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Rationalisation of ITO powers

Ramadurai Chandrasekaran 
on 25 September 2017

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Finance Act 2017 introduced amendments to various sections under the Income Tax Act 1961 that relate to administrative powers of the officers under the Act in the discharge of duties as collection of revenue and bringing to book possible tax evasion

The table below briefly summarizes the amendments introduced in the Budget - Finance Act 2017


Section in the Finance Act 2017

Section in the Income Tax Act 1961 that was amended

Contents of the amendment

50

Section 132 -  explanation to sub section (1) on the disclosure of reason for the search or seizure

The recorded reason for the search and seizure shall not be disclosed to any authority or tribunal

Section 132 - new subsection (9B) - order to pass provisional attachment

order in writing to provisionally attach the property of the assessee with the prior approval of Principal Director General or Director General or the Principal Director or Director

Section 132 - new sub section (9C) - validity of provisional attachment order

The above order shall be valid and in force for 6 months from the date of order

 Section 132 - new sub section (9D) - Valuation of attached properties

Reference to Valuation officer within 60 days after the last date of search to get valuation of attached properties within 60 days of reference

132 (1A) -reasons to believe if books/properties are kept in a place other than for which search and seizure authorization is obtained

The recorded reason for the search and seizure of the other premises shall not be disclosed to any authority or tribunal

51

Section 132A (1) - the requisition officer to deliver such books of account, other documents or assets to the requisitioning officer.

The recorded reason for the search and seizure of the other premises shall not be disclosed to any authority or tribunal

52

Section 133 - Power to call for information - amendment of first proviso to the section

Joint Director or Deputy Director or Assistant Director are added as those having powers to call for information

Amendment to second proviso to the section

Power to inquiry is added to Joint Director or Deputy Director or Assistant Director without prior approval from Principal Director or Director or Principal Commissioner or Commissioner.

If the inquiry has to be performed by Assistant Commissioner or Deputy Commissioner or Income-tax Officer, then they need prior approval from Principal Director or Director or Principal Commissioner or Commissioner.

53

Section 133A - Right to survey premises where business or profession is carried and make the proprietor /employee to provide him facility to inspect books, verify them and make the proprietor/employee to furnish information.

Premises where an activity for charitable purpose is carried on is added and the persons who will assist the officer will also be the Trustee of the activity for Charitable purpose.

54

Section 133C - Power to call for information by prescribed income-tax authority.

"(3) The Board may make a scheme for centralised issuance of notice and for processing of information or documents and making available the outcome of the processing to the Assessing Officer


These come under rationalization of the powers of the Income Tax authorities. Lot of objections on these were heard on these. In that context we shall see the objective behind these amendments from the comments by the Government through its Memorandum circulated on the Finance bill by the Government and any backing from judicial pronouncements made earlier.

Memorandum - FINANCE BILL, 2017 PROVISIONS RELATING TO DIRECT TAXES

Reason to believe to conduct a search, etc. not to be disclosed - section 50/51 of Finance Ac 2017

Confidentiality and sensitivity are the hallmarks of proceedings under section 132 and section 132A. However, certain judicial pronouncements have created ambiguity in respect of the disclosure of 'reason to believe' or 'reason to suspect' recorded by the income-tax authority to conduct a search under section 132 or to make requisition under section 132A. It is therefore proposed to insert an Explanation to sub-section (1) (retrospectively from 1 April 1962) and to sub-section (1A) of section 132 and to sub-section (1) of section 132A (retrospectively from 1 April 1975) 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

Power of provisional attachment and to make reference to Valuation Officer to authorized officer - Section 50 of Finance Act 2017

In order to enable correct estimation and quantification of undisclosed income held in the form of investment or property by the assessee by the Investigation wing of the Department, it is further proposed to insert a new sub-section (9D) in the said section to provide that in a case of search, the authorized officer may, for the purpose of estimation of fair market value of a property, make a reference to a Valuation Officer referred to in section 142A, for valuation in the manner provided under that sub-section. It also provides that the Valuation Officer shall furnish the valuation report within sixty days of receipt of such reference. (Effective from 1st April 2017)

Rationalization of the provisions in respect of power to call for information - section 52 of Finance Act 2017

Considering the requirement of the work profile of the authorities working in the Investigation Directorate, it is proposed to amend the first proviso of the said section and provide that the power in respect of inquiry or proceeding under the Act, as referred to in clause (6) of the said section, may also be exercised by the Joint Director, the Deputy Director and the Assistant Director.

It is further proposed to amend the second proviso of the said section to provide that the Joint Director, the Deputy Director or the Assistant Director may exercise the powers in respect of such inquiry, without seeking prior approval of higher authorities (effective from 1st April 2017)

Extension of the power to survey - section 53 of the Finance Act 2017.

It is proposed to widen the scope of the said section by amending sub-section (1) to include any place, at which an activity for charitable purpose is carried on ( effective from 1st April 2017)

Legislative framework to enable centralized issuance of notice and processing of information under section 133C - section 54 of Finance Act 2017

In order to expedite verification and analysis of the information and documents so received, it is proposed to amend section 133C to empower the Central Board of Direct Taxes to make a scheme for centralized issuance of notice calling for information and documents for the purpose of verification of information in its possession, processing of such documents and making the outcome thereof available to the Assessing Officer for necessary action, if any. (Effective from 1st April2017)

Let us look at judicial precedents on these:        

DGIT (Investigation) Pune & Others Vs M/s Space wood furnishers Pvt Ltd & Others SC 2012.

Since the existence of the conditions precedent to the exercise of the power to issue the notice under section 132, has been interdicted under Article 226 of the Constitution, the ambit of the power of the High Court to do so may be noticed at the outset.

Thus the SC has made it clear that the recorded reason to initiate search and seizure under (1) of section 132 or (1A) of 132 and 132A (1) shall be subject to High court’s scrutiny. The officer concerned shall produce the reasons that he has recorded for himself before initiating the procedures under these sections before the HC and therefore SC.

The SC has relied on the following two judgments to confirm that (Considering the scope of Section 132 of the Act in ITO vs. Seth Brothers; Pooran Mal vs. Director of Inspection)

i. The Commissioner or the Director of Inspection must have, in consequence of information, reason to believe that the statutory conditions for the exercise of the power to order search exist. He must record reasons for the belief and he must issue an authorization in favour of a designated officer to search the premises and exercise the powers set out therein.

ii. If the action of the officer issuing the authorization, or of the designated officer is challenged the officer concerned must satisfy the Court about the regularity of his action. If the action is maliciously taken or power under the section is exercised for a collateral purpose, it is liable to be struck down by the Court.

iii. It is a well-known fact of our economic life that huge sums of unaccounted money are in circulation endangering its very fabric. In a country which has adopted high rates of taxation a major portion of the unaccounted money should normally fill the Government coffers. Instead of doing so it distorts the economy. Therefore, in the interest of the community it is only right that the fiscal authorities should have sufficient powers to prevent tax evasion.

iv. This Court has emphasized the necessity of recording of reasons in support of the ‘reasonable belief’ contemplated by Section 132, nowhere, in either of the decisions any view had been expressed that the reasons recorded prior to authorizing the search needs to be disclosed or communicated to the person against whom the warrant of authorization is issued.

The SC in Dr. Pratap Singh vs. Director of Enforcement while considering a pari material provision in the Foreign Exchange Regulation Act expressed the same view as above:

The material on which the officer has reasons to believe that any documents will be useful for or relevant to any investigation need not be disclosed in the search warrant; such material may be secret, may have been obtained through intelligence, or even conveyed orally by informants.

The Supreme Court also referred to an earlier decision in S. Narayanappa v. CIT [1967] 63 ITR 219 (SC), to hold that:-

  • Whether grounds for ordering search were sufficient or not is not a matter for the court to investigate.
  • However, the court may examine the question whether the reasons for the belief have a rational connection or a relevant bearing to the formation of the belief and are not extraneous or irrelevant for the purpose of the section.'

The summarization in the judgment on the pre requisites for issuance of a notice for search and seizure or power to requisition books of accounts are reproduced below:

The principles that can be deduced from the aforesaid decisions of this Court which continue to hold the field without any departure may be summarized as follows:

(i) The authority must have information in its possession on the basis of which a reasonable belief can be founded that-

(a) The concerned person has omitted or failed to produce books of account or other documents for production of which summons or notice had been issued OR

Such person will not produce such books of account or other documents even if summons or notice is issued to him. OR

(b) Such person is in possession of any money, bullion, jewellery or other valuable article which represents either wholly or partly income or property which has not been or would not be disclosed.

(ii) Such information must be in possession of the authorized official before the opinion is formed.

(iii) There must be application of mind to the material and the formation of opinion must be honest and bonafide. 

Consideration of any extraneous or irrelevant material will vitiate the belief/satisfaction.

(iv) 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 1st October, 1975 the reasons for the belief found should be recorded.

(v) The reasons, however, need not be communicated to the person against whom the warrant is issued at that stage.

(vi) 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.

Para 2.38 of the Search and Seizure Manual published by the Directorate of Income Tax with regard to the preparation of satisfaction note and issuing of warrant of authorization under Section 132 of the Act. Manual being relevant may be usefully extracted:

'2.38 The 'satisfaction note' should ordinarily be initiated by the ADIT Investigation)/DDIT

(Investigation). It should be put up to the DIT (Investigation) through the Joint/Additional DIT (Investigation), along with the detailed comments of the latter. The note must be recorded in the secret file, already prepared for this purpose, containing material like, the secret information collected from various sources, statement(s), if any of the informant(s), reference to tax evasion petition(s), if any, surveillance reports and information relating to assessment(s), returns of income, wealth, etc., where available.'

Thus the authorization for search/seizure/entry into premises/requisition books of accounts/right to survey etc. can be issued by Joint or Additional Director (IT) or any officer above their level on the note prepared by the Assistant Director.

The SC further goes to record:

  • The necessity of recording of reasons, despite the amendment of Rule 112 (2) with effect from 1st October, 1975, has been repeatedly stressed upon by this Court so as to ensure accountability and responsibility in the decision making process.
  • Reasons enable a proper judicial assessment of the decision taken by the Revenue. However, the above, by itself, would not confer in the assessee a right of inspection of the documents or to a communication of the reasons for the belief at the stage of issuing of the authorization. Any such view would be counterproductive of the entire exercise contemplated by Section 132 of the Act.
  • It is only at the stage of commencement of the assessment proceedings after completion of the search and seizure, if any, that the requisite material may have to be disclosed to the assessee.
  • The administrative approval being required from Director General as per Notification dated 7th March 2001 is currently out of place as the Act under section 132 (1) clearly mentions that the authorisation can be issued by Principal Director General or Director General or Principal Director or Director or the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner or Additional Director or Additional Commissioner or Joint Director, or Joint Commissioner
  • The note and authorisations can be in loose sheets of papers
  • The Courts cannot get into an appellate exercise on the sufficiency and adequacy of the reasons and the authenticity and acceptability of the information on which satisfaction had been reached by the authorities. Such an exercise is alien to the jurisdiction under Article 226 of the Constitution

Conclusion:

  1. The amendment to sections 132(1), 132(1A) and 132A(1) making it clear that the reasons for arriving at the opinion to initiate proceedings under the above sections need not be shared with any person or authority or appellate Tribunal is a logical confirmation of the SC judgement in the case above cited
  2. The HC or SC have the right under Article 226 of the Constitution to go through the reasons.
  3. The recording of the reasons is to ensure accountability and responsibility
  4. Those reasons will not be communicated to the assessee at the stage of issuance of the warrant of search or seizure
  5. At the time of commencement of assessment procedure after the search is completed, the material will have to be disclosed to the assessee.
  1.  The courts cannot get into an appellate exercise on sufficiency and adequacy of the reasons and the authenticity and acceptability of the information on which satisfaction had been reached by the authorities. Such an exercise is alien to the jurisdiction under Article 226 of the Constitution

Now coming to the other amendments which the Government’s Memorandum on Finance Bill 2017 refer to as Rationalization measures

  • Market based value estimation to arrive at correct value of the assets provisionally attached
  • The valuation to be received in 60 days
  • The entire process of recovery process to get completed in 6 months
  • Including officers till the level of Assistant Director to initiate inquiry proceedings and call for information. This is to reduce work load at the higher level
  • Social activism has reached an unacceptable proportion in that there is a risk of the funds received from abroad getting used against purposes for which the entities receiving the funds were established. The activities for charitable purpose must maintain books of accounts, get them registered with FEMA or FERA as the case may be and submit to the compliance requirements periodically as contemplated under these laws. In order to ensure that the activities for charitable purpose are conducted within the ambit of law, the section 133A has been amended to include those activities also under the purview of Right to survey, visit, verify and call for information pertaining to the said activity.
  • Once it is found that there is no satisfactory compliance with reference to books of accounts or based on the verification of them and other information collected, the applicable provisions of the other Acts under which these charitable activities come will start initiating compliance notices and prosecution for offences.
  • Many NGOs losing registration and being barred from receiving overseas funding are the outcome of the actions initiated under 133A of the Act.
  • Centralised notice issue process, data collection, mining and then sharing the findings with the concerned assessing officer. This is again to use the power of data mining and complementing the work of line assessing officers. This is after the Demonetisation impact and the requirement to inquire/verify/inspect/investigate a large volume of deposits of Special Bank Notes post demonetization.

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