77% of additions made in search assessments dint stand appeal at CIT/ITAT

Search and Seizure is a very powerful tool available to 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.  The Income Tax Department resorts to search and seizure only in cases where there is sufficient reason to believe that the person concerned would not disclose the true picture of his income in the normal course of filing of return and regular assessment.

Section 132 of the Income-tax Act, 1961 (the Act) empowers income tax
authorities to carry out a search and seizure of books of accounts,
documents, cash, jewellery etc. Further, section 132A of the Act empowers
certain income tax authorities to requisition books of accounts, documents
etc. Besides, CBDT also issued instructions/circulars from time to time to
facilitate search and seizure operations/assessments.

CAG conducted 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
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.

The search operations conducted by department brought 10288 crore of undisclosed income to tax in 2014-15 which increased to 15497 crore in 2016-17, thus, highlighting a significant growth of 51 per cent increase in undisclosed income on account of search conducted in 2016-17 as compared to 2014-15.

The Performance Audit (PA) covered the search assessments completed during the financial years 2014-15 to 2017-18.  Audit checked 24,869 assessment records pertaining to 185 Groups with assessed income of Rs 1,71,503.78 crore during the PA. Audit issued 1659 observations. having tax effect of Rs 4150.02 crore. 

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

During the course of the present performance audit, we noticed that 84
Groups out of 185 Groups had preferred appeal before different appellate
authorities against the additions made in the assessment orders. Audit
observed that 76.5 per cent of additions made in assessments did not stand
the test of judicial scrutiny in appeals at (CIT (A)/ITAT).

Further in 19 Groups, non-sustainability was 100 per cent at appellate stage. Audit scrutiny of the appellate orders revealed that major reasons for deletion of additions at appellate stage were as under:

1) Existing judgments were not considered by AO during assessment.

2) Provisions/sections under which additions made were not clearly mentioned in assessment order.

3) The content of the statement of the assessee recorded under oath u/s 132(4) of the Act during search operations used against the assessee as adverse evidence has neither been provided to the assessee nor reproduced in the assessment order which is irregular and contrary to
the principles of natural justice.

4) All documents found during search were related to the transactions
which were already disclosed by the assessee.

5) Additions were based on the assumptions instead of seized
documents/papers and the addition of undisclosed income was made in assessment year other than the relevant assessment year.

76.5 per cent 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 sustainability of additions made in the assessment orders was nil at appellate stage.

Total additions made during assessments vis a vis additions sustained at
appellate stage in respect of 84 Groups out of 185 Groups are shown in the
table below

It can be seen from the table above that against the total addition of
Rs 24965.70 crore, Rs 5857.40 crore only was sustained at appellate stage.
Overall sustainability of undisclosed income was 23.5 per cent (Approx.).
Undisclosed income of 19108.30 crore did not sustain at appellate stage mainly due to reasons such as additions were made (a) relating to transactions based on the documents found during search which were already disclosed by the assessee, (b) based on assumptions, (c) in assessment year other than the relevant assessment year. Further, provisions/sections under which additions made were not clearly mentioned in assessment order etc.

CAG also observed that in case of 19 Groups out of aforesaid 84 Groups additions sustained at appellate stage out of Rs 1476.42 crore made during assessments was nil as shown in the table below:

Assessing Officers did not take uniform stand in making additions on account of bogus purchases, accommodation entries and in adoption of figures of assessed income/revised income.  The additions were made arbitrarily either on lump sum amount basis or different percentage ranging from five per cent to 50 per cent under similar circumstances without proper justification.  There were cases of non-compliance of 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. 

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

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