Summary of Key Findings And Recommendations In The CAG’s Performance Audit Report On Income Tax Search And Seizure Assessments

Summary of Key Findings And Recommendations In The CAG’s Performance Audit Report On Income Tax Search And Seizure Assessments (Report No.14 of 2020)

Performance Audit Report No.14 of 2020 on Search and Seizure Assessments in Income Tax Department, Union Government, Department of Revenue – Direct Taxes by the Comptroller and Auditor General of India.

• Date on which Report Tabled: 23 September 2020
• Date of sending the report to Government: Thursday, 6 August 2020
• Government Type: Union
• Union Department Type: Direct Tax
• Sector: Taxes and Duties
• Report Type: Performance

Overview:-

Search and Seizure is a very powerful tool available with the Income Tax Department to unearth any concealed income or valuables and to check the tendencies of tax evasion thereby mitigating the generation of black money. Authority and power to conduct search and seizure operations is strident and caustic power authorized by law to be taken recourse to when the conditions mentioned under different clauses of Section 132 (1) of the Act are satisfied. The jurisdictional facts that have to be established before a search under Section 132 (1) of the Act can be authorized are that (i) the authority issuing the authorization is in possession of some credible information, other than surmises and conjectures (ii) that the authority has reason to believe that the conditions stipulated in clauses (a), (b) and (c) of Section 132 (1) qua the person searched exist; and (iii) the said information has nexus to such belief. Section 153A provides for the procedure for completion of assessment in case of a person where a search is initiated under Section 132 or books of account or other documents or any assets are requisitioned under Section 132A after 31st May 2003.

Performance Audit conducted by the Comptroller and Auditor General of India:-

The CAG of India conducted the performance audit on search and seizure assessments in Income Tax Department with the objective to examine (i) the extent of compliance with the existing provisions of the Act/Rules /Circular/Instructions in making such assessments and also to point out the systemic deficiency, if any, in these assessments; and (ii) the efforts made by the department in coordinating with other Government agencies/different wings of the department to disseminate information during the course of assessment, regarding undisclosed income detected during search and seizure operations (iii) Sustainability of additions made in assessments in search and seizure cases at the appellate stage (iv) Implementation of the recommendations made in the CAG Report No.7 of 2006. The Performance Audit (PA) covered the search assessments completed during the financial years 2014-15 to 2017-18. A total of 1417 number of Groups were assessed during the period 2014-15 to 2017-18 by different field offices under the CAG’s audit jurisdiction. Out of this audit universe sample of 185 Groups was drawn. The audit team checked 24,869 assessment records with an assessed income of 1,71,503.78 crore during the performance audit wherein they issued 1659 observations related to the absence of provisions in the Act, noncompliance to the Income Tax provisions, non-centralization of search assessees, nonuniformity in making additions, non-implementation of the recommendations given in the Appraisal Report during search assessments and non-levy of penalty, etc. having tax effect of 4150.02 crores. Besides, the audit team also analyzed the sustainability of additions made during search assessments.

Key observations of the Performance Audit Report on Income Tax Search and Seizure Assessments:-

1. The Income Tax Department did not centralize all cases in respect of certain groups for assessments due to which issues relating to the assessees pointed out in the Appraisal Report could not be addressed.

2. 76.5 percent of additions made in search assessments did not stand the test of judicial scrutiny in appeals at the level of CIT (A)/ITAT. There were cases where the sustainability of additions made in the assessment orders was nil at the appellate stage.

3. Assessing Officers did not take a uniform stand in making additions on account of bogus purchases, accommodation entries, and in the adoption of figures of assessed income/revised income. The additions were made arbitrarily either on a lump sum amount basis or different percentage ranging from five percent to 50 percent under similar circumstances without proper justification. There were cases of non-compliance with CBDT’s instructions/orders. Provisions related to levy of penalty, allowances of deductions/expenses/set off and carry forward of losses/ MAT etc. were not followed correctly.

4. There was a delay ranging from one month to 14 months in handing over of Appraisal Report along with seized material to the AO.

5. Verification of source/genuineness of the transaction pointed out in the Appraisal Report was not done and undisclosed income recommended in the Appraisal Report was not added. Coordination with other wings of ITD to resolve the issues pointed out in the Appraisal report was not there. Useful information was not shared by ITD with other government agencies/authorities or vice versa either directly or through REIC.

6. Action Notes based on comprehensive and methodical examination of the seized material, were not prepared by the AO.

7. Separate Narrative Reports were not prepared and sent to the Member (Investigations).

Para-wise findings as detailed in CAG’s performance report no.14 of 2020 are summarized herein under:-

• Audit noticed cases where there was loopholes/deficiency in the provisions of the Act in respect of search assessments. These deficiencies mainly relate to the absence of specific provisions in the Act/Rules. (Paragraph 2.4)

• Audit noticed that the department did not centralize all cases in respect of certain groups for assessments due to which issues relating to the assessees pointed out in the Appraisal Report could not be addressed. (Paragraph 2.5)

• Audit observed in respect of certain Groups that 76.5 per cent of additions made in assessments did not stand the test of judicial scrutiny in appeals at the level of CIT (A)/ITAT. We also observed cases where the sustainability of additions made in the assessment orders was nil at the appellate stage. (Paragraph 2.6)

• Audit noticed cases where AOs while finalizing the assessments, did not take a uniform stand in making additions on account of bogus purchases, accommodation entries, and in the adoption of figures of assessed income/revised income. The additions were made arbitrarily either on a lump sum amount basis or different percentage ranging from five percent to 50 percent under similar circumstances without proper justification. (Paragraph 2.7)

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