Saturday, 6 March 2010

Model questions and answers which may be asked during the course of search operations

QV. 1 What are the sources of your income?

Ans. The sources of income should be stated irrespective of whether the income there from is taxable or not. The answer be given with regard to the sources as exist on the date of recording of the statement including the source which might have come into existence after the last return was filed. If any such source is not disclosed and evidence is gathered during the search about its existence, it may lead to an allegation of attempt to evade taxes.

However, one is not obliged to disclose sources of income not belonging to him, i.e., those belonging to the members of his family members. But the answer should be comprehensive enough so as to cover income earned in different capacities, e.g., as a proprietor of a concern, partner of a firm, member of an association of persons, member of a HUF or a director of a company and so on.

QV. 2 Are you assessee to Income-tax and/or Wealth-tax?

Ans. If one is assessee to tax, he should straightway give his Permanent Account Number. Where one is not assessee to tax, he may state so. If the return of income has already been filed but the assessment has not been made, the fact may be stated accordingly.

Every person who is ‘liable to tax is supposed to apply for and obtain a Permanent Account Number. This is obligatory. Any breach of this action is liable to penalty. Therefore, if a person has not done so, he may do so forthwith.

QV. 3 What are the properties owned by you?

Ans. This is a factual information which has to be given with regard to the immovable properties owned by the assessee himself Certain properties may be in the name of his wife or children or other relatives. If he himself is not the owner of such properties and does not have any interest in them, ..he need not mention the same. Properties owned by his wife may be her Stridhan and may have nothing to do with the ownership of the assessee. Such properties need not be disclosed in reply to this question, unless specifically asked for about them.

QV. 4 What are the properties owned by your wife and children?

Ans. In reply to this question the assessee may give the particulars of the properties owned by his wife and children to the extent the same are within his knowledge. Normally, one is supposed to know the particulars of such properties but the possibility to the contrary cannot be ruled out specially when they may be living separately.

QV. 5 (In case of ownership of property) What are particulars of purchaser acquisition and sources of investment therein?

Ans. The assessee may state the date and mode of acquisition and sources of payment which may include payments made by him by cheques or cash out of his savings or any other source which may be stated. New property might have been acquired out of sale of an existing one, it may be an ancestral property or one received on partition or by way of gift. As to the sources, the answer would vary from case to case. While giving these answers, one should always anticipate further enquiries for adducing necessary evidence in support of his explanation. Sometimes, it may be possible to produce evidence on the spot, sometimes it may not be possible to do so. In the latter case, one may always state that he would produce necessary evidence subsequently. Law does not provide for seizure of any immovable property.

QV. 6 (Where cash is found) What is the source of money recovered from your possession / custody during search?

Ans. The assessee should state the sources of amounts recovered from his possession and custody and not those recovered from the possession or custody of different persons. From example, he may say “out of total amount of Rs. 1 lakh, Rs. 50,000 is recovered from my possession, or from my bedroom and the balance of Rs. 25,000 is recovered from the possession of my wife or from her suitcase or almirah as the case may be and Rs. 25,000 from the saving books of my children. He should then explain the source of Rs. 50,000 and add that the balance is Stridhan of his wife. In case, the money recovered from his possession belongs to the shop/office, he may state the fact. If the money recovered represents the sale proceeds of any property or realisation of LIC policy or recovery of a debt advanced to some other person or advance received in connection with some business transaction or if it is withdrawal from the bank or if it is sale proceeds of any ornaments or if it is a temporary loan from any friend or relation or business associate, the fact may be stated accordingly. Where the assessee does not remember the exact amount, with regard to the different sources, he may state the sources and add that necessary particulars and evidence will be furnished in due course..

In case, the money represents deposit made by any other person for the safe custody of the assessee, the assessee may state so and if then evidence is available on the spot by way of correspondence or an envelope or box bearing the name of the depositor in which the money was kept separately, this evidence may be brought on record in the assessee’s reply.

If the money represents sale proceeds of agricultural produce, the fact may be stated along with the particulars regarding the agricultural holdings.

There is a possibility that the money represents savings of the ladies and children who might have received cash gifts on various ceremonial occasions, festivals or from foreign friends which is exempt from gift tax. If gift is received outside India, these facts may be stated.

QV. 7 What are the sources for the acquisition of the jewellery recovered during the course of search?

Ans. As in the case of cash, so in the case of jewellery, the assessee must bring out the particulars of the quantum recovered from the custody of different persons. He may also state separately as to what extent the jewellery is owned and declared in wealth-tax assessment by each member of the family. If it is not possible to give the exact particulars of quantum on the spot, the names of the owners may be given with the promise that further particulars will be supplied. The other owners who are present may also make a similar statement, if they are also not aware of the exact particulars.

In case of wealth-tax assessees, the wealth-tax returns may be produced along with the valuer’s report. In other cases, the date of marriage, status of the parents and parents-in­law who might have gifted the jewellery and ornaments at the time of their marriage, may be stated. Similarly, if the jewellery is received by way of gift on other ceremonial occasions or otherwise, the relevant facts may also be stated.

If the jewellery belonging to somebody else is deposited with the assessee for the safe custody, the fact may be stated and necessary evidence which may be available on the spot, should be produced. If not, it may be promised to be produced in due course.

Note: In case of unaccounted cash as well as jewellery which the assessee may not be in a position to explain, the safest course of action is to avail the benefit of sub-section (5) of section 132.

In the case of cash and jewellery, normally, it is difficult to establish the year of acquisition. Therefore, it is always possible to declare the same under section 132(5) as income of the current year and Interest and penalty etc can be avoided.

QV 8. Do you own any locker, separately or jointly with others?

Ans. The information has to be given about the ownership of the lockers as on the date of search. It is not advisable to state that one does not remember personal ownership of lockers as there is always a possibility of tracing the locker keys or receipts showing payment of locker fees or the entries of payment of such fees in the books of account, during the course of search or post-search investigation.

QV. 9 What are the contents of the locker?

Ans. One is not supposed to remember all the items lying in locker. Therefore, it would be plausible to give broad description of the contents and add that the full particulars may be ascertained only after opening the locker. Where, however, one can possibly remember, it is always advisable to give the exact particulars in advance as it would inspire confidence about his credibility and may be treated as a gesture of co-operation. At the same time one has to be ready to answer further questions regarding the nature and source of acquisition.

QV. 10 How much is the cash kept at home? [It was not possible to ask this question prior to the amendment of section 132(4) by the Direct Tax Laws (Amendment) Act, 1987 with effect from 1-4-1989 but now it may be possible to ask this question after commencement of the search but even before any recovery is made.)

Ans. One may give exact or estimated amount if one so remembers. Otherwise, it will be safe to suggest that he is not in a position to do so. Whatever, the amount of recovery, one has to be ready to explain the source.

QV. 11 In case of recovery of share certificate on blank transfers who is the owner of the shares and what is the source of investment thereof?

Ans. If the investment in the shares by the assessee is not out of unaccounted sources, there would be no difficulty in answering the question. however, the difficulty would arise if the situation is otherwise.

In such circumstances it is always better to make a clean breast and declare the amount under sub-section (5) of section 132. However, this can be done only in respect of current year’s acquisition or in respect of those for which it is not possible to pin-point the year of acquisition.

QV. 12 Do you maintain regular books of account?

Ans. There may be numerous answers to this question depending on the facts and circumstances of each case. The individual assessees may not be maintaining books of account for their personal cases. However, the position may be different in case of professionals as it is mandatory to do so under section 44AA according to which every person carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or any other profession as notified by the Board shall keep and maintain such books of account if his income exceeds Rs. 25,000 or if his total sales turnover or gross receipts as the case may be exceed Rs. 2,50,000 in anyone of the three years immediately preceding the previous year, and in the case of a newly set up business if the income is likely to exceed Rs. 25,000 or his total sales turnover or gross profit is likely to exceed Rs. 2,50,000 during the previous year.

Under rule 6F of Income-tax Rules, 1962, it is prescribed that every person carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or after notified professionals (including film artists) should keep and maintain the following books of account and other documents:

Cash book
Journal, if the accounts are made according to the mercantile system of accounting.
Carbon copies of bills, whether numbered or otherwise serially numbered, wherever such bills are issued by the person and carbon copies or counterfoils of machine numbered, or otherwise serially numbered receipts issued by him. Bills and receipts need not be kept for sums not exceeding Rs. 25.
Original bills wherever issued to the person and receipts in respect of expenditure incurred by the person or, where such bills and receipts are not issued and the expenditure incurred does not exceed Rs. 50, payment vouchers prepared and signed by the person:
Provided that the requirement as to preparation and signing of payment vouchers shall not apply in a case where the cash book maintained by the person contains adequate particulars in respect of expenditure incurred by him.

QV. 13 (In case where the books are not maintained) Why do you not maintain regular books of account?

Ans. Considering the magnitude of income and turnover, it may not be economical to maintain the books of account or considering the nature of business or profession, it may not be practicable to keep all sorts of vouchers or receipts or registers.

Non-maintenance of regular books may also be due to the fact that even though the prescribed books are not maintained, there is a reliable contemporaneous record maintained for the income and expenditure wherefrom the taxable income can be properly ascertained.

Non-maintenance may also be due to the nature of the profession being such which involves numerous items of receipts and expenditure that it may not be practicable to keep record of each and every transaction but in overall account is contemporaneously maintained during ordinary course of business which may be reliable enough.

Non-maintenance can also be for the reason that all the transactions of receipts as well as payment are routed through the bank account and up-to-date bank record is available on the basis of which income can be properly deduced at any point of time.

Non-maintenance can also be partial, viz., the accounts had been written up to certain date only in a regular manner but due to the leaving of the employment by the accountant or due to his sickness or due to his absence otherwise, it could not be possible to keep them up-to-date, yet necessary particulars are available along with the subsidiary record on the basis of which it may be possible to bring the regular books of account up-to-date.

There may be several other situations and answer to the query, therefore, has to be given in a manner which inspires the confidence and all the available material should be produced to establish the credibility and to efface possible allegation, if any, of deliberately not maintaining the books with the intention to conceal the income.

QV. 14 Give the particulars of your bank account, bank deposits and other investments made in your own name, in the names of your wife, children, other members of family and benamidars?

Ans. This answer has to be given with regard to the assets belonging to the assessee himself as on the date of recording of the statement unless the information is asked for as on any particular date. Here again, the assessee has to make distinction between the assets belonging to himself and those belonging to others. Where the assessee has made investments out of his own sources in the names of his wife and children, he may be better advised to give the particulars of all such assets and state that though they are in the names of wife and children, they, in fact, belong to him. But, in respect of the assets which are stridhan of his wife or belong to other lady members of his family, one is not supposed to know all the particulars or obliged to make a statement in relation thereto.

QV.15 What is the extent of your monthly or annual personal expenditure and the source of meeting them?

Ans. Answer to this question will depend on the facts and circumstances of each case. In any case the personal expenditure should be sufficiently backed by the previous withdrawals and should be suffice to maintain the standard of living of the assessee. In the case of a joint living, the withdrawals made by different assessees may be pooled together. The authorised officer may question about details of expenditure head wise, e.g., on education of children, marriages, pay of servants, drivers, gardeners, expenditure on petrol, acquisition of jewellery and ornaments, gifts made if any., payment of life insurance premium on self and others, deposits under various saving schemes and so on. Therefore one has to be ready to cover and correlate to the extent possible all such expenses and outgoings with the withdrawals made during the year from his own account or that of his wife, children, etc.

Withdrawals may, be from his account with the bank or firm, companies, etc. While showing the withdrawals from the companies, one has to take care of the provisions of section 2(22) (e) of the Income-tax Act.

QV. 16 (At the office, shop or godown) What is the cash balance as per cash book?

Ans. Wherever cash book is written up-to-date, there would be no difficulty but, where it is otherwise, vouchers may be produced on the basis of which it may be possible to work out the latest cash balance.

QV. 17 What is the stock in hand as per stock register or as per books of account?.

Ans. If the balances are struck up-to-date in the stock register, the answer may be given without any difficulty. In a case where no up-to-date stock register is maintained, it may be updated with the help of vouchers but where no stock register is kept at all, stock may have to be worked out with the help of inventory which may have been filed with the Assessing Officer along with the earlier return, and by adding purchases and subtracting sales and making further Adjustment on the basis of the gross profit earned during previous year or on the basis of the rate of gross profit applied in the assessment as the case may be.

QV. 18 (Where duplicate sets of books of account are found) State the circumstances in which you have maintained duplicate sets of account books?

Ans. Normally, maintenance of duplicate sets of books of account gives rise to a suspicion for an attempt to evade taxes. This may also lead to prosecution under Explanation to section 276C(1) of the Income-tax Act, 1961. Therefore, in all those cases where there is any difference in the income likely to be worked out on the basis of duplicate set, it would always be advisable to make a clean breast of the facts and declare the income under sub­section (5) of section 132.

QV. 19 (Where certain loose slips. note book, diaries are found containing transactions not recorded in the regular books of account) Please explain the nature of transactions recorded in the said documents and state whether they are accounted for in the regular books of account?

Ans. In this case also the answer would be on the same lines as is suggested in a case where duplicate set of books of account are found and one may avail of the facility provided in section 132 (5). However, it may be possible for the assessee to get away with it where he is in a position to explain satisfactorily that the so-called entries in the loose papers, diaries, or note books have no connection with and cannot be related to the business of the assessee and that the books of account regularly maintained by him reflected the correct state of affairs and that no concealment of income or evasion of tax can be proved on the basis of the said documents.

Note: In case the duplicate books of account or the loose papers, diaries and notebooks containing the unaccounted transactions relate to earlier previous years for which the returns have already been filed, or have become due, it may not be possible to make declaration under sub-section (5) of section 132. In respect of such documents, the assesses may have to undergo the usual process of interrogation. To the “tent possible, attempt should be made to explain the correctness of his books of account maintained in the ordinary course of business. Department would try to establish the concealment on the basis of such documents. Therefore, one has to bc more careful in such circumstances.

QV. 20 (Where foreign exchange is recovered) Please state the circumstances which you came to possess the foreign exchange and explain the source of its acquisition?

Ans. Answer to this may depend upon whether the assessee has himself visited foreign country and declared the foreign exchange. It might have been required from others who might have recently visited a foreign country. In case, no one can possess any foreign exchange as discussed earlier and must be surrendered to the authorised dealer i.e. to the scheduled banks, within specified time. There may be circumstances where the assessee has had genuine intention of making such a surrender but he could not do so to some reasonable cause which may be stated?

QV. 2 1 (Where imported articles are found) Please state the nature and source of acquisition of imported articles?

Ans. One may produce the voucher and receipt showing payment of customs duty. Difficulty may arise where assessee is not in possession of evidence for payment of price or the customs duty and where the goods have been acquired or the customs duty has been paid out of unaccounted money. So long as there are adequate withdrawals from bank the acquisition and payment of customers duty, there may be no liability under the act but the problem may arise where the authorised officer might intimate the customs authorities who may come on the scene.

There may be several situations. The assessee or his friends and relations might have brought the imported goods from a foreign country during their foreign visits and may be covered by exemption limits. If the assessee acquired them out of money received as loan or a gift outside India, it may be possible for him to get that way with this transaction by producing the necessary evidence on the spot or by a promise to do so on a future date. However, he should take care of the provisions of section 8 of the FERA.

There may be another situation where the assessee has acquired imported items from some other person in this country and made the payment to the other person for the price of the article as well as the amount of import duty contained therein. If the assessee is able to produce the evidence to this effect, he may be found technically guilty of possession of an article on which the import/customs duty is not paid (if that be the case) but he may get away with the liability under the Income-tax Act?

QV. 22 In case of unaccounted machinery being found either in the asseessee doctor’s dispensary or in the factory premises or where unaccounted assets like air-conditioners, etc. are found at the shop or residence). What are the particulars of the acquisition of asset & and source of investment therein?

Ans. There may be many situations: the assets might belong to some other concern, they might have been taken on lease from leasing company or from some other concern who may not have been in a position to exploit them commercially. In these circumstances, there will be no difficulty in giving the necessary particulars. However, there may be a situation where though the delivery has been taken, the payment is yet to be made as the bill is yet to be received. It may be possible to give the necessary particulars with a promise to produce the evidence on a future date. However, in all those cases where it is not possible to explain the source of acquisition it may be advisable to resort to the benefit under sub­section (5) of section 132 till acquisition is shown in current year.

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