Issues on Undisclosed Foreign Income and Asset | Black Money Act

As is evident from the plain reading of section 3(1) and section 4(1) of this Act, Undisclosed foreign income shall be assessed to tax in the previous year in which such income has been earned. Notice for assessment under this Act may however be issued in any year by the Assessing Officer on receipt of information as per section 10 of this Act. It is pertinent to note that there is no time limit for initiation of assessment proceeding under this Act as is the case for initiating assessment proceeding under section 143(3), or reassessment under sections 147, 149 of the Income-tax Act, 1961.

The notice under section 10 of this Act shall be issued for the assessment year relevant to the previous year in which undisclosed foreign income has been earned. In case notice is issued for any other assessment year, such notice to assess the undisclosed foreign income relating to some other previous year shall be invalid.

It is further important to note that Undisclosed foreign income is to be assessed during the year in which such income was earned but with respect to undisclosed foreign asset, the position of law under this Act is different in as much as such undisclosed foreign asset is to be assessed in the previous year in which it comes to the notice of the Assessing Officer.

As per the provisions of this Act, there is no time limit for the initiation of the assessment proceeding for undisclosed foreign income and/or undisclosed foreign asset. It means that assessment proceeding may be initiated by the Assessing Officer depending upon the year in which information is received by the Assessing Officer and such year may be after several years, say 20 or more, without any time limit.

This position of law under this Act is quite strange and harsh as a person cannot be expected to keep and retain the records and evidence relating to income earned, for an indefinite period. In case notice under this Act is issued to explain the source of income earned or asset acquired in the past, say 20 years back, how can a person ordinarily produce books of account or records or evidence to justify the source of such income and asset.

Under the Income Tax Act, for reopening the assessment relating to income escaping assessment under section 147, there is always time limit prescribed. Further, there is no statutory obligation for a person carrying on business to maintain and retain the books of account and records under section 44AA for any indefinite number of years. Even under the Companies Act, there is time limit of 8 years as per section 128 of the Companies Act, 2013 for maintaining and retaining the books of account. The provision under this Act expecting a person to explain source of income and asset earned, for an indefinite period seems to be beyond any rationale.

Prior to introduction of Black Money Act, 2015 any undisclosed foreign asset was liable to be assessed as undisclosed investment under sections 69, 69B of the Income-tax Act, 1961. Such undisclosed foreign asset could have been brought to tax by invoking provisions of sections 147-148 etc. of the Income-tax Act, 1961 in case income escaping assessment comes to the knowledge of the Assessing Officer at a later date. It is also pertinent to mention that by way of amendment brought under section 149 of the Income Tax Act, by the Finance Act, 2012, time limit for issuing notice under section 148 of the Income-tax Act, 1961 was extended up to sixteen years from the end of the relevant assessment year in respect of the asset located outside India. Thus, there was a special mechanism and sufficient power with the Tax department for assessing or reassessing such undisclosed foreign asset under the Income-tax Act, 1961.

However, in its wisdom to tax undisclosed foreign income and asset, legislature brought separate Act in the form of Black Money Act, 2015 with effect from 1st July 2015 introducing more stringent provisions of tax and penalty.

In such a case a question arises as to whether undisclosed foreign asset acquired or made prior to the commencement of this Act can be assessed under this Act or whether it can be assessed under the Income-tax Act, 1961?

In order to examine this issue, let us analyse the charging section i.e., section 3 of this Act which states that there shall be charged on every assessee for every assessment year commencing on or after the 1^st day of April 2016, subject to the provisions of this Act, a tax in respect of his total undisclosed foreign income and asset of the previous year at the rate of thirty per cent of such undisclosed income and asset. Further, proviso to section 3(1) of this Act states that an undisclosed asset located outside India shall be charged to tax on its value in the previous year in which such asset comes to the notice of the Assessing Officer.

Plain reading of section 3 of this Act does not provide ostensibly any power to bring to tax undisclosed foreign asset acquired or made prior to the commencement of this Act. Section 3 of this Act provides the chargeability of undisclosed foreign income and asset of the previous year at the rate of thirty per cent of such undisclosed foreign income and asset.

When the provisions of this Act have become effective with effect from 1st July 2015 relevant to A.Y. 2016-17 and when there is no specific power under the charging section, then any undisclosed foreign asset acquired or made prior to the commencement of this Act cannot be brought to tax as per the provisions of section 3 of this Act.

However, proviso to section 3(1) of this Act states that an undisclosed asset located outside India shall be charged to tax on its value in the previous year in which such asset comes to the notice of the Assessing Officer.

This proviso provides regarding the value of undisclosed asset located outside India which is chargeable to tax under this Act. As per this proviso, the value of the asset has to be taken in the previous year in which such asset comes to the notice of the Assessing Officer. Meaning of this proviso cannot be extended to interpret that undisclosed foreign asset acquired or made prior to the commencement of this Act are chargeable to tax under charging section 3 of this Act automatically. Going by the plain reading of the proviso to section 3(1) of this Act, it can be said that this takes care of a situation where an undisclosed foreign asset acquired or made after commencement of this Act comes to the notice of the Assessing Officer in any subsequent year, then in that case valuation of such asset would be made in the previous year in which such asset comes to the notice of the Assessing Officer.

However, there seems to be the intention of the legislature to tax undisclosed foreign asset even if such asset has been acquired or made prior to the commencement of this Act, under this Act which is evident from following points:

(i) Charging section 3 of this Act has been made “subject to the provisions of this Act” which means that other provisions of this Act, if any, would also have to be taken into account for bringing any undisclosed foreign asset to tax.

(ii) Chapter VI containing sections 59 to 72 of this Act had provided a scheme for declaration of undisclosed foreign asset acquired or made before the commencement of this Act by paying tax and penalty as provided in sections 60 & 61 of this Act. This window for declaration of undisclosed foreign asset was provided for three months viz. from 1st July 2015 to 30th September 2015.

Clause (c) of section 72 of this Act has provided that where any asset has been acquired or made prior to commencement of this Act and no declaration in respect of such asset is made under this Chapter, such asset shall be deemed to have been acquired or made in the year in which a notice under section 10 is issued by the Assessing Officer and the provisions of this Act shall apply accordingly. Such provision makes the intention of the legislature clear that undisclosed foreign asset which was acquired or made prior to commencement of this Act but was not declared as per provisions of section 59 of this Act shall be brought to tax under this Act and not under the Income-tax Act, 1961.

(iii) There is one illustration given below to section 5 of this Act explaining the provision of section 5 of this Act regarding computation of total undisclosed foreign income and asset which has taken an example of a house property located outside India acquired in the previous year 2009-10 and not disclosed by the assessee for which notice is issued by the Assessing Officer in the year 2017-18. This shows that the intention of the legislature is to bring to tax undisclosed foreign asset even if acquired during the year 2009-10 under this Act.

(iv) Illustration given in Rule 3 of Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Rules, 2015 also takes an example of a house property located outside India acquired in the year 1997, 2001 & 2002 which also indicates the intention of the legislature to bring to tax undisclosed foreign asset acquired or made before commencement of this Act.

(v) As per Circular No. 13 dated 6th July 2015, issued by CBDT clarifying on tax compliance for undisclosed foreign income and asset, question No. 14 has been addressed as under:

What are the consequences if no declaration under chapter VI of the Act is made in respect of undisclosed foreign asset acquired prior to the commencement of the Act?

Answering the above question, it has been stated “……..if any information of an undisclosed foreign asset acquired earlier, say in the year 1975, for $ 1 lakh comes to the notice of an Assessing Officer later, say in the year 2020, when its value becomes, say, $ 5 million, the liability under the Act amounting to 120% of the fair market value of the asset on the valuation date may arise in the year 2020, besides prosecution and other consequences. In this case if the valuation date is in the year 2020 the amount of tax and penalty under the Act will be $ 6 million.”

It clearly proves that the intention of the legislature is to bring to tax any undisclosed foreign asset even if acquired or made prior to the commencement of this Act.

Moreover, such legislative intent is further clear from the answers given to question Nos. 20, 21, 22 and 29 of the above referred circular No. 13 of 2015 dated 6th July 2015.

From the above discussion, it is clear that the intention of the legislature is to bring to tax under this Act any undisclosed foreign asset acquired or made prior to commencement of this Act and not declared as per the opportunity given in three months’ window period as per section 59 of this Act.

However, in our considered opinion, such provision and interpretation do not seem to be legally tenable, and its constitutional validity has already been questioned before the constitutional courts and is pending for final adjudication in the case of Gautam Khaitan before Hon’ble Delhi High Court as per the direction of Hon’ble Supreme Court in the case of Union of India v. Gautam Khaitan reported at [2019] 110 taxmann.com 272 (SC).

The basic provision from which such power seems to have been derived is clause (c) of section 72 of this Act where even the year of acquisition of undisclosed foreign asset has been deemed to be the year in which notice under section 10 is issued by the Assessing Officer even when such asset was acquired or made prior to commencement of this Act. We fail to understand how the year of acquisition can be shifted by making deeming provision.

It is all the more intriguing, though relevant, that when there is already power under the Income-tax Act, 1961 to bring to tax any undisclosed foreign asset acquired or made prior to commencement of this Act as per the provisions of sections 147 to 151 of the Income Tax Act, then to bring to tax such undisclosed foreign asset only under the provision of this Act does not seem to be justifiable and legally tenable.

In the earlier mentioned issue, we have examined as to whether undisclosed foreign asset acquired or made prior to commencement of this Act can be brought to tax under this Act. This issue may further be divided into two parts i.e.

(i) an undisclosed foreign asset acquired or made prior to commencement of this Act which existed as on 1^st July 2015 i.e., the date of commencement of this Act and

(ii) an undisclosed foreign asset acquired or made prior to the commencement of this Act but did not exist as on 1^st July 2015.

In case answer to first situation is in affirmative as per discussion held in the preceding issue, even then the same analogy cannot be drawn for the answer to situation No. (ii) above. Therefore, in this question we are trying to analyse the second situation independently.

There may be some rationale in charging to tax an undisclosed foreign asset which existed as on the commencement of this Act particularly when an opportunity was given for making declaration of such asset as per sections 59 to 72(c) of this Act and the assessee did not avail even such opportunity. But it seems to be highly unreasonable and irrational to tax an asset which was not even existing at the commencement of this Act i.e., on 1.7.2015 in view of the following arguments:

(a) As there is no time barring limit of making assessment under this Act, it would mean that such asset which was transferred/exhausted/disposed long back, say 40 years back, may also be brought to tax under this Act in case assessee is not able to explain the source of such asset. How can an assessee be expected to keep the evidence in such situation?

(b) Application of this Act for such asset in such retrospective manner would be quite unreasonable and harsh.

(c) Definition of ‘undisclosed asset located outside India’ as given in section 2(11) of this Act by using the expression ‘an asset located outside India held by the assessee in his name….’ gives indication that undisclosed foreign asset should be held by the assessee as on the commencement of this Act.

(d) There is a cardinal principle of interpretation that penalty cannot be imposed for a situation which occurred prior to the commencement of the Act. By bringing such asset to tax under this Act, it is liable for penalty at the rate of 90% of the value of the undisclosed foreign asset as per section 41, apart from the tax of 30%. In view of the well- established principle of imposition of penalty, in any case no penalty for such asset can be imposed.

However, if we go through question Nos. 20, 21 & 22 of CBDT circular (FAQ) No. 13 dated 6th July 2015, answer to such FAQs clearly indicate that undisclosed foreign asset acquired or made prior to the commencement of this Act and not existing as on the commencement of this Act are intended to be brought to tax under this Act. In our considered opinion, such provision and interpretation are quite harsh and unreasonable which need reconsideration.

Section 3(1) of this Act seeks, inter alia, to tax the undisclosed foreign asset and the proviso to section 3(1) provides that such undisclosed foreign asset shall be charged to tax on its value in the previous year in which such asset comes to the notice of the Assessing Officer.

There may be situation when undisclosed foreign asset did not exist as on the date on which such asset comes to the notice of the Assessing Officer, but such asset was owned or held by the assessee in any of the earlier year(s). It may so happen when such asset may have been disposed or transferred by the assessee in any of the earlier year(s). A question may arise as to whether such asset can be assessed in the previous year in which it comes to the notice of the Assessing Officer and if yes, then at what value would it be taxed?

Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Rules, 2015 provides for the method of valuation of undisclosed asset located outside India. Rule 3 prescribes as to how fair market value of undisclosed foreign asset shall be determined. As per Rule 3(1), such asset is required to be valued on the valuation date when it comes to the notice of the Assessing Officer and the asset is existing as on that date.

However, sub-rule (2) of Rule 3 prescribes that where an asset other than the bank account was transferred before the valuation date, the fair market value of such asset shall be higher of its cost of acquisition and the sale price. It further provides that where such asset was transferred without consideration or inadequate consideration before the valuation date, the fair market value of such asset shall be higher of its cost of acquisition and the fair market value on the date of transfer.

From the above sub-rule (2), it is evident that an undisclosed foreign asset not existing as on the date on which it comes to the notice of the Assessing Officer, and which was transferred in any of the earlier year(s) is liable to be brought to tax under this Act. It is not necessary that such asset should exist as on the date on which it comes to the notice of the Assessing Officer. The year in which valuation of such asset is to be made and the year in which it shall be brought to tax by passing assessment order under section 10 of this Act may be in different year.

Proviso to section 3(1) of this Act prescribes that an undisclosed asset located outside India shall be charged to tax on its value in the previous year in which such asset comes to the notice of the Assessing Officer. It means that such asset is required to be assessed in the previous year in which it comes to the notice of the Assessing Officer and not in the year in which it was acquired or even not in the year in which it was transferred. However, it is to be assessed in such previous year on its fair market value for which sub-section (2) of section 3 provides that the valuation shall be made in the manner as prescribed in the above said Rules. Therefore, the scheme of the assessment under this Act is different from assessment provisions of the Income Tax Act.

This Act has been enacted with effect from 1-7-2015. Section 3 of this Act which is the charging section under this Act states that there shall be charged on every assessee for every assessment year commencing on or after 1^st day of April 2016 a tax in respect of his total undisclosed foreign income and asset of the previous year. Therefore, any proceeding under this Act can be initiated for assessment year 2016-17 or thereafter. No assessment proceeding prior to assessment year 2016-17 can be initiated as per the provisions of this Act. Therefore, undisclosed foreign income earned prior to assessment year 2016-17 cannot be brought to tax under this Act. For such undisclosed foreign income, provisions of the Income Tax Act shall be applicable.

In the case of Anila Rasiklal Mehta v. Union of India [2020] 115 taxmann.com 321(Bom.), Hon’ble Bombay High Court while deciding writ petition filed by the petitioner, has observed in para 39 that a reading of section 72(c) may indicate that the provisions of the Black Money Act have been given retrospective operation. Hon’ble High Court further observed that this is also a highly debatable issue since the Black Money Act contains provisions for imposition of penalty and for initiation of prosecution.

In the case of Principal CIT  v. Income tax Settlement Commission [2019] 111 taxmann.com 176/[2020] 268 Taxman 234 (Guj.), Hon’ble Gujarat High Court observed in para 14 as under:

“While in case of undisclosed foreign income of an assessee the same would be subject to tax under the provisions of the Black Money Act only for every assessment year commencing on or after 1^st April 2016, namely assessment year 2016-17 onwards, in so far as undisclosed foreign asset located outside India is concerned, the previous year in which such asset is acquired is not relevant. In other words an undisclosed foreign asset would be subject to tax under the Black Money Act notwithstanding the date of its acquisition, which may even be a previous year prior to the assessment year commencing on 1^st April 2016; and shall be charged to tax under this provision on the value of such asset in the previous year in which such asset comes to the notice of the Assessing Officer.”

Section 2(11) of this Act defines ‘undisclosed asset located outside’ India and the meaning of undisclosed has been given in this section to mean a situation where assessee has no explanation about the source of investment in such asset or the explanation given by him in the opinion of the Assessing Officer is unsatisfactory.

The source of investment in any asset can inter alia be from the following sources:

(a) Tax Paid and disclosed foreign income

(b) Untaxed and undisclosed foreign income

(c) Tax paid and disclosed domestic income

(d) Untaxed or undisclosed domestic income

(e) Capital receipts in the nature of loan, gift or otherwise received from India

(f) Capital receipts in the nature of loan, gift or otherwise received from out of India.

An asset can be said to have been acquired out of undisclosed source when any of the above sources of the investment cannot be established. It means that in case assessee is able to establish source of investment in foreign asset out of undisclosed domestic or foreign income, there may be action for bringing to tax such domestic or foreign income under applicable law but so far as the source of investment in the asset is concerned, it stands explained and such asset located outside India cannot be said to be in the nature of undisclosed asset and would not come within the ambit of undisclosed asset located outside India under section 2(11) of this Act.

In case source of investment in foreign asset is established out of untaxed domestic income, such income may be liable to be taxed in India as per the provisions of the Indian Income Tax Act. Similarly, in case of source of investment in foreign asset is established by the assessee to be from the untaxed foreign income, such income shall be brought to tax as per the provisions of this Act or income tax Act as the case may be.

There may be cases where source of investment in foreign asset is not out of taxed or untaxed income but is out of capital receipts. Such capital receipts may be in the nature as remittances from India or receipt from some source or relative or friend out of India being in the nature of loan or gift or otherwise. Such source of investment in foreign asset would also explain and establish that the asset is not in the nature of undisclosed asset.

In fact, undisclosed asset located outside India shall be in the nature of undisclosed asset when assessee is not able to establish the source of investment in such asset. Such situation may be there when funds for investment has been sent from India via illegal means (hawala etc.), or investment has been made out of funds parked in Swiss or other tax havens sent through illegal means or the income has been earned outside India by illegal means not with the intention to disclose in the tax return. Assessee would desist from explaining such kind of sources due to fear of stricter action and criminal offence to be charged in case such source of investment is correlated by the assessee. This seems to be the objective of this Act to bring all such illegal income and funds to tax.