The Hindu Business Line : Hasty conclusions, futile results

The power to search is the ultimate power vested in the income-tax authority. It is meant to be used sparingly and effectively in important cases. Officers entrusted with the task of processing search and seizure cases are expected to be ace investigators.

Recent experience with the way search cases are handled show a woeful inadequacy in investigation techniques.

Jottings in diary

Take the case of Maulikumar Shah, a developer in Gujarat. The income-tax department searched his premises and recovered a diary indicating shop-wise and floor-wise area and rates for selling the building complex.

For the assessment year (AY) 1995-96, Shah credited the rates of those shops at Rs 425 per sq.ft for first floor Rs 375 per sq.ft for second floor, Rs 325 for the third floor and Rs 800 for the ground floor.

The books of accounts maintained for tax purposes showed a different set of figures. The assessing officer (AO) came to the conclusion that the seized papers showed receipt of “on-money”. Shaw denied having received “on-money”.

The seized diary with the notings was the only record the assessing officer had to conclude that sales were made and “on-money” was received outside the books of accounts. He calculated “on-money” on the basis of rates mentioned in the seized papers and added a large sum to the income returned.

The matter was taken in appeal to the High Court by the Revenue. The controversy raised before the court was whether there should be addition on the basis of amount mentioned on loose papers along with rates per sq.ft of different floors.

The court pointed out (in 307 ITR 137) that the AO had not brought any corroborative material on record to prove receipt of “on-money” outside the books of accounts. He did not examine any purchaser to whom sales of shops were affected.

Onus on taxman

The onus heavily lay on the Revenue to prove with corroborative evidence that the entries in the seized diary actually represented sales made by the assessee. Such onus was not discharged by the Revenue.

Mere entries in the seized material are not sufficient to prove that the assessee had indulged in such a transaction. If certain documents are found in the possession of the assessee during the course of search operations, the burden lies on the assessee to explain the nature of transactions recorded in the seized material.

The assessee is duty-bound to explain discrepancy, if any, between the seized material and books of accounts. If the assessee offers an explanation, the Revenue must establish that such explanation was false. The Revenue must establish the date of transaction, the nature of the entries in the seized papers and the relevance to the determination of income.

There should be evidence to corroborate receipt of “on-money”. In the absence of such evidence, any conclusion against the assessee will only represent suspicion and surmises. While it is true that the apparent must be considered real until it is shown to be otherwise, the surrounding circumstances must be looked into to find out the truth in the matter.

The Gujarat High Court dismissed the Revenue’s appeal on the ground that the addition was made by the AO on mere presumptions and assumptions and without any corroborative evidence.

The court accepted the explanation given by Shah to the effect that the amount mentioned along with rates per sq.ft on loose papers was in respect of an estimate asking for loans from banks.

Repeatedly, the court pointed out that no other evidence was shown by the Revenue to justify that “on-money” was received from purchasers. No addition can be made merely on the basis of loose papers found in search.

This is not the first time that the High Court frowned upon flimsy additions made in search cases on the basis of hasty conclusion drawn from notings and jottings in seized papers.

Powers under Chapter XIV-B are not meant to be exercised in a mechanical manner. Reference may be made to similar cases (in 304 ITR 378, 304 ITR 393 and 300 ITR 98).

Training in investigation

Seldom does a search and seizure assessment stand the scrutiny of appeal before High Courts. AOs jump to conclusions on seeing loose sheets and diaries. They have no patience to follow up the leads in seized papers and probe the matter further.

Three decade back, the Central Board of Direct Taxes (CBDT) brought out special volumes of Baghd They’s Investigation Techniques for the guidance of tax officials. It was a monumental effort by a reputed investigator of yesteryear.

The revenue officials must be given a crash course on investigation techniques. Law reports are full of cases where huge additions are knocked of for want of corroborative evidence. The Department should wake up to the reality and start serious investigation in big cases.

(The author is a former Chief Commissioner of Income-Tax. blfeedback@thehindu.co.in)