3 On a scrutiny of the reply furnished by the assessee, an analysis must be made of the submissions, which are: a. Prima facie acceptable. b. Can be accepted only after proper enquiry. c. Not acceptable, in view of material on record/applicable case laws. d. in disagreement with the findings mentioned in the Appraisal Report. 2.4 The attempt at this stage should be on marshalling of the facts and putting them in chronological sequence with the primary focus on establishing the preponderance of probability. The Assessing Officer should make diligent efforts to detect the modus operandi and the manner in which the undisclosed income was generated by the assessee. In case it is found that the seized papers, corroborating the fact of generation of undisclosed income, pertain to the period immediately preceding the search action, then logical conclusion of such activity being carried out by an assessee in the balance period of time, for which no documentary evidence is available, should be reached through investigation and not on presumption or multiplication formula. For this purpose, independent enquiries from banks, other financial institutions, independent parties, Govt. Departments etc. should also be carried out simultaneously. 2.5 The Assessing Officer should mention the explicit modus operandi of tax evasion and develop the assessment on the basis of preponderance of probabilities and draw conclusions on the basis of available evidence and facts of the case. The principles laid down by the Supreme Court in the cases of CIT v. Durga Prasad More 82 1TR 540 and Sumati Dayal v. CIT 214 ITR 801 to look into the surrounding circumstances and go behind the motive of the transactions in the light of human probabilities may be referred to. 2.6 Assessees are increasingly resorting to filing of affidavits to substantiate their claims. The Indian Code of Civil Procedure Order 19 r.l of the Indian Code reads as follows: Any Court may at any time for sufficient reason order that any particular (act or facts may be proved by affidavit, or that the affidavit of any witness may be read at the hearing, on such conditions as the Court thinks reasonable: Provided that where it appears to the Court that either party bona fide desires the production of a witness for cross-examination, and that such witness can be produced, an order shall not be made authorizing the evidence of such witness to be given by affidavit. 2.7 The Assessing Officer must, therefore, apply his mind before admitting any affidavit on record and should not accept it without verifying the contents thereof. The rejection of the affidavit should be recorded after giving proper reasons and should be intimated to the assessee. If admitted, such affidavits need to be dealt with as per the Supreme Court judgement in Mehta Parikh and Company v. Commissioner of Income Tax- Bombay, 30 ITR 181 i.e. that the affidavit cannot be disregarded without effectively discrediting the same. Necessary enquiries should be made by invoking the provisions of sections 133(6) and 131 of the Act as applicable. 2.8 Proper opportunity of cross-examination must be given to the assessee if any evidence has been collected behind his back. However, the following principles enunciated by the Supreme Court in this regard may be kept in mind: i. The right of cross-examination is not an absolute right (Nath International Sales Vs. UOI, AIR 1992 (Del) 295). ii. The right of hearing does not necessarily include right of cross-examination (State of J K Vs. Bakshi Gulam Mohammad AIR 1967 SC 122). 2.9 if the Assessing Officer is not in agreement with any findings/conclusions drawn in the Appraisal Report, the matter should be brought to the knowledge of the Range head who should resolve it with the concerned Addl./Joint DlT(Inv). If considered necessary, the CIT(Central) may also resolve the issue with the DIT(lnv.). A proper office note mentioning the issues which have been accepted on the basis of the assessee s reply and evidence furnished during assessment proceedings and which are deviations from the appraisal report must be mentioned in the office note i.e., note not meant for the assessee. 2.10 After receiving the replies of the assessee on the questionnaire issued and after gathering further evidence in the case, instructions may be given by the Range head u/s I44A of the Act, either on his own motion or on a reference made by the Assessing Officer. 2.11 There is an increasing trend amongst assessees to approach the Settlement Commission during the pendency of assessment proceedings. The Assessing Officers may note that assessment proceedings can continue and can be completed till the date of order u/s 245D(1) by the Settlement Commission. 3. Third Stage : Final Show Cause Notice and Assessment Order 3.1 After completion of the enquiries, a final show cause notice should be given to the assessee, following the principles of natural justice, giving him adequate opportunity for furnishing the reply. The legal position with regard to the principle of natural justice have been laid down by the Supreme Court in Swadeshi Cotton Mills Co. Ltd. v. Union of India [1981] 1 SSC 664 [1981] 51 Comp Case 210 (SC), (page 712). 3.2 All the issues and evidence that is going to be relied upon in the assessment order should be made available to the assessee. The final show cause notice should be prepared in consultation with the Addl, CIT and should contain: i. The proposed structure of the order; ii. The evidence in possession of the department; iii. The case laws being relied upon; iv. The opportunity of rebuttal being provided to the assessee. 3.3 Where reliance is placed by the assessee on a case law, the Assessing Officer should ascertain the question which was before the Court, rather than relying solely on the ratio of the decision. The binding precedent for this is the Supreme Court decision in CIT v. Sun Engineering Works Pvt. Ltd. (198 ITR 297). It has been pointed out that a decision which is not founded on reasons nor on consideration of the issues, cannot be deemed to he a law declared, to have binding effect as is contemplated by Article 141 of the Constitution of India. A summary dismissal by the Supreme Court, without laying down any law, is not a declaration of law envisaged by Article 141 (supra). When reasons are given the decision of the Supreme Court would be binding on all courts within the territory of India: when no reasons are given, dismissal simpliciter is not a declaration of law by the Supreme Court. (S. Shanmugavel Nadar v. State of Tamil Nadu and Another 263/TR 658. 3.4 The assessment order should be a speaking one so that even if a layman reads the order, he should be able to understand the issue, the strength of the evidence and should be able to identify the conclusions drawn. The replies of the assessee should be considered and discussed/ rebutted with proper evidence and applicable case laws. 3.5 The need for speaking orders cannot be over emphasised. The principles in (his regard are laid down in Commissioner of Police v. Gordhandas Bhanji, AIR 1952 SC 16, at page 18. As per the Supreme Court, public orders, publicly made, in exercise of a statutory authority cannot be construed in the light of explanations subsequently given by the officer making, the order of what he meant, or of what was in his mind, or what he intended to do. Public orders made by public authorities are meant to have public effect and are intended to affect the action and conduct of those to whom they are addressed and must be construed objectively with reference to the language used in the order itself. The Supreme Court reiterated the law in Vice Chancellor, Banaras Hindu University v. Shrikant [2006] 6 Scale 66; AIR 2006 SC 2304, (at page 2314) by stating An order passed by a statutory authority, particularly when by reason whereof a citizen of India would be visited with civil or evil consequences must meet the test of reasonableness, 3.6 The additions should not be based or surmises and conjectures but on evidence collected during search and post search inquiries. The Department docs not have a case to make additions on the basis of surmises and conjectures in cases where the assessee has been subjected to the rigours of search. This would also ensure that the fetters put by Rule 46A of the Income Tax Rules, 1962 on the assessee s right to produce additional evidence before the CIT (Appeals) is also effective. In this regard the DIT(Audit) letter no. F. No. RA-9/Gen./99-2000/DIT/dated 20.5.1999 in respect of the mistakes committed by the Assessing Officers involving under/over assessments may be kept in mind. The Board has also issued instructions no. 21 dated 6.2.1969, no. 71 (F.91/47/69-ITJ (18) dated 5.7.1969 and No. 78. F.50/78/69-1T J (21) dated 11.7.1969 to the effect that a constant and corrective watch may be ensured as the PAC has been repeatedly expressing itself against the observed tendency on the part of the assessing officers to make high pitched assessments. The following typical omissions and commissions, as detailed below, were highlighted: i. Assessing, Officers make additions to sales or to gross profits or make disallowances out of expenses without giving any reasons or by giving utterly inadequate reasons; such additions are either almost entirely knocked off or substantially reduced. ii. Assessing Officers tinker with remuneration paid to the Directors of the company, applying highly subjective and unrealistic standards of reasonableness. iii. While imposing penalties for non-payment of tax, the Assessing Officers do not care to check up whether they had disposed of petitions moved by the assessee for stay of demand. iv. Assessing Officers levy penalties u/s 271(1)(c) without caring to make out a convincing case; the assessee s explanation is often not discussed and shown to be unbelievable or false, nor is an attempt made to bring out clearly that the assessee has been guilty of concealment of income. v. Claims for deduction on the LIP are not allowed and that too without giving any reasons. vi. While making (the additions for inadequate personal drawings, the Assessing Officers do not care to give an analysis of what the personal expenses of the assessee should be, to justify additions on this score. vii. In dealing with bad debts, the Assessing Officers adopt unrealistic approach even when the amounts are comparatively small and the claim does not appear to be suspicious or mala fide. 3.7 The assessment order must necessarily contain the following: i. (a) The facts regarding initiation of search in cases covered u/s 153A of the Act, or (b) Details of seized material belonging to other persons and recording of satisfaction in the cases falling u/s 153C of the Act, as the case may be, must duly be recorded in the assessment order. ii. Factum of issuance and service of notice u/s 143(2) along with dates must be recorded in the assessment order. iii. Clear reference should be given to the seized material such as annexure nos, premises where the documents were seized, etc. If such material is of vital importance, its copies should be made part of the assessment order by including it as an annexure or scanned into the body of the assessment order. iv. Proper mentioning of charging of interest under various sections of the Act. 3.8 The recording of satisfaction of concealment is a must for initiation of penalty proceedings, The assumption of jurisdiction to initiate penalty proceeding is only after satisfaction regarding concealment is arrived at during the course of assessment proceedings. This satisfaction, therefore, must be brought out clearly in the assessment order. This would help counter the view that merely because the penalty proceedings have been initiated, it cannot be assumed that such a satisfaction was arrived at, in the absence of the same being spelt out by the order of the assessing authority (CIT v. Ram Commercial Enterprises Ltd. 246 ITR 568). This would also help identify the concealed income in the assessment order itself. Satisfaction must be similarly recorded for other penalty proceedings. 3.9 If any statutory approval has been obtained by the AO, the same should be indicated in the main body of the order. The AO should also ensure that at the final stage of computation of income, all the issues mentioned in the assessment order are covered in the computation. 3.10 It would be advisable for the AO to consult his higher authorities while making large additions. 4. Post Assessment Action 4.1 Cases with potential prosecution angle should be identified. While prosecution for technical matters should be launched as early as possible, in cases of concealment of income, proper watch may be kept on progress of appellate proceedings and prosecution should be launched at the earliest possible. It may be noted that prosecution proceedings can be launched even before the Penalisation of the assessment proceedings and can be taken up independently of the assessment proceedings. Even if the group cases quality for decentralisation as per present guidelines, cases having prosecution potential should be identified separately, and excluded from the proposed list for decentralisation giving clear reasons for the same. 4.2 A paper book containing copy of the seized material, in addition to that annexed to or scanned into the assessment order, relied upon by the Assessing Officer, should also be prepared along with the passing, of assessment order for submission to appellate authorities/ITAT where it is apprehended that the assessee will go in appeal or to the Settlement Commission. This exercise also helps in identification of the seized material which can be released to the assessee. 4.3 On completion of assessment proceedings, immediate action should be taken for retention of books, as per law, where considered necessary. Books of accounts not used in assessment and having no investigation ramification can be considered for release with the approval of the CIT. While sending recommendations for release of books/documents the following must be ensured: i. Audit (Internal Revenue) of the cases are completed. ii. No action u/s 263/145/154 is pending. iii. No set aside assessment is pending. iv. No external agency like CBI/ED/DRI etc. has requisitioned the seized material. If there is a likelihood of such requisition in future, it must be indicated whether a reference has been made to them. v. Prosecution has not been launched nor is it proposed. 4.4 Often seized assets are released against a bank guarantee furnished by the assessee. The bank guarantee has limited validity and needs to be renewed from time to lime. A register should be maintained for the purpose, indicating, the validity of the bank guarantee, to ensure proper renewal. 4.5 Cash deposited in the PD Account should be applied and adjusted in accordance with Board s Instruction No. 11/2006 dated 1.12.2006. 4.6 A register has been prescribed in the Manual of Office Procedure, Volume-II, (Technical) issued by the Directorate of Income Tax (O MS) in 2003 at page 40 indicating the report and registers that are required to be sent to or maintained by the Range Heads. This register is to be maintained in all Central charges. In view of the changes in the Act, a revised format is given as Annexure-1 . 5. The DGslT(Inv.)/CCsIT(Central) should hold seminars at the beginning of the calendar year for orienting the Assessing Officers with the guidelines and also to discuss various issues relating to search and seizure assessments. 6. These guidelines may be brought to the notice of all Commissioners of Income Tax, Range Heads and Assessing Officers handling assessments of search and seizure cases. ANNEXURE A-1 1. Range Addl./JCIT should also maintain a register for each search seizure case incorporating the following details: Name of the Assessee Date of initiation and completion of search whether case covered by Section 153A/ 153C/ 148 Seizure made with break up Disclosure, if any u/s 132(4) Date of passing orders for centralisation (1) (2) (3) (4) (5) (6) Date of receipt of Appraisal Report Date of receipt of seized re cords including copies of warrant Date of application. If any, received for inspection and date on which inspection actually allowed Date of issue of notice u/s 153/ 153C/ 148 Date of filing of return for assessment Income disclosed in return (7) (8) (9) (10) (11) (12) Details of tax paid on income disclosed in return Adjustment from P.D. accounts, if any, income dis closed on return Date of Bank of guarantee, if any, date of expiry and date of renewal thereof Date of application. If any, from the assessee making a claim that seized assets or part thereof are explained Details and date of decision on (16) above Date of first notice to take up assessment proceedings and also details of subsequent notices/questionnaire/hearing etc. (13) (14) (15) (16) (17) (18) Details of hearing before Addl. CIT/Joint CIT before issue of directions u/s 144A, wherever resorted to Assessed income with date of order Tax liability on assessed income Details of adjustment from P.D. account, after completion of assessment with date Whether penalty has been initiated and de tails of penalty. If any, levied Whether case processed for launching prosecution and details of prosecution, if any, launched. (19) (20) (21) (22) (23) (24) CIT and DGIT/CCIT should inspect this register every three months/ six months and record their comments therein.