Very few things are as traumatic as the taxman’s knock on the taxpayer’s door. Usually the ‘strike time’ is earlier than the milkman and newspaper boy. At that hour, the household is just stirring into wakefulness. The children are being woken up, the servant has tea on the boil, the residents are still in their nightdress, many of them still asleep.
Into this domestic idyll, swoop a swarm of taxmen and their police escort, making their way, going from room to room, waking up the unsuspecting who are relishing their last bit of sleep, hustling them to the drawing room, locking all the rooms. These would later be scanned with a fine toothed comb.
Even the most hardened tax evader, who knows that eventually he may play host to the tax team and thinks he is mentally prepared, gets a brutal shock. But most evaders are not hardened, and the experience can be life-changing. The hours and days that follow the dawn attack see the tax team go through the entire house, room by room, cupboard by cupboard, suitcase by suitcase; nothing is off-limits.
At the Expense of Inconvenience to Taxpayer
When keys are not available, the locks are broken open. The aim is to ferret out unaccounted cash, jewellery, investments, duplicate books, incriminating documents – anything that can prove tax evasion. All this happens in the presence of two witnesses from the neighbourhood – itself a source of great embarrassment to the parties when secrets begin to tumble out. A preliminary statement is recorded at the beginning of the raid and a final one at the end of it to confront the taxpayer with valuables and documents recovered. The search can last from a day to several days.
Children can go to school after their satchels are thoroughly examined. No lawyers or chartered accountants are allowed inside. The person raided is pretty much all by himself. The unaccounted assets and books are seized and taken away. The damage to reputation is immense especially when nothing incriminating has been found. By now you would get the basic drift of what’s going on both in the house and in the mind of the unwitting host to the unwelcome posse!
While the experience is earth-shattering to both the industrialist and the common taxpayer, it is no less unpleasant to the tax officers. But it’s the call of duty and they manfully carry it out as humanely as possible.
Because a raid involves the ultimate invasion of privacy, it is the last resort adopted by the tax department. Raids are usually, or at least should be, based on definite and reliable information based on which the tax department has reason to believe that the taxpayer has undeclared income.
Source of Information Behind a Tax Raid
Information usually comes from three different sources.
The primary source is ‘professional’ informers. The motivation is purely financial – the department rewards them a percentage of tax payable on unaccounted income. They tend to exaggerate, if not give outright false information; their information is short on facts and long on verbiage. Basically, they collect information based on heresy, rumour and general reputation.
The second source is a person who has intimate knowledge of the taxpayer’s dealings, say an ex-wife, or former manager or accountant, a business rival, and such like. The information is generally credible but there are chances of contamination because it is usually motivated by revenge.
The third source is the department’s own intelligence garnered by trawling through tax returns and information received from banks, market funds, property registrations, Financial Intelligence Unit, Serious Fraud Investigation Unit, and other agencies and finding a mismatch between income and expenditure. The information is very reliable as the recent raids during the demonetisation have shown. The raids were highly successful and served as a deterrent to other potential wrongdoers.
Most raids are based on the third source. This contrasts with the scenario that existed few years ago where the primary source used to be the professional informer, though this institution remains, albeit to a lesser extent, in smaller towns.
Coerced into ‘Surrendering’ Unaccounted Income
After receiving the information, the investigation officer carries out his own discreet enquiries to verify it – checking tax returns, cross-checking it with information received from other agencies and details available in the public domain. He also carries out a reconnaissance of the residences, offices, factories, warehouses, godowns and office branches. Secrecy is of paramount importance.
The investigation officer writes a ‘satisfaction note’ stating that, based on the information provided and his independent investigations, he has reason to believe that the taxpayer has unaccounted income, and gets it approved by his seniors right up the food chain.
If things do not go as per plan (especially in raids based on professional informers), there is a huge pressure to show a successful search and there is a tendency to seize assets, even if explained, on flimsy grounds. The most common stratagem is to force the taxpayer to ‘surrender’ income as unexplained even though there are government instructions against it.
Usually, such ‘surrender’ doesn’t represent any unaccounted income but is given out of fear to escape harassment and ‘buy peace’. Later, many such ‘surrenders’ are withdrawn as having been given out of coercion and undue influence.
That’s why the ‘satisfaction note’ is a critical document – containing the information, the source, the investigations carried out by the investigation officer, and its link to the reason arrived at by him as to the existence of unaccounted income. It is the foundation on which rests the initiation of the raid and the consequent raid assessment order.
Jurisdiction of the Income Tax Tribunal
Till now, some courts had held that the Income Tax Tribunal, which is an appellate body, had the jurisdiction to see whether the raid was valid and legal and that all conditions which were a pre-requisite for initiating a raid had been satisfied. It could examine the ‘satisfaction note’ and verify whether the facts mentioned were relevant, or whether the inference drawn was correct. If not, the Tribunal had the power to annul the raid assessment order.
Of course, the taxpayer could also move the High Court to file a writ. But the legal recourse is rarely taken. Not all assessees can pay the high costs involved or withstand the delays that ordinarily take place. Having an appellate body within the tax ecosystem, such as the Tribunal, was the most efficacious, time-saving and economical method of seeking justice.
The Tribunal, being the highest fact-finding authority, was rightly given the power by some courts to decide on the validity of the raid, which was a factual matter. Some courts, however, held otherwise. Because of conflicting judgements, the matter is before the Supreme Court.
Legal Validity of Raid
However, that is all moot now because the government in the recent budget has amended the relevant provisions retrospectively from the very inception of the tax act in 1962 clearly violating the promise made two years earlier that there would be no retrospective amendments.
The amendment has been made to sub-sections (1) and (1A) of Section 132 of the IT Act which says that tax authorities will not have to disclose "to any person or any authority or the Appellate Tribunal" why it has ‘reason to believe’ or ‘reason to suspect’ that an assessee is concealing assets.
The explanatory memorandum to the Finance Bill explains the rationale: “Certain judicial pronouncements have created ambiguity in respect of the disclosure of 'reason to believe' or 'reason to suspect' recorded by the income tax authority to conduct a search”.
So, the Tribunal has been barred from considering the validity of a raid, and the only recourse left to the taxpayer is the costly and time-consuming litigation in the High Court.
Amendment to IT Act Deals a Blow to Transparency
The amendment is a retrograde step. Transparency has been badly hit and while other activities of the tax department have seen a remarkable improvement in openness and moved to a process-driven system, this amendment raises the spectre of unbridled power to the tax sleuths without any accountability. A rumour, canard, whim or suspicion will now be sufficient to conduct a raid. The checks and balances in the form of disclosure of the ‘satisfaction note’ necessitating the raid have disappeared. Fishing expeditions could now become the norm.
If the tax department has solid information, and can stand by it, surely it should not have any qualms about revealing it to the Tribunal. This can only enhance the trust and respect for the tax department. After all, when the tax officer re-opens an assessment order, the reasons are communicated to the assessee.
Over the years, several courts have held that a raid amounts to a serious invasion into the privacy of a citizen. The budget has just made such an invasion that much easier. This is nothing but turning ‘less government, more governance’ on its head. The neighbour who is a witness in the raid proceedings this morning, may find the shoe on the other foot and get the morning knock the next week!
( Ajay Mankotia is a former IRS officer presently working in a media company. This is a personal blog and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)
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