Income Tax

Case Studies on Black Money

The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (BMA) have been on the statute for more than 7 yrs now. The present article shall discuss the developments made in curbing the problem of black money and the introduction of the Act through various case laws in respect of the same over the years

2015 – Introduction of Law and Voluntary Disclosure Scheme

The introduction of BMA was made in the year 2015, through the Finance Act 2015, specifically with a view to dealing with undisclosed offshore incomes and assets, as the prevalent laws were inadequate to deal with various aspects of offshore assets and incomes.

A limited period one-time disclosure window was introduced wherein one could make a disclosure (up to September 2015) and come clean by paying 30% tax and 30% penalty (effectively 60% of the value of undisclosed income and offshore assets as against a minimum outflow of 120% as stated above).

Immunity from action under five acts (IT Act, Wealth Tax Act 1957¹, Foreign Exchange Management Act 1999, Companies Act 2013, and Customs Act 1962) was provided to the assessees availing this opportunity. The administrative focus for the major part of 2015 and early 2016 was spent convincing the assessees to avail of this one-time disclosure window and come clean and collect the taxes for disclosures so made. This scheme didn’t receive a favorable response from the assessees, and the disclosure applications and revenues therefrom weren’t commensurate with the Government’s expectations.

2016 To 2018 Invocation of BMA in Various Cases (Issuance of Assessment Notices)

Upon the expiry of the time limit for making the voluntary disclosure, related compliances and payment of taxes, the tax authorities shifted their focus towards the issuance of investigation and assessment notices concerning offshore assets held by Indian assessees.

 A lot of notices were issued between the time periods of 2017 to 2019 requiring assessees to explain/show cause for the non-initiation of the proceedings by the authorities against them. As per news reports, more than 400 BMA notices were issued by the end of 2019.

The administrative machinery of BMA sets in motion when a notice under Section 10 (1) of BMA (an equivalent of Section 143(2) or 148 of the IT Act) is issued. A combined reading of Section 3 (Charging section), Section 10 (Assessment) and 72(c) (Removal of doubts) meant that in case an assessee hasn’t availed the one-time disclosure window, a tax was to be levied in the year in which the assessing officer has discovered the irregularities and issues a notice to the assessee (irrespective of the year of the acquisition of such offshore asset). As per Section 11(1), an order under BMA needs to be passed within two years from the end of the financial year (FY) in which Section 10(1) notice is issued.

Significant Case Law in This Period  

Some of the significant case laws in this period are discussed below-

• Srinidhi Karti Chidambaram Vs The Principal Chief Commissioner (2018): In this case, the assessees had approached the High Court seeking two reliefs. The ruling of the court on these reliefs sought is summarised as under:

• Prohibition Of Writ: The assessees sought for prohibiting tax authorities from instituting and sanctioning any prosecution against them – The HC considered the provisions of Sections 48 and 55 as well as Chapter V of BMA dealing with offenses and prosecution. It was also observed that no material was placed on record showcasing sanction under Section 55 or initiative for the initiation of prosecution against the assessee. In view of such a position, the issuance of a writ of prohibition can be made by the High Court as sought by the assessee.

• Direction Be Given To Tax Authorities To Conclude The Assessment Proceedings Under Bma Forthwith Without Any Delay: It was prayed that substantial details were sought and submitted by the assessee and that the department was delaying the conclusion of proceedings, and that there were multiple officers issuing notices/summons in relation to the same assets, which was causing undue harassment.

With a view to bringing a conclusion to the same, the assessee sought a direction from the court that the authorities should be directed to forthwith conclude the assessment proceedings initiated under BMA.

The Court considered these arguments and held that since a limit had already been prescribed under BMA for passing an assessment order, no such direction compelling the authorities to pass an order well before the stipulated time was feasible. It is pertinent to note that prosecution proceedings were indeed launched later and quashed by the High Court after considering the facts and circumstances of the case.

2019 – Sweeping Changes Made In BMA

When introduced in 2015, the provisions of the BMA were applicable only to an ‘assessee’ (defined under Section 2(2) of BMA), which meant Residents of India according to Section 6 of the IT Act. Assessees who were ‘Non-residents’ or ‘Residents but not-ordinarily residents’ were specifically kept outside the purview of BMA. However, vide Finance Act 2019, the definition of an ‘assessee’ under BMA was amended retrospectively from the date of applicability of BMA (i.e., 1 July 2015)  for including individuals/entities that were residents when undisclosed offshore incomes were earned / undisclosed offshore assets was acquired despite such individuals/entities later became non-residents of India.

While the reason cited for this retrospective amendment was that it merely provides a clarification of the legislative intent of BMA, it was interesting to see if this amendment withstands the test of judicial scrutiny as it has the effect of substantially changing an assessee’s position retrospectively (especially those who could have been residents of India in the past, but left India before 2019).

Significant Rulings Pronounced In This Period

• Mr. Gautam Khaitan’s case: The Delhi HC, while hearing a petition filed by Mr. Gautam Khaitan (wherein various provisions of BMA were challenged), had in an interim order held that the introduction of BMA was made from 1 April 2016. Hence the notification (dated 1 July 2015) amending the effective date of BMA from 1 April 2016 to 1 July 2015 was retrospective and hence, ultra vires the law, and thus, the tax authorities were restrained from taking any action under the BMA. This could have huge repercussions on the applicability of BMA, and therefore, the tax authorities immediately approached the Supreme Court challenging the Delhi HC ruling.

The Supreme Court considered the intention of the law and the fact that the amendment in dates was made for enabling the assessee towards availing of the One Time Disclosure Window and to remove difficulties with respect to penal provisions under BMA. Supreme Court, by its order of 2019, held that there want any infirmity and that the Delhi HC wasn’t right in treating the notification as ultra vires.

• Calcutta High Court on Retrospective of the BMA: The Shrivardhan Mohta Case: In this case, the HC held that despite having sufficient opportunities for the petitioner under the Act of 1961 to make true and proper disclosure of foreign assets, he failed in doing the same after search and seizure and also in Settlement proceedings, therefore he would be liable for the violation of provisions of Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015. It couldn’t be said that a retrospective effect had been sought to be given to the Act of 2015 so far as the assessee is concerned. Therefore, Prosecution under Black Money Act was justified if the assessee failed to disclose foreign bank accounts.

• PCIT V Income Tax Settlement Commission (Gujarat High Court): In this case, the assessee had sought the settlement and payment of taxes on certain offshore assets under their Income Tax Settlement application before the ITSC under the IT Act. According to the fact, it seemed that the tax department accepted such a settlement and recovered taxes on the amount settled under the ITSC order and later approached the courts seeking annulment of the ITSC order challenging it on the grounds that offshore assets could be dealt under BMA only, which is a specific law, rather than IT Act which is a general law.

Various arguments raised on both sides were considered by the Gujarat HC, and ultimately, it held that there isn’t any specific bar of exclusion from the applicability of the IT Act under the BMA.

The HC also referred to some of the FAQs issued under BMA, which also provide for invocation of the Act. It was also held that the applicants under the ITSC did not qualify as ‘assessee’ under the then definition of ‘assessee’ under BMA, and hence it can’t be held that ITSC lacked jurisdiction for deciding the applications. The tax authorities were given various opportunities during the ongoing settlement procedures and hence couldn’t bring these proceedings challenging the settlement order.

2020-21 – First Lot of Assessment Orders, Commissioner of Appeals Notified, and Separate Bench Notified In Tribunal for Hearing BMA Cases

While the first major batch of assessment orders under BMA was due in March 2020, owing to COVID–19 and related relaxations in time limits announced, the time limit for passing such assessment orders was extended until 31 March 2021. Numerous administrative steps were taken in 2021, namely the designation of an area-wise Commissioner of Income Tax (Appeals) for the purposes of filing and hearing BMA appeals, the constitution of specific benches in the Income Tax Appellate Tribunal for hearing BMA cases, and consolidation of ongoing investigation and assessment cases area wise in specifically designated ranges for ensuring a focused and consistent approach.

Significant Rulings During This Period

• Mr. Jatinder Mehra, Ruling Itat Delhi: In this case, BMA proceedings were invoked in the case of the assessee on receipt of information concerning offshore assets. The assessee was alleged to be a settlor of an offshore trust, which, when revoked, had transferred funds to a company based in BVI.

The credits in the bank account of this BVI Company were sought to be added to the hands of the assessee. The assessee submitted that he was a mere nominal settlor of the trust without making any financial contribution, and he did the same upon the request of his family members.

The assessee’s son (who was a non-resident for more than two decades) was the owner of the entity to which the bank account being investigated belonged, and the assessee was neither a director nor shareholder of the entity.

The assessee also filed an affidavit stating he never signed any documents and didn’t receive any funds from this company. The Commissioner of Income Tax (Appeals) found merit in the submissions of the assessee, which led to the deletion of the additions made.

The Tax Department agitated this before the Tribunal, and even the Tribunal upheld the appellate order. In doing so, the Tribunal also examined the meaning of the terms “beneficial ownership” and “beneficial interest” in the backdrop of a number of laws, including the Companies Act, the Prevention of Money Laundering Act, The Benami Property (Prohibition) Act, etc. and held that there wasn’t any evidence placed on record to prove that the assessee was the beneficial owner of such offshore assets. The Tribunal also held that merely due to the appearance of  the assessee’s name on the account opening documents, the assessee doesn’t  become an owner of such a bank account and that the onus is on the department to prove that the funds sought to be taxed to such assessee

• Mr. Yashovardhan Birla Ruling ITAT Mumbai 2021: The Mumbai Bench of the Tribunal pronounced a ruling under BMA in the case of Yashovardhan Birla in the context of offshore assets. These offshore assets were the subject matter of litigation under the Wealth Tax Act 1957, and there was a positive ruling regarding the Wealth Tax in the case of the assessee.

 In the present case, the Tribunal held that the provisions of BMA don’t apply in the case of Yash Birla as merely on account of his being a discretionary class beneficiary of an offshore trust, he couldn’t have been alleged to be the owner of the assets of the trust. It was observed that the assessee wasn’t a contributor to the trust structure and wasn’t liable to be construed as the trust’s sole beneficiary.

 It was held that the Revenue couldn’t collapse the offshore trust structure. It was further held that the bank account in foreign jurisdictions pertaining to offshore entities couldn’t be treated as bank accounts of the assessee, even though for anti-money laundering purposes, the assessee had been declared as a ‘beneficial owner.

• Rashesh Manhar Bhansali Vs Acit (Itat Mumbai): Assessee argued that the alleged undisclosed foreign bank account was operated during the 2008-09 to 2010-11 assessment years. The same was well before the Black Money Act came into force. Conclusion- With regard to the applicability of the Black Money Act for the assessment year 2008-09 to 2010-11, it was held that the question appears to be infructuous and wholly academic. Further, it was held that an undisclosed foreign bank account per se can indeed be treated as an asset under section 2(11) of the Black Money (Undisclosed Foreign Income & Assets) and Imposition of Tax Act 2015. The action of the AO  in bringing to tax, in the hands of the assessee, the income reflected, to the extent information was available to him, in respect of undisclosed accounts with UBS AG, Singapore, under the Black Money (Undisclosed Income and Assets) & Imposition of Tax Act, 2015 was upheld. The order of the Assessing Officer was thus restored, and the relief granted by the learned CIT(A) was vacated.

2022- Present

According to the data published by the Press Information Bureau, the Ministry of Finance has stated that as of 30.11.2022, assessments under BMA, 2015, have been completed in 394 cases, which have raised tax demand of over Rs. 15,570 crores. Further, 125 prosecution complaints have been filed under the provisions of BMA, 2015. The State/UT-Wise details aren’t maintained separately.

Giving more information, the Minister stated that there isn’t any official estimation or methodology for measuring and defining the amount of black money in the country. However, the Government had commissioned a study, inter alia, on the estimation of unaccounted income and wealth inside and outside the country, through the National Institute of Public Finance and Policy (NIPFP), the National Council of Applied Economic Research (NCAER) and the National Institute of Financial Management (NIFM).

The reports and a detailed Government response to them were forwarded to the Lok Sabha Secretariat for placing them before the Standing Committee on Finance. The Standing Committee on Finance, after due deliberations and taking necessary oral evidence, presented a preliminary report on the matter (i.e. 73^rd Report of Standing Committee on Finance) to the Speaker of Lok Sabha on 28.03.2019 and this report has observed that “the unaccounted income and wealth inside and outside the country do not appear amenable to credible estimation in the context of India.”

• Dcit Vs  Ashok Kumar Singh 13 April 2023:The ITAT Delhi has held that once additions have been made under the Black Money Act, the same additions cant be made under the Income Tax Act ( ITA)  on the same set of facts.

The bench of C.N. Prasad (Judicial Member) and N.K. Billaiya (AccountantMember)had upheld the order of the CIT (A), wherein it was held that the addition made by the AO amounts to double addition and, therefore, should be deleted.     

• Withdrawal Of Rs 2000 Notes By RBI: On 19^th May 2023, the RBI decided to withdraw the Rs 2000 note from circulation, citing its clean note policy. RBI has asked banks to stop the issuance of these notes with immediate effect. The Apex bank has given 4 months till September 30, 2023, for the public to exchange or deposit Rs 2,000 notes in their possession in the branches of Banks or with the designated RBI offices.                                                                                                                                                                

Conclusion    

The abovementioned case laws and events are clear examples of the efforts made by the Indian Government towards curbing the menace of black money in the country. However, it must be noted that it is not the responsibility of the government alone, and the citizens of the country must contribute equally to tackling this issue.  

Read Our Article: Impact of Black Money on the Indian Economy

1. https://incometaxindia.gov.in/pages/acts/wealth-tax-act.aspx