NOTWITHSTANDING CONCERNS about a possible breach of privacy in the digital search and seizure provisions in the new Income Tax Bill, 2025, through powers to override digital codes and access to social media, a Select Committee of Parliament has recommended retaining the clause without any significant changes.
Except for some drafting corrections, the Select Committee on the Income Tax Bill, 2025, headed by BJP leader Baijayant Panda, in its 4,575-page report tabled in Lok Sabha on Monday, said the clause on search and seizure powers was “adequate” and “in line with the corresponding section of the 1961 Act”.
Apart from the key concern of an infringement upon the right to privacy, stakeholders, in suggestions to the committee, had flagged the need to define clear guidelines for the use of personal data obtained during searches; removal of the power to cover “any person who is present in the premises” of the search operation; and introduction of restrictions for protecting privileged communication such as those between husband and wife, with doctors/ lawyers etc.
In its response to the committee, the Department of Revenue, under the Ministry of Finance, said the changes have been made with a view to align with the changed circumstances. On the powers to cover any person present on the premises, the ministry said statements of such persons become important and are relevant for investigations.
On narrowing down the reference to any information stored in electronic media, the response was that “the phrase cannot be restricted as digital data is all encompassing including login id and password of any email or social media account which are used to hide financial data in encrypted chats.”
On exclusion of social media accounts from the definition of virtual digital space, the ministry said various incriminating evidence and material are found/ seized from electronic records, including WhatsApp communications, emails, etc. “In most of the cases of search operation, the taxpayers do not share the password/ login credential of online forums/ portals/ e-mail accounts, etc. This is because various encrypted communication modes are being used by taxpayers to communicate and discuss their unaccounted transactions. The amendment has been rightly made to rationalise the provisions. Thus, the suggestion is not feasible,” it said.
The Income Tax Bill, which was tabled in Lok Sabha in February this year, had defined “virtual digital space” – in the powers to call for information during surveys, searches and seizures – as “any digital realm that allows users to interact, communicate and perform activities” through computer technology. It had also allowed tax authorities to break open, or “override” access controls, such as passwords, set up by users for digital communication on social media platforms, email services, and other communication on encrypted platforms such as WhatsApp.
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The committee sought the views of several ministries on the search and seizure provisions, including the Ministry of Home Affairs, Ministry of Law and Justice, and Ministry of Electronics and Information Technology (MeitY).
In its response, MeitY said the broadening of powers for Income Tax authorities to gain access to virtual digital space “may be seen as a necessary measure to adapt to the realities of a rapidly evolving digital world”. Citing the sections on personal data from the Digital Personal Data Protection Act, which is yet to come into force, MeitY said any search and seizure of virtual digital space places the Income Tax Department in the role of a data fiduciary and would subject it to all the responsibilities and exemptions provided for a data fiduciary under the DPDP Act. It also said that the government agency must affirm that the information will not be published or shared with any other person.
On privacy, the Ministry said it is clear that the right to privacy is limited, and shall be restricted on the basis of legitimate State aim, necessity and proportionality, and that the Income Tax department may execute the search and seizure under certain legitimate uses as defined in the DPDP Act.
The Ministry of Law and Justice also said that the right to privacy is not absolute and listed seven exceptions — national security, public order, morality, contempt of court, defamation, incitement to commit an offence and prevention of crime. It said the Income Tax rules provide for the procedure to be adopted to conduct search and seizure, and ensure deposit and safe custody of materials seized in a search.
Proposed changes
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As part of its total 32 recommendations on the Bill, the committee also recommended relief for non-profit organisations (NPOs) by seeking re-introduction of tax exemption on anonymous donations made to religious-cum-charitable trusts, as present in the existing Income Tax Act. The Bill proposes a 30 per cent tax on anonymous donations for all NPOs, exempting only those that are wholly religious.
Noting that there is a significant divergence in the current and proposed versions of the law, the committee said the ambiguity on NPOs, especially those with mixed charitable and religious objectives, for taxing anonymous donations needs to be removed. “This omitted ‘religious-cum-charitable’ trust, a significant category previously exempt under Section 115BBC. To prevent undue burden and support India’s hybrid NPO sector, the committee strongly recommended reintroducing a provision similar to Section 115BBC’s explanation, approving Clause 337 subject to this amendment,” a statement said.
The existing provision recognises “religious-cum-charitable” entities as a distinct and valid class eligible for concessions on anonymous donations, understanding that such organisations often receive contributions through traditional means like donation boxes where donor identification is practically impossible.
“Many legacy trusts were staring at disqualification under vague definitions. By recommending clarity on ‘wholly for charitable or religious purpose’, the committee saves hundreds of older institutions from legal limbo,” Amit Baid, head of tax at BTG Advaya, said.
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On TDS refund claims by individuals who are otherwise not required to file tax returns, the committee suggested removal of the provision in the Bill that makes it mandatory for an assessee to file Income Tax returns within the due date. The committee said the current mandatory requirement to file a return solely for the purpose of claiming a refund could inadvertently lead to prosecution, particularly for small taxpayers whose incomes fall below the taxable threshold but from whom tax has been deducted at source.
“In such scenarios, the law should not compel a return merely to avoid penal provisions for non-filing. The committee, therefore, recommends removing sub-clause (1)(ix) from Clause 263 to provide flexibility for allowing refund claims in cases where the return is not filed in due time,” it said.
“The recommended removal of sub-clause (1)(ix) of Clause 263 stands to offer relief to small taxpayers by permitting refund claims even if returns are filed after the due date – an important step in preventing undue hardship for those with income below the taxable threshold but with TDS already deducted,” Amit Maheshwari, Tax Partner, AKM Global said.
