Issues and Procedures for Assessment of Search Cases

1. Notice for submission of return of six assessment years –

Section 153A provides the procedure for completion of assessment where a search is initiated under section 132 or books of account, or other documents or any asset are requisitioned under section 132A after May 31, 2003.

In such cases, the Assessing Officer shall issue notice to such person requiring him to furnish, within such period as may be specified in the notice, return of income in respect of six assessment years immediately preceding the assessment year relevant to the previous year in which the search was conducted under section 132 or requisition was made under section 132A.

2. Pending assessment

If any proceeding initiated or any order of assessment or reassessment made under sub-section (1) has been annulled in appeal or any other legal proceedings, then, notwithstanding anything contained in sub-section (1) or section 153, the assessment or reassessment relating to any assessment year which has abated under the second proviso to sub-section (1), shall stand revived with effect from the date of receipt of the order of such annulment by the Commissioner:

Provided that such revival shall cease to have effect, if such order of annulment is set aside.

3. Tax rate – In an assessment or reassessment made in respect of an assessment year under section 153A, the tax shall be chargeable at the rate or rates as applicable to such respective assessments.

The new provision does not refer to ‘undisclosed income’ as was categorically and specifically referred to in block assessment.

Therefore, it is felt that the Assessing Officer in the assessment proceedings under section 153A could examine all the issues that could be taken up in pursuance of filing of return of income.

However, as far as completed assessments are concerned, the issues already examined by the Assessing Officer in such completed assessment could not be re-examined in assessments under section 153A unless some material is found in the course of search action.

Explanation to section 153A declares that save as otherwise provided in sections 153A, 153B and 153C, all other provisions of the Act shall apply to the assessment made under this section. Hence all exemptions, deductions, deeming provisions, clubbing provisions and other provisions relatable to computation of total income contained in Chapters IV, V, VI, VI-A and other chapters shall be applicable to such assessment. In an assessment or reassessment made in respect of an assessment year under this section, the tax shall be chargeable at the rate or rates as applicable to such assessment year. The assessment shall be made under section 143(3) or section 144 read with section 153A of the Act. Such assessment shall be considered as a regular assessment.

4. Time-limit for completion of assessment [Sec. 153B]

Time limit of completion of assessment of 6 assessment [section 153B (1) (a)];

The Assessing Officer shall make an order of assessment or assessment in respect of each assessment year, falling within six assessment years under section 153A within a period of 21 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.

Time limit of completion of assessment year relevant to the previous year in which search is conducted, or requisition is made [section 153B (1) (b)]:

This section also provides that the time-limit for completion of assessment in respect of the assessment year relevant to the previous year in which the search is conducted under section 132 or requisition is made under section 132A shall be a period of 21 months from the end of the financial year in which the last of the authorizations for search under section 132 or for requisition under section 132A, as the case may be, was executed.

Although the return of income of the previous year in which search was conducted shall be filed as per the normal provisions but the assessment of assessment year relevant to such previous year shall have to be completed within 21 months from the end of the financial year (not the assessment year) in which the search was conducted.

The authorisation of search under 132 is executed when the last panchnama is drawn up and in case of requisition under section 132A, when the books of account or other documents or assets have been actually received by the authorised officer.

Time limit for completion of assessment of other person referred to in section 153C [proviso to section 153B (1)]:

In case of such other person, the time limit for making assessment or reassessment of total income of the assessment years referred to in clause (a) i.e. block period of six assessment years and clause (b) i.e. assessment year of search of the said sub-section, shall be the either:

(a)  21 months from the end of the financial year in which the last of authorisations for  Search under section 132 or for requisition under section 132A was executed; or

(b) 9 months from the end of the financial year in which books of account or  Documents or assets seized or requisitioned are handed over under section 153C to  The Assessing Officer having jurisdiction over such other person,

Whichever is later.

Amendment of section 153B

With effect from June 1, 2007 the time-limit specified under section 153B in cases where reference is made to Transfer Pricing Officer (TPO) shall be extended by 12 months.

5. Assessment of income of any other person Sec. 153C

Section 153C  provides that where an Assessing Officer is satisfied that any money, bullion, jewellery or other valuable article or thing or books of account or documents seized or requisitioned belongs to a person other than the person referred to in section 153A, then the books of account, or documents or assets seized or requisitioned shall be handed over to the Assessing Office having jurisdiction over such other person and that Assessing Office shall proceed against such other person and issue such other person notice and assess or reassess income of such other person in accordance with the provisions of section 153A.

6. Prior approval in the case of search [sec. 153D]

Section 153D has been inserted with effect from June 1, 2007.it provides that in search cases no order of assessment or reassessment shall be passed by an Assessing Officer below the rank of Joint Commissioner except with the previous approval of the Joint Commissioner.

7. LEVY OF INTEREST:

As per the provisions of section 234A, where the return of income is filed belatedly in pursuance of notice issued under section 153A, interest would be charged and the same is mandatory.

Therefore, it seems that return would have to be filed irrespective of whether the copies of seized material are given or not or there is a reasonable cause. However, in appropriate cases application can be made for waiver of interest in accordance with CBDT Instruction No. F. No. 400/234/95-IT (B), dated 23^rd May, 1996. Explanation 3 to section 234A has been suitably amended. Such assessment shall be regarded as a regular assessment for the purpose of levy of interest.

As per provision of section 234B, if first assessment for a particular assessment year is under section 153A of the Act, then the same shall be treated as assessment for charge of interest U/s 234B and hence, the interest shall be charged on the demand raised as per the assessment framed U/s 153A of the Act. Where the original assessment is completed, the interest U/s 234B would be charged on the demand raised in the original assessment for the period upto the framing of the assessment U/s 153A and thereafter, on the demand outstanding as per the amount added by way of assessment made under section 153A. Explanation 2 to the said section has been suitably amended so as to regard such assessment as a regular assessment for the purpose of levy of interest. Sub-section (3) of section 234B has been suitably amended by insertion of section 153A in the said sub-section.

Tax and surcharge shall be leviable as operative in the relevant assessment year.

III. PROVISIONS RELATING TO PENALTIES IN SEARCH CASES.

1.   The existing provisions of Explanation 5 to section 271(1) shall be applicable only in a case where search under section 132 was initiated before 1-6-2007.

Provision applicable where search was initiated on or after 1-6-2007 Explanation 5A has been inserted to section 271(1) so as to provide that where in the course of a search initiated under section 132 on or after 1-6-2007, the assessee is found to be the owner of-

(i)  Any money, bullion, jewellery or other valuable article or thing (referred to as assets in Explanation 5A), or

(ii) any income based on any entry in any books of account of account or other documents or transactions and he claims that such assets or entry in the books of account or other documents or   transactions represents his income (wholly or in part ) for any previous year;-

(a) Which has ended before the date of the search, and

(b)  The due date for filing the return of income for such year has expired and the assessee has not filed the return,  then, notwithstanding that such income is declared by him in any return of income furnished on or after the date of the search, he shall, for the purposes of imposition of a penalty under section 271(1) (c), be deemed to have concealed the particulars of his income or furnished inaccurate particulars of such income.

2. New section 271AAA inserted w .e .f. 1-6-2007: section 271AAA has been inserted so as to provide that, in a case where search has been initiated under section 132 on or after 1-6-2007, the assessee shall be liable to pay by way of penalty, in addition to tax, if any, payable by him, a sum computed at the rate of 10% of the undisclosed income of the specified previous year.

However, provisions of this section shall not be applicable if the assessee-

(i)                in a statement made under section 132(4) in the course of the search, admits the undisclosed income and specifies the manner in which such income has been derived;

(ii)              substantiates the manner in the undisclosed income was derived; and

(iii)            Pays the tax, together with interest, if any, in respect of the undisclosed income.

Further, no penalty under the provisions of section 271(1) (c) shall be in levied or imposed upon the assessee in respect of the undisclosed income referred to in section 271AAA.

It is also provided that the provisions of section 274 (relating to procedure for imposition of penalty) and section 275 (relating to bar of limitation for imposing penalties) shall, so far as may be, apply in relation to the penalty leviable under section 271AAA.

(a)     For the purposes of this section “undisclosed income” means-

(i)                any income of the specified previous year represented, either wholly or partly, by any money, bullion, jewellery or other valuable article or thing or any entry in the books of account or other documents or transactions found in the course of a search under section 132, which has-

(A)   not been recorded on or before the date of search in the books of account or other documents maintained in the normal course relating to such previous year; or

(B)   which has otherwise not been disclosed to the chief  commissioner or commissioner before the date of the search; or

(ii)              any income of the specified previous year represented, either wholly or partly, by any entry in respect of an expenses recorded in the books of account or other documents maintained in the normal course relating to the specified previous year which is found to be false and would not have been found to be so had the search not been conducted.

(b)    “ specified previous year” means the previous year-

(i)                which has ended before the date of search, but the date of filing the return of income under section 139(1) for such year has not expired before the date of search and the assessee has not furnished the return of income for the previous year before the said date; or

(ii)        In which search was conducted.

Guidelines for seizure of jewellery and ornaments in course of search:

The CBDT has vide instruction No. 1916 dated 11th May, 1994, issued guidelines for seizure of jewellery and ornaments in course of search. The said guidelines, which is reported in (1994) 120 Taxation (St.) 98, is reproduced below.

‘Instances of seizure of jewellery of small quantity in course of operations under section 132 have come to the notice of the Board. The question of a common approach to situations where search parties come across items of jewellery, has been examined by the Board and following guidelines are issued for strict compliance:–

In the case of a wealth-tax assessee, gold jewellery and ornaments found in excess of the gross weight declared in the wealth-tax return only need be seized.

In the case of a person not assessed to wealth-tax, gold jewellery and ornaments to the extent of 500gms. per married lady, 250gms. per unmarried lady and 100 gms. per male member of the family, need not be seized.

The authorised officer may, having regard to the status of the family and the custom and practices of the community to which the family belongs and other circumstances of the case, decide to exclude a larger quantity of jewellery and ornaments from seizure. This should be reported to the Director of Income-tax / Commissioner authorising the search at the time of furnishing the search report.

In all cases, a detailed inventory of the jewellery and ornaments found must be prepared to be used for assessment purposes.

These guidelines may please be brought to the notice of all the officers in your region.’

Confession during Survey Search & Seizure

Extract of Letter F. No. 286/2/2003/I.T (Inv.) dated March 11, 2003

Subject: Confession of additional income during the course of search and seizure and survey operation – regarding.

Instances have come to the notice of the Board where assessees have claimed that they have been forced to confess the undisclosed income during the course of the search and seizure and survey operations. Such confession, if not based upon credible evidence, are retracted by the concerned assessee while filing returns of income. In these circumstances, confessions during the course of search and seizure and survey operations do not serve any useful purpose. It is, therefore, advised that there should be focus and concentration on collection of evidence of income which leads to information on what has not been disclosed or is not likely to be disclosed before the Income – tax Departments. Similarly, while recording statement during the course of search and seizures and survey operations no attempt should be made to obtain confession as to the undisclosed income. Any action on the contrary shall be viewed adversely.

Further, in respect of pending assessment proceedings also, assessing officers should rely upon the evidences/materials gathered during the course of search/survey operations or thereafter while framing the relevant assessment orders.

Charter of Rights and Duties of Persons searched:

The following is the Charter of rights and duties of persons searched which has been reported in [1994] 208 ITR (St) 5.

Rights of the person searched:

• To see the warrant of authorisation duly signed and sealed by the issuing authority.

• To verify the identity of each member of the search party before the start of the search and on conclusion of the search.

• To insist on personal search of ladies being taken only by a lady, with strict regard to decency.

• To have at least two respectable and independent residents of the locality as witnesses.

• A lady occupying an apartment being searched has a right to withdraw before the search party enters, if, according to custom, she does not appear in public.

• To call a medical practitioner in case of emergency.

• To allow the children to go to school, after checking their bags.

• To have the facility of having meals, etc., at the normal time.

• To inspect the seals placed on various receptacles, sealed in course of search and subsequently at the time of reopening of the seals.

• Every person who is examined under section 132(4) has a right to ensure that the facts so stated by him have been recorded correctly.

• To have a copy of the panchanama together with all the annexures.

• To have a copy of any statement that is used against him by the Department.

• To have inspection of the seized books of account, etc., or to take extracts therefrom in the presence of any of the authorised officers or any other person empowered by him.

• To make an application objecting to the approval given by the Commissioner of Income-tax for retention of books and documents beyond 180 days from the date of the seizure.

Duties of the person searched:

• To allow free and unhindered ingress into the premises.

• To see the warrant of authorisation and put signature on the same.

• To identify all receptacles in which assets or books of account and documents are kept and to hand over keys to such receptacles to the authorised officer.

• To identify and explain the ownership of the assets, books of account and documents found in the premises.

• To identify every individual in the premises and to explain their relationship to the person being searched. He should not mislead by impersonation. If he cheats by pretending to be some other person or knowingly substitutes one person for another, it is an offence punishable under section 416 of the Indian Penal Code.

• Not to allow or encourage the entry of any unauthorised person into the premises.

• Not to remove any article from its place without notice or knowledge of the authorised officer. If he secretes or destroys any document with the intention of preventing the same from being produced or used as evidence before the court or public servant, he shall be punishable with imprisonment or fine or both, in accordance with section 204 of the Indian Penal Code.

• To answer all queries truthfully and to the best of his knowledge. He should not allow any third party to either interfere or prompt while his statement is being recorded by the authorised officer. In doing so, he should keep in mind that –

If he refuses to answer a question on a subject relevant to the search operation, he shall be punishable with imprisonment of fine or both, under section 179 of the Indian Penal Code.

Being legally bound by an oath or affirmation to state the truth, if he makes a false statement, he shall be punishable with imprisonment or fine or both under section 181 of the Indian Penal Code.

Similarly, if he provides evidence which is false and which he knows or believes to be false, he is liable to be punished under section 191 of the Indian Penal Code.

• To affix his signature on the recorded statement, inventories and the panchanama.

• To ensure that peace is maintained throughout the duration of the search, and to co-operate with the search party in all respects so that the search action is concluded at the earliest and in a peaceful manner.

• Similar co-operation should be extended even after the search action is over, so as to enable the authorised officer to complete necessary follow-up investigations at the earliest.

–. Assessment or reassessment, if any, relating to any assessment year falling within the period of six assessment years pending on the date of initiation of  the search under section 132 or requisition under section 132, as the case may be, shall abate.