Should Tax Raids Be Outlawed? No, They Should Be The Last Resort

Coffee Tycoon VG Siddhartha’s Case: Tax raids can be traumatic; not everyone can withstand the boiler-room pressure.

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(Photo: iStock / Altered by Arnica Kala / The Quint)

The country woke up on Tuesday morning (30 July) to hear the shocking news of Cafe Coffee Day Group founder VG Siddhartha’s mysterious disappearance on 29 July night. His disappearance was followed by speculations of suicide.

In the letter that he wrote to the Board of Directors on the same day, VG Siddhartha mentioned that he failed to create the right profitable business model despite his best efforts. Amongst the reasons stated by him, one was, and I quote – “There was a lot of harassment from the previous DG Income Tax in the form of attaching our shares on two separate occasions to block our Mindtree deal and then taken possession of our Coffee Day shares, although the revised returns have been filed by us. This was very unfair and has led to a serious liquidity crunch.”

Earlier, in 2017, Siddhartha had been accused of tax evasion.

Income tax raids were conducted at over twenty locations in Mumbai, Bengaluru, Chennai and Chikmagalur. The Tax Department declared that the group's officials had admitted to ‘concealed income’ exceeding Rs 650 crore.

Subsequent to Siddhartha’s letter, the Tax Department issued a statement doubting the letter’s authenticity. It also upheld the tax demands, based on Siddhartha’s own admission, based on evidence found during the raids. It also justified the attachment of shares.

Cases Of Tax ‘Targeting’

July 2019 has not been a good month for the targets of tax investigations – not necessarily Income Tax.

On 10 July, a tax consultant, who was under the scanner of the State Goods and Services Tax (SGST) Department in connection with a Rs 20 crore GST evasion racket, along with twenty local businessmen, allegedly committed suicide in Indore. He ended his life by jumping off the third floor of a residential building. He had been raided a week earlier and his family claimed he was under stress since then. His son said he took the extreme step possibly due to psychological pressure.

Last year too there were similar cases.

On 20 February 2018, a trader in Pattukottai town of Thanjavur district (Tamil Nadu), died during a two-day tax raid at his oil mills and his house.

He reportedly developed chest pains following the tax raid, and was declared dead upon arrival at a private hospital. His death had sparked a rumour that he had committed suicide on account of mental agony.

On 25 April 2018, a jeweller in Delhi committed suicide after jumping off the sixth floor of the Directorate of Revenue Intelligence (DRI) office. He was at the DRI office in connection with an alleged gold smuggling case. Earlier, the DRI had conducted raids at his shops and residence and seized smuggled goods.

Some tax raids take bizarre turns.

During a raid on 2 June 2016, at the residential premises of a technology consultant in New Delhi, a Russian girl, who was present at the residence, slashed her wrist, prompting the tax officials to lodge a police complaint and inform the Russian Embassy.

And the list continues.

Tax Raids: A ‘Necessary Evil’

It happens in other countries too.

In the United States, an Indiana man blamed his wife’s suicide on an Inland Revenue Service (IRS) raid on their home in 2007 and filed a suit against the IRS, claiming intentional infliction of emotional distress, negligence in obtaining and executing a search warrant, trespass, invasion of privacy and wrongful death.

Search and seizure operations (‘raids’ as commonly understood), are the most intrusive violation of privacy.

They are, however, a necessary evil to counter tax evasion.

Raids are unpopular and thankless, and sometimes dangerous, and earn disapprobation and contempt from the unwilling hosts.

It’s a measure of last resort, only undertaken when all other methods of detecting unaccounted income and assets fail.

The Trauma Of A Tax Raid

There is no doubt whatsoever that many persons raided feel traumatised by it. The early morning knock, when the newspaper delivery boy is yet to come, when the household is just stirring into wakefulness, when the children are being woken up, when the morning chai is on the boil, when the residents are still in their nightdress, many of them still asleep – is an earth-shattering wake-up call for even the hardened lot.

Having strangers go through your personal belongings, sari by sari, underwear by underwear; move the furniture to look for hiding places; look under the mattresses; knock on walls to locate hollow sounds; read your personal diaries – is a life-changing experience.

‘Secrets’ hidden by nuclear families in their respective bedrooms in a joint family residence, say jewellery or investments, tumble out.

And all this takes place in front of their two neighbours who need to be called as witnesses. With the police accompanying the raid team for their security, positioned both outside and (sometimes) inside the house, visible to the neighbourhood, word soon spreads, and spectators gather outside, hoping for juicy scraps of news.

Then there is the huge fear of the legal (and attendant financial) consequences to follow if unaccounted money, assets or investments have been found, or a duplicate set of books retrieved from that secret compartment in the bathroom.

Escaping Harassment & ‘Buying’ Peace

If nothing has been found, there is huge pressure on the raid team to coerce the raided person to ‘surrender’ ‘concealed income’.

Rules prohibit this method of extraction unless some evidence has been found based on which the taxpayer admits to having concealed his income along with the details and methods of earning it. But aberrations still happen in some cases and it can be devastating for anybody who is forced to ‘surrender’ unaccounted income even though none has been found.

They do it out of fear to escape harassment and ‘buy peace’.

To compound their misery, they have no assistance from their tax lawyers or chartered accountants who are banned from entering the premises. The raids can last from a few hours to several days. Official work gets neglected. Though children can go to schools (after checking their satchels thoroughly), their life also gets disrupted. They see their parents worried, see their house turn upside down – they know something is not right.

When the raid draws to a close and a decision is taken to seize the undeclared jewellery and the unaccounted cash, it leads sometimes to crying, wailing, screaming, and shouting.

The Tax Man’s Dilemma – And Boiler-Room Pressure

No other job evokes so much hatred, ill will, contempt. It’s not a pleasant task for the taxman. He is also human. He also has a family. He is only carrying out his official duty. Most try to carry it out professionally, within the bounds of law and prescribed procedure. They try to ensure that minimum disturbance is caused in the running of the house. The kitchen functions normally. In case of medical emergencies, doctors are called. They try to ensure that there is no undue harassment.

But ask the person at the receiving end. Some can’t handle the boiler-room pressure and exacerbate their underlying medical condition with the stress of the raid, or, in some unfortunate cases, take the extreme step.

The agony for the taxpayer doesn’t end when the raid ends. It continues. The post-raid investigations can be equally traumatic. If the taxpayer has been forced to ‘surrender’ income without any supporting evidence and retracts the statement on the basis that is was made under coercion, there will be consequences.

If the taxpayer admits to unaccounted income, based on documents found during the raid, but later, after gaining access to his books, realizes that he has wrongly done so, or the quantum is lower, and retracts or modifies his admission, there will be consequences. These could comprise rejection of his retraction, taxes and penalties on the income originally ‘surrendered’, recovery of tax demand, and provisional ‘attachment’ of assets, which he then can’t sell or give as collateral for loan.

The post -raid stress too can sometimes lead to fatal consequences.

Given the nature of the beast and the trauma it can cause, raids are carried out after thorough due diligence.

Due Diligence & Genesis Of A Raid

Thorough investigations are carried out, such as data mining, reconnaissance, market intelligence, information from other agencies and countries and the same co-related to the declared income and assets of the taxpayer.

If the raid officer is satisfied, after all his research, that the case clearly substantiates concealment of income which cannot otherwise be brought to tax in the normal course and warrants a raid, he writes a ‘Satisfaction Note’ which goes all the way up the food chain for approval.

It is a critical document – containing the information, the source, the investigations carried out by the raid 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.

Spectre Of Unbridled Power To Tax Sleuths

Raids, by their very nature, should be few and far between. An extreme step shouldn’t be a regular occurrence; it can’t be treated as a stick to be wielded daily. But that’s not true anymore.

Till recently, some courts had held that the Income Tax Appellate Tribunal, which is an appellate body, had the jurisdiction to see whether the raid was valid and legal, and that all conditions which are a pre-requisite for initiating a raid had been satisfied. It could examine the ‘Satisfaction Note’ and verify whether the facts mentioned were relevant, or whether the inference drawn was correct. If not, the Tribunal had the power to annul the assessment order arising out of the raid.

The government has amended the relevant provisions retrospectively from the very inception of the Income Tax Act in 1962 whereby the Tribunal now stands barred from considering the validity of a raid.

The only recourse left to the taxpayer now is the costly and time-consuming litigation in the High Court.

The amendment is a retrograde step. Transparency has been badly hit and while other activities of the Tax Department have seen a remarkable improvement in openness and moved to a process-driven system, this amendment raises the spectre of unbridled power to the tax sleuths without any accountability.

Question Of Checks & Balances – And Invasion Of Privacy

The checks and balances in the form of disclosure of the ‘Satisfaction Note’ necessitating the raid have disappeared. If the Tax Department has solid information, and can stand by it, surely it should not have any qualms about revealing it to the Tribunal. This can only enhance the trust and respect for the Tax Department.

Over the years, several courts have held that a raid amounts to a serious invasion into the privacy of a citizen.

Such an invasion has now become that much easier. This is nothing but turning ‘less government, more governance’ on its head.

Another disquieting news is that the Income Tax Department has officially started outsourcing the task of assistance in raid operations to external accounting firms.

The auditor provides forensic services to the Tax Department in various locations.

This is a retrograde step. Firstly, it is not required. The Tax Department has the finest officers in the country who are experts in various disciplines and forensic accounting is a subject which they deal with daily. It may have made sense to farm out projects to audit firms and external investigating agencies in the aftermath of demonetisation, when the workload went through the roof, but not now.

But more disturbing is the fact that these outsourced firms, in some cases, have ‘demanded bribes’, to dilute their findings or brush the adverse findings under the carpet.

Outsourcing Assistance In Raid Operations & Problem Of Accountability

In June this year, an audit firm expelled a partner after he was accused of demanding bribes, for altering the report on a raided company, while working on an assignment with the Tax Department.

While there could be certain instances of egregious misconduct by tax officers during the post-raid investigations, the results of which get recorded in the ‘Appraisal Report’ on the basis of which the tax officer carries out the tax assessments, the officers are bound by Service rules and regulations, and are penalised for any infraction.

But the outsourced firms have no such restrictions.

Some of their employees can use their independence and the taxpayer’s fear to indulge in this illegal act. Only few taxpayers do not succumb and make complaints, as in this case. But most don’t. And they keep suffering even after the raid is over.

So, Should Raids be Outlawed?

Not at all. Violative of privacy they may be, but they are an essential tool to ferret out unaccounted money. Raids have played a huge part in deterrence. But they need to be sanctioned only as a last resort and in deserving cases.

Wielding the rod daily will kill the child.

Forceful ‘surrenders’ or indiscriminate seizure that sometimes take place should be visited with severe penalty. Raids with accountability, is the way forward. Else, they will turn into terror, and terror takes its toll!

(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.)