Black Money Law | FAQs on Undisclosed/Foreign Assets Located Outside India

2. Flow of Consideration and Beneficial Owner

However, the Co-ordinate Mumbai Bench of the ITAT in the case of Rashesh Manhar Bhansali v. Addl. CIT Mum.² distanced itself from the reasoning given by the ITAT Delhi in Jatinder Mehra (supra) and held that the Delhi bench of ITAT erred in relying upon the dictionary meaning of the word ‘beneficial owner’ as also the provision of other statutes including Income-tax Act. In the present case, the assessee put upon the defence that he cannot be called a ‘beneficial owner’, since he did not provide the consideration either directly or indirectly for the foreign asset in terms of Explanation 4 to section 139(1) of the Income-tax Act. The ITAT Bench negative the contention of the assessee and observed as follows:

“Coordinate bench has proceeded on the basis that it is not necessary that to examine the provisions of BMA only the definition provided under the Income-tax Act is required to be seen…….the beneficial ownership is required to be understood with respect to its dictionary meaning and also other provisions of other statute also keeping in mind the nature of the object and purposes of the BMA. To the extent that these observations overlook the existence of section 2(15) of BMA, the coordinate bench did indeed err. However, that by itself, does not mean that the decision of the coordinate bench is per incuriam; the reasoning may be per incuriam, that does not necessarily mean that decision is also per incuriam. While there is indeed an error in reasoning process, as noted above, one may add that, it is viewed that whether a term is defined under the Income-tax Act or not, it must also be borne in mind the fact that such a definition comes into play only when the context does not require otherwise. When the definitions under section 2 of the ITA stand incorporated in the BMA, the rider of this definition that is ‘In this Act, unless the context otherwise requires’ must stand incorporated. The context of the definition under the ITA and the BMA must therefore meet to invoke the definition, under the ITA, for the purposes of the BMA. In other words, the definition provided is subject to ‘unless the context requires otherwise’ condition, and, therefore, merely because the expression ‘beneficial ownership’ is defined under Explanation 4 to section 139(1), that definition would not automatically apply to the BMA context as well…

………It is only elementary that BMA is enacted to deal with, as its preamble aptly puts it, “the problem of the black money that is undisclosed foreign income and assets”, and, as such, it deals with the underbelly of the world of offshore companies and tax havens. The present context of ‘beneficial ownership’ is thus diametrically different inasmuch as, unlike the Income-tax Act, it does not deal with transparent business transactions of the normal bona fide business world. Unlike in the situations dealt with in the Income-tax Act, which, more often than not and as a matter of course, deal with the genuine businesses which exist transparently and above board, the BMA deals with the hidden assets located outside India, and undisclosed incomes earned outside India. The monies and incomes stashed abroad in the undisclosed offshore entities in the tax havens and undisclosed foreign bank accounts are, as a rule, not out of the legitimate gains of businesses. In fact, when an assessee can demonstrate that the monies invested in the offshore companies and undisclosed accounts abroad are out of their legitimate earnings, for this reason alone, these investments get outside the ambit of the BMA. The provisions of this Act come into play only when the monies invested are not out of legitimate earnings of the assessee, and, therefore, to expect that the Assessing Officer is required to prove that the assessee has paid consideration for these undisclosed investments before these investments can be said to be undisclosed, is wholly unrealistic. If someone has to invest in an undisclosed offshore entity or an undisclosed foreign bank account, he would not make the investments through official channels. To expect that when an undisclosed asset in the name of an assessee, or a company which is owned by him, is detected abroad, the Assessing Officer will also be required to prove that the assessee has paid, directly or indirectly, for that asset, before the provisions of BMA can be invoked is contrary to common sense. It will make the provisions of the BMA unworkable inasmuch as the Assessing Officer can never prove, let us say, hawala transactions, or account receivables being diverted to the offshore accounts, which are inherently outside the books of account of legitimate businesses. The Assessing Officer thus has to first find out the undisclosed assets, and then he has to prove that the assessee paid, directly or indirectly, for these assets. If the routing of consideration was so transparent that the Assessing Officer could identify the same, it would not normally be for an undisclosed asset. The provisions of BMA can never be put into effect, but then, as is the well-settled position of law, the law can only so be interpreted so as to make it workable rather than redundant, as is the prescription of the Latin maxim ‘ut res magis valeat quam pereat’. A statute is supposed to be an authentic repository of the legislative will and the function of a judicial forum is to interpret it “according to the intent of them that made it.” From that function the judicial forum cannot resile, it has to abide by the maxim ut res magis valeat quampereat, lest the intention of the legislature may go in vain or be left to evaporate in thin air. (See CST v. Mangal Sen Shyam Lal AIR 1975 SC 1106.) The judicial forums should thus as far as possible avoid that construction that attributes irrationality to the legislature. Viewed thus, if we are to hold that definition of ‘beneficial owner’ as assigned by Explanation 4 to section 139(1) is to equally apply, we will end up in a situation in which the BMA itself will become unworkable. Therefore, for both of these reasons- i.e.

(a) the contextual requirements being otherwise, and

(b) the adoption of this meaning rendering the provisions of BMA becoming unworkable

The definition under Explanation 4 to section 139(1) cannot be adopted in the context of the BMA. We reject this plea of the learned counsel as well.”

The ITAT Bench in the aforementioned case rejected the approach adopted by the coordinate Delhi Bench in placing reliance on external aids for interpretation of the phrase ‘beneficial owner’ based on the reason that such reliance will render the meaning unworkable and hence the same does not fit the contextual requirements.

In author’s opinion, the Mumbai ITAT bench has left the definition open, vague and susceptible to misuse/abuse. The legislature has been careful enough to use the words ‘beneficial owner’ to extend the scope of the definition of ‘undisclosed foreign asset’, beyond the person who has held the asset, to also include an assessee who is the beneficial owner, in respect of the ‘undisclosed foreign asset’. Further vide the same definition; the legislature has not only put the burden of explaining the source of investment on the holder of the asset but also the ‘beneficial owner’. Thus it falls upon the revenue to establish a prima facie case that the ‘beneficial owner’, has provided the consideration of the asset.

3. Difference between ‘Beneficial Owner’ and ‘Beneficiary’

From the bare reading of the Act, it is clear that the legislature in its wisdom has consciously used the phrase ‘beneficial owner’ and the word ‘beneficiary’ distinctively. While section 2(11) refers to the phrase ‘beneficial owner’, to expand the scope of the definition beyond the person who has held the asset, sections 49 and 50 of the Act, refers to both, to make sure that neither the ‘beneficial owner’ nor the ‘beneficiary’, are excluded from operation of the Section.

Further CBDT vide Circular No.13, Q No. 31, has recognized that the phrase “beneficial owner” and the word ‘beneficiary’ are distinct from each other as defined in Explanation 4 of and Explanation 5 of Section 139(1) respectively. In the same breath the CBDT has clearly recognized that a ‘beneficiary’ become a ‘beneficial owner’, only when he provides consideration of the asset. The relevant part of the above referred question is reproduced again herewith, to demonstrate the distinction as recognized by the CBDT.

“As far as ownership is concerned, as per section 2(11) of the Act “undisclosed asset located outside India” means an asset held by the person in his name or in respect of which he is a beneficial owner. The definition of “beneficial owner” and “beneficiary” is provided in Explanation 4 and Explanation 5 to section 139(1) of the Income-tax Act, respectively (which is at variance with the determination of beneficial ownership provided under Rule 9(3) of the PMLA (Maintenance of Records) Rules, 2005. Therefore, for the purpose of the Act “beneficial owner” in respect of an asset means an individual who has provide directly or indirectly, consideration for the asset for the immediate or future benefit, direct or indirect, of himself or any other person. Further, “beneficiary” in respect of an asset means an individual who derives benefit from the asset during the previous year and the consideration for such asset has been provided by any person other than such beneficiary. Therefore, as per the Act the beneficial owner is eligible for declaration under section 59 of the Act.

There may be a case where a person is listed as a beneficiary in a foreign asset, however, if he has provided consideration for the asset, directly or indirectly, he will be covered under the definition of beneficial owner for the purposes of the Act.”

In view of the above, on intra polating the definition of ‘beneficial owner’ contained in Explanation 4 to section 139(1) of Income-tax Act to section 2(11) of the Act, it follows that the assessee would be considered as “beneficial owner” in respect of an asset, if such assessee “has provided, directly or indirectly consideration for the asset for the immediate or future benefit, direct or indirect, of himself or any other person”.

Thus from the discussion above, it is clear that the person will not be covered under the scope of section 2(11) by virtue of being a mere ‘beneficiary’, unless it is shown that the ‘beneficiary’ has provided consideration for the undisclosed foreign asset so as to become a ‘beneficial owner’.

Such a distinction may come to the rescue of an assessee where the revenue has not established the flow of consideration from the beneficiary. Example:- where an assessee is nominal settler in the discretionary trust which was created at the behest of his son, for the benefit of the son and his family and the assessee has made no contribution towards the funds of the Trust. The assessee may set up a defence that assessee at best is a discretionary beneficiary and not a beneficial owner as per section 2(11) of the Act.

4. Foreign Asset ‘held’ or not

The other important question that arises is whether the foreign asset must continue to be held by the assessee at the time of enactment or at the time of receipt of information by the Revenue, in order to fall within the meaning of aforesaid definition, considering that the definition uses the word – “held”. In other words, if the asset stands disposed off prior to enactment or receipt of information, and there is no asset held by the assessee including money in the foreign bank account, since there is no current holding of the relevant asset, such asset do not strictly fall within the language of aforesaid definition.

The CBDT, however, has given contrary clarification to the above reading of the definition in the Circular Nos. 13 and 15 of 2015; the relevant portion of which is reproduced hereunder for ready reference:

Circular No. 13/2015 (Annexure 4)

1. [2021] 128 taxmann.com 152/190 ITD 611 (Delhi – Trib.)
2. [2021] 132 taxmann.com 20/[2022] 193 ITD 141 (Mum. – Trib.)