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Power to issue summons u/s.131(1A) — A controversy

Subject : Income Tax Law
Month-Year : Jun 2001
Author/s : Bharat Agarwal
Ritika Garg

Chartered Accountants
Topic : Power to issue summons u/s.131(1A) — A controversy
Article Details :

Introduction :

Ever since the enactment of the original Income-tax statute of 1922, the Income-tax authorities have been vested with certain powers that are coterminous with the powers of a Court under the Code of Civil Procedure, 1908. S. 131 of the Income-tax Act, 1961 is one such provision which includes, inter alia, the power to ‘enforce the attendance of any person and examine him on oath.’

The justification or rationale for these powers, depending on the reader’s point of view, is amply supported by the well-settled and pervasive judicial principle of ‘audi alterem partem,’ (no one be condemned unheard) in spite of the equally well-settled principle that ‘nobody can be compelled to render evidence against himself’.

The powers u/s.131(1) are exercised for the proper administration of tax laws and for obtaining further elucidation, on information available with the authorities, from the as-sessee concerned. It enables the authorities to conduct inquiry and collect evidences in support of their contentions. It also helps to bring to light the correct facts and circumstances, for the purpose of carrying out proceedings under the Act and is treated to be equally fair to the Depart-ment as well as the assessee.


Insertion of Ss.1(A) :

S. 131(1A) was introduced with effect from 1-10-1975 to empower the Asstt. Director of Inspection, now amended to include officers authorised to carry out search operations (i.e ‘authorised of-ficers’), to exercise the powers mentioned in the S. 131(1).

The said provision was introduced to nullify the effect of the ruling of the Calcutta High Court in the case of UoI v. Gopal Das Gupta, (1974 Tax LR 656) wherein the Court held that the Director of Inspection had no power to issue a notice u/s.131 and record a statement of the person under the said Section as the same was avail-able to the assessing officer.

This practical difficulty was explained by the Departmental Circular No. 551 dated 23-1-1990 which was issued to explain the scope and effect of the amend-ment in the following words :

". . . difficulty felt was that an authorised officer could record a statement on oath only during the course of search under the provisions of S. 132(4). Sometimes it becomes necessary to record a preliminary statement before the commencement of search for proper investigation. This was not possible as the Courts had held that such a preliminary statement before the search could not be re-corded under the provisions of S. 132(4) . . ."

To overcome these difficulties, the Amending Act, 1987 has amended the said Ss.(1A) to extend similar powers to an ‘authorised officer’ within the meaning of Ss.(1) of S. 132 before he takes search and seizure action under clauses (i) to (v) of that sub-section.


S. 131(1) and S. 131(1A) — Distinction and controversy :

S. 131 is comprised of two complementary sub-sections relating to two different classes of officers. Whereas S. 131(1) empowers the jurisdictional assessing officer to issue sum-mons, S. 131(1A) empowers the officers of the investigation wing viz. Assistant Director, Deputy Director or the Director of Income-tax (Investigation).

Another point of distinction is that powers u/s.131(1) can be exercised by the assessing officer only when any proceedings are pending before him in relation to that assessee. Whereas power u/s.131(1A) can be exercised notwithstanding that no pro-ceeding is pending before the investigation officers. In other words, S. 131(1A) can also be invoked for the purposes of a preliminary inquiry before carry-ing out the search operations.

However, the controversy arises when the said Section i.e. S. 131(1A) is brought into play by the authorised officers after conclusion of search action u/s.132. The questions arise whether such acts on the part of the authorised officers are valid in view of the fact that the same powers are available to the assessing officer u/s.131 and whether, such exercise of power u/s.131(1A), after conclusion of action u/s.132, is valid.

By bringing both the provisions into play simultaneously, there occurs multiplicity of pro-ceedings in connection with the same assessee for the same case; one before the assessing officer u/s.131(1) and another before the investigation officers u/s.131(1A).

In order to shed more light on the issue, let us analyse the scope of powers u/s.131(1A) and related issues.


Scope of power u/s.131(1A) :

The Section reads as under :

"If the Director General or Director or Joint Director or Assistant Director or Deputy Director, or the authorised officer referred to in Ss.(1) of S. 132 before he takes action under clauses (i) to (v) of that sub-section, has reason to suspect that any income has been concealed, or is likely to be concealed, by any person or class of persons, within his jurisdiction, then, for the purpose of making any enquiry or investigation relating there-to, it shall be competent for him to exercise the powers conferred U/ss.(1) on the Income-tax authorities referred to in that sub-section, notwith-standing that no proceedings with respect to such person or class of persons are pending before him or any other Income-tax authority."

From the above, three important phrases emerge in relation with the exercise of powers u/s.131(1A) that seize our at-tention in the present discus-sion. These are :

(a) before he takes action under clauses (i) to (v) of S. 132;

(b) has reason to suspect that income has been concealed; and

(c) notwithstanding that no proceedings with respect to such person or class of persons are pending.

From a plain reading of the provision as aforesaid and the explanatory memorandum, the intent and the purpose of the legislature is clearly evident. The said provision enables the officers of the investigation wing to exercise the powers as mentioned before search and seizure action u/s.132(1), clauses (i) to (v) are applied. However, a recent trend is that even after conclusion of the search, the authorised officers keep summoning the person searched u/s.131(1A) to conduct a ‘post-search inquiry’.


‘Postsearch inquiry’

— Whether a misnomer :

The officers as aforesaid are wont to conduct a ‘post search inquiry’ as called in common parlance. The searched assessee is summoned and his statement is recorded on the various assets/papers/books seized.

It is incumbent upon the ‘authorised officers’ to hand over the seized documents, statements recorded by them u/s.132(4) and other material to the assessing officer for the purposes of completion of assessment procedure under Chapter XIV-B. In case a ‘post-search inquiry’ is carried out, a report of the same is also forwarded, along with recom-mended lines of inquiry. This report is a confidential official document.

As a result, at the time of block assessment proceedings under Chapter XIV-B, it is often felt that, the jurisdictional assessing officer, gets unduly influenced by the findings in the appraisal report. Even though such findings are arrived at uni-laterally and without affording a reasonable and adequate oppor-tunity for hearing to the assessee, the assessing officer is unable to judiciously and independently analyse the case before him. This is more so when the said report is never forwarded to the person searched by the assessing officer.

It is a well-laid down principle that the assessing officer is a quasi-judicial authority having quasi-judicial powers during the course of assessment. The Supreme Court in the case of Sirpur Paper Mills Ltd. v. CWT, (1970) 77 ITR 6 at pages 7 and 8 have upheld the above contention.

The need for independent application of mind by the assessing officer and non-applicability of any guiding force is further stressed by the Supreme Court in the case of Orient Paper Mills Ltd. v. Union of India, AIR 1969 SC 48, 51. The Court held that :

"No authority, however high placed, can control the decision of a judicial or quasi-judicial authority. That is the essence of our judicial system. It is true that the assessing authorities as well as appellate authorities are judges in their own cause; yet when they are called upon to decide disputes arising under the Act, they must act independently and impartially. They cannot be said to act independently if their judgement is controlled by the directions given by others. Then it is a misnomer to call their orders as their judge-ments; they would essentially be the judgements of the authority that gave the directions and which authority had given those judgements without hearing the aggrieved party" (Orient Paper mills Ltd. v. Union of India, AIR 1969 SC 48, 51)

. . . their two functions are separate; while functioning as quasi-judicial officers they should not allow their judgements be influenced by administrative considerations or by the instructions or directions given by their superiors." (Orient Paper Mills Ltd. v. Union of India, AIR 1969 SC 48, 51)

Similar view, in respect to the report sent to the assessing officer by the authorised officer, has also been expressed by the Madras Bench of the ITAT in the case of Kirtilal Kalidas & Co. v. DCIT reported in 67 ITD 573 (Mad.).


From belief to suspicion : A regressive approach :

Summoning the person searched u/s.131(1A) after conclusion of search also appears to be regres-sive in nature. Action u/s.132 is an extreme step taken by the Income-tax Department to un-earth the undisclosed income/asset of a person. Prior to issuance of a warrant of authorisation, the issuing authority should have adequate information which forms the ‘reason to believe’ that there is undisclosed income. However, the powers u/s.131(1A) are exercisable upon having a ‘reason to suspect’ the existence of undisclosed income.

Now, once a ‘reason to believe’ has been formed by the Depart-ment regarding the existence of the undisclosed asset/income and search operations have been carried out, formation of ‘reason to suspect’ for issuance of summons appears to be quite regressive and illogical. Hence, the practice of issuance of summons to the person searched u/s.131(1A), for the purpose of the postsearch inquiry, seems incorrect and tends to hit at the very root of the purpose behind the introduction of this sub-section.

The contents of S. 132(1), which specify the circumstances in which the search operations may be carried out, read as :

(i) when a person to whom notice u/s.131 or u/s.142 of the Act was issued to produce books or documents and he has failed to comply;

(ii) when a person to whom aforesaid notice is to be issued and he would not comply or

(iii) any person is in possession of valuable article or thing, representing income or property which has not been or would not be disclosed under the Act.

Satisfaction of at least one of the above three conditions is a precondition to an income-tax search operation. It is inter-esting to note that one of the circumstances in which the power to search is exercisable is when a notice u/s.131 is issued and it has not been complied with or there is a reason to believe that if a notice u/s.131 is issued, it will not be complied with — Some food for thought.

It is also interesting to compare the powers provided u/s.131(1) and the powers provided u/s.132(1). These are :

Powers much more enlarged in scope are already exercised by the Department on a person at the time of carrying out search and seizure operations. The provisions related to search operations are expansive enough to enable the officers to complete their investigation, within the provided framework. Hence, there cannot be an occasion in law to virtually carry out the same act once again by the same authorities by issuing summons u/s.131(1A) after exercising the powers as mentioned u/s.132.


Impact of new Chapter XIV-B and deletion of S. 132(5) :

Before the introduction of Chapter XIV-B, an assessee who had been subjected to search was afforded an opportunity to appear before the Income-tax Officer so that an order u/s.132(5) could be passed ‘estimating’ his undisclosed income. This would help the Department in deciding how much assets to retain towards the taxes. During the course of such proceedings, it was incum-bent upon the assessee to appear before the investigation authorities and help the authorities in resorting to such estimation and in inquiry and investigation.

However, w.e.f. 1-7-1995, the entire operation has been decentralised and separate wings for search & seizure and assessment procedure respectively have been instituted. S. 132(5) stands abolished and now there is no provision in law which allows estimate of undisclosed income by the Department. There is a clear demarcation between the scope of duties and powers before and after the conclusion of a search operation.

After introduction of the Block assessment scheme u/s.158BC, the assessee is first afforded an opportunity to file his return of income commonly known as ‘Block return’ and disclose his undisclosed income honestly. For this purpose the assessee is provided complete immunity from any penalty under the Act and only higher rate of taxation i.e. 60% is applicable. Now, the question of concealment, if any, in the said Block return is to be determined by the jurisdictional assessing officer before whom the ‘block assessment’ is pending. There cannot be any ‘concealment’ till return is filed. Hence, summons by investigation wing to detect concealment after conclusion of search but before providing rightful opportunity to the assessee to come clean and pay taxes on his hidden income goes against the express intent of the legislature.


Applicability of Law of

Limitation :

Postsearch inquiry u/s.131(1A) also comes under shadow of doubt because provisions of S. 132(9A) specifically state that the seized material has to be transferred to the jurisdictional Income-tax Officer within 15 days. Thereafter it is the domain of the AO to analyse the seized material and carry out the requisite investigation. The above contention has been upheld by the Kerela High Court in the case of Dr. Balkrishnan Nair v. CIT reported in 154 CTR page 543 as well as the Gujarat High Court in the case of N. R Paper Boards reported in 234 ITR 733 wherein it has been held that :

". . . a separate procedure is devised in Chapter XIV-B to deal with the cases where search is initiated or requisition made u/s.132 or u/s.132A, after June 30, 1995. This procedure is for assessment of the ‘undis-closed income’ as defined in S. 158B(b) of the Act. We may notice from the provisions of S. 132(9A) that where the authorised officer has no jurisdiction over the person referred to in clause (a), (b) or (c) of Ss.(1) of S. 132, the books of account or other documents or assets seized under that sub-section shall be handed over by the authorised officer to the Income-tax Officer having jurisdiction over such person. It will also be noticed from the provisions of S. 120 and S. 124 of the Act, that there are provisions made for empowering the Assessing Officers in respect of the area and they have jurisdiction in respect of any person residing or carrying on business within that area. Thus, in cases where the search was initiated after June 30, 1995, and the authorised officer who has conducted the search and seizure u/s.132(1) of the Act, is not the Assessing Officer having jurisdiction over the person, he will be handing over the material to the Assessing Officer having jurisdiction in the matter as a result of the provisions of Ss.(9A) of S. 132 of the Act".

In any case, S. 158BH provides for the completion of the block assessment within a time limit of two years from the end of the month in which the last warrant of authorisation has been executed. So, in case, after the conclusion of the search, the matter remains with the investigation wing, instead of being expeditiously transferred to the jurisdictional officer, the time available with the latter, for carrying out the complex procedure of assessment gets whittled down, which certainly cannot be the intention of the legislature.

Last but not the least, is the authors’ contention that powers u/s.131(1A) can be exercised only when no proceedings under the Act are pending in relation to the concerned assessee. This view has been concurred with by the Madhya Pradesh High Court in the case of Arjun Singh & Another v. Assistant Director of Income-tax (Investigation) reported in 246 ITR page 363 wherein it has been held that :

". . . the comparison of the two provisions i.e., Ss.(1) and Ss.(1A) of S. 131 leads us to the irresistible inference that the officers mentioned in Ss.(1) of S. 131 of the Act can exercise power thereunder only if a proceeding for assessment is pending before him against an assessee but the authorities mentioned in Ss.(1A), viz., Director General or Director or deputy Director or Assistant Director or the authorised officer, can exercise such power, notwith-standing that no assessment proceedings for assessment are pending, where he has reason to suspect that any income has been concealed or is likely to be concealed by any person or class of persons, obviously other than the assessee against whom assessment proceedings are pending as for him the power is already available under Ss.(1)."

Thus the above Court has very categorically restricted the scope of notice u/s.131(1A) so as to avoid duplication and multi-plicity of proceedings. It has stated that S. 131(1) and S. 131(1A) are mutually exclusive as when S. 131(1) comes into play S. 131(1A) has no role to play. As soon as the action u/s.132 is concluded, by virtue of the jurisdiction being passed on to the designated assessing officer, assessment proceedings under Chapter XIV-B become pending, thereby making S. 131(1) operative and S. 131(1A) redundant.


The other side of the coin :

However, the above arguments have not been accepted by the Gujarat Bench of High Court in the case of Aarti Gases reported in 248 ITR page 55. The High Court dismissed the writ petition of the assessee stating that in order to have complete idea about the material seized during the search and under-stand the nature of the documents, notice u/s.131(1A) can be issued by the authorised officer. Such a notice would be helpful not only to the Department but also to the assessee as he will be in a position to offer explanation correctly.

However, the above judgements seems to have erred in appre-ciating the role of the assessing officer vis-à-vis the authorised officer. The opportunity of hearing has to be afforded by the assessing officer. Moreover, it is his domain to call for explanation and information from the person searched as he is burdened with the responsibility of passing a speaking assessment order under Chapter XIV-B. It is a simple management maxim that authority and responsibility go hand in hand. Hence, if the responsibility of passing the assessment order rests with the assessing officer, it is but natural that the authority to call for information vests with the same officer. Moreover, the person searched has appellate remedy against the order passed by the assessing officer which is not available against the report prepared by the authorised officer.


Summing up :

The Act has undergone conceptual and fundamental change in search and seizure operations after the introduction of Chapter XIV-B for the assessment of search cases. Consequential changes in S. 132 [for instance abolition of S. 132(5)] also leads to an inevitable conclusion that there is a clear demarcation between the authorities conducting investigation and the authori-ties passing the assessment order. Separate powers have been provided by the statute to both these authorities to enable them to exercise their authority in the right manner. However, whether or not these powers are coterminous or are they mutually exclusive is what is to be decided not only judicially but also administratively. Till then the controversy shall continue.

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