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Saturday, Oct 19, 2002

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The conversion fiasco

T. C. A. Ramanujam

T. C. A. Ramanujam on a case where a survey was converted into search and messed up

THE power of survey of an assessee's business premises is very different from the power to search the premises. Both may have the same object of verifying the correctness of transactions reported or to be reported by the taxpayer in the returns due. But the consequences of the two actions are radically different. Tax officials often find it convenient to convert a survey into an operation for search and seizure. The decision has to be taken on the spot after verification of the records spotted in a survey. The procedures for carrying out a search have to be scrupulously followed. It does not always happen that the affected taxpayers challenge the actions of search and seizure as illegal. Yet, the consequence of an irregular search can be serious and damaging for both sides.

In the Dr Nalini Mahajan vs Director of I-T (INV 257 ITR 123) case, Ramlal Mahajan Charitable Trust was set up in January 1968 and was registered by the Commissioner of Income Tax under Section 12 A of the Income-Tax Act, 1961. The trust had the benefit of exemption under Section 80 G and was continuously exempted under Section 11. It was running a hospital in Panipat. Dr Nalini Mahajan was working in the hospital as an employee. A survey was conducted in the premises of the hospital run by the trust. Dr Nalini was the direct employee and her husband, Rakesh, was the managing trustee. All the assessments of Nalini were completed up to the assessment year (AY) 2000-2001.

During the course of survey of the hospital, at the instance of the officers conducting the survey, search warrants were issued against Dr Nalini by the Additional Director (INV), Delhi, and her premises were searched on August 29, 2000. Jewellery, cash and loose papers were seized. The search was based on a report of the authorised officer about incriminating documents indicating siphoning of funds from the hospital by Dr Nalini.

The Additional Director merely agreed with the recommendations of the authorised officer. No material was disclosed to show how the authorised officer came to form a reasonable belief about the existence of incriminating material. The Additional Director did not ask for any material before signing the warrant. No reason was given as to why the survey operations would not suffice and why it should be converted into search and seizure. There was no reason to believe from the records that if the assessee was called upon to produce any document relevant to the proceedings under the Act, the same would not be complied with. Yet, such a finding was crucial in deciding upon search and seizure. Nothing was indicated in the records to show which sub-clause of Section 132 would be attracted in the case. There was no independent application of mind.

It was also found that the books of accounts and documents belonging to Dr Nalini were retained by the Department in violation of Section 132(9A) provisions. The authorised officer was expected to handover the seized records within 15 days of seizure to the income-tax officer (ITO) having jurisdiction over the case. This was not done.

Applying the `Doctrine of Justness', the Delhi High Court ruled that Section 132(9A) provisions were mandatory and should be complied with, if not within 15 days, at least within a reasonable period of time. Retention of books can be done only with the written approval of the Commissioner.

The Delhi High Court finally pointed out that the hospital belonged to the trust and not to Dr Nalini. The authorisation to conduct the survey was issued against Dr Nalini and not against the trust. No authorisation was issued against the trust. A search invades the privacy of a citizen. It cannot be sustained unless it is clearly shown that it was done by an authority duly authorised therefor and all conditions precedent in relation thereto are complied with.

Formation of the opinion leading to the reason to believe by the authorising officer must be apparent from the records of the case. The opinion or the belief so recorded should clearly demonstrate that the case falls within any one or more clauses contained in Section 132(1). No arbitrarily power is conferred on the revenue officers. The Delhi High Court quoted the Supreme Court in CIT vs Vindhya Metal Corporation (24 ITR 614 at 618) to the effect that mere unexplained possession of the amount, without anything more, could hardly be said to constitute information which could be treated as sufficient by a reasonable person, leading to an inference that it was income which would not have been disclosed by the person in possession, for purpose of the Act.

Ultimately, the Delhi High Court categorically held that the search and seizure operations in the premises of the hospital and the residence of Dr Nalini were illegal. It also held that the Additional Director did not have any statutory power to issue search warrants.

This is an important ruling and forcefully explains the rights of the taxpayer and the obligations of the tax department in matters concerning survey, search and seizure.

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