How to prevent Income Tax Raid?

Income tax raid is very scary word for normal person. Most of the people are afraid of income tax raid or query from income tax. In this post we will try to understand what is income tax raid? and how to prevent it.

What is Income Tax Raid?

As a tax payer we have to follow Indian income tax rules in terms of paying tax on our income.
If we don’t pay tax honestly or try to hide our income on which tax is applicable authorized officers of the IT department can search residential and business premises, vehicles and bank lockers for unaccounted money this search operation is called as Income tax raid.
If unauthorized transactions are found Income tax officer can seize the account books, stocks and valuables.

How to Prevent Income Tax raid?

• Filing Income Tax return honestly – One should make a full and true disclosure of one’s taxable & exempt income.
• Avoid high value transaction – IT department receives information about high value transaction from bank & financial institution. Following transaction are considered as high value transaction.
• Property purchase above 30 lakh
• Above Rs 10 lakh deposits in a saving account
• Above Rs 10 lakh car or consumer durables purchase
• Credit card expense above 2 lakh
• Purchase of stock above 1 lakh
• Above Rs 1 lakh of share purchase of a single company
• Above Rs 2 lakh of mutual fund investments
• Jewellery purchase of Rs 2 lakh or above
• Don’t introduce fresh capital over 10 lakhs.
• Don’t sale property for lesser amount than Govt. Valuation.

• It is advisable for an assesse to declare the nature and source of every non-taxable income or other receipts in the income tax and wealth tax returns, or in a statement enclosed with the returns.

• If Income tax has given summons or notice, one should comply with summons or notices to prevent a tax raid.

• Preserve important receipts and other documentary evidence for any high value transaction with detail about source of income.

• Do keep proper records of income, assets and wealth for each of your family members including receipts, bills, bank account statements, credit card statement, copies of tax returns etc.
• Always make you updated about Income tax rules & statutory provisions of the Income Tax Law.

• Where gold ornaments or jewellery have not been purchased by the owner but have been acquired by way of a gift on some ceremonial occasion or otherwise it is advisable that records carefully preserved.

What to do in case of Income Tax Search, Survey or Summons?

Be Cautious and get ready for Income Tax search survey scrutiny or raid. In past few days if you have deposited a large amount of cash in your account, if you have done high-value transactions or if you have opened fixed deposit, a current account without PAN card, earned capital gain via penny stocks, taken bogus loan entry or donation than you are under scanner of Income tax department. You are likely to get Income tax notice and in case you are unable to give a satisfactory answer to notice you may face Income Tax search, survey or raid.

What to do in case of Income Tax Search, Survey or Summons?
Income Tax raid or search operation is one of the worst nightmares for anyone. Some reasons for the fear during the raids are heavy tax, penalty, and mental harassment etc. The impacts of the income tax raid are unavoidable. However, this impact can be minimized if you have knowledge about process. If you come across similar situation don’t get panic check following things carefully.

• Find out under which section income tax search or raid is conducted.
• Name and address mentioned on notice are proper or not.
• After checking above aspects allow income tax officer with proceedings.

Income Tax Survey under section 133(1) / 133(5) /133 B

Income Tax survey under section 133 is carried out for the following purpose.
1. a) To verify books of account, stock & cash at the place of business & record statement.
2. b) To obtain details of expenditure incurred at a function/program etc & record statement.
3. c) Survey to collect information.
• Under section 133 officers are not allowed to do any search operation at your house, shop or office. They can only check account books, stock & cash. After completing survey they can take your statement of confirmation.
• Income tax officer can impound your books of account or papers.
• Remember to take a copy of your statement. You have a right to do so.
• If your home address and office address is same they can come to your home for the survey.
• They cannot break any lock or cabinets. However, they can ask you to open it.
• In the case of summons, search or survey you should give your statement carefully with a peaceful mind. Don’t give any false statement under pressure or stress.
• Do write your statement in your own language. Instead of writing surrender, confession or admission in the statement you should write that I will be able to answer after checking records carefully.
• It is seen that during Income Tax survey officer will allow you to take help of expert CA. You should call a known and trustworthy CA else you will face difficulties at a later stage.
• Be polite and keep patience during the process. Please assist Income tax officer during the survey. Don’t use abusing language.

Income Tax summons under section 131

Income Tax summons under section 131 is issued under following circumstances.
1. a) There might be some case pending before officer against you.
2. b) For the case of any other person, your presence is required.
• Under section 131 you will be called at income tax office by officer along with the document to record your statement.
• The summons is to examine you under oath, compel production of books or account and documents.
• If summons is issued and served on a person for personal attendance under section 131, it is binding on him to attend in person. He cannot be represented by a lawyer, CA or an authorized representative.
• It is advisable to hire a CA or Advocate who is practicing in Income Tax matter before appearing for summons.
• Non-compliance with the summons / notice issued under section 131 may result in levy of penalty of rupees 10,000 for such a default.

Income Tax Search Warrant under section 132

Income Tax Search or raid is conducted for following reasons.
1. a) If you are unable to give a proper answer to the notice issued under section 131(1) or 142(1).
2. b) If Income tax officer knows/believe that you have unaccounted/black money, property or jewellery.
3. c) In case someone gives proof about your unaccounted to income to Income Tax.
• In the case of an income tax search first step is to check and verify ID of officers carefully. You can confirm the authenticity of the officer by dialling control room number specified in the search warrant.
• You can call two neutral persons to witness the entire process. You have right to call your CA but he cannot interfere in the search process. He can help in records verification.
• Under Income Tax raid officers can search your office or house.
• If you or any family member is facing any medical issue during the process you have a right to call a doctor.
• You can follow a normal routine during the search process. You can sleep at a night time and you are authorized to send your children to school.
• The search operation may continue for a longer duration as main intention of the raid is to find out unaccounted income.
• You need to give an explanation about amount written on every single papers or document. So, it is advisable to scrap lose papers once work is over.
• If any cash amount is found in your office or house you need to produce evidence like cash payment receipt or cash withdrawal documents.
• You have to give an answer for the unaccounted gold found at your place. As per rule married woman can keep 500 gm gold and man can keep 100 gm gold. In the case of unmarried woman 250 gm gold is allowed.
• If you have extra gold jewellery you have to keep invoice along with proof of payment from your accounted income.
• Income tax officer may check your computer, USB pen drive or laptop. If you are keeping accounts of books on your computer make sure to reconcile every entry. If possible delete unwanted files from your computer.
• Apart from computer make sure to check your mobile phone regularly. Delete unwanted SMS, money transaction related Whatsapp Chat or e-mail correspondence.
• Whenever you are purchasing any valuable assets like car, jewellery, TV etc. make sure to keep payment invoice aside. Remember in Income tax raid you have to give an answer about every valuable asset.
• You are not supposed to give clarification about any asset purchased before 6 years. However, you need to prove that mention asset was purchased before 6 years.
• Make sure not to keep any foreign currency at your home or at an office.
• In income tax raid officer can seize unaccounted cash, jewellery, locker, promissory notes, cheque, draft, property documents etc.
• In addition to above, they can also confiscate computer hard disk, pen drive, CD, DVD, Mobile phone etc.
• Income tax officer cannot seize your house or property declared in income tax return or under the book of accounts.

Procedure for Survey under Income tax Act

PROCEDURE FOR SURVEY UNDER INCOME TAX ACT

I Legal Provision of Survey
The powers of survey under section 133A can be exercised by the following officers:-
• Commissioner,
• Joint Commissioner,
• Director,
• Joint Director,
• Assistant Director,
• Deputy Director,
• Assessing Officer, and
• Tax Recovery Officer

2. The Income tax authority mentioned in para 1 above enter :-
• any place within the limits of the area assigned to him, or
• any place occupied by any person in respect of whom he exercises jurisdiction,
• any place in respect of which he is authorized for the purposes of the survey.

3. Place of Survey
3.1 The survey can be carried out at the place where the business is carried on. The business place also includes such place where the books of account or any documents or any part of his cash or stock or any other valuable article or thing relating to the business are kept.

3.2 Survey at Residential Premises
Normally, the power of survey does not confer a right to make survey of residential premises. If during the course of survey the income tax authority finds that some books of account or documents or the stocks are not available at the place of business and the assessee makes a statement that these are available at his residence, the income tax authority will assume jurisdiction to enter the residence for the purpose of inspecting such books of account, documents or the stock of the business. Similarly, if any discrepancy is found in cash and the assessee states that the same is kept at the residence, the authority concerned will be authorised to go to the residence and to check the same. In view of this, the assessee should avoid the keeping of stocks at his residence or the cash balance of the business at his residence so that it may not be required from him to state that these are kept at his residence. No businessman would desire to allow anybody to enter his house. It is therefore, required to be planned that the records, stocks cash or other valuables pertaining to the business not be kept at the residence or be removed from the place of residence if they are kept there, so that the unwanted guest may not enter the residence for encroaching upon the assessee’s privacy.

3.3 Survey at CA’s Office & third party
Reference is invited to Circular No.7D dated 3-5-1967 which states that the place where entry can be made under section 133A must not be a place where the assessee does not carry on business. Residential or office premises of third parties including a Chartered Accountant, a pleader or income-tax practitioner of whom the assessee may be a client are not places which may be entered into for the purposes of section 133A.

3.4 Conduct of Survey when business premises are locked
There is no provision in Section 133A enabling the surveying authority to break open any door or lock or windows to obtain ingress. Entry can be made only if the premises are open and that too during the normal business hours of the assessee.

4. The survey can commence only when the business place is open for the conduct of the business. In case of any other place, the income tax authority can enter only after sunrise and before the sunset. Once the survey commences then there is no time limit as to when it should conclude. The restrictions are on the time of the entry in the business premises and not as to the exit from such place.

5. Sub-section (2) of section 133A provides that the authority may enter only during the business hours. After such entry, no further limitation is imposed by the section regarding the period for which he may remain in that premises. If the volume of material to be scrutinized is such as to require the survey being continued even after the business hours, the continued presence of the authorities in the premises and continuance of the survey cannot be regarded as “illegal”. K. Mohnot v. Dy. CIT (1995) 215 ITR 275 ( Mad).

6. While conducting the survey an income tax authority as mentioned in para 1 above, may
• Place marks of identification on the books of account or other documents inspected by him,
• Take extracts or copies from the books of account or documents,
• Impound and retain the books of account or documents
• Make an inventory of any cash, stock or other valuable article or thing checked or verified by him
• Record the statement of any person which may be useful for or relevant to any proceedings under the Act.

7. The powers to impound any books of account can be exercised only after recording the reasons to do so. The books of accounts can be retained for a period of ten days ( excluding the holidays). For retaining the same beyond the period of ten days, the approval of the Chief Commissioner or Director General has to be obtained.

8. During the survey the income tax authority cannot remove any cash, stock or any other valuable things. This prohibition contained in section 133A(4) is absolute and unqualified. CIT v. Mool Chand Salecha (2002) 124 Taxman 898/ 256 ITR 730 (Raj.)

9. It is the duty of every person present at the place where the survey is being carried out to extend the following facilities:-
• To afford the facility to inspect such books of account or other documents as may be required and which may be available at such place,
• To afford the necessary facility to check or verify the cash, stock or other valuable article or thing which may be found therein
• To furnish such information as may be required as to any matter which may be useful for, or relevant to, any proceeding under the Act.
Consequences of non co-operation

Provision of section 131 (1) may also be made applicable in case of non-cooperation on the part of assessee. Alternatively, If an assessee who is being surveyed does not co-operate, either in respect of inspection or verification mentioned above in sub-section (1) or does not supply or share the information with the surveying officer and if the officer feels that he is deliberately avoiding such an inspection or evades to furnish the information or to answer the question which are material, it is likely that the survey officer may approach his superiors for authorising a search under section 132. All this will cause greater difficulties to him. Therefore the assessee should co-operate fully with the survey team in respect of all matters connected with the survey namely, inspection, verification, furnishing of information and answering the statements recorded by the survey party.
Explanation (b) below Section 133A(6) makes it amply clear that for conducting survey, no proceedings need to be pending.

10. To detect the unaccounted money being spent in extravaganza the income tax authority has the powers to call for the details of the expenditure incurred. The information can be obtained after such function, ceremony or event from the assessee who has incurred the expenditure. The information can also be obtained from a person who is in possession of such information. The statement of the assessee or that of such other person can be recorded. The statement so recorded can be used in evidence in the proceeding in the Act.

11. In case of default by a person in extending the necessary facility, the income tax authority can exercise the same powers as are vested in a court under the Code of Civil Procedures 1908 when trying a suit.

12. An Income Tax Inspector has the following limited powers:-
• To inspect the books of account or other documents,
• To place marks of identification on the books or account or other documents inspected by him
• To enquire regarding the expenditure incurred in any function, ceremony or event and to record a statement.
The inspector of income tax can act only up to the extent of authority given to him by the authorized authority under section 133A and such emp0owered authority can authorize inspector only for limited purpose. The inspector when authorized under section 133A, then he can require proprietor, employee or any other person who may at that time and place be attending to afford him the necessary facility to inspect such books of account or other documents as he may require and which may be available at such place.

13. Powers cannot be given to Inspector
The Inspector can act and exercise the powers only to the extent he is authorized by the empowered authority. The Inspector of income tax cannot be authorized to exercise following powers and purpose:
• To make an inventory of any cash, stock or other valuable article or thing checked or verified by him and
• To record the statement of any person which may be useful, for, or relevant to any proceeding under this Act. [ITO vs. Jewells Emporium (1994)48 ITD 164 (Ind.)]
Further the Inspector cannot be authorized to require any proprietor, employee or any other person attending such place.
• To afford him the necessary facility to check or verity the cash, stock or other valuable article or thing which may be found therein and
• To furnish such information as he may require as to any matter which may be useful for, or relevant to any proceedings under this Act.

14. Section 133A doesnot require prior notice to be given to the affected persons regarding the survey. N.K. Mohnot v. Dy. CIT (1995) 215 ITR 275 ( Mad).

15. There is no provision for permitting cross- examination of the person whose
statement is being recorded during the survey. Rameshwar Lal Mali CIT (2002) 256 ITR 536 (Raj).

16. During a survey there was difference in stock at business premises. The CIT (A) accepted the explanation that jewellery kept at home for safe custody was usual practice in the trade. The finding that there was no discrepancy nor evidence of sale outside the books of account was a finding of fact. No substantial question was said to have arisen. CIT v. Bhagwat Prasad Bansal and Sons. (2007) 291 ITR 132 ( P& H).

17. Statements recorded
It is commonly found that income tax authorities record the confessional statements and/or obtained admission from person surveyed. The admission made in ignorance of correct position of law and facts are not binding up a party [Polat Marmo Agglomerates Ltd vs. Union of India (1994) 73 ELT 536 (Raj.)]. Similarly confessional statements recorded under threat, coercion, inducement or promise are not valid but person concerned should take care to retract such confessions without delay. Retraction would then be weighed in the light of other evidence available [Ambalal vs. Union of India (1983)13 ELT 1321 (SC)]. Merely because statement has been recorded under summon before a gazetted officer, it does not mean that it has to ‘ipso facto’ accepted as truthful. Its evidentiary value has to be judged in conjunction with other evidence. [Orient Enterprises vs. Collector (1986) 23 ELT 507 (Tri)]. Further the person examined is however, entitled to get a copy of his statement, if the authorities choose to rely on it. It he asks for it and it is not supplied, the authorities cannot rely on it [Ambalal vs. Union of India (supra)]

18. Section 133A only permits the income tax authority only to record a statement of any person which may be useful but does not authorize for taking any sworn in statement. Paul Mathew & Sons v. CIT (2003) 129 Taxman 416 (Ker).

19. The Hon’ble High Court of Madras in the case of Commissioner of Income tax vs. S. Khader Khan Son (2008) 214 CTR 589 has held that Section 133A does not empower any IT authority to examine any person on oath, hence, any such statement has no evidentiary value and any admission made during such statement cannot, by itself, be made the basis for addition. This view is clearly supported by CBDT Circular dated 10.03.2003.

20. Counsel’s presence during survey
• The Article 22(1) of the Constitution of India provides that person shall not be denied the right to consult, and to be defended by, a legal practitioner4 of his choice. The counsel can be present during survey proceedings [Nandini Satpathi vs. P.L. Dari AIR 1978 SC 1025].

• Legal assistance during survey
Law does not permit an assessee to insist the tax authorities not to conduct survey till arrival of the Tax Consultant irrespective of an Advocate, Chartered Accountant or a Tax Practitioner. However, an Assessee may request and if permitted may call for, to assist in proper conduct of the survey. Section 288(1) of the Act provides that any assessee, who is entitled or required to attend before any Income-tax authority or the Appellate Tribunal in connection with any proceeding under the Act, otherwise than when required under section 131 to attend personally for examination on oath or affirmation, may subject to the other provisions of section 288 attend by an authorized representative. The said section does not entitle an authorized representative to attend the survey proceedings. The said section does not help in seeking personal presence in survey proceedings. Practically it has been experienced that after persuation the consultant is allowed to be present but he is not allowed to interfere in the proceedings.

21. Information form illegal impounding of documents can be used.
The income tax authorities can be initiate proceedings on the basis of information gathered from such documents impounding of which is held illegal. The adverse inference can be taken on the basis of such illegal impounded documents, etc. (United Chemical Agency vs. R.K. Singh, ITO (Supra).

22. Whether business premises can be sealed
In Shyam Jewellers & Anr v. Chief Commissioner (Admn) U.P. & Ors. (1992) 196 ITR 243, Allahabad High Court observed that a business place cannot be sealed during the course of survey. The Court held that sealing of business place during survey or even in course of search under Section 132 is not permitted in view of the fundamental right to practice any profession or carry on any trade or business bestowed under Article 300A of Constitution of India and is also violation of Article 19(1)(g) relating to the fundamental rights of a citizen.

23. Interrupt/ stoppage of business
The authorities cannot stop the business or the normal activities of a person. The authorities do not have power to interrupt the ordinary business or peaceful life of citizen. They should use the power given to them strictly within the four corners of large power. Since the powers vested are large, even a millimeter departure there from is not allowed (Dr. Vijay Pahwa VS DCIT 250 ITR 354 (Cal) and L. R. Gupta 194 ITR 32).

24. Chits/ slips found during survey
When there chits /slips found during the survey the issue comes up is if these chits/ slips belong to the assessee. Second can these chits/ slips can be called as documents. Third is the figures in these chits / slips without any narrations or details represents income the assessee. These issues are answered in para 23 & 24 of 39 ITD 183 (Delhi) in the case of Ashwani Kumar V ITO.

• There is nothing in 133A unlike u/s 132(4A) which presumes that whatever is found is belonging to the assessee. More over all things physically present inside the place of a person may not be in that person’s control & possession. For proving possession it is necessary to show that the person concerned had the intentio possessendi.

• If the slips/chits can be called as documents is also an issue. Document has been defined in section 3(18) of the General clauses Act to include any matter written, expressed or described upon any substance by means of letters figures or marks or by more than one of those means which is intended to be used or which may be used for the purposes or recording that matter. If the slips/chits do not indicate whether the figures refers to quantities of money or quantities of goods and if so which side represents receipts and which side represents outgoing. Where there is no narration the chits can be called, as dumb documents without indicating any meaning cannot be treated as document.

25. Physical search during the Survey not permitted
The authorities conducting survey do not have right to taken physical search of any person. There is a specific right gives for physical search in search & seizure provisions under section 132(1)(B)(iia). Practically the survey party will request the persons surveyed to keep all their belonging in their pockets on the table and then they see the belongings. If person denies to fulfill this request, then the survey party cannot take his physical search.

26. When survey is converted into a search
26.1 Proceedings under section 133A, 133B, and 132 are independent of each other. The object and scope of action under each of these sections is well defined. A survey can lead to a search only when on the basis of information collected in survey, condition laid down in clause (a), (b) or (c) of section 132(1) are satisfied. Similarly, a persistent failure on the part of the assessee to show co-operation with income-tax authorities in the matter of survey may also result into income-tax raid leading to search and seizure. For instance, if the income-tax authority comes to know that some account books, documents, cash, valuable articles or things, etc., are lying in some place other than the place where business or profession is carried on but the assessee does not state so, action can be taken under section 132 because unless the assessee makes a statement to the above affect, the department shall not be in a position to enter such other place under section 133A or 133B. In such a situation, the department cannot rest contended with the idea of taking penal action. Rather it should move fast for taking action under section 132 lest the assessee removes such account books, etc. from there to another secret place.

• According to Punjab & Haryana High Court in Vinod Goel, Advocate & Ors. V. Union of India & Ors. 252 ITR 29, the survey ordered at the premises of petitioners under section 133A and conversion of said operation into search operation on the basis of authorisation given by Additional Director cannot be declared illegal. Absence of express enumeration of post of Additional Director in the list of authorities embodied in section 132 cannot lead to an inference that Additional Director is not entitled to exercise power of Director General under that section. Many times authorities threat that survey will be converted into search is just to take out more declarations during the survey. Practically only when very big tax evasions are found then only the search provisions are applied.

• However, Delhi High Court in a very recent judgement in Dr.Nalini Mahajan & Ors v. DIT(Inv) & Ors – 257 ITR 123 dissented from the view of Punjab & Haryana High Court.

27. Surrender of amounts during survey
It is a common experience of the assessee whose premises are surveyed under section 133A of the Income Tax Act, 1961, that irrespective of whether any apparent discrepancy in cash, stock or books of account is found or not, they are asked to make surrender towards concealed income. They do so by referring to section 132(4) and the Explanation 5 to section 271(1) (c) assuring him that if he so surrenders he will not be subjected to penalty, etc. But such is not the correct position of law. The immunity granted under the Explanation 5 to section 132 and not under section 133A. Delhi Tribunal in Amir Chand v. ITO – 49 ITD 606 held that penalty u/s 271(1)(c), Explanation 5 cannot be pressed into service while dealing with a case of survey u/s 133A but is applicable only in search proceedings u/s 132. It is impossible to subscribe to the views of CIT(A) that “by sheer logic Explanation 5 to Section 271(1)(c) would cover Section 133A also.”

• The proper course for the assessee under such circumstances is to assure that he will reconcile the discrepancy noticed by the surveying authorities or he will return the amount representing the discrepancy as his income of the current year. Further, by that time he would be able to value the stock, etc., correctly and as such, the disclosure made by way of return would be more accurate. Therefore, surrendering would not entitle the assessee to any extra benefit. If there is a charge against him to willfully evade tax under section 276C of the Act, it would not be diluted by making a surrender. Further, the surrender made in hurry is going to worsen the assessee’s plight. Therefore, assessee should avoid surrendering of any income during the course of survey.

• The Hon’ble High Court of Madras has held in the case of Commissioner of Income Tax vs. M. Pachamuthu (2008) 214 CTR 525 that no penalty u/s. 271(1)(c) could be imposed on the basis of agreed addition.

28. DISCREPANCY IN STOCK:
This is one of the most common and major problem faced by the assessee during survey and in subsequent assessment proceedings. It may be in the form of excess stock or shortage in stock.

Income Tax authority normally values excess stock at market value, instead of the actual cost, i.e. the amount invested/utilised to acquire such excess stock, for the purpose of determination of additional income. One needs to consider the accounting treatment of such excess stock, implications of provisions of section 40A(3) as such excess stock could represent purchases in cash out of undisclosed income and implications of section 69C with regard to disallowance of unexplained expenditure. Reasons for excess stock may be due to calculation of lower GP rate than as per records, certain purchases for which deliveries are received but bills are not received, certain sales are made but delivery is not dispatched. Certain materials received for job work or on sale or return basis, Certain stock which is obsolete which may be overvalued by the authorities, goods received on consignment, difference in valuation. Similarly shortage of stock may be due to consumption, samples sent to customers, pilferage, mis-appropriation, theft, non-delivery of goods purchased, goods send on consignment, difference in valuation.
If the reasons for discrepancies are brought on record at the time of survey, there may not be much difficulty during the course of assessment.

In case of shortage, normally income tax authority treats it as undisclosed sales and the sale value is declared as income. The assessee can content that only the profit element included in such sale should be taxed. The accounting treatment of this is very important as it can change the percentage GP, it may affect Sales Tax, Excise & other levy.

[51 TTJ (Del) 743, 28 TTJ(JP) 128, 201 ITR 608 (Cal), 100 CTR 204 All 258 ITR 654, 60 ITD 531 (Mad), 40 ITD 180 (JP), 66 TTJ 695 (Pune).]

29. DISCREPANCY IN CASH: –
This discrepancy arises due to difference in physical cash available and balance as per Books of Accounts. Excess cash may be due to cash sales yet to be recorded, assessee’s personal money lying in business premises, recovery from debtors, advances received or other receipts remaining to be recorded for the past few days, money received for safe keeping. Generally such excess cash, being unexplained, is treated as additional income.

Similarly shortage in cash may be due to withdrawal by partners/ proprietors, which is yet to be recorded, pending entries of payments made, advances given etc. Generally even in cases of shortages a declaration of income is obtained from the assessee. 30 Taxman 389, 27 TTJ ITO 170 (All).

30. INCOMPLETE BOOKS AND RECORDS AT THE TIME OF SURVEY
In many of the cases, at the time of survey, the books and records are incomplete or not written at all. By and large identification marks are placed by the income tax authority on the basic documents. However some documents might go unnoticed or may be received / obtained subsequently. In such cases the Assessing Officer raises an issue whether books of accounts produced by assessee are reliable for determining his correct income and thus may reject the same. The Assessing Officer cannot reject the of books prepared on basis of genuine documents merely on the ground that the books were incomplete on the date of survey.

31. Treatment of undisclosed turnover
During the course of survey some material may lead to existence of undisclosed turnover. In such a case, it is important to keep in mind the fact that for every unaccounted sale there must be corresponding unaccounted purchase without which sale is not possible. If the assessee is in a position to prove that purchase cost of goods sold has not been recorded in the regular books of account, the whole of sales proceeds cannot be treated as income but only the income component embedded in the unaccounted sales can be liable to tax. Again here proviso to section 69C is to be considered carefully. [CIT v. S. M. Omer – 201 ITR 608 and Ashok Kumar Rastogi v. CIT – 59 Taxman 82.]

32. Treatment of income declared without specifying the nature thereof
When declaration of income is made without specifying the nature of income, then such income may be taxed, under the head ‘Income from other sources’. It is advisable to specify the nature of income disclosed because if facts indicate that the income is generated in business, a case then can be made out to get it taxed as business income.

33. Capitalisation of declared income when represented by tangible assets.
Normally, if a declaration is made admitting some income, then it can be treated as the income represented by cash and it is not capitalised. However, the facts of the case can ultimately decide whether capitalisation of income is possible or not.

34. Effect of (Finance No. 2) Act, 1998 on survey cases
Finance (No. 2) Act, 1998 has considerable impact on assessment of cases covered by survey as it has brought about radical amendments in Section 37 and Section 69C.

35. Retraction of Statements
A statement made during survey operations is normally binding on the person who made the statement only if it is voluntary and without threat, undue influence, misrepresentation, coercion or misunderstanding. If that were so, it would not be binding on the person making the statement. However, if he claims that the statement is not voluntary, onus would be on him to prove the same and must show to the authority concerned the reasons leading to making the statement.
Besides, after the survey, when the person making declaration finds that the declaration is not substantiated with facts found, it should be retracted within a reasonable time. Its retraction later on may not be very efficacious though the consequences will depend on facts and the nature of declaration. For instance when certain facts by nature take time to be available, then time taken for retraction in such cases may be held to be justified. On the other hand, when a declaration is made to buy peace and not retracted within a reasonable time, its retraction later on may not be efficacious.

Supreme Court in Pullangode Rubber Produce Co. Ltd. v. State of Kerala – 91 ITR 18 held that an admission though is an important piece of evidence cannot be said to be conclusive and it is open for the person making admission to show that it is incorrect.

Similarly, Mumbai Tribunal in Pushpa Vihar v. Assistant Commissioner of Income Tax – 48 TTJ 389 after considering its own judgment in Kishore A.Meswani (ITA No.7161/B/87 dated 7.8.1990) as also the Supreme Court judgment in Krishna v. Kurushetra University – AIR 1976 SC 376 held as under:

“that merely on the basis of assessee’s offer for being taxed, the assessment cannot be sustained. The Apex Court in the case of Krishna v. Kurushetra University (supra) has held that any admission made in ignorance of legal rights or under duress cannot bind the maker of the admission. It is an accepted position that what is admitted by the party to be true, must be presumed to be true, unless the contrary is demonstrated. However, mere admission cannot be bedrock or foundation of an assessment. It is always open to the assessee who made the admission to show that what he admitted was not correct. Thus, it can be said that the admission made by a person is relevant in deciding the matter. But it is not always conclusive. The person who admitted the fact is at liberty to explain or clarify the circumstances and the nature of statement and also the correct facts. It is well settled that the effect of an alleged admission depends upon the circumstances in which it was made. Therefore, it can be said that an admission is the best evidence that Revenue can rely upon and though not conclusive, is decisive of the matter unless successfully withdrawn and proved erroneous.”

36. Precautions
Some precautions that one needs to exercise are:
• Avoid large cash and stock balances.
• Update books of accounts, at least primary books.
• Periodical verification of stock and cash.
• Maintain Inventory of previous year.
• Facilitate Location of goods with identification.
• Keep track of unbilled goods.
• Keep track of Cash receipts.
• Keep track of Goods received without bills.
• Keep track of Cash expenditure.
• Avoid Residential Address to be used as Place / Address for Business.

37. Precaution during Survey & after Survey
The Assessee should not be unduly influenced by the pressure tactics exerted by the survey team and must maintain his mental state cool and observe the following points:

• The assessee must satisfy himself about the identity and genuineness of the person conducting the survey and for this he must ask for his identification or may contact his superior to find out the real facts. He may also ask for the copy approval of the Joint Director or Joint Commissioner for verification and return.

• The assessee and the concerned persons must co-operate with the official and try to give all the available facts. Any evasive tactics on the part of the assessee may lead to search and seizure operations by the department.

• The assessee, in order to avoid the production of books of account or documents or stock or cash or any other asset, should not take up a plea that they are laying at residence. Such a statement may prove to be suicidal and invite the authorities at his residence because of his own foolishness.

• If during the course of survey, discrepancies are found, as for instance the actual cash does not tally with the amount in the books of account, the assessee shouldn’t get panicky but should try to reconcile the difference and give appropriate explanation to the official to his satisfaction.

• As the books of accounts and other documents and valuable things can be impounded only on non-cooperation by the assessee, he must cooperate with the income-tax authority conducting the survey.

• Surrender of any income or asset as income in a statement recorded under section 133A should be avoided, as no immunity is available under Explanation 5 to Section 271(1)(c) as advocated by survey team. Even if pressed, the assessee should avoid surrendering of any income during the course of survey. Ultimately if any income is surrendered, the income so surrendered should be included in the current year’s income to be returned.

• If the authorised representative is not present during survey operations, the assessee must keep and preserve copies of the inventories, statements etc. and to contact his Tax Advisor immediately on completion of survey. The Assessee would be running a great degree of risk if he hides or conceals such material aspects, which were detected by survey party in survey. If any of the statements are not available, they must be gathered from the Income Tax authorities as they are bound to be used against the person surveyed during the course of assessment by the concerned official.

• The Assessee must disclose all the material facts to his Tax Advisor and act as per the best advice of his Tax Advisor and to do any other act or step which may be in the facts and after considering the prevalent circumstances.

38. Tax Authorities should refrain from doing the following acts:

To remove or seize cash, stock-in-trade and other valuable article or thing etc. found during the course of the survey.

• To harass and resort to coercion and related tactics.

• To exert pressure on the assessee to declare and surrender exorbitant amount under the pretext that there would be no liability for interest, penalty etc. if the assessee surrendered as per the sweet will of the survey team.

• To collect cheque for tax applicable to amount of declaration.

• To act in a manner which is against the provisions of law or travel beyond his jurisdiction.

• To interrupt incoming telephone calls or to deny usage of telephone etc.

• To physically search person or the persons present at the place of survey and to stop ingress or exit of any person inside the place at the time of survey.

• Not allowing meals, rest, medical facility whenever required.

• Not giving copies of statements.

• Breaking lock of any cupboard or room.