The recent initiative of the CBDT to introduce grievance redress system with regard to survey is a welcome step. Survey under the income-tax law is a measure adopted by the Revenue to gather information for proper and correct assessment of income liable to tax.

So far, tax officers have to take the prior approval of the Joint Commissioner before embarking on survey. Now taxpayers are to be given details of the survey team and the controlling authority which would bring better transparency and prevent possible abuse of powers.

The end-result or outcome of a survey is less serious than search. In the case of search, the privacy of the taxpayer could be disturbed in the process of unearthing the unaccounted income or assets.

A survey could be converted into search based on the gravity of situation and a search, due to pre-search spadework, might never be downgraded into a survey.

Why a survey

Reasons prompting a survey include (i) verification of the actual state of affairs vis a vis the return filed by the taxpayer, more particularly in respect of persons engaged in business or profession; (ii) detecting and taxing any transaction which may go unnoticed by efflux of time; (iii) to observe, estimate and obtain a statement with regard to expenditure such as ostentatious marriage, social celebrations etc; (iv) cross verification of any statement made by any other taxpayer elsewhere which may have a bearing on the party surveyed or the said third party; and (v) verifying tax deductible at source, actual deductions made and remittance to the exchequer.

Tax survey exercise is not supposed to dislocate the regular business activities of the taxpayer. However, the taxpayer or any person who is in control of the premises subjected to survey must afford necessary facility to the survey team for inspecting books of account and other documents and for verification of cash, stock or other valuable articles or things. The survey team could also seek information as may be required with regard to any matter which may be useful or relevant in tax assessment.

The statement recorded is not binding on the taxpayer and he is at liberty to retract the same since it does not possess any evidentiary value. [CIT v.S.Khader Khan Son (2008) 300 ITR 157 (Mad) and CIT v. Dhingra Metal Works (2011) 196 Taxman 488 (Del)].

The direct consequence of survey is the taxpayer admitting certain amount or effect of certain transactions as income liable to tax.

The transactions may relate to the financial year in which the survey is made or any preceding year. Where exact identification or nexus of transaction to a particular year is possible, there would be no difficulty in assessment of the same as income of that year. In the case of any uncertainty with regard to the year to which the detected income relates, it is taxed on the strength of evidences available.

Stock statements

It is more often than not, that the survey team visiting business premises inspects the books of account and detects excess stock, undisclosed or understated investments, which are chargeable to tax.

Any excess stock on detection might inflate the profit of the year of detection and would deflate the income of the subsequent year when it is taken as opening stock of that year (CIT v. Ahmedabad Mills 4 ITC 245 (PC)).

Stock statement given to banks and financial institutions could be compared with the stock disclosed in the books of account and the excess reported to lending institutions might be subjected to tax as undisclosed income of the taxpayer.

However, the stock statement given to lending institutions might be on market rate and could be an approximate list of values and in the absence of definite evidence such differential stock could not be subjected to tax. [CIT v. Sri Padmavathy Cotton Mills (1999) 236 ITR 340 (Mad) and CIT v. N.Swamy (2000) 241 ITR 363 (Mad)].

Assessment post-survey was a discomfort to the taxpayers because of mandatory scrutiny assessment which was given a go-by some four years ago by exempting such cases from scrutiny subject to the rider that the taxpayer had admitted income in the return matching with his admission made at the time of survey.

The recent introduction of a pro forma being submitted by the survey team to Commissioner of Income-tax with necessary details about survey would provide definiteness with regard to detection by revenue vis-a -vis admission if any, by the taxpayer.

Clarity needed

Clarity is needed relating to the assessment year in which any additional income admitted in survey is chargeable to tax.

Any admission in survey made before the expiry of ‘due date' for filing return must be mandated for inclusion/admission as income of the preceding financial year.

Similarly, any such admission on survey made after the ‘due date' for filing the return, must be treated as income of the financial year of survey, in which case the need for filing revised return for the preceding years would not arise.

(The author is an Erode-based chartered accountant.)

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