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Presumptions under surveys and searches
May, 10th 2008

The law provides that books of accounts, documents, money, etc., found in the possession or control of the person concerned in the course of a search may be presumed to belong to the person who was searched.

The power to search the premises of a taxpayer is a power to invade the privacy of the person concerned. The income-tax department is armed with this power so as to help unearth black money. It is not always the case that the department comes across unaccounted cash or bullion. Even if such cash/bullion is spotted, proof is necessary to show that the same belongs to the person being searched and represents the unaccounted part of the income.

To strengthen the hands of the department, the law provides that books of accounts, documents, money, etc., found in the possession or control of the person concerned in the course of a search may, in any proceedings under the I-T Act, be presumed to belong to the person who was searched.

There is also a presumption that the contents of such books of accounts and other documents are true and that the signature and every other part of such books of accounts and documents may be reasonably presumed to have been signed by that particular person.

This presumption is provided for under Section 292C of the I-T Act, 1961. This was inserted in the Act in 2007 taking retrospective effect from October 1, 1975. The newly inserted Section 292C clarified that presumptions provided under Section 132 (4A) of the Act can be made in respect of any proceedings under the Act.

Extreme power

The power of search is an extreme power. The income-tax officer (ITO) can impound the books of accounts or other documents inspected by him. He can also record a statement from the person concerned.

The question that has often arisen is whether the evidence spotted during a survey can be made use of in search assessments. In the CIT vs Ajit Kumar (300 ITR 152) case, the office and residential premises of cine actor Ajit Kumar were searched in August 2002. The I-T department thought that there was understatement of cost of construction of his building in Thiruvanmiyur, Chennai.

The premises of the builder was surveyed simultaneously. It was found that the actor had paid Rs 95.16 lakh in cash without accounting for the same.

This evidence was recovered from the survey at the premises of the builder. Attempts were made by the I-T department to add this amount in the assessment of the actor.

The Madras High Court ruled that material found in the course of the survey in the premises of the builder could not be used in the search assessment of Ajit Kumar. The actor won the case.

The Madras High Court elaborated further on this matter in CIT vs Khader Khanson (300 ITR 157). In this case, during a survey under Section 133A of the Act, the assessee offered additional income of Rs 50 lakh for assessment through a letter signed by one partner of the firm.

Later on, the firm retracted the statement pleading that the partner concerned knew nothing about the business and that his statement can have no evidentiary value. Here again, the Madras High Court held that the power under Section 133A is different from that under Section 132. The leading case on this subject is PR Metrani vs CIT 287 ITR 209 SC). The Supreme Court pointed out that Section 132 is a complete code in itself and cannot intrude into any other provision of the Act. Similarly, other provisions of the Act cannot interfere with the scheme or the working of Section 132. The law did not provide that the presumption under Section 132(4A) would be available while framing the regular assessment or for that matter any other proceedings under the Act except under Section 278D.

Now Section 292C has been introduced obviously to bring into focus the very same presumption under Section 132(4A) into proceedings under Section 133A and other proceedings. The amendment tries to annul established law of evidence regarding presumptions. It obliterates the distinction between survey operations and search proceedings.

Even the Kerala High Court has ruled that statements recorded under Section 133A cannot be given evidentiary value (Paul Mathews and Sons vs CIT 263 ITR 101).

The court appreciated the stand taken by the assessee before it that statement during the survey with reference to any books of accounts can hardly be the basis for any assessment. No power is conferred on the assessing officer to examine any person on oath under Section 133A.

The amendment made by Finance Bill, 2008 attempts to set at naught all the above rulings.

T. C. A. Ramanujam
(The author is a former Chief Commissioner of Income-Tax.)

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