Total Undisclosed Foreign Income & Asset | Understanding Charges | Scope | Computation (Section 3, 4 & 5)

Undisclosed foreign income and asset refers to any income from a source located outside India or any asset held outside India that has not been disclosed in the taxpayer’s income tax return as required under Indian law. This includes income that is taxable in India but not reported and assets whose ownership or source of investment is not explained to the satisfaction of the Assessing Officer. The term applies to residents, non-residents, and not-ordinarily residents of India, with tax and penalties imposed on such undisclosed income or assets under specific legal provisions.

Table of Contents

1. Text of Section 3
2. Notes on Clauses
3. Salient Features of Section 3
4. Text of Section 4
5. Notes on Clauses
6. Salient Features of Section 4
7. Text of Section 5
8. Notes on Clauses

Check out Taxmann's Law Relating to Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act 2015 which is a treatise to the Black Money Act, 2015, authored by experts who provide a clear and practical analysis of the Black Money Act's complex legal framework. It features a detailed analysis of the Black Money Act's provisions, including stringent compliance, assessment, and valuation rules, along with penalties and prosecution measures, distinguishing it from the Income-tax Act, 1961. It is updated with the latest amendments from the Finance (No. 2) Act, 2024; it is an essential resource for understanding the legal challenges of managing undisclosed foreign income and assets.

1. Text of Section 3

Charge of tax

3. (1) There shall be charged on every assessee for every assessment year commencing on or after the 1st 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:

Provided 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.

(2) For the purposes of this section, “value of an undisclosed asset” means the fair market value of an asset (including financial interest in any entity) determined in such manner as may be prescribed.

2. Notes on Clauses

Clause 3 provides for charge of tax. It provides that every assessee shall be liable to tax in respect of his total undisclosed foreign income and asset at the rate of thirty per cent of such undisclosed income and asset. It also defines the term “value of an undisclosed asset” to mean the fair market value of an asset (including financial interest in any entity) determined in the prescribed manner.

3. Salient Features of Section 3

3.1  Applicable to whom?

As per section 3 of the Act regarding charge of tax, this Act is applicable to every ‘assessee’. ‘Assessee’ has been defined under section 2(2) of the Act to mean a person, ––

(a) being a resident in India within the meaning of section 6 of the Income-tax Act, 1961 in the previous year; or

(b) being a non-resident or not ordinarily resident in India within the meaning of clause (6) of section 6 of the Income-tax Act, 1961 in the previous year, who was resident in India either in the previous year to which the income referred to in section 4 relates; or in the previous year in which the undisclosed asset located outside India was acquired.

The definition of ‘assessee’ has been amended by the Finance Act, 2019 with retrospective effect from 1-7-2015. Prior to the amendment, the definition of ‘assessee’ was as under:

‘Assessee’ means a person being a resident other than non-ordinarily resident in India within the meaning of clause (6) of section 6 of the Income Tax Act by whom tax in respect of undisclosed foreign income and assets, or any other sum of money, is payable under this Act and includes every person who is deemed to be an assessee in default under this Act.

Originally, the ‘assessee’ was defined to mean, inter alia, a person who was a ordinarily resident in India. Finance Act, 2019 amended the definition of ‘assessee’ and that too with retrospective effect from 1-7-2015 and apart from the resident, one more category of person was included i.e. one who is a non-resident or not ordinarily resident in India in the previous year but, who was resident in India either in the previous year in which undisclosed foreign income was earned or in the previous year in which the undisclosed asset located outside India was acquired.

3.2  Purpose of amendment in the definition of ‘Assessee’

From the earlier definition of ‘assessee’, it was not clear as to in which previous year the assessee to be covered within the ambit of this Act has to be resident i.e. whether the year to which income belongs or the year during which notice is issued under section 10 of the Act. Absence of the clarity was creating a situation wherein a Non-resident or Not ordinarily Resident in the year in which notice under section 10 of the Act is issued would plead that he is not an ‘assessee’ under the Act for this previous year. To address this uncertainty, amendment was brought to prescribe the definition of ‘assessee’ laying down that even a Non-resident and Not-ordinarily resident in the year in which notice under section 10 of the Act is issued, is also assessee if he was resident in the year in which undisclosed foreign income was earned or undisclosed foreign asset was acquired.

The above amended definition is also creating confusion in as much as a person who is resident in the year in which the notice under section 10 of the Act is issued would also be an ‘assessee’ and would be subject to the provisions of this Act even if such person was non-resident or not ordinarily resident in the year in which foreign income was earned or foreign asset was acquired.

It would mean that if a person who was non-resident in earlier years and acquired foreign asset or earned foreign income while being non- resident becomes resident in India in later years, such person may also be served a notice under section 10 of the Act by the Assessing Officer in the year in which such income or asset comes to his notice and may be subject to the proceeding under this Act. However, it would be open for such assessee to show and establish during the course of proceeding under this Act that such income and such asset was not chargeable to tax as it was earned and acquired in the year in which he was either Non-resident or Not-Ordinarily Resident.

This view also finds support from the answer to question Nos. 24 & 32 of circular No. 13 of 2015 dated 6th July 2015.

Therefore, a person who was earlier non-resident or not-ordinarily resident but later on becomes resident should maintain and preserve all records and evidences in connection with his foreign income earned in the past and foreign asset acquired in the past so that at later stage when he is issued notice under section 10 of the Act, he may be in position to establish the source of the earning of the foreign income and acquisition of the foreign asset and about his residential status. This position of law under this Act seems to be anomalous for the reason that a person is not required to disclose his foreign income or foreign asset earned or acquired in a year in which he was non resident or not-ordinarily resident.

3.3  Applicable from which Assessment year?

Charge to tax has been created under this Act for every assessment year commencing on or after 1^st April 2016 i.e. from A.Y. 2016-17 onwards. This Act has come into effect from 1-7-2015 which means that first previous year under this Act corresponding to A.Y. 2016-17 shall consist of 9 months commencing from 1-7-2015 till 31-3-2016.

Income is taxable for the year to which it relates & separate assessment for each year with respect to the undisclosed foreign income shall be made. However, in the case of undisclosed foreign asset, it has been provided that fair market value of such asset shall be brought to tax in the year in which it comes to the notice of the Assessing Officer.

3.4  “Total Undisclosed Foreign Income and Assets of the Previous Year”

Tax under this Act is levied on the total undisclosed foreign income and assets of the previous year.

‘Undisclosed foreign income and assets’ has been defined under section 2(12) of the Act which means the total amount of undisclosed income of an assessee from a source located outside India and the value of an undisclosed asset located outside India. This definition has the following components:

• Foreign Income or asset is in the nature of undisclosed income or asset
• Income is from a source located outside India and
• asset is one which is located outside India

‘Undisclosed asset located outside India’ has been defined under section 2(11) of the Act whereas Undisclosed foreign income has not been defined. However, section 4(1)(a) & (b) of the Act provides the meaning of undisclosed foreign income.

Section 4 of the Act specifies the scope of total undisclosed foreign income and asset and further, section 5 of the Act prescribes the manner of computation of total undisclosed foreign income and asset.

3.5  Undisclosed foreign income – Meaning thereof

Undisclosed foreign income as such has not been defined under the definition clause even though ‘undisclosed asset located outside India’ has been defined under section 2(11). However, what is ‘undisclosed foreign income’ is clear from the bare reading of clauses (a) & (b) of sub-section (1) of section 4 of this Act.

‘Undisclosed foreign income’ would mean that any income from a source located outside India which is chargeable to tax in India as per the provisions of the Income Tax Act which has not been disclosed in the income tax return filed under section 139 of the Income tax Act.

Chargeability of such income to tax in India is to be seen with reference to the domestic tax provisions read with the applicable tax treaty provisions.

3.6  ‘Undisclosed asset located outside India’ – Meaning thereof

Section 2(11) of this Act provides the definition of the ‘undisclosed asset located outside India’ to mean an asset located outside India held by the assessee in his name or in respect of which he is beneficial owner, and he has no explanation about the source of investment in such asset or the explanation given by him is in the opinion of the Assessing Officer is unsatisfactory.

From the above, the following features emerge regarding meaning & scope of ‘undisclosed asset located outside India’:

• Such asset should be located outside India. It would imply that if any asset is located in India, such asset would not come within the ambit of definition under consideration. Such asset should be outside the boundaries of India before it can be covered under the definition as ‘asset located outside India’. An asset located in Nepal or Bhutan, or any other country would fall within its ambit. Asset may be in the nature of immovable asset, movable asset, bank deposits, shares of listed or unlisted companies or any other financial instruments etc. The asset shall be treated located outside India in case of immovable & movable asset when it is physically situated outside India. However, in case of shares or other financial instruments of a company, these would be treated to be located outside India if the company is registered outside India.
• Meaning of ‘asset’ has not been given under the Act but in our opinion, it would include tangible asset as well as intangible asset. Issue regarding the location of intangible asset falling outside India may be a controversial and debatable. Intangible assets may be in the nature of patents, copyrights, licenses, trademarks and brands etc. Intangible assets can be said to be located in the jurisdiction in which such assets are registered with the relevant authority set up for this purpose. In case of non-registration of intangible asset, it can be said that these are located in the jurisdiction in which such assets have been created.

Location of asset outside India is important to be determined for the purpose of this Act. There is no definition or guidelines given under this Act in this regard. However, based on the general principles universally accepted, location of an asset can be determined. Moreover, Rule 8 of the Estate Duty Act which is no longer in force may however provide the guiding principles for this purpose. These are summarized in tabular form as under:

• Such asset shall include financial interest in any entity which means financial interest as partner in the partnership firm or LLP or AOP or unincorporated body or beneficiary in Trust registered outside India.
• The asset may be in the name of the assessee or in respect of which assessee is the beneficial owner. There may be situations when asset is held in the name of some other person or entity but if beneficial owner of such asset located outside India is the assessee, such asset would be covered.
• Such asset should be explained in the sense that there should be explanation about the source of investment in such asset and if there is no such explanation or the explanation furnished is not to the satisfaction of the Assessing Officer, such asset would be treated undisclosed asset located outside India.

3.7  “Of the Previous Year”

Sub-section (1) to section 3 of the Act provides that the tax is to be imposed in respect of total undisclosed foreign income and asset of the previous year. Concept of the previous year is the same as is there under the Income Tax Act. However, under this Act ‘previous year’ for undisclosed foreign income and for undisclosed foreign asset may have to be determined based on separate parameters. In the case of undisclosed foreign income, previous year shall be the year in which such income was earned. Such undisclosed foreign income is liable to be assessed with respect to the respective previous year(s) to which such income belongs.

However, in the case of undisclosed foreign asset, it has been provided under sub-section (1) of section 3 of the Act 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. Therefore, in a case when the asset was acquired in earlier years, the undisclosed foreign asset shall not be brought to tax in the year of acquisition as is the case under the Income tax Act. Under this Act, a departure has been made and such undisclosed foreign asset is liable to be taxed in the year in which it comes to the notice of the Assessing Officer.

It is pertinent to note that there is no time barring limitation prescribed under this Act for assessing or reassessing the undisclosed foreign income and assets. It would mean that even after a lapse of considerable period, say 20 or 25 years, if any undisclosed foreign asset comes to the notice of the Assessing Officer, it shall be brought to tax in the year in which it comes to the notice of the Assessing Officer on the value of such asset in such previous year, to be determined as prescribed in the rules made in this regard.

3.8 Value of undisclosed foreign asset

The value of the undisclosed foreign asset shall not be taken or would not be equal to the cost of investment made in acquiring the asset in earlier years when such investment was made. Since such undisclosed foreign asset is being taxed in the previous year in which such asset comes to the notice of the Assessing Officer, its value on which assessment is to be made and tax is to be charged shall be taken to be the value to be determined in such previous year.

Further, sub-section (2) to section 3 of the Act prescribes that value of undisclosed asset means the fair market value of an asset determined in such manner as may be prescribed. Separate rules have been prescribed for determining the fair market value of undisclosed asset for this purpose.

It has been held in the case of Rashesh Manhar Bhansali v. Addl. CIT [2021] 132 taxmann.com 20/[2022] 193 ITD 141 (Mum. – Trib.) which reads as under:

“Rule 3(1)(e) of BMA provides that for the purposes of chargeability of tax under section 3(2), the fair market value of an account with a bank shall be, (i) the sum of all the deposits made in the account with the bank since the date of opening of the account; or (ii) where a declaration of such account has been made under Chapter VI and the value of the account as computed under sub-clause (i) has been charged to tax and penalty under that Chapter, the sum of all the deposits made in the account with the bank since the date of such declaration subject to the proviso that ‘where any deposit is made from the proceeds of any withdrawal from the account, such deposit shall not be taken into consideration while computing the value of the account’. Whether rule 3(1)(e) is on the statute or not, this is the right way, even from a common-sense perspective discussed earlier. It is not the case that it is because of rule 3(1)(e) that a bank account is being treated as an asset under section 2(11). Rule or no rule, the position would be the same. [Para 94]”

3.9 Applicable Tax Rate

Tax on undisclosed foreign income and asset as assessed under this section of the Act shall be charged at the rate of 30% of the undisclosed foreign income and asset. Rate has been prescribed under Section 3 of the Act itself unlike separate tax rates which are usually given for income tax purpose in the Finance Act every year. There is no surcharge or cess on such tax rate.

Moreover, it may also be mentioned that in case of undisclosed foreign asset, as assessment is to be made at value in the previous year in which the asset comes to the notice of the Assessing Officer, no interest shall be leviable on such tax for the period commencing from the year of acquisition of asset. However, in case of undisclosed foreign income, it is to be assessed in the previous year in which such income was earned and therefore, interest under section 40 of the Act is leviable in the same manner as provided under sections 234A, 234B & 234C of the Income tax Act in respect of such tax on undisclosed foreign income.

In addition to tax and interest, penalty at the rate of 90% of the value of undisclosed foreign income and assets shall also be charged as provided under section 41 of the Act.

4. Text of section 4

Scope of total undisclosed foreign income and asset

4. (1) Subject to the provisions of this Act, the total undisclosed foreign income and asset of any previous year of an assessee shall be,—

(a)  the income from a source located outside India, which has not been disclosed in the return of income furnished within the time specified in Explanation 2 to sub-section (1) or under sub-section (4) or sub-section (5) of section 139 of the Income-tax Act;

(b)  the income, from a source located outside India, in respect of which a return is required to be furnished under section 139 of the Income-tax Act but no return of income has been furnished within the time specified in Explanation 2 to sub-section (1) or under sub-section (4) or sub-section (5) of section 139 of the said Act; and

(c)  the value of an undisclosed asset located outside India.

(2) Notwithstanding anything contained in sub-section (1), any variation made in the income from a source outside India in the assessment or reassessment of the total income of any previous year, of the assessee under the Income-tax Act in accordance with the provisions of section 29 to section 43C or section 57 to section 59 or section 92C of the said Act, shall not be included in the total undisclosed foreign income.

(3) The income included in the total undisclosed foreign income and asset under this Act shall not form part of the total income under the Income-tax Act.

5. Notes on Clauses

Clause 4 deals with the scope of total undisclosed foreign income and asset. It provides that the total undisclosed foreign income and asset of any previous year of an assessee shall be,—

• the income from a source located outside India, which has not been disclosed in the return of income furnished under sub-section (1) or sub-section (4) or sub-section (5) of section 139 of the Income-tax Act;
• the income, from a source located outside India, in respect of which a return is required to be furnished under section 139 of the Income-tax Act but no return of income has been furnished under sub-section (1) or sub-section (4) or sub-section (5) of section 139 of the Income-tax Act;
• the value of any undisclosed asset located outside India.

It further provides that any variation made in the income from a source outside India in the assessment or reassessment of the total income of any previous year, of the assessee under the Income-tax Act in accordance with the provisions of section 29 to section 43C or section 57 to section 59 or section 92C of the said Act shall not be included in the total undisclosed foreign income.

It also provides that the income included in the total undisclosed foreign income and asset under this Act shall not form part of the total income under the Income-tax Act.

6. Salient Features of Section 4

• Section 4 prescribes the scope of total undisclosed foreign income and asset. It comprises of

1. 1. undisclosed income from a source located outside India
   2. Value of an undisclosed asset located outside India.

• Undisclosed foreign income shall consist of the income of any previous year of an assessee from a source located outside India. It means that if there is any income, the source of which is located in India, such income cannot be said undisclosed foreign income.
• A resident is required to disclose his global income in his income tax return to be filed under section 139 of the Income-tax Act. Therefore, such resident is required to disclose all his foreign income also in the income tax return to be filed by him under section 139 of the Income tax Act for the relevant year.
• Undisclosed foreign income would arise under this Act when such foreign income has not been disclosed by the resident in the return of income furnished by the assessee under section 139 of the Income tax Act or where the return of income has not been furnished within the time prescribed under the Explanation 2 to section 139(1) of the Income Tax Act for the return under sub-section (1), or within the time prescribed under sub-section (4) or (5) of section 139 of the Income-tax Act.
• It has been held in the case of Srinidhi Karti Chidambaram v. Principal Chief Commissioner of Income Tax [2018] 99 taxmann.com 181/[2019] 411 ITR 1 (Mad.) that an offence under section 50 of the Black Money Act cannot be attracted, till the time period for filing a return, under section 139(5) of the Income-tax Act, is not over.
• Similar view has been held in the case of K. Mohammed Haris v. Income-tax Department [2023] 147 taxmann.com 370 (Kar). Hon’ble High Court held that once assessee declares the foreign asset within one year from the date of filing of original ITR, it cannot be considered, that he has wilfully not declared or failed to declare even in the revised ITR filed under section 139(5) of the Income-tax Act. To attract the offence under section 4 and penalty under section 50 of the Black Money Act would arise only even in the revised ITR under section 139(5) of the Income-tax Act, if the petitioner has not disclosed the foreign assets, then only it is an offence under sections 4 & 50 of the Black Money Act.
• In case part of such foreign income has been included in the return of income filed aforesaid under the Income tax Act, the other part which has not been so disclosed would be treated to be undisclosed foreign income.
• In case foreign income of any previous year has been disclosed by the assessee in his income tax return filed under section 139 and later during the course of income tax assessment, additions or disallowances are made in accordance with and under the provisions of sections 29 to 43C or sections 57 to 59 or section 92C of the Income-tax Act, such additional income would not be treated as undisclosed foreign income and such additional income would continue to be taxed under the Income-tax Act.
• It has also been provided in sub-section (3) of section 4 of the Act that the income included in the total undisclosed foreign income and asset under this Act shall not form part of the total income under the Income Tax Act. This provision implies that provision of this Act shall have precedence over the provisions of the Income tax Act after the introduction of this Act.

7. Text of Section 5

Computation of total undisclosed foreign income and asset

5. (1) In computing the total undisclosed foreign income and asset of any previous year of an assessee,—

(i) no deduction in respect of any expenditure or allowance or set off of any loss shall be allowed to the assessee, whether or not it is allowable in accordance with the provisions of the Income-tax Act;

(ii) any income,—

(a) which has been assessed to tax for any assessment year under the Income-tax Act prior to the assessment year to which this Act applies; or

(b) which is assessable or has been assessed to tax for any assessment year under this Act, shall be reduced from the value of the undisclosed asset located outside India, if, the assessee furnishes evidence to the satisfaction of the Assessing Officer that the asset has been acquired from the income which has been assessed or is assessable, as the case may be, to tax.

(2) The amount of deduction referred to in clause (ii) of sub-section (1) in case of an immovable property shall be the amount which bears to the value of the asset as on the first day of the financial year in which it comes to the notice of the Assessing Officer, the same proportion as the assessable or assessed foreign income bears to the total cost of the asset.

Illustration

A house property located outside India was acquired by an assessee in the previous year 2009-10 for fifty lakh rupees. Out of the investment of fifty lakh rupees, twenty lakh rupees was assessed to tax in the total income of the previous year 2009-10 and earlier years. Such undisclosed asset comes to the notice of the Assessing Officer in the year 2017-18. If the value of the asset in the year 2017-18 is one crore rupees, the amount chargeable to tax shall be A-B=C

where,

A = Rs. 1 crore, B = Rs. (100 × 20/50) lakh = Rs. 40 lakh, C = Rs. (100-40) lakh = Rs. 60 lakh.

8. Notes on Clauses

Clause 5—deals with the computation of total undisclosed foreign income and asset. It, inter alia, provides that in computing the total undisclosed foreign income and asset no deduction in respect of any expenditure or allowance or set off of any loss shall be allowed to the assessee, which is otherwise allowable in accordance with the provisions of the Income-tax Act.

It further provides that any income which has been assessed to tax for any assessment year under the Income-tax Act prior to the assessment year to which this Act applies, or which is assessable or has been assessed to tax for any assessment year under this Act, shall be reduced from the value of the undisclosed asset located outside India, if, the assessee furnishes evidence to the satisfaction of the Assessing Officer that the asset has been acquired from such income which has been assessed or is assessable, as the case may be to tax.