Measures to check tax evasion. - Income Tax - 1618/CBDT

INSTRUCTION NO. 1618/CBDT Dated: June 3, 1985 It is observed that scrutiny assessments are completed by the field authorities in a routine manner thus defeating the very purpose of scrutiny. Hereafter great care has to be taken while completing scrutiny assessments(including cases selected for scrutiny on random basis). The recent liberalisation in the limit for summary assessments vide Board's Instruction No.1617 dated the 16th May 1985 (F.No.201/109/85-ITA.II) is only one limb of the policy to ensure better voluntary compliance from taxpayers. The other essential limb of the same policy is intensive scrutiny and relentless investigation in the remaining cases so as to leave no doubt in the minds of taxpayers that they cannot get away with anything they declare in their returns. Intensive scrutiny is thus an essential step in the implementation of the total policy package which reposes increasing faith in the taxpayers and seeks to ensure at the same time that this faith is not abused. 2. Scrutiny assessments should be framed keeping two broad objectives in view. Firstly , there should be no error in the assessments so that audit objections and the need for rectifications do not arise. secondly each assessing officer should be able to process about a half dozen cases from the prosecution angle. No hard and fast rule can be laid down for selecting these cases. It is based entirely on the judgement of the assessing officer, his investigating ability and alertness as well as experience gathered in the department. 3. For spotting potential prosecution cases, the following among others may be used:- a).Information regarding the assessee and his general reputation: b).Intimations received from other officers regarding the business transactions of the assessee: c).Substantial increase in wealth: d).Unsatisfactory state of accounts and low rate of profit: Improved conditions of particular trade or industry during the year not reflected in the books of accounts: e).Assessee being connected with any important group of cases suspected to be evading taxes. 4. The assessing officer has to be alert in detecting fraud and tax evasion. He has to look for and identify the weakness in each case. While going through the accounts and documents furnished by the assessee, he may keep in mind the following points:- i) The profit and loss account and balance sheet of the earlier years should be scanned to find out if there has been any abnormal or unusual increase or decrease in any item or to see whether any new item has been introduced: ii)The wealth tax records of the earlier years should also be scrutinised to see whether there has been abnormal increase in the wealth; iii)Total wealth statement may be obtained wherever required; iv) The methods of detecting tax evasion described in the three volumes of "Investigation of accounts in the context of the practices followed in the specific trade/industry may be kept in view: v) Whether addition has been made in the earlier years and if so what happened to it in appeals, vi) Whether the accounts are audited he must invariably go through the notes of the Auditor to see whether any comments have been made on the financial results of the organisation. The report of cost auditors, if any, may also be seen. 5. It is not possible to spell out all the areas where concealment could be detected. Tax dodgers are continuously developing newer and finer methods of concealing their income and the accounts are frequently looked up so as to look perfect and flawless. A good investigating officer has so remove this veil of perfection and look at the real state of affairs. It may be mentioned that it is not enough to confine the scrutiny only to the books of accounts. The real clues to tax evasion are increasingly available now outside the books. Some of the clues that one is ordinarily likely to come across while examining the books may however be stated . These are : (a) Bogus and inflated purchases; (b) The expenses claimed under various heads may be bogus, inflated or personal; (c) Stocks may be suppressed or understated; (d) Stocks may be undervalued or suppressed; (Find out whether stocks have been pledged with Bank or other agencies and see if the value thereof is more than what is stated in the accounts I) (e) Excessive commission amounts and secret commission may have been paid; (f) Look for erasures, overwriting and totalling mistakes; (g) Bogus partnership deeds might have been created in the beginning. Subsequently one partner may be signing for all the partners in Form No.11 or 12; (h) Bogus cash credits/hundis loans may be present; (i) Double sets of accounts may be existing. The clues mentioned above are only illustrative and are not exhaustive wherever large stocks are involved the possibility of carrying out survey u/s.133 A should be intensified and resorted to more often to detect unaccounted stocks. 6. It may be ensured that the wealth-tax assessments are invariably completed along with the income-tax assessments for the relevant years. Further intimation slips may be sent to other assessing officers wherever required. 7. If any fraud or tax evasion has been detected, the original documents should be kept in the personal custody. The statements of the concerned parties should be recorded u/s.131. Since the Income-tax authorities are not price officers, the Supreme Court has held that the statements recorded by them are admissible in evidence so long as they are not under coercion. Additional evidence should be collected from the Bank accounts and from other sources. For proving the signatures of the parties opinion of the Handwriting Expert may be taken. Efforts should be made to collect independent evidence on the points in dispute. Such information should then be put to the assessee and the parties should be examined and cross-examined so that later on the assessee may not be able to take the stand that the information has been collect behind his back. After hearing the assessee further enquiries should be made if found necessary. All the relevant evidence etc. can be collected quite conveniently during the assessment stage. Later on when the assessee is aware that it is proposed to launch a prosecution against him, collection of independent evidence becomes difficult, Hence the need to be careful in these matters while finalising the assessment in a potential prosecution case. 8. If after completing all these formalities the assessing officer feels that the case is fit for prosecution he may be taken further action on the following lines:- i) As per Boards existing guidelines no prosecution has to be launched where the concealment does not exceed Rs.10,000 or the assessee is above 70 years of age; ii) List out the documents which will be necessary for proving the guilt of the accused; iii) Make a list of all the names of witnesses record their statements u/s.131 and mention at the end that these statements have not been given under undue influence, inducement threat or coercion. This is necessary so that the persons may not charge their statements before the Trial Magistrate; iv) List out the relevant judgements of the court which will help us in the case. Take an extract of these judgements. Also identify any circular/instructions etc. of the Board which may help in strengthening the case; v) Make an inventory of all the information that is available and the additional information required to make the case fool-proof; vi) The Commissioners of Income-tax are being directed to keep a guard file of the circulars/instructions/letters/important court judgements etc. regarding prosecutions, see if any help can be obtained from this guard file. 9. After completing the above requirements the case may be sent to the D.D.I/A.D.I(Prosecution) for further processing. The opinion of the standing/prosecution counsel may be taken. If the counsel is of the opinion that a successful prosecution complaint can be filed in the facts and circumstances of the case, the case may be made ready for obtaining the administrative approval of the board. 10. While sending a proposal to the board, the following points may be kept in mind:- a) Since prosecution is an important item of work prosecution proposals should be sent by the concerned commissioner of Income-tax only under his own signature after ensuring that the formalities as mentioned above have been completed. b)Along with the prosecution proposal an annexure should be provided listing out the documents that have to be relied upon, witness to be produced and case-laws/circulars/instruction etc. from which help has to be taken in the prosecution case, c) Also enclose a copy of the opinion of the standing/prosecution counsel 11. After obtaining the Board's approval great care should be taken in drafting the complaint. Our standing/prosecution counsel should be provided with all the necessary help and should be properly briefed. A copy of the scrutiny note containing all the details should be given to the prosecution counsel so that the complaint could be drafted correctly. 12. Kindly bring these instructions to the notice of all your assessing officers urgently.