24. Investigation by Income Tax Department

The word investigation signifies the process to search for truth. In Webster’s Dictionary, it is explained as “a careful search or examination or a systematic enquiry”. In Oxford English Dictionary, investigation is said to be “an official examination of the facts about a situation, crime, etc.”


For income-tax purposes, the expression investigation involves all the processes undertaken through legitimate powers to arrive at facts about a person’s income or wealth. Income tax authorities are vested with very vast statutory powers to investigate into the financial affairs of any person or entity so as to find out whether the correct state of affairs is being disclosed to the authorities or not.

These powers are basically enshrined in the Income Tax Act by way of powers of carrying out scrutiny of a return; calling for books of account and documents; summoning persons and recording their statements; collecting information from outside sources; conducting inquiries; carrying Out surveys; and conducting searches of residential and business premises.

The power to search and to survey, referred to as raid in common parlance, are the invasive powers of the department. It becomes necessary to resort to these powers and to enter somebody’s premises looking for evidence when it becomes clear that tax is being evaded in a big way and the evidence would not be produced before the income tax authorities in response to the notices issued for this purpose. The evidence gathered through the exercise of these powers is examined and evaluated for determining the extent of tax evasion. In other words, the income tax authorities investigate to detect and quantify tax evasion.

The present times have witnessed significant technological advancements. Businesses have adopted technology, resulting in change in the methods and manner of doing business. As a result, the scope and meaning of investigation has also changed. Gone are the days when account books were written on traditional bahi khatas and undisclosed transactions were recorded in personal diaries and on loose chits of paper. Now, a small pen drive just one inch long, is sufficient to contain one giga byte (about 1,00,000 pages) of information. Payments are no longer made through cash or cheques alone; e-payments by credit or debit cards or direct transfer from one account to another or through electronic clearing system are catching up. The Internet, perhaps the most important achievement of mankind in modern times, has made practically all information available to us on the click of a mouse, within the four walls of a room.

Investigation today has to match with the fast pace of technological developments and for this purpose, the investigation set-up in the Income Tax Department has been equipped with requisite hardware. They have been provided with internet and intra-net facilities, voice recorders, digital cameras, mobile memory card readers and other such equipment required for investigation in the present day e-scenario. Tax officials possess the necessary skills and software required for breaking passwords, retrieving data which has been deleted and accessing data stored in remote storage devices, etc. They are also continuously innovating and experimenting to develop their own software to facilitate investigation.

In the recent past, the methods of doing business have undergone a metamorphic change. With the advent of globalization and the exposure to world class goods and services, small businesses have given way to large multinational corporations. Stand alone cinema halls and retail shops have given way to multiplexes and malls. Local brands have been replaced by international brands. The corner pansari shops or cloth shops no longer exist. People like to visit stores like Zara, Aldo, Mango, Celio or Oliver. The youth like to buy shoes from Nike or Reebok or even Gucci rather than from Bata or Flex. E-commerce is on the rise. Goods and services are ordered online. International money transfers can be carried out on the Net and payments can be made by using websites like eBay, Paypal and Visa. Money can be withdrawn from any ATM in India from an overseas bank account. Debit and credit cards can also be linked to offshore bank accounts. In this changed environment, investigation for detecting tax evasion has become a far bigger challenge. Offenders are indulging in newer and newer methods of tax evasion, while the older ones have not been given up. While hawala transactions, bogus billings, benami bank accounts and the like continue to be resorted to, formation of dummy corporations, violations of arms length pricing, misuse of the concept of permanent establishment, dubious cross border transactions, etc., to evade taxes have also surfaced.

International taxation has emerged as a new field. The Income Tax Department is now getting attuned to the new scenario. The departmental officers are being trained in all the new areas. The National Academy of Direct Taxes, Nagpur and the Regional Training Institutes are conducting courses, workshops and seminars to fully equip the officials to meet the new challenges. They also have the benefit of attending courses conducted by other training institutes and some enforcement agencies. These programs are aimed at updating the knowledge of officers and sharpening their professional skills, so that they can keep pace with the rapid developments taking place all around.
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