An IRS Officer's Account of What Happens During and After an Income Tax Raid

The tax raid at a UP businessman's house has got many curious about the process. A former taxman explains it all.

Police stand guard outside UP businessman Piyush Jain's residence during a raid by Income Tax officials, in Kanpur district, Friday, 24 December.

Photo: PTI

Over the past few days, the pictures of tax officials from the Directorate-General of GST (DGGI) sifting through piles upon piles of currency notes have riveted the nation. This was at the Kanpur house of Piyush Jain, the supplier of raw material for pan masala. SBI officials had to be summoned with cash-counting machines to count the money, which totalled a staggering Rs 177.45 crore.

As many as 14 machines were used, which finished counting the cash in 36 hours. The money was stashed in wardrobes, neatly wrapped in paper and plastic, and secured with coloured tape. At his Kannauj house, a further Rs 19 crores, 23 kg of gold, and 600 kg of sandalwood were found. The cash was hidden in the bed, the basement (in two secret chambers) and inside the walls. The raid lasted five days.

Yes, It's All True

Had the above been a movie scene, viewers would have shrugged it off as an exaggerated account arising out of artistic license and necessary ‘mirch masala’. But truth is stranger than fiction, at least in tax raids. What may appear to be an over-the-top description in films is, in many instances, a normal occurrence of raids. Such raids are highlighted more these days because of the ubiquitous media and the ever-alert social media. But huge cash seizures have happened even earlier (in terms of the then cost of living).

Because of the saturation coverage, the political fallout, and, very importantly, the heavy security, the shifting of cash from Jain’s residences to the safe custody of the State Bank of India (where it has been kept as case property by the DGGI) did not pose a law-and-order problem. But many times, it does.

Tax Raids Are Risky for Even the Ones Conducting Them 

During an income tax raid in Kanpur that we conducted on a local politician (who also ran a flourishing business) in the 1980s, a slogan-shouting, hockey sticks/iron rods-wielding crowd of students stormed into the house. The police simply vamoosed, leaving the tax team at the mercy of the politician and his blood-thirsty supporters.

In another matter, we raided a money lender in Banda district in Uttar Pradesh, again in the mid-80s, and it lasted three days. The dreaded dacoit Dadua's writ ran over the area. A few months earlier, he had killed former Prime Minister VP Singh's brother. We seized a substantial amount of jewellery, which we took back with us in steel trunks to Allahabad. It was a full moon night when we began our journey on a bus. The police kept admonishing us about the very need to raid a person in that district. They were certain that Dadua would attack the bus and sat tense and nervous throughout the journey, upbraiding us incessantly. Their fear rubbed off on many of the tax team members. The journey seemed to take forever. The palpitations normalised only after we crossed the Yamuna Bridge at the Sangam in Allahabad.

During a raid against some diamond traders in Mumbai in the late 90s, a diamond merchant got his fellow traders to surround the shop and prevent us from leaving.

An important office-bearer of the Association (also a film producer/financier/distributor) also got into the act. Otherwise mild of manners and gentle of disposition, he showed his vituperative side of the most violent kind. However, the presence of the police ensured that matters didn’t get out of hand.

Similarly, one jeweller we raided in a Haryana town close to Delhi, in the late 80s, was the President of the Market Association. In no time, other shops downed their shutters and collected outside in support. The jeweller, on very amicable terms with the local police, and with his confidence bolstered by the market support, was confident that we would leave empty-handed despite unexplained stock found. He was shattered when things didn't go as per his expectations.

Secret Stash of Housewives

Nary was a house in which we did not find the housewife with a secret stash of money of which the husband had no knowledge whatsoever. This “rainy day” fund, which most housewives liked to call it (rightly so), was financed in part by skimming off the household budget given to them by their breadwinner husbands (usually from unaccounted money), with the balance coming from gifts from parents and relatives, again behind the back of the husbands. The amount would be secreted among her clothes, in the box bed, in her suitcase placed in the loft, in plastic pouches buried deep in rice or flour canisters in the kitchen, you name it. Some even had lockers in which to stow their booty, the key safely hidden from the spouse but, ultimately, not the taxman.

Since there would be no evidence to explain the money, it had to be seized. We used to jokingly refer to such cash as "Number teen ka paisa”.

It was my misfortune to witness the consequences of the discovery. Very few husbands took it well. There would be screaming and shouting, foul-mouthing, and, in some cases, even punching and beating, which, of course, we immediately stopped. The presence of police escort very rarely acted as a deterrent to what the husbands perceived as a breach of trust and lack of faith. We knew that as soon as we left, the fighting would resume.

No, Tax People Cannot Seize Cash/Jewellery on a Whim

It is important to know that cash and jewellery can’t be seized on a whim. A seizure can only be made if the cash/jewellery represents, either wholly or partly, income or property that has not been or would not be disclosed as income/property for the purpose of the Income Tax Act. If it constitutes stock-in-trade, it cannot be seized but can be inventoried.

Sometimes, it is impossible to prove the provenance of cash found in the house. During one raid soon after Diwali, a huge amount of cash was found in a locked almirah of a taxpayer. He claimed that it was his gambling earnings of the Diwali season. Unfortunately, for him, he had no evidence to back his claim, which may well have been true. He beseeched us not to tell his wife. We didn’t, but had no choice and had to seize the cash.

With respect to jewellery, there are certain guidelines regarding seizures.

In the case of a wealth-tax payer, only gold jewellery found in excess of the gross weight declared in the wealth-tax return can be seized.

In the case of a person not assessed to wealth-tax, gold jewellery to the extent of 500 grams per married lady, 250 grams per unmarried lady, and 100 grams per male member of the family cannot be seized. Besides, the raiding officer, having regard to the status of the family and the custom and practices of the community to which the family belongs and other circumstances of the case, can decide to exclude a larger quantity of jewellery from seizure.

Even for the remaining jewellery, the taxpayer can furnish evidence in support of his claim that the jewellery has been acquired from disclosed sources.

But, Why Take the Risk?

However, in practice, it works differently. In most cases, the person raided cannot establish that the cash/jewellery is declared. He may not have the books of accounts. Or he may not know the nitty-gritty of his book-keeping to prove the bonafides (most taxpayers don’t). He is not allowed to consult his CA or lawyer to explain his business dealings. All these explanations are adduced at the time of the post-raid proceedings or during the tax assessment proceedings. Because he is unable to do so at the time of the raid, the cash/jewellery gets seized.

Even in the unlikely event that he can explain, brave would be the raiding party that would accept his explanation and leave the cash/jewellery behind as satisfactorily explained. Better seize now and let the taxpayer explain later. Why take the risk?

What Happens If...

What happens if the money/jewellery found belong to some other person?

If it is explained to the satisfaction of the raiding officer that the money/ jewellery found belongs to some other person and has been kept in the safe custody of the person raided, it cannot be seized. But in practice, it is not always so.

What happens if the cash/jewellery is seized by another agency other than tax – say, the police, or the Enforcement Directorate, or the CBI? Or the DGGI as in the present case?

The seizure of cash found in the possession of any person by the police department is very common during election periods. The Election Commission of India has issued instructions that if cash of more than Rs 10 lakh is found in a vehicle during the election process and there is no suspicion of commission of any crime or linkage to any election candidate or agent or party functionary, the police shall not seize the cash but pass on the information to the Income Tax authority for necessary action under the law.

However, if there is suspicion of commission of a crime, the cash is to be seized as per the provisions of CrPC, complaint/FIR filed in court, and Income Tax authorities are to be informed.

What Happens to the Seized Cash?

Most people wonder what eventually happens to the cash and jewellery seized. Where is it kept? How is it dealt with? Does it ever get returned? If so, what is the procedure?

The cash/jewellery seized is first taken to the strong room of the Income Tax office. The cash is deposited as soon as is feasible in the Personal Deposit (PD) account of the Director of Income Tax (Investigation), and later to the PD account of Commissioner of the Central Circle, where the case would eventually be assessed. The PD account is an interest-free account with the SBI or any other authorised bank.

The cash is utilised to settle any existing tax liability and the liability determined on completion of the assessment pertaining to the raid, and the assessment of the year in which the raid is initiated or requisition is made, including interest/penalty. The remaining cash, if any, is to be forthwith paid to the person from whose custody it was seized (if the said person is dead, to his legal heirs), in presence of two witnesses.

If the taxpayer makes an application to his tax officer within thirty days from the end of the month in which the cash was seized, for release of cash and the nature and its source of acquisition is explained to the satisfaction of the tax officer, the existing liability (not any future liability) is recovered out of such cash and the remaining cash is released. Further, such cash is to be released within a period of one hundred and twenty days from the date on which the last of the authorisations for raid/requisition was executed.

The taxpayer is entitled to interest of 0.5 per cent for every month on the excess cash seized from the expiry of 120 days from the date on which the last authorisation for raid/requisition was executed to the date of completion of the assessment. However, in practice, the tax department makes unreasonable delays in granting refunds even after the completion of assessment. Various courts have held that in addition to the above interest, the tax department must also pay interest from the date of assessment till the date of refund in cases of inordinate delays.

What Happens to the Seized Jewellery?

If the cash seizure is not adequate to settle tax liabilities, the jewellery can be sold by the Income Tax department to the extent of settling the existing tax liability and the liability determined on completion of the assessment pertaining to the raid, and the assessment of the year in which raid is initiated/ requisition is made, including interest/penalty. The remaining jewellery, if any, is to be forthwith returned to the person from whose custody it was seized (if the said person is dead, to his legal heirs), in presence of two witnesses.

Where, however, the nature and source of acquisition of jewellery is explained by the taxpayer to the satisfaction of the tax officer, such jewellery is to be released after recovery of outstanding arrear demand.

The jewellery can also be released if the taxpayer unconditionally accepts the ownership and the valuation of the seized jewellery determined at the time of the raid; and makes a written request to release the seized jewellery and provides unconditional and irrevocable bank guarantee, or cash, to the extent of the value of seized jewellery.

Cash at the Airports

Air travellers may have noticed rooms at airports with ‘Income Tax Air Intelligence Unit’ written on the door. These offices work in close coordination with the airport Customs and CISF to seize unexplained cash detected by Customs/CISF at the airport.

Once information is received about the seizure/detection of cash by another authority, the Income Tax department can requisition such authority to deliver the cash to it. However, for exercising such requisition power, the primary condition is that the cash seized/detected by the authorities under any other law has not or would not have been disclosed under the Income Tax Act; in other words, such cash is an undisclosed income of the taxpayer.

What Next for Uttar Pradesh's Perfume Trader?

Back to the DGGI raid on the perfume trader. The GST tax liabilities are yet to be determined. Investigations are ongoing. After the cash has been retained to the extent of the GST liabilities (including interest/penalty), the Income Tax Department, if it comes to a finding that the cash represents unaccounted income on the basis of documents seized and statement recorded, and other evidence, can requisition the balance money and utilise it to settle the tax dues.

If the perfume dealer does not accept that the cash/jewellery is unaccounted for, he has to be ready for the long haul. Fighting all the way up to the highest court takes time. Even if his claim is vindicated in the end, it will be decades for him to get it back. This is just the start of the journey. If, however, he does accept that the cash/jewellery represents his unaccounted money, he can pay the taxes (and interest/ penalty), close the matter expeditiously and get on with his life, suitably chastened by the experience and henceforth keeping his business affairs clean.

(Ajay Mankotia is a former IRS Officer and presently runs a Tax and Legal Advisory. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for them.)