India, US systems of ‘search & seizure'

G. KARTHIKEYAN | Updated on: May 25, 2012

Assets acquired as a result of gift or a will should be supported by proper certificates.

A visiting American certified public accountant (CPA) from Florida, while on a local Indian flight, met a Commissioner of Income Tax.

Their conversation veered to this topic of mutual interest: The commissioner's poser to the American CPA was regarding the search and seizure provisions under Income Tax regulations in the US.

The CPA was surprised to hear about the concept of search and seizure which is known to US taxpayers but is part of a criminal investigation and conducted a little differently.

Done with care and secrecy

In India, the “Income tax raid” sends jitters down the spine and makes the high income group dread tax authorities. Technically called a “Search & Seizure”, it is a plan of action devised by Tax officials with care and secrecy based on authentic information rather than rumour and gossip.

If the tax officials firmly believe that a person is in possession of money, jewellery or undisclosed assets that would necessitate a search operation, they may issue a search warrant after confirming the veracity of information.

It may be noted that merely living in posh houses or conducting lavish marriages or an expensive lifestyle may not be the basis for a search, “information” is the essential factor.

While the operations invade the privacy and freedom of the tax payer, they are exercised under statutory requirements and principles of natural justice.

During the course of the search, the taxpayer's rights include examining the search warrant, having two or more respectable citizens as witnesses, verifying the identity of the search officials, allowing children to attend school, calling a doctor for any emergency, having a copy of panchanama which is the first list of evidence and findings, and copies of the seized books of account, data and documents.

However, these rights do not include the right to call the auditor during the course of search or attend any phone calls.

The tax officials are authorised to seize any unaccounted cash, bullion, gold, USB drives, digital cameras or any other documents or assets but they cannot seize any stock-in-trade of the business.

As far as jewellery goes, especially gold ornaments, the allowances are 500 gm per married lady, 250 gm per unmarried lady and 100 gm per male member of the family. Anything within these allowed limits shall not be seized.

It would be a better practice for high net worth individuals to make separate files for each family member that specifies the details of assets held and income earned, followed by a balance sheet for each financial year, along with the receipts and sources for acquisition of assets.

Assets acquired as a result of gift or a will should be supported by proper certificates. The details of various bank accounts and lockers held should also be mentioned in the file.

Levels of investigation

During the course of the conversation, the commissioner explained to the CPA that most of the search operations yield more than the expected disclosure of income and hence one cannot claim the search provision as it operates in India is vindictive, prejudicial or baseless.

The CPA, in turn, explained that though there may be a wider search provision in developed nations including the US, these are criminal investigations with worse effects.

Criminal investigations can be initiated when the IRS suspects fraud or money laundering. Special agents analyse the information to determine if criminal tax fraud or other financial irregularities have taken place. This is a primary investigation.

The preliminary information obtained is reviewed to determine further development requirements and if necessary permission is obtained to initiate a “criminal investigation”.

Once an investigation begins, various techniques are used to obtain evidence, such as interviewing third party witnesses, conducting surveillance, executing search warrants, subpoenaing bank records and reviewing financial data.

If evidence indicates criminal activity, the special agent then recommends prosecution via a written report. It is pertinent to note that about 3,000 criminal prosecutions are initiated per year which has a deterrent effect.

One of the principal points of difference between the Indian and US systems is that any search is authorised by the Judicial Magistrate in the US while this right is vested with the Income Tax Department in India.

It should also be noted that the general public in developed nations are convinced that the tax paid comes back to them in the form of welfare measures without a major leakage in the system but the same cannot be guaranteed in developing nations such as India.

Tracing the source of various assets held by taxpayers requires months of focused investigation. Developing nations do not have the resources to set up a tracking system that would automatically catch a leakage and raise a flag.

Einstein summed it up succinctly when he said that “the hardest thing in the world to understand is income tax” — this from the man who came up with the Theory of Relativity.

Yes, taxes are hard to understand from a layman's point of view but following a simple system of recording and tracking income sources and assets will ensure that taxes are filed correctly and taxpayers not subjected to seizures — of hard earned assets or of the physical stress-induced kind.

(The author is a Coimbatore-based chartered accountant)

Published on May 25, 2012
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