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PRE-BUDGET2025

 
Adv.Sushil Kumar
Managing Partner

Union Budget 2025-2026 (Expectations and Recommendations)


Income Tax Search & Seizure: Expectations and Recommendations.
As the 2025-26 Union Budget approaches, one of the key areas under scrutiny is the process of income tax search and seizure. This provision, which empowers tax authorities to conduct searches and seize assets in cases of suspected tax evasion, has long been a subject of debate. While intended to curb tax evasion, concerns around its effectiveness, fairness, and transparency have prompted calls for reforms.

Here are some expectations and recommendations for improving the income tax search and seizure mechanism in the upcoming budget:

1.Strengthening Safeguards for Taxpayers.

 
There is a growing demand for clearer guidelines and stronger safeguards to protect taxpayers during searches and seizures. The introduction of specific protocols to ensure fairness and transparency could help prevent arbitrary actions and ensure that taxpayers' rights are upheld throughout the process.
 

2.     Greater Transparency and Accountability.

 
Recommendations include making the entire process more transparent, such as requiring the income tax department to provide detailed explanations for initiating a search and seizure. This could also involve regular audits of such actions to ensure they are conducted in accordance with the law, further enhancing the accountability of tax authorities.

3.Reducing the Scope for Harassment.

Many taxpayers report facing undue harassment during search operations. To address this, there could be a push for limiting the powers of the tax authorities to avoid excessive intrusiveness, particularly in cases where only minor discrepancies are suspected. Additionally, clear timelines for the resolution of search-related matters could be introduced to reduce prolonged investigations.

1.Digitalization of Search and Seizure Procedures.

 
Another key expectation is the full digitalization of the search and seizure process. The use of technology could streamline procedures, make the process more efficient, and reduce the scope for human error or misconduct. The government could also look at implementing a system for taxpayers to track the status of their cases in real-time.
 

2.Clearer Legal Framework.

 
There is also a call for a clearer legal framework outlining the powers of tax authorities, including specific guidelines on when and how searches should be conducted. This would help prevent misuse of power and ensure that searches are carried out only when there is adequate justification.
 

3.Review of Provisional Seizures.

 
Currently, tax authorities often seize assets provisionally during a search, which can cause significant distress to individuals and businesses. A review of provisional seizures with a view to limiting them to only the most serious cases could help mitigate undue hardship.

4.Digitalization of Search and Seizure Procedures.

 
Another key expectation is the full digitalization of the search and seizure process. The use of technology could streamline procedures, make the process more efficient, and reduce the scope for human error or misconduct. The government could also look at implementing a system for taxpayers to track the status of their cases in real-time.

1.       Clearer Legal Framework.

 
There is also a call for a clearer legal framework outlining the powers of tax authorities, including specific guidelines on when and how searches should be conducted. This would help prevent misuse of power and ensure that searches are carried out only when there is adequate justification.

1.       Review of Provisional Seizures.

 
Currently, tax authorities often seize assets provisionally during a search, which can cause significant distress to individuals and businesses. A review of provisional seizures with a view to limiting them to only the most serious cases could help mitigate undue hardship.

1.Enhancing Public Awareness.

 
To ensure taxpayers are fully aware of their rights during a search and seizure, it is essential to enhance public awareness. The government could introduce educational campaigns that explain the procedures involved, the rights of taxpayers, and the steps they can take if they believe they are being treated unfairly.

Removal of Drafting Lacuna in Section 132(9B) of the Income Tax Act, 1961 Concerning Provisional Attachment of Property.


Section 132 of the Income Tax Act, 1961 grants the power of search and seizure to tax authorities, subject to certain conditions. To protect the interests of revenue and ensure recovery in cases of tax evasion, the Finance Act of 2017 introduced sub-section (9B) under Section 132. This provision allows the authorised officer, upon being satisfied that provisional attachment of property is necessary to protect the revenue, to attach any property belonging to the taxpayer during the course of a search or within sixty days of the execution of the last search authorization. Such an attachment is subject to prior approval from high-ranking officers like the Principal Director General, Director General, Principal Director, or Director. Furthermore, the attachment is set to expire after six months from the date of the order.
It is important to note that the provisions of Section 132(9B) closely mirror those of Section 281B of the Act, which grants similar powers during assessment proceedings. However, a key difference exists: Section 281B explicitly empowers the Assessing Officer to revoke an attachment if the taxpayer furnishes sufficient equitable security or guarantee. Unfortunately, Section 132(9B) lacks similar provisions, leaving the authorised officer without the explicit authority to revoke a provisional attachment in cases where the taxpayer provides adequate security or guarantee.
This drafting lacuna presents significant challenges, as it creates undue hardship for both taxpayers and the revenue department. The absence of a provision allowing revocation based on equitable security or guarantee undermines the flexibility and fairness of the attachment process, leading to potential injustices and unnecessary financial burdens on taxpayers. Therefore, addressing and rectifying this lacuna is crucial for ensuring a more balanced and equitable application of the law.

 

Re-introduction of Income Tax Settlement Commission (ITSC) or Similar Body:

 


  1. Abolition of ITSC under the Finance Bill, 2021
 
Clause 59 of the Finance Bill, 2021 discontinued the Income Tax Settlement Commission (ITSC) by inserting sub-section (5) to Section 245C of the Income Tax Act, 1961, which prohibits the filing of settlement applications on or after February 1, 2021. Additionally, the ITSC was abolished as of the same date under Clause 56, amending Section 245B of the Act. Despite the fact that the terms of the existing Vice-Chairmen and Members of the Commission had not expired and they were available to dispose of pending settlement applications, an interim Board was constituted by the Central Board of Direct Taxes (CBDT) to handle these cases. This move effectively marked the end of the Commission’s role in expediting tax dispute resolution.

(ii)              Contrast with Indirect Taxes Settlement Commission

 
While the ITSC was discontinued, it is worth noting that a similar Settlement Commission for indirect taxes, covering Customs and Central Excise, continues to operate. This highlights the ongoing importance of such a mechanism in certain areas of taxation, suggesting that a reconsideration of the ITSC’s discontinuation is warranted.

(iii)Global Precedent for Tax Settlement Mechanisms.

The settlement of tax liabilities through confession, compromise, or dispute resolution is a long-established practice worldwide. Countries such as the UK, USA, Canada, France, and Germany have been using such methods for decades. In the UK, for example, this system has been in place since 1923. Known as the "confession method," it allows taxpayers to voluntarily disclose their true

income, pay the due tax and interest, and cooperate with authorities to verify the accuracy of their disclosure. In return, they may be granted partial or full immunity from penalties and criminal prosecution. This system aims to collect taxes expeditiously, minimize the use of scarce investigative resources, and provide a one-time opportunity for taxpayers to settle their liabilities 

(iv)                Introduction of ITSC in India

 
The concept of tax settlement in India was introduced following the recommendations of the Direct Tax Enquiry Committee (Wanchoo Committee) in 1971. Based on these recommendations, the Settlement Commission was established under the Taxation Laws (Amendment) Act of 1975, which came into effect on April 1, 1976. Initially, the ITSC operated with one bench in Delhi, and as demand grew, additional benches were set up in Mumbai, Kolkata, and Chennai. Prior to its discontinuation in 2021, the ITSC had seven functioning benches across the country, handling a significant volume of settlement applications.
 

(V)                Absence of Justification for Discontinuation

 
No explanation has been provided by the finance minister or in the Explanatory Memorandum accompanying the Finance Bill, 2021 for the abolition of the ITSC. The Commission offered taxpayers the option to settle disputes quickly within 18 months of filing an application, thus avoiding prolonged and costly litigation. The process was overseen by senior officers of the Income Tax Department, including Chief Commissioners, which ensured a high level of expertise in resolving tax matters. The discontinuation of the ITSC seems to be driven by the government’s desire to pursue criminal prosecution in cases of tax evasion, particularly in search and survey cases, rather than allowing taxpayers to settle their cases with immunity from penalties and prosecution.

(Vi)Consequences of Disbanding the ITSC

 The abolition of the ITSC has had several negative effects. It has led to an increase in tax disputes, especially in search and seizure cases, and has contributed to the growth of unpaid tax liabilities. Without the option to settle disputes through the Commission, taxpayers are now forced to engage in prolonged litigation, further delaying tax collections and increasing the burden on the tax department.

(Vii)Alternative Approach to Tax Evasion

 
If the government's primary concern behind abolishing the ITSC was to deter tax evasion by prosecuting tax evaders, this goal could still be achieved by initiating criminal prosecution in select cases shortly after a search or survey. The Settlement Commission already had provisions to deny immunity from
prosecution if proceedings had been initiated before the settlement application was received. Thus, the prosecution of serious offenders would not have been hindered by the continued existence of the ITSC.

 

(Viii)                Re-introduction of ITSC or Similar Body


In light of the increased tax litigation, rising income tax arrears, and the overall disruption caused by the ITSC’s abolition, it is strongly recommended that the government consider reintroducing a body similar to the ITSC. This body could be tasked with the speedy disposal of search and seizure cases, with modified processes and safeguards to address the concerns of tax evasion while providing a fair opportunity for taxpayers to settle their disputes.

Conclusion
 
The reintroduction of an Income Tax Settlement Commission or a similar mechanism would not only expedite the resolution of tax disputes but also help reduce the growing backlog of cases and tax arrears. By providing taxpayers with an option for settlement, the government can encourage compliance and promote timely tax collection, ultimately benefiting both the revenue department and the taxpayers.
 
 
 
Kumar Legal Research LLP 
(Advocates & Solicitors)
 
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