The tax department’s move seeking the introduction of amendments to the Income Tax (I-T) Act to rescind the need to explain the “reason to believe” for searches to appellate authorities or individuals has been prompted by concerns over judicial orders potentially opening the doors for the disclosure of reason for searches to the person against whom the search warrant has been issued. In the intra-departmental discussions preceding Budget 2017-18, the investigation wing of the tax department proposed changes to plug the move to disclose the satisfaction note to persons or appellate authorities. Though courts, including the Supreme Court (SC), have reiterated the importance of recording the reason for searches for accountability and responsibility in several cases, the tax department, according to officials, has cited concerns about the disclosure of the satisfaction note and the entire evidence to the person to whom the warrant has been issued following a 2015 order by the apex court.
In May 2015, the SC, while delivering its judgment in the case of Directorate General of Income Tax (Investigation) Pune versus M/s Spacewood Furnishers Pvt Ltd and others, had stated that while the recorded reasons for belief of searches need not be communicated to the person against whom the warrant is issued at the stage of issuance of search warrant, the relevance of the reasons for the search will be entitled to examination in court, if it were to be challenged.
“Though Rule 112(2) of the Income Tax Rules which specifically prescribed the necessity of recording of reasons before issuing a warrant of authorization had been repealed on and from October 1, 1975, the reasons for the belief found should be recorded. The reasons, however, need not be communicated to the person against whom the warrant is issued at that stage,” the SC had pronounced in its judgment pertaining to the case against Spacewood Furnishers.
The judgment further stated that “such reasons, however, may have to be placed before the Court in the event of a challenge to formation of the belief of the authorized official in which event the 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,” the judgment stated.
The SC had, however, highlighted the action of High Court to reproducing the satisfaction note as “highly premature”. In its judgment, the apex court said, “…we would like to say that the High Court had committed a serious error in reproducing in great details the contents of the satisfaction note(s) containing the reasons for the satisfaction arrived at by the authorities under the
Act… In the light of the above, we cannot approve of the aforesaid part of the exercise undertaken by the High Court which we will understand to be highly premature; having the potential of conferring an undue advantage to the assessee thereby frustrating the endeavor of the revenue, even if the High Court is eventually not to intervene in favour of the assessee.”
It was the small window of examination of relevance of reasons that opened a plethora of opportunities for assessees to question the action of searches by the tax department. Tax officials, on the other hand, say that this would have made a secret document of satisfaction note, which has details of informants and other evidence, to be accessible to the person against whom warrant is issued, thereby giving an undue advantage to the assessee. Some tax officials were also of the view that the issue could have been resolved by changing the way the tax department writes its satisfaction note, though it would have been a long drawn process.
Acting on the intra-departmental suggestion, the tax department in the Finance Bill, 2017 proposed to include an explanation, to sub-Sections (1) and (1A) of Section 132 and sub-Section (1) of Section 132 A of the Income Tax Act “to declare that the ‘reason to believe’ or ‘reason to suspect’, as the case may be, shall not be disclosed to any person or any authority or the Appellate Tribunal”, leading to some apprehensions in the industry.
On February 15, in a meeting of the Department-related Standing Committee on Finance, headed by Congress leader M Veerappa Moily, to discuss the tax proposals enlisted in the Finance Bill, members from the Bharatiya Janata Party, the Congress and the Biju Janata Dal raised apprehension about “harassment” of people due to the proposed changes for conducting a search. The members expressed concern that the proposed changes in the Finance Bill might be used as tools by tax officials for tax terrorism.
Revenue secretary Hasmukh Adhia, however, assured the panel members that the reasons would be revealed to Constitutional courts such as high courts or the SC even as the income tax department will not reveal them to Appellate Tribunal or persons. Adhia is learnt to have said that the reason for the raid will be recorded and it is a misconception that there will be no record of the reasons, which will be submitted to the SC and high courts.
The industry had also raised concerns about the Budget 2017-18 proposal to provide the tax officials with power of provisional attachment for a period of six months with the prior approval of a senior official. “In order to protect the interest of revenue and safeguard recovery in search cases, it is proposed … the authorised officer on being satisfied that for protecting the interest of revenue it is necessary to do so, may attach provisionally any property belonging to the assessee,” the Budget proposal said.
As of now, property of the assessee could only be attached after the assessee’s request for stay on attachment of property has been rejected by the commissioner of income tax. Normally, the department gives 30 days to the assessee for payment of the demand, in which time the assessee can apply for stay on attachment of property.
Responding to the apprehensions of the industry leaders about increased powers to taxmen, Central Board of Direct Taxes (CBDT) chairman Sushil Chandra earlier this month had asserted that the amendment was proposed “to plug the abuse” of law by tax evaders. The power for provisional attachment of property has been accorded in the Budget, as tax evaders could sell off their property in the intervening time taken for preparation of investigative report, which is usually around 4-5 months, he had said.
“The power of referring the property to a valuation cell has been given to the investigative officers. The rationale behind it is that it takes 4-5 months for preparation of report when the search takes place. So, some of the assessees, what they did was till the time report is being made ready, they could sell off their properties. So to plug that particular thing, the power has been given to provisionally attach the property. He cannot sell the property. Tax official can provisionally attach the property so that whenever the liability is created after that time, you can pay the liability and the property will be released. It is only to safeguard the revenue,” Chandra had said.