The Truth Behind IT Raids

While income tax raids are in the spotlight and maligned as vindictive actions by irked governments, the truth about IT raids is something very different. Here the author, who himself has been part of such raids spills out what really goes behind such actions....

Income tax raids are in the news these days. A Bollywood actor, producer and director’s premises have been raided. To begin with, the raids were carried out at 22 premises and then the number increased to 29 on consequential searches. As the said actor and producer director spoke on controversial issues, the income tax department has been criticised for harassing people who speak against the government. But on the other hand, the searches have been deemed as a process to dig evidence, in pursuance of income tax evasion complaints. This column is a humble effort to explain about income tax searches, without venturing into or taking any side with the reporting media, as earlier, I was privileged to be associated directly with income tax searches in Mumbai, the financial capital of the country.

DUAL JOB

The Income Tax department is a civil department and it has been given a dual responsibility of collecting evidence and then passing the order as a judge, as a quasi-judicial authority. Unlike other enforcement agencies, tax officers have no authority to arrest people. An arrest is possible in extreme cases and that too in a very limited manner, on the order of a court.

The main job of the tax department is to collect income tax from people, both individuals and corporates. For this, tax returns are filed by taxpayers. These returns are electronically processed at the Computer Processing Centre (CPC) of the department. It is the endeavour of the department to issue refunds based on the returns filed, wherever applicable, within four months of filing the returns.

In cases where there is a wide discrepancy in the figures of the income reported in the returns and the information in the possession of the department, the cases are selected for scrutiny and that too, without any human interface.

FACELESS INTERFACE

The department wants to have the least number of cases for scrutiny and normally it hovers around 0.5% of the number of returns filed. As per the legal position today, scrutiny assessments and even appeals before commissioners (appeal) and ITAT (Income Tax Tribunal) are carried out facelessly. The taxpayers and officers are not known to each other, and they may also be located in different cities.

It is an accepted and worrisome fact that our tax base is very narrow. Many people having taxable income, do not file income tax returns and many who file returns, do not pay tax correctly. The country runs on taxes collected but against a population of about 135 crores, the number of taxpayers is only 1.5 crore. The number of returns filed is more, about five crores, but most of them have no tax payment, while some are only filed for the purpose of claiming refunds. Even these number of returns will fall, with the exemption limit now hiked to Rs.5 lakhs.

TO UNEARTH UNPAID TAX

The provision of income tax raids under the Income Tax Act is the ultimate provision to unearth tax evaded income. This provision [Section 132 (1)] mandates the tax office to conduct raids against people who do not pay tax despite having taxable income or against those who hide the correct income and thus pay less than the payable tax. Searches are not conducted on guesswork or any suspicion but doable information against the tax evader.

MODUS OPERANDI

The information is collected by the officers of the investigation wing of the tax department from informants, evasion petitions or even from suo moto market enquiries. The information so collected is duly recorded in a secret folder by a Group-A officer of the IRS Cadre and then he goes about doing his own verification of the information. He has to be satisfied that the information collected is reliable and that it has been duly verified.

The satisfaction notes as prepared then go to a Commissioner level officer (Director of Income Tax Investigation) and he has to record his satisfaction as well. He may discuss with his subordinate/s who initially created the note, and even may direct them to make more enquiries discreetly and bring more prima-facie evidence on record. The satisfaction note then travels to the Director General of Investigation who is of the rank of Chief Commissioner of income tax. He also has to record satisfaction before the warrant of authorisation for the search is issued and the search is conducted.

"In cases where there is a wide discrepancy in the figures of income reported in the returns and the information in the possession of the department, the cases are selected for scrutiny and that too without any human interface"

BOTTOM UP

The beauty of this process is that the enquiry process starts from below and goes to the top, the search is not caused by a mere order from the top. The victim of the search has the legal right to go to a higher court and challenge the search process and in such a situation, the courts can call for the secret file and may look into it and examine whether the satisfaction note has been created properly. The courts while verifying the satisfaction note, however, do not show it to the petitioner of the writ petition. My experience says that courts have hardly ever rejected the search process as illegal.

To illustrate what I have said, I give my own personal experience of handling search cases in Bollywood, where I was associated as a middle level officer.

In one such case, most of the top level actors, producers and directors were covered, in total numbering about 30. There was no instruction from above about the names of the persons to be covered. The targets were identified by a young IRS officer under the supervision of middle level officers like me. The identification of targets again was not based on any objective consideration of any officer but on the accumulated complaints of tax evasion.

For each target, detailed dossiers were prepared over a span of six months. The dossiers also contained discreet enquiries conducted by me and other middle level officers to verify the correctness of the complaints and the extent of tax evasion. I remember visiting residential and office complexes of the targets under consideration incognito and even talking, as a layman, to lower functionaries present there, to satisfy myself that an innocent person is not being raided wrongly. Searches took place after verifying the correctness of complaints. Search teams went to about 80 places connected with the targeted persons. There was big media coverage.

I remember as a young officer, I used to get complaints from disgruntled employees, from business rivals, from fighting partners and sometimes even suspecting wives and relatives. As a normal practice of the department, I never encouraged the complaints and most of the complaints were not considered and appropriate reasons were given for that. Searches took place only when prima facie evidences were given on tax evasion, and the quantum of evasion was large.

HIT EVASION, NOT A PERSON

It has to be underlined that the policy of the department is only to hit tax evasion and not to hit the reputation of the targeted person. This is the reason that the departments follow the practice of not giving press releases naming the person except in certain cases, where certain situations arise. The seizure is reported along with the confessional admission, but the details of ongoing enquiries based on documents seized are normally not given.

The Income Tax department is a big department with about 6000 IRS officers on its cadre, which is almost at par with the IAS or IPS cadre. Considering the total number of employees, the income tax department has manpower of almost 7.50 lakh. The atmosphere in the department is very positive and democratic. Even subordinates have the right to express their views without fear while disagreeing with seniors. In such a situation, it is not possible to give an order from the top to conduct a search against a person. The search takes place based on established working procedures.

I remember the case of a big celebrity against whom I was investigating and had collected some damaging evidence. My very senior boss called me to go slow and soft as he was under pressure. I politely told him that I could not deviate and that if he was too much under pressure, then I could even be transferred out. At the same time, I requested him to keep away from the case. He appreciated my stand and nothing happened to me and I passed the order, which was valid in view of the evidence collected.

NATION BUILDING

The Income Tax department earns funds to run the country. Searches conducted by it are done to unearth unpaid tax. It is highly desirable that the credibility of search actions is not tarnished. Search actions are carried out by officers who are not linked with any political ideology. There is a risk of losing tax revenue if our people have no faith in the tax department. It is necessary that there remains some fear of tax raids as they have a demonstrative effect on tax evaders. Honest taxpayers have nothing to fear, as tax raids are conducted only against tax evaders.

The tax department follows the principle enunciated by Kautilya that taxes should be collected like bees gathering honey from the flowers, without causing any pain. Tax raids are a digression from the established protocol of the department and they are directed only at evaders.