CAG pulls up IT Dept for post-raid slackness

MUMBAI, OCT 2: Income Tax officials in Mumbai may be patting themselves on the back for the surprise swoop on filmstars and for recovering...

MUMBAI, OCT 2: Income Tax officials in Mumbai may be patting themselves on the back for the surprise swoop on filmstars and for recovering huge, undeclared booty from them. However, a review of the department by the Comptroller and Auditor General of India CAG in its annual report on direct taxes presented to Parliament recently, raps the department8217;s officials for slack post-search performance and for the quality of investigation conducted.

CAG officals have found a staggering loss of almost Rs 500 crore because of delayed completion of assessments, mistakes in computation of income and tax which resulted in short levy of tax, undercharge of tax, unintended benefit given to assessees, non-levy of interest and penalties, ineffective searches and defective assessments, all revealed a loss of revenue.

The period covered for the review was from July 1, 1995 to December 31, 1998. In all, 8,482 cases were scrutinised which involved undisclosed income of Rs 50 lakh and above. It also included 20-30 per cent of other cases depending on the quantum of search operations or block assessment in their jurisdiction.

As the massive exercise got underway, CAG officials discovered reluctance and refusal on the part of IT department authorities to make available appraisal reports to CAG8217;s audit parties despite written orders from the Central Board of Direct Taxes CBDT. Very often, IT officials simply pleaded non-availability of seized documents.

The CAG audit on the efficacy of IT search and seizures was carried out on the express orders of a Public Accounts Committee report of 1996-97 which had stated that 8220;8230; the Committee desires that in the light of non-detection of concealed income in large number of cases, the Finance Ministry should take specific steps and ensure that thorough groundwork is done before undertaking search and seizure operations and also make a more detailed examination of each of the cases to find out whether any lapses had occurred due to the connivance of departmental officers.8221;

The CAG was, therefore, not surprised to discover there were huge differences between the two main wings in the IT department 8212; the investigating department and the assessment department. An appraisal report is prepared on the basis of materials and documents found as a result of the search and contain an estimate of the undisclosed amount, on the basis of which, the assessing officer proceeds to do the 8220;block8221; assessment.

According to the CAG, the huge difference between the two reports reflects either an improper and insufficient estimation by the investigating officer or inadequate attention on assessment by the assessing officer.

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It was also discovered that instructions by the CBDT that any variation of quantum of undisclosed income between the block assessment orders and appraisal reports which were to be clearly recorded in the assessment order, was completely ignored. In the absence of this, notes the CAG, the IT department can never be in position to fix accountability and take action.

During the course of the review, it was also found that there were several instances of completion of assessments being delayed within the new prescribed time limit of one year which invariably helped the tax offender. The limit was reduced by a year in the Finance Bill, 1995, as it was found that by the time the search-related assessments were completed, the effect of the search was considerably diluted. Underassessment of undisclosed income was yet another area for trickery through various irregularities like incorrect rules and deliberate mistakes being recorded. In Gujarat alone, in 27 cases of underassessment of income resulted in short levy of taxes of Rs 88 crore. In one case, figures were marked in sterling pounds and US dollars but the figures were taken as rupees in the final report.

The audit review also revealed that there were several cases where search operations were not conducted thoroughly and that assessments were ineffective as well. In Karnataka, for instance, search and seizure operations were initiated against six individuals, three firms and a company all engaged in the timber business. Warrants of search were issued only to two individuals and since the others replied nil8217; returns to the IT notices, the income assessed in the block assessment was reduced to Rs 1.1 crore whereas earlier, the investigation wing had assessed it at Rs 9.7 crore.

Even a lack of coordinaation between various investigating agencies has led to penalties tumbling down. As per IT departmental instructions, the investigative wing and the assessing officer should liaise with other agencies like the Revenue Intelligence, Enforcement Directorate, Sales, Customs and Excise wings so that every penny owed for evading tax is accounted for. As a case in point, it was revealed that in Maharashtra, in one case the facts of suppressed sale of Rs 2.75 crore was not passed on to the sales tax authorities.