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Introduction and scope
The current thinking in the Revenue Department is that increase
in tax revenue should come not only from the existing assessees, but
also through widening the tax base. Surveys u/s 133A is the most potent
weapon utilised by the department to unearth undeclared income from
existing assessees as well as those who are not on the department’s
record.
The other aspects of the survey namely,
the authorities, who are authorised to carry out a survey, place and
time at which a survey can take place, the power and scope of the
surveying party, the significance of the statement and declaration
and consequences thereof are being dealt with in separate articles.
In this article, I propose to deal
with the accounting treatment of assets found or declared in the course
of survey, accounting treatment of additions and the effect of the
finding/declaration in the survey on assessment proceedings.
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Accounting treatment of assets
found/declared in the course of survey
As will be apparent from a reading of other articles, the powers
of a surveying team carrying out a survey u/s 133A are limited compared
to that of a search party. The object of the survey is to elicit information
and to verify the factual position with the information contained
in the record. In the course of survey, broadly the following situations
arise.
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Cash is either short or excessive
compared to the books
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Stock is short or excessive compared
to the book records
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Assets are found which are not
recorded in the books of account
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Expenditure recorded in the books
is not properly supported
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There is record of expenditure
incurred which is not recorded in the books
Prior to 1st June, 2002, a survey
team had no powers to impound books of account. The team is armed
with such powers w.e.f. 1st June, 2002. During the course of a survey
the Income tax authority is entitled to verify the cash, stock and
other valuable article or thing and also inspect the books of account.
During the process of survey, normally cash or stock is physically
verified and the result compared with the books. If the physical verification
tallies with the book record or the difference is explained no consequences
follow. This unfortunately is a rare occurrence and many a time the
situations discussed above emerge and the consequences are discussed
below.
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Cash is either
short or excessive compared to the books
If cash is found short as compared to book records, there
would be no immediate consequence unless any other incriminating
evidence indicating concealment of income is found. The shortage
of cash would normally represent expenditure, which has remained
to be recorded in the books. This could be recorded subsequent
to the survey before finalisation of accounts for the Financial
Year in which the survey took place. However, due care must
be taken to ensure that all the entries representing utilization
of such cash are properly supported by vouchers and external
evidence so that no adverse consequences arise in the course
of assessment. The shortage could also represent drawings
by the proprietor/partner.
If cash in found excessive,
there can be two possible eventualities.
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Such excess of cash is
coupled with shortage of stock
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Excess cash without any
difference in stock.
In the first case, the excess
cash would represent undisclosed sales and therefore, it would
be recorded by reducing the book stock and recording the sale.
In such an event, addition to the income would only be that
of the gross profit. This sale would form part of the Profit
& Loss Account and the income would be computed accordingly.
The addition or deduction would only be to the total of gross
profit embedded in the sale.
However, in the case where
the excess cash is not coupled with any shortage and stock,
it would ordinarily represent unrecorded income. In such a
situation, two issues would arise as to whether the said income
represents income of the current year or past years. If it
represents income of the year, the excess cash should be brought
into the books by crediting income declared on such survey.
In the event that the income pertains to earlier years, it
should be credited to the proprietor’s/ partners’ capital
account or reserves depending upon the entity being surveyed.
To illustrate:
If income pertains to the
financial year in which survey is carried out
Cash A/c
Dr.
To income declared on survey
(Entry to bring cash
into the books)
Income declared on survey
To Profit & Loss A/c
(Entry to transfer income to P & L
A/c)
If income pertains to earlier financial
years
Cash A/c
Dr.
To Proprietors/
Partners Capital A/c/
Reserves
(Entry to bring asset into the books)
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Stock is short
or excessive compared to the book records
In case, the excess stock is found as compared to book
records, it would represent unexplained income either of the
year under survey or of past years. The methodology of recording
such excess stock would be similar to that of cash as explained
in the foregoing paragraphs.
As regards shortage of stock
as compared to book records, in such an event, the quantum
income which is unrecorded would depend on facts and circumstances
of the case. The entire shortage may either represent undisclosed
income or if it has been utilised for the purpose of expenditure
which is not reflected in the books, the income may be only
to the extent of profit embedded in the sale.
At times, when there is no
book record, the shortage and excess of stock is computed
by the survey team on the basis of a reverse working wherein
the sales and purchases up to the date of survey are considered
and applying the gross profit ratio, probable stock is arrived
at. However, in this case, it is open to an assessee to challenge
the methodology of the computation.
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Assets are found
which are not recorded in the books of account
In the event that assets which are not recorded in the
books are found at the time of survey, they may represent
income of the past year or of the present year. This would
normally be covered u/s 69C. If an assessee is able to establish
that the income is of the current year, then no penal consequences
would follow.
At times on inspection of
books, the survey team verifies expenses. If they are not
supported, the consequences of addition would follow. In such
an event, the expenses already recorded in the books, and
what is being questioned is their veracity. In such a case,
no accounting entry is to be passed in because if such an
expenditure is reversed and the corresponding income is capitalised,
it would amount to an admission and all consequences including
penalties would follow.
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Expenditure recorded
in the books is not properly supported. Record of expenditure
is found which does not appear in the books
If expenditure recorded in the books is either not genuine
or is not properly supported an inference could be drawn that
income has not been disclosed. The inference is rebuttable
with cogent evidence
As regards expenditure on
ceremony etc. is concerned which is not recorded in the books
the same is being dealt with in a separate article.
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Effect of finding/offer in survey
on assessment
The findings in the course of survey recorded by the Survey Team
in a report. The most damaging part to assessees is the statement
recorded u/s 133A [3(iii)] at the conclusion for a survey. This is
popularly known as a "Declaration or Disclosure" and is relied on
during the course of assessment.
The statement which is recorded u/s
133A during the course of a survey or at its conclusion is not a statement
u/s 132(4), and its evidentiary value is debatable. Similarly, in
respect of books of account, other documents or assets found in possession
of the assessee being surveyed, there is no presumption as in the
case of a search u/s 132(4A),
Recently, the Kerala High Court in
Paul Mathews & Sons vs. CIT 129 Taxman 416 (Ker.) held
that the surveying authority did not have the power to record a statement
on oath. The High Court therefore held that the statement could not
be relied on. With respect to the judgement of the High Court I am
of the view that the statement which is recorded during the course
of survey or at the conclusion thereof can be used against an assessee
and therefore due care must be taken in making the statement itself.
The contents of the statement the circumstances in which it is made,
the person making it would determine its evidentiary value, but it
may be difficult to contend that it should be ignored. The aspect
of a statement and its contents and the effects thereof has been dealt
with in a separate article.
As has been stated in the foregoing
paragraphs, the findings in the survey and the statement recorded
at the time of survey have some evidentiary value during the course
of assessment. The revenue is entitled to rely on the finding and
the statement and the onus is on the assessee to rebut either the
information as being erroneous, or an inference which is being drawn
as incorrect. It must, however, be borne in mind that the declaration
of the survey cannot be the only basis for making an addition. The
statement or declaration must be backed by other evidence such as
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Shortage/excess of stock
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Shortage/excess of cash
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Unrecorded assets
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Unsubstantiated expenditure
If both these are available, in such
a situation, addition can be made. As regards the penalty, a declaration
or offer of income by itself is not sufficient to avoid levy of penalty.
Many a time, the declaration / disclosure is made with a request not
to levy penalty. However, unless this is backed by facts which corroborate
the claim that the disclosure was subject to non-levy of penalty,
the request in the statement has only a persuadable value.
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Effect on current/past assessments
Two consequences arise after a survey. The first being that the
assessment of the relevant assessment year is taken up for the scrutiny.
If the survey has resulted in a deduction for past years, the assessments
are reopened.
The survey findings and statements
recorded are points of rebuttable evidence.
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Conclusion
This is often a temptation on part of many assessees to bring
into the book income which is declared in a survey. This recording
in the book should be done after obtaining proper advice, otherwise
the entries in the books themselves would amount to evidence against
the assessee. To illustrate, if during verification of books, the
survey team finds expenditure which in the team’s opinion is bogus/without
evidence, and declaration is made to buy peace, cash equivalent to
such expenditure should not be recorded in the books as that itself
would amount to a admission of concealment and consequential penalty.
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