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Article Dated 09th August, 2021

HOW TO HANDLE NOTICE U/S 131 OF INCOME TAX ACT,1961

THE PROVISIONS OF SECTION 131

The provisions of section 131, as updated upto Finance Act, 2021 read as below:

131. (1) The Assessing Officer, Deputy Commissioner (Appeals), Joint Commissioner, Commissioner (Appeals), Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner and the Dispute Resolution Panel referred to in clause (a) of sub-section (15) of section 144C shall, for the purposes of this Act, have the same powers as are vested in a court under the Code of Civil Procedure, 1908 (5 of 1908), when trying a suit in respect of the following matters, namely :—

(a) discovery and inspection;

(b) enforcing the attendance of any person, including any officer of a banking company and examining him on oath;

(c) compelling the production of books of account and other documents; and

(d) issuing commissions.

(1A) If the Principal Director General or Director General or Principal Director or Director or Joint Director or Assistant Director or Deputy Director, or the authorised officer referred to in sub-section (1) of section 132 before he takes action under clauses (i) to (v) of that sub-section, has reason to suspect that any income has been concealed, or is likely to be concealed, by any person or class of persons, within his jurisdiction, then, for the purposes of making any enquiry or investigation relating thereto, it shall be competent for him to exercise the powers conferred under sub-section (1) on the income-tax authorities referred to in that sub-section, notwithstanding that no proceedings with respect to such person or class of persons are pending before him or any other income-tax authority.

(2) For the purpose of making an inquiry or investigation in respect of any person or class of persons in relation to an agreement referred to in section 90 or section 90A, it shall be competent for any income-tax authority not below the rank of Assistant Commissioner of Income-tax, as may be notified by the Board in this behalf, to exercise the powers conferred under sub-section (1) on the income-tax authorities referred to in that sub-section, notwithstanding that no proceedings with respect to such person or class of persons are pending before it or any other income-tax authority.

(3) Subject to any rules made in this behalf, any authority referred to in sub-section (1) or sub-section (1A) or sub-section (2) may impound and retain in its custody for such period as it thinks fit any books of account or other documents produced before it in any proceeding under this Act :

Provided that an Assessing Officer or an Assistant Director or Deputy Director shall not—

(a) impound any books of account or other documents without recording his reasons for so doing, or

(b) retain in his custody any such books or documents for a period exceeding fifteen days (exclusive of holidays) without obtaining the approval of the Principal Chief Commissioner or Chief Commissioner or Principal Director General or Director General or Principal Commissioner or Commissioner or Principal Director or Director therefor, as the case may be.

SUBSTANCE OF THE PROVISIONS OF SECTION 131

In substance, Section 131 is a powerful tool which gives distinct powers to different classes of officers for the purposes of the Act accordingly the tax officials can summon for –

  1. Conducting inquiries for the purpose of discovering and inspecting the various people and the necessary documents;

  2. Imposing that any person, including any officer of a banking company, be present in attendance and further scrutinizing him or her under oath;

  3. Forcibly demand the books of accounts and other documents to be produced; and

  4. Issuance of commissions.

In other words, section 131 of the Income Tax Act empowers the income tax authorities to conduct inquiries. It provides powers to summon persons/witnesses, examine them under oath, compel production of books of account and documents and to impound them, and issue commissions. The power of enforcing attendance of a person under this section is the same as available under the Code of Civil Procedure, 1908.

THE MEANING OF SUMMON

The word ``summons`` is defined in K.J.Aiyar`s Judicial Dictionary (10th Ed. 1988) to mean as ``a call of authority to appear before a Judicial Officer". In the Oxford Dictionary of Law (2003) published by the Oxford University Press, it is defined as follows:-

``A court order to an individual to appear in court at a specified place and time. The term is used in criminal cases for appearance at a Magistrate`s Court. Before the introduction of the Civil Procedure Rules in 1999, it was used in civil cases for hearing in the county court and applications to a Judge sitting in chambers about procedural matters prior to the court hearing. Such orders are now made by application notice."

MAIN LIMBS OF SECTION 131

Section 131 contains basically two limbs relating to two different classes of officers. Whereas section 131(1) empowers the jurisdictional assessing officer to issue summons. Section 131(1A) empowers the officers of the investigation wing viz. Assistant Director, Deputy Director or the Director of Income Tax (Investigation) to issue summons.

Later on, section 131(2) was added to empower income-tax authority not below the rank of Assistant Commissioner of Income-tax to make inquiry or investigation in respect of any person or class of persons in relation to an agreement referred to in section 90 i.e. Agreement with foreign countries or specified territories regarding double taxation relief, or section 90A i.e. Adoption by Central Government of agreement between specified associations for double taxation relief, it is similar to section 131(1A).

POWERS U/S 131(1)

Here it is also important to clarify that an assessing officer can invoke section 131(1) for making inquiries only in a case where proceedings are pending before him, which includes  assessment/reassessment proceeding, the same can also be issued under a pending revision, appeal, or dispute resolution proceeding by the competent authorities. For example, during the course of ongoing assessment proceedings, the assessing officer can summon a third party for verifying facts presented before him by the assessee. He can also summon the assessee to his office for recording his statement on any of the issues relevant to the assessment.

POWERS U/S 131(1A)

However, the powers under section 131(1A) are distinct, The competent authority of the investigation wing can issue summons under this part of section notwithstanding that any proceeding with respect to such person or class of persons is pending, under following circumstances

a) before he takes action under clauses (i) to (v) of S. 132 relating to search and seizure operation;

b) has reason to suspect that income has been concealed;

THE RELATION BETWEEN 131(1A) AND THE CIVIL CODE OF PROCEDURE

The Civil Code of Procedure manages the civil proceeding in India and gives Section 131(1A) the power to issue commissions, enforcing the attendance of an individual, discovery, and inspection of any property. It also allows the section to examine the assessee on oath along with producing the necessary books of accounts and documents.

POWER U/S 131- A RIGHT OR A DUTY

Section 131 not only gives right to the authorities to conduct enquiries etc.  for the purposes of the Act, but it also cast a duty upon them to do so to establish and prove their contention leading to additions to the declared income of the assessee and having direct impact on the revenue. How important it is, could be understood from the comments made by the Hon’ble Tribunal in case reported in ABCAUS 3227 (2020) (01) ITAT. In this case additions were made by the Assessing Officer (AO) on account of unexplained deposit in Bank Account, which were sustained by the Ld. CIT(A), the assessee explained that the money as deposited was received from a specific person for construction of his house. The assessee also submitted a confirmation of that person during the assessment proceedings with his explanation, which were not found tenable. The Tribunal questioned that when before both the authorities below the assessee had explained that the amount had been received from specified person, why the AO had not invoked the provisions of section 131 of the Act available to the income tax authorities for the personal presence of the depositor. The Tribunal opined that when a very powerful tool was available to the income tax authorities in their quest for the truth, the AO cannot sit back with folded hands in not issuing summons u/s.131 of the Act. Meaning thereby, It was a duty of the learned AO to issue summons to the depositors, to verify the correctness of the assessee’s explanation, however the Assessing Officer had not bothered to enforce the presence of depositor by issuing summons u/s 131 of the Act, which was not found acceptable.  

SUMMON TO ATTEND OR APPEAR IN PERSON.

If summons are issued and served on a person for personal attendance under section 131, it is binding on him to attend in person, generally in case of witness personal appearance is required, He cannot be represented by a lawyer or an authorized representative, as witness has no right of being represented by an authorised representative.

However, a notice other then witness may be represented by his authorised representative in response to notice u/s 131.

SUMMON TO PRODUCE BOOKS OF ACCOUNTS

Further, a person can also be compelled to produce books of account or Documents by issuing a notice under section 131.

However any books of account or other documents cannot be impounded by the investigation officer without recording reasons for doing so, and further  the same cannot be retained by him in his custody for a period exceeding fifteen days (exclusive of holidays) without obtaining the approval of the higher authorities.

SUMMONS ISSUED WITHOUT APPLICATION OF MIND ARE NOT VALID

It’s very important to understand that the summons issued should be backed by well thought reasons and proper logics. Hence, it is imperative that proper care is taken and proper logical reasoning be applied before having the summons issued. The powers of section 131 should not be used as a cover for examining any investigation or a meandering inquiry.

In Barium Chemicals Ltd. and another -vs- Sh. A.J.Rana and others reported in (1972) 1 SCC 240. the Supreme Court had also observed as follows:-

``19. The fact that an omnibus order was made in respect of all documents relating to the appellants, which were in the custody of the Registrar under the order of this Court, including some of the documents which have not even remotest bearing on the matter covered by the Act, goes to show that there was no due application of the mind by the authority concerned. As mentioned earlier, an essential condition precedent to the making of an order under Section 19(2) is that the authority concerned should have considered it necessary to obtain and examine for the purpose of the Act the specified information, book or other document. The element of due care and attention which is an essential ingredient of the phrase `considers it necessary` is lacking in this case. As such, the impugned order should be held to be not in conformity with sub-section (2) of Section 19 of the Act."

it is stated that Section 131 (1A) of the Income Tax Act is also an analogous provision and, therefore, the summons before its issuance must be based on reasons and calling for all the documents relating to an immovable property owned by the petitioner is nothing but a fishing expedition.

When a summon is issued, care should be taken in filling up the necessary particulars in the format used for issuing the summons ,the portion that is not applicable has to be scored out. Summons not containing the required particulars or containing un-scored inapplicable portion are not considered as valid summons. In G.M. Braveries Ltd. Vs. UBI 241 ITR (446) the Bombay High Court has held that neither the blanks has been filled up nor the inapplicable portion has been scored out so it was non application of mind and proceedings were stayed by the court. It was further observed by the court that it was not clear that summons were issued under I.T. Act, W.T. Act, G.T. Act and it was also not evident from the summons that in what connection and under which act the books of accounts were required to be produced. When these actions or items are not followed, the court then would assume that the summons was issued without any logical application of the mind. The reason for the summons has to be clearly stated and the specific Act should be mentioned.

Until the insertion section 292(B) in the Income Tax Act, 1961, A summon which was required/intended to be issued under section 131(1A) but issued under section 131, then such summon was considered to be invalid.

VALIDITY OF A SUMMON WHEREIN PURPOSE AND NATURE OF PROCEEDING NOT DISCLOSED.

It is a settled law, that the person who is the recipient of the summons or to whom the summons is issued is not entitled to have the full details of the nature & purpose of the proceedings in respect of which the summon as held in above case.

In the case Ka.Manshoor vs. Assistant Director ED, before The Hon’ble Madras High Court, the validity of summon issued u/s 37 of FEMA (which is an analogous provision to section 131 of the Income Tax Act), was challenged on the ground that the impugned summons was issued without disclosing any purpose or nature of enquiry that has been taken against the petitioner, hence it is contrary to the Act. However, the Ld. DR stated that there is no necessity to disclose the particulars at the time of summons, as it will enable a person to manipulate or conceal the required particulars. The summoning authority need not disclose the nature of the enquiry/ investigation to the person so summoned. The issuance of summons will no way affect the rights of the person, as it is only for the preliminary investigation and for production of documents before the authority for further investigation. The Hon’ble High court accepted the argument of the DR and rejected the assessee’s appeal.

ISSUE OF NOTICE UNDER SECTION 131(1A) AFTER SERACH

Issuing a notice u/s 131(1A) after the search is over, is a controversial issue, despite that there is no legal binding that the there should be a pending proceeding for issuing notice section 131(1A).

There are conflict decisions of different courts. The Hon’ble Gujrat High Court in the case of Arti Gases v. DIT (Inv.) (2001) 248 ITR 55 has held that notices u/s 131(1A) can be issued after completion of search undertaken under the provisions of section 132, as it would be absolutely logical to call for information so as to have better particulars or to have complete idea about the material seized during the search. The court was satisfied with the reasons recorded by the authorities before issuing search warrant u/s 132, according to court  the authorities had sufficient material to take action u/s 132.

Contrary to above, the Hon’ble  Allahabad High Court in the case of Dr. Mrs. Anita Sahai v. DIT (2004266 ITR 597 in which the High Court have held that there was neither reason to believe nor material before authorizing officer on the basis of which he could issue a warrant u/s 132. According to the court the reason to believe must exist and must be taken into consideration by the Director/Commissioner at the time of issuing of warrant of authorisation. If the reason to believe comes into existence later, i.e., after issuance of warrant of authorisation, then the warrant of authorisation and entire search and seizure will be illegal even if the material on the basis of which the Director formed his opinion that there was reason to believe existed prior to the issuance of warrant of authorization, since the aforesaid material was taken into consideration by the Director/ Commissioner, subsequent to the issuance of the warrant of authorisation.

ISSUE OF NOTICE UNDER SECTION 131 DURING THE SURVEY

Notice u/s 131 cannot be issued during course of a survey u/s 133A except under compelling circumstances in terms of subsection 6 of section 133A, which says that if  during the course of survey u/s 133A a person is required to afford facility to the income-tax authority to inspect books of account or other documents or to check or verify any cash, stock or other valuable article or thing or to furnish any information or to have his statement recorded either refuses or evades to do so, the income-tax authority shall have all the powers under sub-section (1) of section 131 for enforcing compliance with the requirement made.

Moreover once the survey is over, there remains no pending proceedings, as such survey authority cannot issue notice u/s 131, even if the assessee behavior was not cooperative in terms of section 133A(6), notwithstanding that the assessing officer is still looking for making enquiries from the assessee even after survey is over to establish his findings. Hence, to deal with this legal hurdle, it is seen in practice that more or less in every survey, the assessing officer issues notice u/s 131 during the course of survey itself, so that enquires can be made from the assessee even after the survey is over.

In Gheru Lal Bal Chand v. ITO [1982] 137 ITR 190, the Punjab and Haryana High Court held that the Income Tax authorities have no jurisdiction to resort to the powers under Sub-sections (1) and (2) of Section 131 while surveying the accounts of the assessee under section 133A when the assessee neither refused nor evaded to co-operate with the competent authority.

Similarly in Dr. Vijay Pahwa v. Samir Mukhopadhyay, Deputy CIT [2001] 250 ITR 354 the Calcutta High Court considered the case where the survey was conducted and the summons under Section 131(1) were served upon him on the spot and the same were executed within thirty minutes or so. The books and other documents, when produced before the authority in the Income Tax office, were impounded immediately. In the peculiar facts and circumstances of the case, the court held that the authority had exceeded its powers and the procedure adopted by the authority was illegal and amounted to high handed action.

HOW TO HANDLE AND RESPOND TO NOTICE UNDER SECTION 131

After having basic understanding of the provisions of section 131, and of various leading case laws as above, It would be easier to handle the notices under Section 131 without any panic. The first thing you must do is to keep all the summoned documents ready. Engage a lawyer/CA having expertise over the subject, and do not try to reply at your own. Please be careful and never ignore such notices, and if you have been asked to be present physically, make sure you do, see if it allows hiring an Authorized Representative (AR). You may ask him to represent you or accompany you during the proceedings. You can also send all the documents within the deadline mentioned in the notice. In case some document is missing, make sure you seek an extension from AO.

Though the notice issued u/s 131(A) do not disclose the purpose and nature of the proceeding, yet it is certainly about some information the department has got about you, making them believe that there is some income that you may have been concealing. So, track all your financial transaction you have entered in to recent past, like purchase and sell of property, shares, or arranged some big functions/event entailing huge expenses etc., collect necessary documents to prove the genuineness and source of funding of such financial transactions, do not hesitate to show and consult the same with your tax expert, and follow his advise. There is no other way out except to comply with such notice diligently.

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