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Saturday, Nov 30, 2002

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Opinion - Taxation

Seized of the matter

T. C. A. Ramanujam

The Kelkar Task Force has looked at enforcement from a right perspective, says T. C. A. Ramanujam

THE more agreeable part of the Kelkar report relates to the recommendations concerning the enforcements aspects of the tax law. The power to search and seize is the ultimate weapon to detect unreported or under-reported incomes. A search to be successful must take the errant taxpayer by surprise. Normally, transactions detected during a search cover a length of time spreading over several years. Problems arise in correlating the concealed income with the particular accounting year to which it relates. A simple solution to this problem was found with the insertion of Chapter IV B in the Income-Tax Act, under which, a block assessment is made for a period covering six years prior to the date of search. Chapter IV B introduced concepts such as block assessments, undisclosed income, and so on, and courts have been trying to interpret and understand the meanings intended for these terms.

The 1995 amendment had proposed a flat levy of 60 per cent on undisclosed income deducted as a result of search. The original amendment did not visualise the levy of penalties and prosecution. The law was subsequently altered to provide for penalties under certain contingences. Chapter IV B has come under criticism on the ground that the errant taxpayer is often given a more liberal treatment than an ordinary assessee who has to shell out a heavy mandatory interest on completion of the assessment.

It can often happen that the ultimate levy on such an assessee, inclusive of interest and penalties, can be much more than the incomes, as is known from certain proceedings reported from High Courts . But an assessee who has been searched can get away by paying a flat tax of 60 per cent.

The Kelkar panel has understood the issue in the right perspective. It has observed thus:

"Search and seizure cannot be a way of life for any civilized society. Search and seizure should be used in the rarest of rare cases, when it is a must and where alternative measures of investigation have failed. And once it is used, it should have its full impact as a deterrent. The tax-evader will suffer the penal consequences of interest, penalty and prosecution in respect of the concealed income detected as the result of the search."

The panel has recommended the omission of the special procedure for assessement of search cases in Chapter IV B. It has also suggested the restriction of the power of the Settlement Commission to grant immunity from interest, penalty and prosecution to cases other than those where the assessee admits of tax evasion consequent to search. A practical suggestion from the panel is that stocks should not be seized so as to disrupt the manufacturing activity, except in exceptional cases. Even where stocks are seized, the same should be released within seven days. These are wholesome recommendations and should be readily implemented.

The panel has come down heavily on the way search assessments are made on the basis of confessions obtained in the aftermath of the raid. These confessions are later on retracted. It has referred to appraisal reports prepared by the officer-in-charge of the raid without any accountability for what he says or omits to say in the report. This report forms the basis for search assessments. The assessing officer (AO) does not independently investigate the case. The additions are knocked off in no time since the assessment did not stand the test of judicial scrutiny in appeals. Overall, the contribution of search cases to total revenue collection is less than 1 per cent. The panel has doubted the deterrence effect of a search. Search and seizure has become a substitute for all investigations and are considered an end in itself. It has become a routine exercise. The panel has castigated the system of rewarding officers who make search assessments. The public often associate the I-T Department with raids. Search is the most visible enforcement activity.

Search activity is blown up in the press, and gives publicity to the officers concerned. The objective of ascertaining facts and collecting evidence of concealed income is lost. As carried out at present, searches generally do not result in the detection of tax evasion.

Strong words, indeed, from a panel of experts. The Department has only itself to blame for this severe indictment. It has never occurred to the specialists in the investigation cell all these seven years that Chapter IV B is flawed. It diverts the attention from real investigation by giving catchy definitions of block assessments and undisclosed incomes.

The omission of Chapter IV B will restore the pre-1995 situation. The Panel's advice to limit search action to the rarest of rare cases has to be heeded. There should be no publicity to a search until the matter reaches finality.

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