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T. N. Pandey

T. N. Pandey on the beneficial changes to the search regime

THE common refrain of taxpayers who are subjected to search by the income-tax (I-T) department is that they are forced to make surrenders, even when the department does not find any incriminating evidence, documents or undisclosed income/assets merely to show that the search exercise was successfully initiated. Due notice was taken of this practice by the Kelkar Task Force in para 3.27 of its report:

"A cross-section of people, cutting across trade and industry, complained of a highhanded behaviour of raiding parties, particularly while recording a statement. It was pointed out that overenthusiastic raiding parties would often coerce a `surrender'. As a result all follow-up investigations are distracted and generally brought to a standstill. Since, the surrender is not backed by adequate evidence, the tax-evader invariably retracts from the statement of surrender, by which time it is too late for the department to resume investigations. Similarly, where adequate evidence is indeed found, a surrender is not necessary to establish tax evasion. Therefore, the Task Force recommends that the Central Board of Direct Taxes issue immediate instructions to the effect that no raiding party should obtain any surrender whatsoever. Where a taxpayer desires to voluntarily make a disclosure, he should be advised to make so after the search. As a result, the taxpayer will not be able to allege coercion and successfully distract investigations. All cases where surrender is obtained during the course of the search in violation of the instructions of the CBDT, the leader of the raiding party should be subjected to vigilance enquiry. Further, the Task Force also recommends that all statements recorded during the search should be video recorded. This will, indeed add to the confidence of the taxpayer in the impartiality of the system."

Such surrenders in statements, obtained generally by coercion during search proceedings, merely proliferate litigation and do not absolve the department from proving its case when there is retraction from the statements made during the course of assessment proceedings. The Supreme Court, in Pullangode Rubber Produce Co. Ltd vs State of Kerala (1973 91 ITR 18), held that retraction from admission was permissible in law. It was open to the assessee who makes the admission to show that it was incorrect. A similar view was taken by Punjab & Haryana High Court in the Krishan Lal Shiv Chand Rai vs CIT (1973 88 ITR 293) case.

The Supreme Court, in Pangambam Kalanjoy Singh vs State of Manipur (AIR 1956 SC 9), held that the confession, even if inculpatory, should be corroborated if retracted. The corroboration has obviously to be done on the basis of independent evidence.

In Palani Swami vs State of Tamil Nadu (AIR 1956 SC 593), it is held that where circumstances caste suspicion on the genuineness of confession, corroboration is necessary.

It is, no doubt, true that an admission is the best evidence — against one who makes it, but any addition made to the income merely on the basis of such admission, without any corroborating or supporting evidence, would not be sustainable. There is every likelihood that such an admission, confession or surrender is made under pressure or in a disturbed state of mind caused by the search operations.

In such circumstances, it would be open to the assessee to retract therefrom. Once a retraction takes place, a heavier burden lies on the department to establish that the confession, admission or surrender was correct and that the retraction is as a result of an after-thought or a subsequent advice received by the assessee and that the department has incriminating material seized during the course of search to corroborate the admission or confession or surrender.

The prevalent position is that where after spending considerable time and efforts in search operations, nothing incriminating is found, the taxpayer in concluding hours is told that he must surrender something otherwise he will have to face the consequence of umpteen visits to the IT offices and can be harassed in various other ways. On persuasion and pressure from the search party or to ward off further trouble of search being continued, surrender of certain amounts on some grounds without any firm basis to support it is obtained.

In many cases after the search, the assessees retract and state that there is no question of any concealment of income or surrender thereof because the department did not find any material to show the existence of any concealed income even after a thorough search and the surrender was made in a disturbed state of mind, and so on. Obviously, no addition to income would be possible in the face of a retracted admission of this kind made during search proceedings.

The Bombay High Court, in Madras Bangalore Transport Co. vs CIT (1991 190 ITR 679), said that if documents are found to show that income is earned, invested or enjoyed without having been disclosed in the regular books of account or in the return of income and the documents and/or undisclosed assets found during the course of search, prima facie demonstrate the existence of concealed income. The surrender would get corroborated and even if the assessee tries to retract therefrom, the Department would be in a position to establish the concealment independently and the admission made during the search proceedings would be additional evidence against the assessee. But if nothing is there with the tax department to support the so-called surrendered income, the assessment made cannot be sustained.

Thus, the legal position that emerges in regard to making of statements during the course of searches, admitting certain sums as concealed income and surrendering the same for tax purposes, is that additions to income and initiation of penalty proceedings for concealment on such statements retracted subsequently cannot be sustained only on the basis of admissions made unless these are otherwise fully corroborated by documents, record and other evidence found at the time of search. However, the departmental practice proliferated litigation substantially.

The practice of forcing persons searched to make statements surrendering certain sums as undisclosed incomes was highly objectionable. If concealment is found, it needs to be proved on the basis of evidence unearthed as a result of search — not taking the easy route of forcing a person to admit by coercion about concealment.

It is heartening to note that during the course of Budget exercise for 2003, due note was taken of this pernicious practice and it has been decided to put an end to it. In Para 151 of the Budget speech, dealing with administrative reforms, the Finance Minister has said that "no confession shall be obtained during search and seizure operation". Detailed instruction from the CBDT for implementing this measure can be expected soon.

Other favourable decisions concerning search cases are:

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