Bollywood Tax Raids: Why ‘Proof of the Pudding is in the Eating’

If Anurag Kashyap & Taapsee Pannu’s dealings have been above board, they have nothing to fear.

Image of Taapsee Pannu and Anurag Kashyap used for representational purposes.

(Photo: Shruti Mathur / The Quint)

These days the media is replete with news about the tax department’s raids on filmmaker Anurag Kashyap, actress Taapsee Pannu, two leading film production companies including the now-dissolved production house Phantom Films, and two talent management companies, including KWAN at Mumbai, Pune, Delhi, and Hyderabad. A total of 28 premises are being covered. Founded in 2011, Phantom Films produced films such as ‘Lootera’, ‘Queen’, ‘Ugly’, ‘NH 10’, ‘Masaan’ and ‘Udta Punjab’.

The opposition parties have alleged that the action was ‘politically motivated’ to muzzle dissent. Kashyap is a vocal critic of the government and opposes the Citizenship Amendment Act (CAA).

The central government has rejected the allegations. “This is too much…probe agencies undertake investigations based on credible information and the matter later goes to courts as well,” said Union minister Prakash Javadekar. Even Finance Minister Nirmala Sitharaman weighed in: "First of all, I am not commenting on any A or B individual. (But) since the names were taken, (I want to say) the very same names were raided in 2013.” It “wasn't an issue (in 2013). It's an issue now," she added.

The Aim of a Tax Raid

In many instances, after any raid on a public figure, an outcry against it does take place. It is a normal feature of raids. When we raided film stars and fashion designers two decades back in Mumbai, there was an outcry from the film and fashion designing fraternity. When we raided an opposition politician in the mid-80s, he alleged a conspiracy, by the then central government, to scuttle his career. Parties across the political spectrum all do it.

The tax department, in a statement, has stated that ‘evidence’ of ‘huge suppression’ of income by the leading film production house compared to the actual box office collections has been unearthed.

The company officials have not been able to explain the discrepancy of around Rs 300 crore. Evidence — related to the ‘manipulation’ and under-valuation of share transactions of the production house amongst the film directors and shareholders, having tax implications of about Rs 350 crore — has been found, which are being further investigated.

Also, ‘evidence’ of cash receipts by Pannu amounting to Rs 5 crore has been recovered. Some inter-linked transactions between the entities searched were under the scanner of the department. The raids were aimed at gathering more evidence to further probe the tax evasion allegations against them.

These are still early days, and it will take a while before all the details emerge.

The Ultimate Invasion of Privacy

At this stage, without taking any sides, it will be useful to understand the income tax provisions regarding raids. Incidentally, the word ‘raid’ is colloquially used for the official expression ‘search and seizure’, used in the income tax provisions.

Very few things are as disquieting as the taxman’s knock on the taxpayer’s door.

The early morning knock, when the newspaper delivery boy is yet to come, when the household is just waking up, when tea is being made, is an earth-shattering event. Having strangers go through your personal belongings, moving the furniture to look for hidden valuables or duplicate set of books, reading your personal diaries, going through your phone messages, is an experience that is life-changing.

Because a raid involves the ultimate invasion of privacy, it is the last resort adopted by the tax department. Raids are few and far between. Only a few out of the several lakhs of taxpayers are made unwilling hosts to the early morning tax brigade. But raids are a necessary evil to counter the concealment of income. It is an unpopular and thankless task. Raids are based on specific information based on which the tax department has reason to believe that the taxpayer has undeclared income which he would not be willing to disclose to the tax department.

What Instigates a Tax Raid?

The source of information is usually the tax department’s own intelligence regarding tax evasion, by way of manipulation of books of accounts, vouchers and bills; unexplained cash credits; manipulations in share transactions; unexplained lavish expenditure, and suchlike.

Information is also received from banks, market funds, property registrations, the Financial Intelligence Unit, Serious Fraud Investigation Unit, and other agencies. Whether the information is reliable or not can only be determined later. It was found to be reliable during the raids linked with demonetisation.

After receiving the information, the investigation officer carries out his own discreet enquiries to verify it from tax returns and details available in the public domain. He also carries out a reconnaissance of the premises – both residential and office.

The investigation officer writes a ‘satisfaction note’ stating that, based on the information provided and his independent investigations, he has reason to believe that the taxpayer has unaccounted income, and gets it approved by his seniors.

Thus, the raids are based on definite information, which after verification, get actioned. The investigation officer needs to be satisfied that there exists tax evasion and the same needs to be approved all the way up. There are checks and balances. The tax department cannot raid a person without any basis.

What Happens After a Tax Raid?

The ‘satisfaction note’ is a critical document – containing the information, the source, the investigations carried out by the investigation officer, and its link to the reason arrived at by him as to the existence of unaccounted income. It is the foundation on which rests the initiation of the raid and the consequent assessment order. The satisfaction recorded can be looked into by the High Court in a writ and, in case of any discrepancy, the raid can be quashed. Hence, the procedures enshrined in law and practice are taken very seriously.

However, the proof of the pudding is in the eating. We will have to wait to see whether tax evasion did take place or not, and if yes, how much was it.

The process of quantification begins after the raid is over and all the books, documents, statements, valuables, cash, and other evidence have been examined. The first stage at which some clarity will arise will be when the investigation officer writes the ‘Appraisal Report’ - a preliminary report which lists out important documents seized, recommends line of enquiry, and computes an estimate of concealment. Thereafter, the assessment unit takes over, carries out an in-depth investigation and passes an assessment order.

Then there is the appeal process, beginning with the Commissioner of Appeals, through the income Tax Appellate Tribunal, to the High Court and beyond. We will have to see how much of the tax department’s claim is finally upheld.

Help Sought Post-Raid

On the other hand, the parties may admit or ‘surrender’ the unaccounted income. Here is where the tax department must tread very carefully. Usually, such ‘surrender’ doesn’t represent any unaccounted income but is given out of fear to escape harassment and ‘buy peace’. Without documented proof, and knowledge of modus operandi, this is an exercise in futility. The parties can later claim that they were coerced into admitting evasion.

Meanwhile, it has been reported that Pannu’s boyfriend Mathias Boe has raised the issue before Sports Minister Kiren Rijiju and urged him to look into the matter.

The minister has responded by saying that the “law of the land is supreme”, and they must abide by that.

Seeking help is typical during, and after, a raid. Even though a raid, once commenced, is akin to a shot arrow and nothing can lure it back, the parties raided do try to reach out for help from politicians, bureaucrats, industrialists, acquaintances in the tax department — anyone they feel is influential enough to help. Some of the people approached do pick up the phone and try to influence, not the raid, but the post -raid investigations but they seldom succeed.

The Road Ahead

At the end of the day, if Kashyap and Pannu have done nothing wrong, and all their dealings have been above board, they have nothing to fear. Of course, that said, the process they will have to go through is punishment in itself for most taxpayers. They will have to chin up and bear it.

If, on the other hand, they have indulged in evasion, now is the best time to admit it, pay the taxes and penalties and get on with their lives. Both Kashyap and Pannu are outstanding film personalities and we all want them to get back to the studios and do what they do best.

(Ajay Mankotia is a former IRS officer presently working in a media company. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)