A searched person cannot be allowed to adjust Cash seized During Income Tax Raid with payment of advance tax

Treatment of Cash seized During Income Tax Raid

The Finance Act, 2013 has introduced an explanation to section 132B which states that the ‘existing liability’ does not include advance tax that is paid according to chapter XVII. Accordingly, Can an assessee ask for Adjustment of Advance Tax Payable against Cash Seized during Income Tax Raid?

Provisions of Section 132B of the Income Tax Act:

Section 132B of the Act provides that the assets and cash seized during an income tax raid or search conducted as per section 132 or 132A of the Act can be applied for the purpose of recovery of any existing tax liability and the amount determined upon completion of the assessment in pursuance to a search conducted as per section 153A of the Act.
Earlier there had been a controversy as to whether the ‘existing tax liability’ will include the advance tax that an assessee has to pay for the year of search. In many decisions given by the Courts, it was held that cash seized can be adjusted with the advance tax payable by the assessee upon his request. It was further held that interest under section 234B and 234C has to be charged from the date when such request for adjustment of the tax with the seized cash was made by the assessee.

Legal Precedents in cash of Cash Seized during Income Tax Raid

In the cases of CIT vs. Arun Kapoor (2011) 334 ITR 351 (P& H) the Punjab and Haryana High Court delivered such decision. The Delhi High Court in the case of Vishwanath Khanna vs. UOI (2011) 335 ITR 548 (Delhi) held in similar terms.

Effects of the amendment:

It seems that the Finance Act, 2013 has introduced the above explanation to section 132B with the intention to nullify the effect of the decisions of various High Courts and Tribunals.
The implication of the above amendment shall however be harsh on the assessees who have faced such a search under section 132 of the Act or for whom a requisition has been made under section 132A.
The above explanation provides that the cash seized during income tax raid cannot be adjusted with payment towards advance tax by the searched person and he should pay separately on account of the tax liability in connection with his undisclosed income during the statement recorded under section 132(4) of the Act, revealed during the search operation.

Effect of the Amendment on treatment of Cash Seized During Income Tax Raid

After the introduction of the above explanation, an assessee is required to pay tax separately on the amount of undisclosed income to be declared in his income tax return. The cash seized shall not be allowed to be adjusted with his tax liability and the same shall remain as an additional security with the department which shall be adjusted against any other demand relating to tax that may arise upon completion of related assessments.

As a Result, Searched Persons would be discouraged to declare Undisclosed Income:

Insertion of the aforesaid explanation is likely to discourage the searched persons from adjusting their undisclosed income which may further increase the litigation for the income tax department.
If the assessees make declaration of the undisclosed income, a problem might arise as to how they would arrange for further funds to pay the tax liability for their undisclosed income.

Related Read- How to Tackle Income Tax Raid