Background

The power of survey under section 133A of Income Tax Act, 1961, was made available to Tax Recovery Officers w.e.f. 01.06.2003 vide the Finance Act, 2003 by amending Explanation (a) to sub-section (6) of Section 133A. This has undoubtedly strengthened the TROs for better result in collection and recovery of outstanding taxes. The power of survey is provided to Income tax authorities basically to enable them collect information and evidence for the purposes of the Act, out of which assessment was the main purpose. Survey was rarely utilized as a tool for recovery.

TROs were officers specially designated for collection and recovery but they did not have this power. So, TROs had to request the Assessing Officers to conduct survey and remain fully dependent on him for the outcome. On many occasions such surveys conducted by Inspectors of Assessing Officers at the request of TROs lost the focus and ultimately result too. It is due to these reasons that extension of power of survey to TROs has been considered as a great leap forward towards collection and recovery of taxes.

Selection of cases for recovery survey

(i)    After 30 (or reduced) days of service of demand notice. Check receipt of notice

(ii)   Stay petition – not filed or filed & rejected

(iii)  Stay/instalment/rectification/waiver petition not pending with Assessing Officer/higher authorities

(iv)  Giving effect to appellate order – not pending

(v)   Business is running

Objective behind recovery survey

The objective behind recovery survey by Assessing Officers as well as Tax Recovery Officer is to collect of information useful for recovery of tax due. For example:

(i)     Unaccounted bank accounts (pass book, cheque book/leaves, account statement, counterfoils of pay-in-slips, DD application)

(ii)    Copies of documents of immovable properties

(iii)   Fixed Deposit, National Saving Certificate (NSC), shares, units of Mutual Fund, debentures, R.C. book, insurance policy

(iv)   Addresses of trade & loan debtors as on 31st March before survey

(v)    Credit sale bills to new parties (in this Financial Year which remain due) & addresses new loan debtors (in this Financial Year which remain due) & addresses

(vi)    Addresses of godowns where stock-in-trade is kept

(vii)   Details of security offered for Over Draft/CC accounts

(viii)  Addresses of premises where cash is kept

(ix)  Addresses of persons from whom assessee is receiving different items of income such as rent, commission, etc.

(x)     Rubber stamps/letter-pads in other name(s)

Conduct of recovery survey

Needless to say, in a survey for recovery, focus has to be on collecting any type of information which can help in taking action under the provisions of the Act for recovery.

  (i)      All requirements as for normal surveys under section 133A except that focus is not on stock-taking or finding out undisclosed income (however, discrepancies, if any noted, to be questioned in statement). Focus is to gather details which will be helpful to recover the arrears.

   (ii)         After showing authorisation/approval, prepare inventory of cash found & gather all other details required.

(iii)          To check, verify inventories/ cash/ stock and other valuable articles/things.

 (iv)        To impound books of a/cs. and other documents if necessary (which may be particularly useful when these are voluminous and survey team is unable to finish inspection of these during survey)

(v)      To extend survey to “other places” like residence, chamber of authorized representative/accountant etc. (which pre-requires taking of statement)

 (vi)         To take statement (which the Inspectors are not authorized to take) and thus obtain replies to questions on different findings in books of a/cs. or other documents.

(vii)         To issue summons under section 131 in the situations mentioned in Section 133A(6).

(viii)      Once unaccounted bank accounts found, issue notice under section 226(3) to those banks, from survey premises, covering all accounts under same CIF (customer identification folio) No. serve copy on him after serving on bank.

 (ix)     Once names & addresses of trade & loan debtors from whom amounts are due as on date of survey are collected, issue notice under section 226(3) to those debtors from survey premises. Serve copy on him after ensuring personal service on high value local debtors.

   (x)   Prepare inventory of immovable property documents found. Take photocopies. Once Fixed Deposit receipts are found, issue notice under section 226(3) to bank, from survey premises, to prevent premature encashment.

 (xi)          Prepare inventory of shares, units, debentures, R.C. books, insurance policies found.

(xii)       Once names & addresses of persons from whom he is receiving other items of regular income such as rent, interest, etc, are collected, issue notice under section 226(3) to those persons from survey premises & serve copy on him.

(xiii)      Once details of security offered for OD/CC a/c are collected, take appropriate action based on nature of security.

(xiv)   From rubber-stamp impressions & letter-pads in other names, ascertain the link and take appropriate action if amounts are due from those entities.

(xv)        After getting details of all godowns, certain approximate value of stock.

Precautions during recovery survey

(i)           At the time of survey, all general procedures like spreading out in the premise, taking control of telephones, disallowing exit of staff/proprietor, stopping removal/destruction of documents must be followed.

(ii)        Control of cash, valuables, NSC, F.D. etc. should be taken as fast as possible. If cash is found, TRO should make the seizure under Schedule-II if and Tax Recovery Inspector should do the survey OR the other way round. The bottomline is that cash should not be and cannot be seized during survey operation. So, adequate application of mind should be made at planning stage itself so as to avoid any legal complication.

(iii)       All types of books of accounts and other papers including loose sheets, letters, cheque books, small diaries etc. should be gathered from all places including brief cases at a central place in the survey-spot.

(iv)       These are to be sorted into different groups, e.g. books of accounts. Bank documents, sales bills, bills submitted, loan papers, investment documents, tax files, subscription and membership folder, telephone bills, electricity and other bills, rent receipts etc.

(v)         From the current sale bills, name and address of the buyers may be noted. Later, correspondence may be made with them to know amount receivable by assessee and the same may be attached.

(vi)       From all types of documents (e.g. bank pass book, counterfoil of pay-in-slip, record ship of cheque books, cheque leaf, rent receipt, tax paid challans, electricity/telephone bill receipts, page of payment “Schedule”, deed of purchase/sale of immovable property, bill/invoice of purchase of car etc.) try to note down details of all bank accounts (including term loan account, cash credit account. Fixed deposit account etc. with all banks and branches. Sometimes, only the cheque no. is available. But that too should be noted as account no. can be known with this (subsequently these accounts can be attached).

(vii)     If bank guarantee papers are found these will show as to where the assessee has filed bills which have been discounted by bank (subsequently, Assessing Officer/TRO may explore whether any amount can be collected by attaching the bill).

(viii)   In the cash book, each page should be verified to find out sources of cash /cheque received and destination of payments made.

(ix)       If there is loan/cash credit account, Assessing Officer /TRO should try to get details of assets placed as collateral security (If there is any, he may later explore if anything is available by attachment of these after meeting bank’s hypothecation).

(x)         Small diaries, correspondence folders etc. should be inspected to find out details of investments (so that these can be attached).

(xi)       Copies of documents related to purchase of car/immovable property, share/debenture etc. should be obtained (these details will enable TRO later to attach and sell these as these are necessary for proclamation).

(xii)     Apart from these, even if documents of foreign travel, club expenses, cash memo of expensive items are found, then copies of these should be impounded. These will enable TRO to arrest and detain the assessee on the ground that he had the means to pay the taxes but still neglected/refused to pay.

(xiii)   At the time of taking statement, question should be asked with the aim of eliciting some such reply which will disclose and own up attachable assets.

(xiv)   If assesse is a company /firm/HUF/AOP/BOI/, then all details of assets of director responsible under section 179 (1)/partners/karta/member, as the case may be, should be collected.

(xv)  If Assessing Officer conducts the survey, he should prepare a report and give it to the TRO. Assessing Officer /TRO should not waste any time in attaching the assets. Immediately after return, they should attach all assets/take action for arrest and detention. In this way, survey can be used as a very effective tool for recovery of taxes.

Invoking section 226(5)

Section 226(5) provides that the Assessing Officer or Tax Recovery Officer may, if so authorised by the Chief Commissioner or Commissioner by general or special order, recover any arrears of tax due from an assessee by distraint and sale of his movable property in the manner laid down in the Third Schedule.

Under section 133A(4), any cash, stock or other valuable article or thing cannot be removed from survey premises.

However, if authorised by general or special order by PCCIT/CCIT/ PCIT/CIT, AO/TRO may recover tax arrears by distraint & sale of movable property in the manner laid down in Third Schedule. As per Third Schedule, it has to be done as per Second Schedule.

Procedure for 226(5)

1. If cash on hand is of huge value & stock is also huge, issue warrant of attachment of movable property to Income Tax Inspector. Income Tax Inspector will serve it on assessee. Inform assessee that ITI can seize both cash & stock & sell the stock. but if stock is not be seized he has to mobilize funds to the extent of balance arrears (after considering cash on hand). If he mobilises additional funds, even if not to the entire extent of balance arrears, DD can be accepted & stock need not be seized. Income Tax Inspector can return the warrant stating that since he paid full/part of arrears, warrant was not executed.

2. If assessee is not willing to mobilise additional funds, cash on hand has to be seized by Income Tax Inspector after bringing two witnesses, preparing an inventory and panchanama serving a copy of both on him. Stock need not be seized if approved by higher authorities.

THE THIRD SCHEDULE

PROCEDURE FOR DISTRAINT BY INCOME-TAX OFFICER

[See section 226(5)]

Distraint and sale

Where any distraint and sale of movable property are to be effected by any Income-tax Officer authorised for the purpose, such distraint and sale shall be made, as far as may be, in the same manner as attachment and sale of any movable property attachable by actual seizure, and the provisions of the Second Schedule relating to attachment and sale shall, so far as may be, apply in respect of such distraint and sale.

FORMS FOR RECOVERY SURVEY

(1) Warrant of attachment of movable property

Government of India

Ministry of Finance

Income Tax Department

                                                                                                Office of the ........................................

F.No.

WARRANT OF ATTACHMENT OF MOVABLE PROPERTY

[See Section 226(5) and Third Schedule to the

Income-tax Act, 1961]

To

Shri/Smt./Kumari. ............................................................

Inspector of Income Tax

O/o ......................................................................................

Whereas Shri/Smt./Kumari/M/s. ................................................ (assessee) *Proprietor of M/s. ............................................................................ functioning at.............................. is in arrears of the following tax dues which have not been certified to TRO:—

And whereas the said sum of Rs............................. has not been paid till date;

And whereas the undersigned has been authorized by the ........................... by *general/special order in C. No. ........................... dated ........................... to recover the arrears of tax due from the assessee by distraint and sale of movable property of the assessee;

Therefore in exercise of the powers vested under section 226(5) of the Income Tax Act, 1961, this Warrant is issued to direct you to serve a copy of this warrant on the assessee and, unless after such service the said assessee pays forthwith the said sum of Rs............................ together with interest liable u/s 220(2) thereon at the rate of one per cent for every month or part of a month on Rs........................... from the date of the issue of this warrant and Rs........................... for the cost of executing this process, to proceed to attach the movable property of the said assessee [and where necessary, the movable property which is included in the assessee’s property by virtue of the Explanation to sub-section (1) of section 222 of the Income-tax Act, 1961] and to hold the same until further orders from the undersigned. You are further directed to return this warrant on or before the .................. day of ................ 20 .......... with an endorsement certifying the day on which and the manner in which it has been executed, or the reason why it has not been executed.

Given under my hand and seal at ................ this ................ day of ...........

(SEAL)                                                                                                Assessing Officer

* Score out whichever is not applicable.

(2) Panchanama

Panchnama drawn by the Panchs, in the presence of Shri/Smt./Kumari ..................................................................................., Inspector of Income Tax in the Office of the .................................................. (Assessing Officer), during the course of the execution proceeds of Warrant of attachment of movable property in File No. ....................................... in the case of Shri/Smt./Kumari/ M/s.......................................................... (assessee),*Proprietor of M/s ............................................................................... functioning at ................................................... who is a defaulter for non-payment of arrears of Income-tax etc., on the spot at No. .......................... Street .......................... at the time ..........................AM/PM on .......................... 20 .........

We, the above mentioned Panchs, on being called by the above said Shri ............................................................. Inspector of Income Tax in the Office of the ............................................................ (Assessing Officer), gathered here today at the business premises of ........................................................................ at ............................. *belonging to Shri ............................................................ and learned that Shri/M/s. ............................................................ is a defaulter for non-payment of Income-tax etc., arrears to the extent of .............................. for the assessment year ................... and consequently the .............................. (Assessing Officer) has issued a warrant of attachment of movable property of the assessee in the name of Shri/Smt./Kumari .............................. Inspector of Income Tax on date .................... in F. No. ............................. and the warrant is to be executed on or before date .............................. and in execution thereof Shri ........................................ the holder of the warrant, today entered the business premises of ........................................................... *(Proprietor Shri/Smt./ Kumari ............................................................ ) at .................... at .................... *A.M./P.M., and after the service of warrant on Shri ........................................ demanded the payment of the above arrears and on its non-payment, attached movable properties as detailed in the inventory attached to this Panchanama between the hours ....................... A.M./P.M. and ........................ A.M./P.M. in our presence.

We also hereby state that during the execution proceedings  ...............................................................

.................................................................................................... (to be filled in case of occurrence of any incidence)

Therefore, we solemnly, declare that the facts of the Panchnama mentioned herein are true and correct to the best of our observations & knowledge.

Dated Time

Signature of witness No. 1

Signature of witness No. 2

Drawn before me.                                                                    Inspector of Income Tax

(3) Inventory

Inventory of cash attached in the case of ..................................................

File No. ....................................

Date: .................... 20 ..............

Inventory of cash attached at the premises of M/s ............................ *(Proprietor: Shri/Smt./Kumari ........................................................................... at No. .................... Street, .................... under Section 226(5) read with Third Schedule to the Income-tax Act, 1961 while executing warrant of attachment of movable issued by the ................. (Assessing Officer), .................... (Place), date .................... towards realisation of arrears of tax of .................... due from .................... and executed by Shri ......................................................... Inspector of Income Tax on .................... of .................... 20 ............ between the hours .................... A.M. and .................... P.M.

Witnesses:

Drawn by me today the .............. of ............ 20 ...... at .............. AM/PM.

Signature of Assessee                                      Signature of Inspector of Income Tax

* Strike if not applicable