If you have been reading DailyO, Quint, India Today, etc., you are in for one hell of a ride. In fact, best fictional tales on the latest Income Tax amendment pertaining to RAIDS has been written by Quint. The Quint article gives a lovely picture of Commoners i.e. good tax payers of India waking early in morning, their maids preparing tea, kids playing in the house; And then BAM! Income Tax Officers dressed in Black just like Men in Black (MIB) come to their house and ransack it, while they remain a mute spectator. The article further states that a common tax payer will not know why MIB is at his house, since, they need not disclose. Maybe, the MIB got a hunch or sixth-sense based idea that the common man tax-payer has done something or has not done something; but still he doesn’t need to tell that he has Super-powers. Additional super-power that MIB has, is to even take your Television since it could he housing aliens which are ‘detrimental to interest of revenue’, while you and your family watch in terror. Two things got left out:
- MIB or Income Tax officers using Red Flash to wipe the Commoners Tax Payers’ memory and
- Modi & Jaitley are watching everything through the EYE (Lord of The Rings) and having a devious laugh over a cup of TEA (Chai Pe Charcha)
If you are done with Fiction, we can now focus on non-fiction, or the boring part. If, you are a person looking to understand the amendment, READ:
The Finance Bill 2017 has proposed numerous amendments; each amendment deserves an article. I am focusing on Section 132 related amendment that i.e. power of search seizure. The amendment proposed is:
In section 132 of the Income-tax Act
(i) in sub-section (1), after the fourth proviso, the following Explanation shall be inserted and shall be deemed to have been inserted with effect from the 1st day of April, 1962, namely: —
“Explanation. ––For the removal of doubts, it is hereby declared that the reason to believe, as recorded by the income-tax authority under this sub-section, shall not be disclosed to any person or any authority or the Appellate Tribunal.”;
(ii) in sub-section (1A), the following Explanation shall be inserted and shall be deemed to have been inserted with effect from the 1st day of October, 1975, namely: —
“Explanation. ––For the removal of doubts, it is hereby declared that the reason to suspect, as recorded by the income-tax authority under this sub-section, shall not be disclosed to any person or any authority or the Appellate Tribunal.”;
Initial thoughts:
- Retrospective amendment
- No need to disclose, or as per general media article, no need to tell anyone why there is Income Tax raid.
One cannot just read these two lines and jump to a conclusion that there is UNLIMITED power. The whole section needs to be read, and not its bits & pieces.
What is section 132?
I will not mention whole section in “bare act” form but will explain Section 132 in an interpretative way, without distorting the section. The section 132 is a very wide section, and as an intelligent thinking reader, following questions should come to your mind first before you jump the gun:
- Who has the power?
- What is the origin or basis of the power?
- Where can such powers be exercised?
- What are the specific additions or regions addressed in 132A?
- What can they actually do 132B?
- What are additional safeguards, protecting abuse, or timelines for the same?
- Finally, why is the amendment being proposed?
- Does it nullify everything and make the Income Tax Officers Almighty?
I will address the key questions above, and balance we can keep for a part 2 article, if readers so demand. I will try to focus on the Amendment coupled with the wide powers of the said Section.
Who has the Wide powers in this section:
- Principal Director General or Director General
- Principal Director or Director
- Principal Chief Commissioner or Chief Commissioner
- Principal Commissioner or Commissioner
- Additional Director or Additional Commissioner
- Joint Director or Joint Commissioner
Mind you, these are the top most authorities; and of the total Income Tax Department strength of ~45,000(excluding helpers, etc.) these are a ~2200 empowered individuals. So, the section empowers extremely important people to take decision and not just Assessing Officers or even Superintendent.
Source: http://www.incoetxindia.gov.in/Pages/about-us/manpower.aspx
These authorities are more concerned with big fishes and not commoner tax payers, as opposed to what folks at DailyO and Quint state. In fact, the owners at DailyO and Quint are the troubled lot here; maybe that’s why they fear MIB.
What does the section say, about origin or basis of this section?
The section say “… in consequence of information in possession, has a reason to believe…”
So, this section will come into effect via first satisfying 3 conditions:
- Above mentioned people can exercise it
- They have information in their possession i.e. adequate concrete knowledge
- This information leads them to believe something. That something is specific, and addressed in sub-sections (a), (b) & (c) discussed below.
The points where section 132(1) (a), (b) and (c) is applicable are:
- Summons or notice is already issued and person is asked to produce, any books of account or other documents; and he has omitted or failed to produce so requested, OR
- Summons or notice has or might be issued and person will not produce books, OR
- Person is in possession of any money, bullion, jewellery or other valuable article or thing and such items are not disclosed or would not be disclosed in Income Tax
Thus, the authorities (as referred above), should have INFORMATION that the above three items i.e. someone already has a notice and he will not comply, he will be sent a notice and will not comply or has undisclosed assets and will not disclose.
This INFORMATION is based on something called “Reason to believe” or “Reason to suspect”; has to be RECORDED and based this RECORD only, the search shall be carried.
Again, there are two part to the above and what does the section intend to do?
Part 1: Information has to be present and it has to be recorded. Contrary to what you may have read there are well established case-laws which have crystallized as to what constitutes Concrete info:
- Information must be something more than the mere rumor or a gossip or a hunch.
- The material which can be regarded as information must exist on the file based on which the authorizing officer can have reason to believe that action under section 132 is called for.
- There must be rational connection between the information or material and the belief about undisclosed income.
- Mere intimation by the police or mere possession of certain cash cannot lead to interference that income has not been or would not have been disclosed warranting action under section 132.
- Moreover, it is established that, if the action taken under this section is mala fide or arbitrary or betrays the application of mind, or does not comply with the statutory requirements or with the principles of natural justice or is patently erroneous or without jurisdiction, it would be illegal and the court would interfere.
- ‘Reason to believe’ and ‘reason to suspect’ is a ‘salutary safeguard’ and has to recorded. In absence of the requires ‘information’, a search cannot be authorized. A search cannot be based on surmise or conjecture.
The above six points are mere drop in the oceans of case laws defining the ‘Reason to believe’ and ‘Reason to suspect’.
Part 2: The current amendment says; “reason to believe, as recorded by income-tax authority under this section shall not be disclosed to any person or any authority or the Appellate Tribunal”.
Now, if you read carefully, the amendment doesn’t say:
- Don’t record reasons, or
- Don’t have a reason
Thus, since ‘reason to do’ is present, hence all the relevant case laws defining reason shall hold ground. Now, it says, that the ‘recorded reason’ shall not be disclosed to ‘any person’ (i.e. assesse), or ‘any authority’ or ‘Appellate Tribunal’.
Having established that no one can just do raids without clearly mentioning reasons, why has the record is ceased?
As rightly mentioned in Taxmann article, confidentiality & sensitivity are hallmarks of proceedings under section 132 & 132A; but, there have been cases, wherein multiple case-laws have been in favor of tax-payers on account of ambiguity in the said “reasons”. So, what used to happen is that the case is in favor of the Income Tax department, say a raid on a developer; but the case is quashed on the basis that, the ‘reasons mentioned are inadequate’. Given this ambiguity, there was always a case that genuine cases in favor of Income Tax were lost, as the whole search was nullified. So, instead of discussing on the ‘income escaping assessment’ the focus on shifted on the ‘reasons for Income Tax officers knocking’. The government has just plugged this hole.
This shall lead to a case of say income escaping assessment moving to an assessee having to prove genuineness of income rather than incorrectness of whole search.
One may argue that in this case, the officers may not record anything; and create harassment. Now, since the amendment does not say ‘don’t record’, the data will be present. If data is present it should have all the conditions that ‘correct information’ should bear. How will you reach to the data? Well, vide a writ petition, pertaining in the event of a challenge to formation of the belief of the authorized official, High Court exercising jurisdiction under article 226 would be entitled to examine the relevance of the reasons for the formation of the belief though not the sufficiency or adequacy thereof. In this event, the assessee will have pay relevant tax; and then move to High Court.
Let us understand one thing, the intent of this change is not to harass the Tax-payer. If based on a detailed search, survey and the assessment-post-search of the tax-payers records it is observed that say INR 10.0 cr., has escaped assessment, should the case be fought to established validity of INR 10.0 cr., and collect tax or prove ambiguousness in the reason for search.
This article has already stretched to ~1800 words, hence I would not get into other safeguards, in the section which are favor of tax-payer.
On a concluding note, I will go back to my question no. 8 raised “Does it (the amendment) nullify everything and make the Income Tax Officers Almighty?”; answer is NO. What is does is, it establishes the Tax dues, and one has to pay them first. Now, if someone wants to take recourse of the ‘reason to believe’ he will have to fight a writ petition in High Court. Being a Chartered Accountant, I have been privy to various such raids, cases, etc., and attended hearing. It is not as harrowing as described, which is written by “social media journalists”. There are good apples and bad apples, but does not mean that facts can be falsified. One has have good record-keeping in place that’s the best solution; and be adequately compliant.
Sources:
Bare act: http://www.incometxindia.gov.in/pages/acts/inome-tax-act.aspx
