Nut Crackers

Questions & Answers

Direct Taxes

N. M. Ranka,
Sr. Advocate


Q.1 During the course of survey, there were certain discrepancies in stock. The assessee wants to declare income considering the discrepancies in stock etc. What are the precautions he should take before making any declaration of income to cover such discrepancies viz.

  • Year of declaration – should he consider declaration for earlier years of which returns are already filed.

  • Effect on Gross Profit and/or Sales outside the books

  • Applicability of S. 40A(3) in respect of purchases.

  • Effect on Vat and Excise etc.

  • Non moving items

Ans. (i) If no paper, document or material for the year earlier to the year of survey is found, it should be declared for the year of  survey. If any material for earlier year(s) is found, it would be declared for that relevant year and penalty may be leviable.

(ii) If no unrecorded or understated or overstated purchases or sales are found – may not effect gross profit for the year of survey.

He may claim that difference in value of closing stock is on account of system of valuation on estimation. On sales outside the books normal g.p. rate should be calculated as income. Please refer CIT vs. Purshottamlal Tamrakar (2004) 270-ITR-314 (M.P.), Manmohan Sadani vs. CIT (2008) 304-ITR-52 (MP), CIT vs. Smt. Santosh Jain (2008) 296-ITR-324 (P&H); CIT vs. Banwarilal Bansidhar (1998) 229-ITR-229 (All.); CIT vs. Gurbachan Singh J. Juneja (2008) 302-ITR-63 (Guj.); CIT. vs. Motilal Khatri (2008) 218-CTR-602 (Raj.).

(iii) If there is no material showing payment by cash – no disallowance can be made u/s. 40A(3). Otherwise also there should be telescoping while working total additional income.

(iv) VAT and Excise would depend on facts.

(v) Non-moving items can be discounted or value substantially reduced.

Q.2 The Authority before authorizing the Search, should have information and reason to believe that there is an existence of undisclosed income and / or assets representing undisclosed income, which would not be disclosed before the assessment authority.

Is it necessary to have sufficient tangible information and have direct nexus with the belief of existence of undisclosed income? Can mere information on hearsay or rumour would be sufficient to authorize search ?

Ans. Mere information or hearsay or rumor would not be sufficient for the competent authority to issue search warrant and authorize search. There must be material on the basis whereof, a well reasoned person, well instructed in law may infer of possibility of undisclosed income / assets. Reasons to believe must be honest and should be similar to as required to exercise powers u/s. 147 of the Act. (Please refer CIT vs. Lakhmani Mewaldas (1976) 103-ITR-437; UOI vs. Ajit Jain (2003) 260-ITR-80 (SC) and Sikkim Subba Associates vs. Union of India (2005) 276-ITR-456 (Sikkim). Reliance can be placed on the latest decision of Allahabad High Court in Dr. Sushil Rastogi vs. DIT (2003) 260-ITR-249.

Q.3 The Search was authorised on a partner of the firm. Can the search be conducted on the firm ?

Ans. Search warrant must contain name of the person and place to be searched. Firm and partner are distinct persons under the I.T. Act. On the search warrant against the partner – search on the firm would be unauthorized. Please refer K. R. Modi & Co. vs. DCIT (2005) 272-ITR-587 (Cal.); Jayantilal Damjibhai Soni & Ors. vs. DIT (2008) 219-CTR-26 (Guj.).

Q.4 The search warrant is issued in the name of a person along with the address at which such person would be found. However, if such person is not available, can search be carried out at the premises which is mentioned in the search warrant?

Ans. Search warrant is for a person and the specified premises. Merely if the specified person is not available at the stated premises, search can be conducted in his absence in the presence of two independent witnesses, to reach at the undisclosed income/assets of the person. Reliance can be placed on the latest decision of the Gujarat High Court in Jayanti Lal Danjibhai Soni & Ors. vs. DIT (2008) 219-CTR-26.

Q.5 During the search, it is usual on the part of the Department to seize jewellery which according to them, is undisclosed. There is no uniform system which is being followed by different authorities while conducting the search at different places. Many times it happens that the jewellery is seized due to little difference in the description of the item of jewellery. What precaution should be taken by the assessee in order to minimize the risk of seizure of jewellery by way of keeping records etc.

Ans. No uniform system or procedure is possible, as it is a matter of fact. There lay instructions of the Central Board of Direct Taxes not to seize if the ornaments and jewellery is found of the quantity to be worked out on the basis of the male and female members in the family. Stock-in-trade is not liable to be seized. Purchase vouchers and bills for conversion and remaking deserve to be maintained.The assessee should be advised to keep details of the jewellery, wherever it is kept. In case of any change, such change be recorded. If overall weight or value is lower than declared on records, no adverse inference need be drawn. Material in support of the jewellery in possession should be preserved and placed on records.