The Hindu Business Line : Search and relief from penalty

Search by the officials of the tax department could be a traumatic experience for any taxpayer. It is an invasion into the privacy of an individual and it is resorted to by the tax administration to detect the undisclosed income or wealth.

To prevent misuse of the privilege of invading the privacy of a person, the power to authorise search is vested with reasonably higher officials in the hierarchy of tax administration. Hence, before authorising a search, it becomes incumbent on the part of the officials to be doubly sure that there is concealment of income or wealth chargeable to tax and the case is fit for search and, if necessary, seizure of valuables and documents.

Statement at the time of search

Section 132(4) empowers the authorised officer to examine on oath, any person who is in possession or control of assets or documents. A statement would be recorded and would be used as evidence for completing the search assessment.

After completion of search assessment, which in most cases would include assessment of concealed income or wealth of the taxpayer, the relevant penal provisions would be activated.

Section 271(1)(c) provides for levy of penalty for concealment of income. The minimum penalty is equal to the amount of tax sought to be evaded and the maximum is three times the amount of tax sought to be evaded.

A taxpayer while giving the statement at the time of search could avoid concealment penalty if the following conditions contained in Explanation 5 to Section 271 are satisfied:

Admits money or wealth found at the time of search as acquired out of income of the previous year;

The ‘due date’ for filing the return of income had not expired for the previous year in which the income was earned; and

Specifies the manner in which the income was derived for acquiring the wealth or the money found at the time of search.

Conditions for relief

In CIT vs Mahendra C. Shah (2008 172 Taxman 58 Gujarat) the assessee gave a statement at the time of search and the statement recorded under Section 132(4) however did not contain the manner in which such income was earned by him. The third condition of the Explanation was not satisfied.

The court held that the assessee having admitted the income as relating to the previous year for which the ‘due date’ for filing the return had not expired and since the tax was also paid subsequently, no penalty could be levied.

The court held that the statement at the time of search is recorded in the form of questions and answers and there would be no occasion for the taxpayer to state in the exact format of the legal provisions for enjoying immunity from penalty.

It made reference to the decision in the CIT vs Radha Kishan Goel (2005 278 ITR 454 Allahabad) case and held that even if the statement at the time of search does not specify the manner in which the income was derived, if the taxpayer had declared the income so admitted and paid tax thereon, there is substantial compliance of law. Accordingly, the taxpayer is eligible for relief from penalty.

(The author is an Erode-based chartered accountant. blfeedback@thehindu.co.in)