Background-:

a)     Like any other country, India has a sovereign right to levy tax on income in terms of aspect / nexus theory with India.

b)     It has been codified by the Income Tax Act, 1961 [1 of 1961] and to be specific, section 4, 5, 6 and 9 of the Act.

c)      It is a fact that, income to the tune of crores of rupees has gone untaxed.

d)     The said income / money has been used for various objectives including civil and criminal objectives, organised crime and terrorism .

e)     To tackle the problem, Government has enacted The Black Money (Undisclosed Foreign Income And Assets) And Imposition Of Tax Act, 2015 [No. 22 of  2015] [henceforthe referred to as The black money law]

f)       It has come into force from FY 2015-16.

Audience-:

g) It is meant for all assessees for getting a surface acquaintance.

h) A professional may refer it as a starter for study of the black money law. At the end, specific input with the heading for Professional is included.

Objective of the Black Money law-:

i) to make provisions to deal with the problem of the Black money that is undisclosed foreign income and assets, the procedure for dealing with such income and assets and

j) to provide for imposition of tax on any undisclosed foreign income and asset held outside India and

k) for matters connected therewith or incidental thereto.

One time window / Immunity-:

l) The black money law provides one time window for taxpayers to come out clean. The provisions of this one time window are distinct from any Amnesty Scheme.

m) Immunity will be given from penalty under the Income Tax Act other than those mentioned below

  • Immunity will not be given
  • from prosecution under civil laws like income tax act, FEMA, Co Act, 2013,
  • from any of the criminal laws like Indian Penal Code, law relating to smuggling, corruption, Narcotic Drugs etc.

Scheme of Taxation-: 

n) The black money law intends to tax is undisclosed income AND undisclosed assets.

o) The provisions of this law are quite stringent.

p) Thus it is neither purely in the nature of extended income tax which taxes income nor purely in the nature of wealth tax which taxes wealth / value of assets.

q) You may be aware of Liger i.e. an unnatural specie of combination of Lion and Tiger.

r) This Liger has been created to ruthlessly / mercilessly devour its pray.

liger

s) The law has restricted to the person being resident and ordinarily resident.

Basis to be taxed-:

t) The law intends to tax the pie of undisclosed income and undisclosed assets without giving deduction for

  • application of income or
  • other tax holiday incentives.

Valuation of such undisclosed income / undisclosed asset-:

u) The undisclosed income will be taxed as per normal provisions of Income Tax Act.

v) The undisclosed asset will be taxed at fair market value of the asset on the date of taxation and not at the value of cost of acquisition / improvement.

Example-: Mr. Bill Gates decides to leave USA and settle in India permanently. During FY 2015-16, he settles in India. Needless to say for all earlier years, he was a non resident for India. Thus the question of filing of return of income does not arise. His income during the year will be chargeable to tax in India under Income Tax Act, 1961 but all his assets earned outside India can not be taxed under this law.

Article is Updated till 21 June 2015. Audience may refer the latest news item in this regard at http://www.ndtv.com/india-news/new-bill-likely-to-control-tax-evasion-774578 

Few Additional Points for Professional

There are many grey areas in the black money law where the scenario is not clear regarding the interpretation of the statute.

As been informed, Direct Tax Committee of the Institute of Chartered Accountants of India is in process of constituting a group of eminent faculties to help the members serve their clients in this area.

While taxing the pie of undisclosed asset / income, the aspect / nexus theory as noted by Supreme Court needs to be explored.nexus theory

Aspect / Nexus Theory

Article 265 of the Constitution states that “No tax shall be levied or collected except by the authority of law”.

I am re-producing herewith the extract of judgement of Supreme Court vide its constitutional bench of 5 judges in the case of GVK Industries Ltd. v ITO [2011] 197 TAXMAN 337 (SC) March 1, 2011 which speak about authority of parliament to make laws. In this case, validity of sec 9 was challenged.

The two questions that have arisen for consideration before the Constitution Bench of the Supreme Court are:

(1) Is the Parliament consti- tutionally restricted from enacting legislation with respect to extra-territorial aspects or causes that do not have, nor are expected to have any direct or indirect, tangible or intangible impact(s) on, or effect(s) on, or cones- quences for:

(a) the territory of India, or any part of India; or

(b) the interests of, welfare of, well being of, or security of inhabitants of India, and Indians?

(2) Does the Parliament have the powers to legislate ‘for’ any territory, other than the territory of India or any part of it? The Attorney General contends that the Parliament is a ‘Sovereign Legislature’, and that such a “Sovereign Legislature has full power to make extra-territorial laws.” He further contends that the Courts in India do not have the powers to declare the ‘extra-territorial laws’ enacted by the Parliament as invalid, on the ground that they have an ‘extra-territorial effect’, notwithstanding the fact:

(a) that such extra-territorial laws are with respect to extra- territorial aspects or causes that have no impact on or nexus with India;

(b) that such extra-territorial laws need not, in any manner or form, work to, or intended to be to the benefit of India; and

(c) that such extra-territorial laws might even be detrimental to India.

While answering, SC in para76 observed as follows. It has been para phrased as follows

Thus, the Parliament is constitutionally restricted from enacting legislation with respect to extra-territorial aspects or causes that do not have, nor are expected to have any direct or indirect, tangible or intangible impact(s) on or effect(s) in or consequences for:

(a) the territory of India, or for any part of India; or

(b) the interests of, welfare of, well being of, or security of inhabitants of India and the Indians.

However, the Parliament may exercise its legislative powers with respect to extra-territorial aspects or causes, – events, things, phenomena (howsoever commonplace they may be), resources, actions or transactions and the like -, that occur, arise or exist or may be expected to do so, naturally or on account of some human agency, in the social, political, economic, cultural, biological, environmental or physical spheres outside the territory of India and seek to control, modulate, mitigate or transform the effects of such extra-territorial aspects or causes, or in appropriate cases, eliminate or engender such extra-territorial aspects or causes, only when such extra-territorial aspects or causes have, or are expected to have, some impact on, or effect in, or consequences for:

(a ) the territory of India, or any part of India; or

(b) the interests of, welfare of, well being of, or security of inhabitants of India and the Indians.

The powers of legislation of the Parliament with regard to all aspects or causes that are within the purview of its competence, including with respect to extra-territorial aspects or causes and as specified by the Constitution or implied by its essential role in the Constitutional scheme, ought not to be subjected to some a-priori quantitative tests, such as ‘sufficiency’ or ‘significance’ or in any other manner requiring a pre-determined degree of strength. All that would be required would be that the connection to India be real or expected to be real and not illusory or fanciful.

Whether a particular law enacted by the Parliament does show such a real connection, or expected real connection, between the extra-territorial aspect or cause and something in India or related to India and Indians, in terms of impact, effect or consequence, would be a mixed matter of facts and of law. Obviously, where the Parliament itself posits a degree of such relationship beyond the Constitutional requirement that it be real and not fanciful, then the Courts would have to enforce such a requirement in the operation of the law as a matter of that law itself and not of the Constitution. The Parliament does not have the powers to legislate ‘for’ any territory, other than the territory of India or any part of it. It is obvious that the Parliament is empowered to make laws with respect to aspects or causes that occur, arise or exist, or may be expected to do so, within the territory of India and also with respect to extra-territorial aspects or causes that have an impact on or nexus with India. Such laws would fall within the meaning, purport and ambit of the grant of powers to the Parliament to make laws “for the whole or any part of the territory of India”, and they may not be invalidated on the ground that they may require extra-territorial operation. Any laws enacted by the Parliament with respect to extra-territorial aspects or causes that have no impact on or nexus with India would be ultra vires and would be laws made ‘for’ a foreign territory. 

Facts-:

Consider a case that an assessee has undisclosed income Rs. 3,00,000/-.

The assessee purchased an immovable property out of it.

The current fair market value of that asset is Rs. 6,00,000/- 

Approach

The assessee will offer it as undisclosed income and offer Rs. 3,00,000/- for taxation. The assessing officer may treat it as undisclosed asset which is to be taxed on Rs. 6,00,000/-. The tax rate in both scenarios is 30%.

Query-:

Thus there is a question as to how it should be taxed….

( Author CA. Yogesh S. Limaye can be reached at yogesh@salcoca.com)

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