In the context of tax raids in India, the bugle call of “Charge” is invariably accompanied by
massive publicity. The bugle call of “Last Post”, however, rarely makes it to even a passing
mention.

Because a raid involves gross invasion of privacy, it is adopted, or should be adopted, only in
limited circumstances by the tax department. Only a few out of the several lakhs of taxpayers
are covered. But raids are a necessary evil to counter tax evasion. Raids are based on specific
information based on which the tax department has reason to believe that the taxpayer has
evaded taxes.

The source of information is usually the tax department’s own intelligence. Information is also
received from banks, market funds, property registration offices, the Financial Intelligence Unit,
Serious Fraud Investigation Unit, and other agencies.

The source of information is usually the tax department’s own intelligence. Information is also received from banks, market funds, property registration offices, the Financial Intelligence Unit, Serious Fraud Investigation Unit, and other agencies. 

Thus, the raids are based on definite information. Thereby, after verification, action is initiated after approval from all the way up. There are checks and balances. The tax department cannot raid a person on a whim. 

However, the proof of the pudding is in the eating. Whether the information is reliable or not can only be determined once the tax assessments and all appeals are gone through much later. Here, the record of the tax department is not known. 

If an exercise has been conducted internally, or, by an outside agency such as the Comptroller & Auditor General (CAG) to determine its efficacy — the ‘success of raids’ is not known. Instead, there are enough indications, anecdotally and otherwise, to suggest that, often, ‘claims’ made at the time of raids don’t stand up to scrutiny in their entirety at the end of the legal process. Of course, the long, exhausting, expensive process is itself a punishment and getting exonerated at the end of it all is a pyrrhic victory. 

It is in the backdrop of the above state of affairs, that the raid on actor Sonu Sood needs to be discussed. 

Sonu grabbed the national spotlight for helping migrants reach their homes during the nationwide lockdown clamped last year in the wake of the Covid pandemic. He was lauded for his work. 

He was reportedly raided for four days in a row, along with his Foundation (Sood Charity Foundation), associates and a Lucknow-based infrastructure group, with which, as claimed by the tax department, Sonu had entered into a joint venture and invested substantial funds. A total of 28 premises, spread over Mumbai, Lucknow, Kanpur, Jaipur, Delhi and Gurgaon were covered. 

The CBDT has stated that incriminating evidence pertaining to tax evasion by Sonu, and the infrastructure group, has been found. As far as the actor is concerned, the main modus operandi alleged to have been followed by him was to route his unaccounted income in the form of bogus, unsecured loans from many bogus entities. Reportedly, the total tax evasion thus far is more than Rs 20 crore. He has also been accused of violating the Foreign Contribution Regulation Act (FCRA) while raising donations from abroad. 

The infrastructure group has been accused of bogus receipts of Rs 65 crore and of dubious circular transactions of Rs 175 crore. Though the tax department has provided the figure of tax evasion pertaining to Sonu, it has not given any figure of tax evasion pertaining to the transactions of the infrastructure group. 

In this day and age, tax evasion of Rs 20 crore does not merit a raid on any entity. There needs to be at least one more zero in the figure to deserve a successful rating. Even a ‘survey’ which yields Rs 20 crore is deemed to be not successful. 

The time and efforts of the tax department could have been more productively utilized in nabbing bigger players indulging in bigger tax evasion. And there are hundreds and thousands of them out there. Tax evasion is rampant in the country, and there is no dearth of unscrupulous taxpayers. 

It might be countered that the purpose of a raid is not only to unearth tax evasion, but to act as a deterrent to other tax-evaders. It may be so, but the one and only yardstick used by the tax department to determine a raid’s success is the quantum of tax evasion. That is the figure that is touted, that is the measure of the investigation officer’s worth; in the earlier days when information was gathered from the ‘informer’, that was the basis of his 10 per cent reward. 

Having said that, I must hasten to add that it is still early days. The evasion may be much more. Books will be scanned, witnesses examined, information dredged, lockers checked. If the evasion goes up, the tax department will announce it. 

The issue is if Sonu is established to be innocent, whether in his own dealings or in his association with the infrastructure group (even if the infrastructure group is found to be guilty in its business dealings, which has nothing to do with Sonu), will the news be given the same saturation coverage? 

It never is, and that is a pity! 

What does Sonu have to say?

He states that every rupee in his foundation is awaiting its turn to save a precious life and reach the needy. He also says that he has encouraged brands to donate his endorsement fees for humanitarian causes. He has denied any business dealings with the infrastructure group and has categorically stated that he has not invested with them. He has no knowledge of their business affairs — their work is separate and so is his. He has taken objection to the fact that statements relating to the raid on his premises and the raid on the infrastructure group are being released as ‘one’ — leading to a misunderstanding in the public domain. 

Undoubtedly, Sonu will attempt to counter the allegations at the assessment stage, and if he fails there, at the appellate stage. If, however, the claims made by the tax department are accepted by him as true, he may ‘surrender’ the income that he has concealed and pay taxes and penalties, close the matter, and carry on with his life. This will, of course, entail a huge impact on his reputation. 

Early days, but who knows what will unfold? Many taxpayers adopt this route to ‘buy peace’ (a term often used in the affairs of the tax department). 

HOWEVER, IT IS no doubt true that Trusts are sometimes misused to launder money. The tax department has been aware of this misuse and has been amending laws over the years to stop the practice. Yet, many taxpayers stay ahead of the curve with the tax department trying to catch-up. Why India, all over the world, Trusts have been used for evasion!

However, that is not to suggest that Sonu Sood has done the same. That would be established later. 

One very common method adopted by taxpayers in India is to convert their unaccounted money through the stratagem of showing bogus, unsecured loans from shady companies which normally exist only on paper. It is an old chestnut which has existed in the Indian tax landscape since inception and been the subject matter of countless court cases. Proving it is an uphill task. 

But, again, that is not to suggest that Sonu Sood has done the same. That determination will be made in the future. 

Could this tax evasion by Sonu, as claimed by the tax department, be established by the normal assessment procedure? 

The nature of allegations — seeking bogus loans from bogus companies — has been dealt with in a huge number of assessment proceedings by tax officers, many times of much larger amounts. There is no tax officer who has not handled such cases in the normal course of assessment proceedings. 

When a case is selected for scrutiny, it is thoroughly investigated. The tax officer has the powers to send tax inspectors to verify information, such as the existence and the genuineness of the lending companies, or, to summon the directors of these companies and examine them, or, to seek information from banks regarding the cash-for-cheque transactions, or, to procure details of Sonu’s dealings with the infrastructure group. His powers are extensive enough to get to the bottom of the matter. 

So, why the raid, especially when it is the ultimate weapon to be used — sparingly — when all other avenues are closed?

The tax department would have the answer which would be in the ‘satisfaction note’ prepared by it to justify the raid which can only be looked into by a court in a writ. Speculations are rife, but that is expected. The opposition parties, predictably, have issued their condemnations. We have already seen a similar phenomenon happen in the Anurag Kashyap/Tapsee Pannu case. 

Therefore, watch this space. As and when the raid and post -raid proceedings wrap up, some questions may have the answers. Indeed, for other questions, it may still be a long haul. 

The writer is a former IRS officer of the Government of India.