Survey — Legal, Tax and Accounting Aspects

At the outset while identifying the reasons prompting the Tax
Department to conduct a survey is that though theoretically every assessee has
to pay tax on income he actually earns, in actual practice the assessee pays tax
only on the income he discloses. Very often, the gap between the two is found to
be mordantly large, resulting in generation of undisclosed income and
undisclosed wealth. To counteract this practice, the Legislature has given wide
powers to tax authorities to conduct surveys and search proceedings. Though
these provisions are legally valid, controversies arise in their implementation.
It also gives rise to many issues in accounting the differential incomes
disclosed at the conclusion of the survey or search.

2. Search (S. 132) and survey [S. 133(A)]

Though repercussions of Search are more drastic, the Survey
provisions, according to the speaker are more risky for the following reasons :

The first reason is that a warrant for search needs approval
of the highest administrative authority,
namely, Director General of Investigation (a rank equal to Chief Commissioner)
who issues the warrant only after careful and in-depth study of all relevant
facts, circumstances and background of the case.

Another safeguard is that before coming to the decision of
taking search of any assessee, care is taken to ensure that the assessee’s case
satisfies at least one of the three basic conditions. The authority must record
the reason to believe that the assessee is understating his income. He has to
spell out why the search is to be conducted and what is the information
available for conducting the Search.

This process of collection of data to arrive at this
satisfaction takes two to three months. It is only after such satisfaction that
the Director General of Investigation issues a warrant.

As compared to this, S. 133A does not contain similar
preconditions of satisfaction. It provides that the Income-tax authorities may
visit the place of business of the assessee to carry out the Survey. It can take
place if there is fall in turnover, fall in G.P. ratio or non-compliance by the
assessee during assessment proceeding. The only condition is to get approval of
the Additional Commissioner of Income-tax.

3. Analysis of legal, accounting and tax aspect of survey proceedings :

Survey connotes comprehensive inspection of place of business
or profession. A survey cannot be conducted at place of residence. The survey
party can inspect the books of accounts, documents, take inventory of stock,
cash, valuables, investments, all of which thereafter will be inventorised.

After 1-6-2002, survey party is given power to impound books
of accounts and documents and take custody of the same after inventorisation. No
other asset can be impounded.

Normally survey cannot be conducted at residence, since it is
not a place of business. If in the return of income it is shown as any other
place of business, then the survey can be conducted at residence as well as in
any other place of business, say, godown or branch or additional place.

4. Timing for commencement of proceedings :

As regards timing to commence Survey, the same should be
within normal business hours. Once proceedings start, the same can continue till
it is concluded i.e., even beyond hours of business. The Search
proceedings should commence only between sunrise and sunset.

5. Places that can be covered under survey proceedings :

Where the assessee states that his books of accounts are with
his C.A. or Advocate, then the survey can be conducted even in office of the
C.A. or Advocate. However, In 1994, the CBDT issued a Circular stating that
normally Survey should not be conducted in office of C.A., but he should be
asked to produce those books at the place of business of his client who is being
surveyed. If the C.A. refuses to co-operate, then the office of the C.A. can be
surveyed. But the scope of survey will have to be restricted to the books and
other documents of that particular client only and not to books, etc. of C.A.
himself or his other clients.

6. Authorities who can conduct the survey proceedings :

The Income-tax authorities defined in explanation to S. 133
are Commissioner, Asst. Commissioner, Income-tax officer and Inspector, so also
officers of investigation wing i.e., Asst. Director, Director of
Investigation, Deputy Director of Investigation, Additional Director of
Investigation and Inspector. But Chief Commissioner and Director of
Investigation cannot conduct survey. The reason is they are senior officers.

7. Rights conferred on the Officers :

The rights of officers in survey party include right to enter
premises and verify whatever is available in the premises. But the officers
cannot take personal search. The officers in such cases ask the assessee and
others present to empty their pockets and place the papers, documents before the
officers’ table which can then be inspected. It is important to note that though
inspector is an authority in search party, his powers are very limited viz.
to verify books and documents and put identification marks on books and
documents. Except these two powers, he has no other authority. However, in
practice, stock inventory, cash count is done by the inspector. So also very
often statement is recorded in handwriting of the Inspector and signed by the
assessee and countersigned by an officer. The statement is recorded u/s.133A(3),
in search proceedings u/s.132(4), the oath is to be administered before the
statement is recorded. However, u/s.133A, the authorities have no power to
administer oath. Therefore, even if the assessee makes a false statement,
provisions of prosecution under the Indian Penal Code cannot be invoked. Three
important Sections of I.P.C. are excluded in survey proceedings. These are S.
179, S. 180 and S. 181 of the Indian Penal Code, which apply to refusal to make
statement, refusal to give evidence and refusal to give reply. But in search
proceedings, if any of these events occurs, the assessee can be prosecuted. S.
166 of I.P.C. provides that if a Government servant exercises any power for
which he is not authorised, he can be imprisoned for one year.

8. Rights of assessee during survey :

As far as search proceedings are concerned, the rights are given as guideline. These are applicable even during the survey proceedings. The assessee can do his normal functions required for carrying on his business activity, he and his assistants can go out for the assessee’s work. The only restriction is that he should remain present when his statement is to be recorded.

There is no power to arrest or confine the assessee to his business premises.

After inventory is taken, the assessee is asked to put values against each item of stock inventorised. But per law, after inventorisation, the function of survey comes to end. It is only at the time of assessment that the assessee can be called upon to evaluate and prove the valuation and to reconcile the same with stocks shown in books.

During the survey the search party insists on valuation and to quantify the difference solely with a view to persuade or compel the assessee to make high amount of declaration. But such action is not as per law. The survey party or even search party cannot restrict the movement of the assessee. This is held by Delhi High Court in its discussion on rights of assessee during survey proceedings, refer 194 ITR. U / s.132, governing search proceedings, there is power to break open doors, cupboards, cash boxes, false ceiling while making search of unaccounted valuables. No such power exists in S. 133A. If the cupboard or safe is locked, the officer can record his satisfaction about existence of valuable stored in it and get search warrant, whereby he can get the power to break open such containers.

As regards sealing of business premises or god owns, there is no such power to seal premises or god own with search authorities, nor survey authorities. [Shyam Jewellers 196 ITR 239.]

Generally survey proceedings end with recording statement and taking declaration from the assessee.

9. Retraction of declaration of disclosed amounts by assessee:

Whether the statement can be retracted? The statement is not recorded on oath. If it is so recorded, then it casts higher burden on the assessee to prove what he said was not correct.

Before retracting the statement the assessee should first consider the material gathered during survey and its value. Mere blanket retraction will not help the situation. But where materials gathered indicating concealed income form a small part of the disclosed amount, which is either through pressurisation or otherwise, then the assessee can retract his statement saying that it is taken under coercion. Retraction shall be made at the earliest point of time. Retraction statement should clearly set out the circumstances and factual events compelling him to disclose higher amount in his original statement recorded.

10. Three basic principles to be borne in mind are:

i) The amount disclosed in statement is not a conclusive evidence. One has to give due weightage to the circumstances leading to disclosure.

ii) Confessional statement given under ignorance of legal rights is not having evidential value. To illustrate, an assessee not aware of exemption to capital gain, discloses and includes such amount in his declaration statement, still no tax can be levied on such capital gain.

iii) The law is always open to convict a person if evidence is found to be false. Hence, even if declaration is produced before the Court, which is retracted, the Court will verify whether the evidence or material gathered, is sufficient to justify declared sum. If the answer is affirmative, then retraction will not stand the test of law. In converse situation, the Court will uphold retraction.

11. Issue of summons  during  survey  proceedings:

The power to issue summons is given when the assessee is creating hindrance in proceedings or not giving statement when called upon, then the officer can issue summons u/s.131 calling the assessee to attend his office on appointed day and time. S. 131 gives all powers of a Civil Judge to Af), Actually, if the assessee has cooperated and if stocks, cash valuables are inventorised, then summons is not necessary. This was held in 58 ITD 492 and 27 BCAJ 475, which supports the law that summons cannot be issued indiscreetly.

As decided in 246 ITR 353, a bar is put on recording the statement of the assessee over long periods. The recording of statements has to be completed within reasonable time.
 
In survey proceedings, the authorities persuade the assessee to declare large amount assuring him that penal proceedings will not be invoked if he discloses such amount as indicated by officers. However, such assurance has no legal base.

Penalty u/s.271(1)(c) can be levied only when there is concealment of income or filing of inaccurate particulars. Hence, filing of returns is a prerequisite. If the due date for filing the returns of current year is not yet expired and if the disclosed amount is not related or attributable to earlier year’s income, then there is no ground to initiate S. 271(1)(c)proceedings.

12. Accounting treatment to stock and cash difference :

The undisclosed stock included in the stock inventorised can be brought into books by debiting stock and crediting income. Thereafter the assessee can pay tax as Advance Tax. In 190 ITR 43 (Born.) it was held that where due date for filing has not yet expired, no penalty can be levied if such difference is submitted to tax as income. So, if the undisclosed stock or cash or any valuables not disclosed relate to current financial year and not earlier year, then the assessee need not file declaration regarding such stock, but can incorporate the same in current year income and pay tax. This position will not be applicable if such undisclosed income relates to earlier year. The speaker said that a survey is something like voluntary disclosure scheme always available to the assessee by disclosing it as current year income.

13. Power to impound stocks, cash and other assets, books of accounts & documents:

Prior to 1st June, 2002, there was no power to impound anything from business premises. After 1st June, 2002, officers can impound books of accounts and documents and no other assets. The definition of books of accounts is contained in S. 2 (12A) and documents are defined in S. 2(22A). So any loose papers noting unaccounted sale may not fall in the definition of books of accounts, still survey party can inventorise them and will require the assessee to produce them at the time of assessment proceedings. Those documents which are unsigned, which are undated, unsigned Memorandum of Understanding, may not be documents.

14. Presumptions:

In S. 132(4A) there are certain presumptions, viz. (i) contents  of documents are presumed to be true; (ii) The handwriting will be presumed to be of the assessee unless proved otherwise, (iii) signatures will be presumed to be of assessee unless proved otherwise.

However, all these presumptions available during search proceedings are not available during survey proceedings.

15. Presence of CA. during the course of surveyor search:

The speaker felt that such presence will facilitate the proceedings in its smooth functioning. Unfortunately, S.C in 62 Taxrnan 73, has held that whatever is noted in proceedings is the statement of facts. The concerned person is not yet accused and no charge sheet is filed against him, so the work of investigation is in nature of finding of facts, hence CA. or an Advocate has no role in these proceedings. Based on this their presence is not permitted.

16. Time limit for return of impounded documents:

After impounding the documents, ten days’ time is given to retain them, after which those documents are returned unless the officer takes permission of CIT or Director of investigation to retain them for further time by recording the reasons. Such recording is necessary even at the time of impounding.

In 156 ITR, S.c. has held that documents collected even during illegal search can be a piece of evidence which the Dept. can use against the assessee. The Commissioner while giving permission for retaining documents beyond ten days has to record the reason for giving such permission and according to the Speaker, he should intimate the same to the assessee. In search & survey, no appeal is provided. The only remedy is writ which is expensive.

When disclosure of excess cash and excess stock is made, the difference is treated as income. But where there is a shortage, then the Dept. will presume that the difference is unaccounted sale. But entire estimated sale price will not constitute income, a due deduction of cost of material can be claimed from such sale. The same is the position of cash on hand. If cash of, say, Rs.5 lakhs is found but cash per books is, say, Rs.1 lakh, the entire difference though treated as unaccounted sale, the assessee can claim cost of unaccounted purchase as deduction and the difference alone will be concealed income. Again, since the source for unexplained investment is proved, provision of S. 69C or other sub-sections of S. 69 will not apply. Therefore entire shortage of stock or cash will never constitute income. Accounting entries to regularise excess stock or excess cash in the same financial year by debiting stock or cash and crediting income. The entry can be made at any time, at the time of surveyor thereafter. Excess stock can be entered in stock book with corresponding entries in financial books. However, in case of a manufacturer, the incorporating entries of sales (unaccounted) will expose him to liability under indirect taxes like excise, sales tax, vat. In case of traders, if the amount is credited as commission, then service tax gets attracted. As against this, it is possible to argue that income was from derivative trading speculation or commodity trading. Though the source gets explained, the confrontation in Indirect Taxes, VAT, etc. can be avoided. In case of less cash and more stock being found, a set-off can be claimed. Hence due care should be taken when the assessee is made to disclose. He can reserve his explanation till the date of assessment proceedings.

17. Copies of statements recorded:

Can the assessee ask the authority to furnish him copies of statements – The answer is in the negative. The judicial view is that the assessee gets the right to demand it only when any such statement is used against him.

The meeting then terminated with a vote of thanks to the learned speaker.