Challenges under Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015

1. Introduction

1.1 The problem of black economy is deep rooted in almost all high tax jurisdictions and has become an issue of discussion at almost all global forums. All the countries have felt the need of reducing the generation of black money as well as the siphoning of it to other tax jurisdictions. At various levels, initiatives of information sharing, prosecutions, extradition support have gained momentum.

1.2 It is in this context that the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Bill, 2015 was tabled in the Lok Sabha on 20.03.2015. The Bill was characterised as a Money Bill by the Speaker and was passed after debate on 11.05.2015 by the Lok-Sabha. The bill was sent to Rajya Sabha for its recommendation which debated on the bill on 13.05.2015 and returned it to the Lok Sabha without any recommendations. The Bill received the assent of the President and became an Act on 26.05.2015 i.e. exactly one year after the formation of the NDA Government.

Black Money

1.3 The Act seems to be a self- contained code though at various instances there are references to the Income Tax Act, 1961. A large portion of the language deployed in the Act also seems to be imported from the Income Tax Act. The brief framework and layout of the Act is summarised as under:

Chapters Section
I. Preliminary 1 to 2
II. Basis of Charge 3 to 5
III. Tax Management 6 to 40
IV. Penalties 41 to 47
V. Offences & Prosecution 48 to 58
VI. Tax Compliance for Undisclosed Foreign Income and Assets 59 to 72
VII. General Provisions 73 to 88

1.4 An experience with the working of the Act reveals that there are various challenges in practical application of the Act. This Article aims to identify and address some of these challenges.

2. Applicability, Charge of Tax and Choice of Act.

2.1 Section 3 of the Act provides that tax shall be levied at the rate of 30% on undisclosed foreign income and assets of an assessee w.e.f. 01.04.2016. It is further provided that undisclosed assets located outside India shall be charged to tax on its value in the Year in which such asset comes to the notice of the Assessing Officer (AO).

2.2 Assessee: – The term assessee was originally defined u/s. 2(2) of the Act to mean a person, being a resident other than not ordinarily resident in India within the meaning of section 6(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. It may be noted that as stated above, the charge of tax is not the year in which assessee acquires the asset but the year in which the asset comes to the notice of the AO. This definition therefore caused confusion as to whether the residential status ought to be considered for the year in which asset was acquired or the year of taxation. Therefore, the Finance Act, 2019 has substituted section 2(2) of the Act with retrospective effect from 01.07.2015 to provide that assessee means a person

(a) being a resident in India in the previous year; or

(b) being a non-resident or not ordinarily resident in India 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.

Therefore, it is now clarified that the provision of the Act shall apply in either cases i.e. where the assessee was a resident either in the year of assessment or in the year in which income is earned or asset is acquired.

2.2 Choice of Act – The Act stipulates a rate of 30% on the value of Undisclosed Asset/ undisclosed income. Further, the Finance Acts have so far not provided that surcharge and cess shall be levied on the tax payable under the Black Money Act. The foreign undisclosed income and assets may also be taxed u/s. 68 to 69D of the Income Tax Act (Unexplained Credits/ Assets/ Expenditure). The tax rate on such income was originally prescribed at 30%, however, has been enhanced to 60% vide the Taxation Laws (Second Amendment) Act, 2016 w.e.f. 01.04.2017. The summary of tax rates on undisclosed income and Assets may be summarised are as under:

Particulars Undisclosed Income & Assets
Under Income Tax Under Black Money Act
AY 13-14 to AY 16-17 AY 17-18 onwards
Rate of Tax 30% 60% 30%
Surcharge 7 to 15% of tax (based on income) 25% of tax Nil
Cess 3% of tax plus surcharge 4% of tax plus surcharge Nil
Penalty 100% to 300% of tax 10% of tax 300% of tax

The aforesaid table indicates that the undisclosed foreign income/ Asset is capable of being taxed either under the Income Tax Act or Black Money Act. Therefore, the Act clarifies that the income included in Income Tax Act cannot be assessed again under the Black Money Act and vice-versa. A question therefore arises that whether the assessee/ AO have a choice of taxation under either of the Act. It seems from the scheme of the Act that the assessee clearly does not have an option of selecting the Act under which he wishes to be assessed. However, in view of the author there is no bar on the AO to either include the undisclosed foreign income/ asset in the total income under the Income Tax Act or Black Money Act.

2.4 Year of Taxation – The most important and unprecedented change brought about by the Black Money Act is that the AO is empowered to question the source of foreign asset in the year in which such assets comes to his notice. Often practical difficulties may arise in establishing the source of old assets especially where the asset were acquired prior to the period for which accounting records are required to be preserved or in case of assets of deceased assessee inherited by his legal heir. It is true that there is no time limit in which an asset may come to the notice of the AO. However, it must also be noted that the power to assess is only for the year in which the asset may come to the notice of the AO and not any subsequent year. In the opinion of the author, if the AO has notice of the asset (e.g.: – in the course of assessment proceeding of earlier years, disclosure in ITR, etc.); the AO is not empowered to question the source in any and/ or every subsequent year. Further, it is also worthwhile to note that the deeming fiction is merely in respect of undisclosed assets and not to undisclosed income. Therefore, undisclosed foreign income can be taxed only in the year in relation to which it pertains.

2.5 Credit of Foreign Taxes – The Act does not provide any specific section which enables claim of credit of taxes paid in other tax jurisdictions. However, the scheme of the Act indicates that the tax levied under the Act is in essence Income Tax. The view is strengthened by the fact that the Act prohibits levy of the tax under this Act in respect of income on which Income Tax is levied and vice-versa. Thus, in essence the tax is in the nature of Income Tax and should be covered by the provision of the Double Taxation Avoidance Agreement and therefore, the assessee should be eligible to claim treaty benefits in respect of income being taxed under the Act either by way of exemption or credit method having regard to the respective Double Taxation Avoidance Agreement.

3. Scope of undisclosed foreign income and asset.

3.1 Section 4 of the Act provides for the mechanism of computation of undisclosed income and assets. It states that the value of undisclosed income and assets shall comprise of the following components:

(i) Income from source located outside India which has not been disclosed in Income Tax Return furnished u/s. 139(1)/(4)/(5) of Income Tax Act.

(ii) Income from source located outside India in respect of which Income Tax Return has not been furnished u/s. 139(1)/(4)/(5) of Income Tax Act.

(iii) Value of undisclosed assets located outside India.

3.2 Source located outside India – The term income from source located outside India has not been defined in either the Black Money Act or in the Income Tax Act. However, the term “income” has been defined under the Income Tax Act and the definition under the Act shall also apply to the present Act. Further, section 9 of the Act provides certain incomes which are deemed to accrue/arise in India. For e.g.- explanation 5 to Section 9 provides that capital asset being share in a company registered outside India shall be deemed to be situated in India, if the share or interest derives, directly or indirectly, its value substantially from the assets located in India. In such a scenario, a question arises whether the deeming fiction contained in section 9 operates only for Income Tax Act or even the present Act. Though, the Black Money Act imports the definitions of terms contained in the Income tax Act, the other deeming provisions have not been expressly imported. However, though, as it may be, it is most logical that both the Acts being intrinsically connected should be read harmoniously and therefore the source of income in case of income referred to in section should be considered as India and the Act should have no application on such income. Therefore, in the example, the gain on share of the foreign company deriving substantial value from India should be deemed to be from source situated in India to which the provisions of the Black Money Act should not be applicable.

3.2 Non-disclosure of Assets – Section 2(11) of the Black Money Act provides that “undisclosed asset located outside India” means an asset (including financial interest in any entity) located outside India, held by the assessee in his name or in respect of which he is a 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 AO unsatisfactory. Therefore, mere Non-disclosure of foreign assets in the Income Tax return or non-filing of Income Tax Return cannot result into terming the asset as undisclosed foreign assets if the source thereof can be explained. (Note: The non-disclosure of assets is subjected to a penalty as has been discussed separately in succeeding paras.)

4. Computation of undisclosed foreign income and asset.

4.1 Section 2(12) of the Act provides that undisclosed foreign income and asset 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, referred to in section 4, and computed in the manner laid down in Section 5. Section 3(2) of the Act provides that 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. The central Government has notified the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Rules, 2015. Rule 3 provides for the valuation of undisclosed Assets in respect of various class of Assets.

4.2 Undisclosed Asset vis-à-vis Undisclosed Income – The valuation of Bank Account provided under the Rule is the sum of all the deposits made in account since the date of opening the Account. It is further provided 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. It may be noted that in the assessment, the AO tends to add the entire credit appearing in the bank account in the year in which the Bank account comes to the notice of the AO as value of Undisclosed Assets. However, in view of the author though deposits in Bank account are to be aggregated any item which can be attributed as income say for e.g. Bank Interest, Dividend, etc. reflects income which should be taxed as undisclosed income only in the year to which it relates and not as undisclosed asset in the year in which it comes to the notice of the AO.

4.3 Telescoping of Income – Section 5 of the Act deals with computation of undisclosed Foreign Income and Assets. Clause (i) of sub-section (1) provides that no deduction of allowance or set off of any loss shall be allowed in computing the total income of the assessee. Clause (ii) provides that while computing the value of undisclosed asset, the amount of income which has been assessed to tax under the Income-tax Act or Black Money Act if the assessee furnishes evidence to the satisfaction of the AO that asset has been acquired from income which has been assessed to tax. It is a settled provision under the Income Tax Act that where the assessee has undisclosed income and undisclosed assets or incurred undisclosed expenses, the assesse can claim that undisclosed asset/ expense is sourced out of the undisclosed income. This is known as telescoping theory and has already been accepted and upheld by various judicial forums. The aforesaid clause in the Black Money Act however casts upon the assessee the onus of establishing that the undisclosed assets are acquired from the undisclosed income which has been subjected to tax. Sub-section (2) provides that in case of immovable property, the deduction as referred to in clause (ii) shall be computed in the manner as under:

Deduction to be allowed = Income added in earlier year * Value of asset
Cost of the Asset

5. Penalties & Offences

5.1 The penalties prescribed under the Act can be summarised as under:

Section Default Penalty
41 Undisclosed Foreign Income & Assets Three times of tax
42 Failure to furnish return of Income in respect of foreign income & Assets by a person being resident and ordinarily resident Rs. 10 lakhs (no penalty in respect of bank if aggregate balance at any time does not exceed Rs. 5 lakhs)
43 Failure to furnish information in respect of foreign income & Assets by a person being resident and ordinarily resident
44 Default in payment of Tax Arrear Equal to Tax Arrear
45 Other Defaults i.e.-

(a)  Failure to answer questions

(b)  Sign any statement

(c)  Attend or Produce books

Rs.50,000 to Rs.2,00,000/-

5.2 The Offences prescribed under the Act can be summarised as under:

Section Default Prosecution
49 Failure to furnish ROI in respect of foreign income & Assets by a person being resident and ordinarily resident Rigorous Imprisonment for a term ranging from 6 months to 7 years and with fine
50 Failure to furnish information in respect of foreign income & Assets in ROI by a person being resident and ordinarily resident
51(1) Attempt to evade tax by person being resident and ordinarily resident Rigorous Imprisonment for a term ranging from 3 years to 10 years and with fine
51(2) Attempt to evade payment of Tax Rigorous Imprisonment for a term ranging from 3 months to 3 years and fine at the discretion of court
52 False Statement in verification Rigorous Imprisonment for a term ranging from 6 months to 7 years and with fine
53 Abatement of Offence referred in 51(1) Rigorous Imprisonment for a term ranging from 6 months to 7 years and with fine

6. Procedural Difficulties

6.1 The procedure provided under the Act is quite similar to procedure provided under the Income Tax Act with certain variations. Some of the important practical variations and challenges faced in procedural aspects are elaborated in subsequent proceedings.

6.2 Assessment: – Section 10(1) provides that the AO may on receipt of information from an income-tax authority or any other authority under any law for the time being in force or on coming of any information to his notice, serve on any person, a notice requiring him on a date to be specified to produce or cause to be produced such accounts or documents or evidence as he may require for the purposes of this Act. It also empowers the AO to conclude the assessment ex-parte where the person to whom notice is served fails to comply with it. Section 11 provides the time limit for completion of assessment as two years from the end of the financial year in which the notice under section 10(1) was issued.

The term “assessment” is defined us/s. 2(3) to include reassessment. However, no special provisions for re-assessment have been contemplated under the Black Money Act. Further, section 10 and 11 at certain stages uses the phrase “Assessment or reassessment” and at certain other places merely “assessment”. One fails to understand that if the term assessment has been defined to include reassessment why the term reassessment has been included at certain places and there is absence of the term in the very same section at some other places.

6.3 Appeal to Commissioner (Appeals): Section 15(1) of the Act provides for persons who can prefer appeal as a person who is:

(a) objecting to the amount of tax on undisclosed foreign income and asset

(b) denying liability to be assessed under this Act; or

(c) objecting to any penalty imposed

(d) objecting to order of rectification having the effect of enhancing the assessment or reducing the refund; or

(e) objecting to an order refusing to allow the claim made by the assessee for a rectification under section 12.

In this context, it is important to note that ordinarily a notice issued for assessment is not appealable under the provisions of Income Tax Act. However, the clause (b) of section 15(1) provides that a person denying his liability to be assessed under the Act is entitled to file appeal indicating that the notice issued u/s. 10(1) of the Act may be appealable. The time limit for filing the appeal is 30 days from the date of receipt of order.

Section 15(2) provides that the form and manner in which appeal may be preferred shall be prescribed. The Black Money Rules prescribe that the appeal is to be filed in Form No. 2 and is to be accompanied by a fees of Rs.10,000/-. Astonishingly, Rule 6 (4) prescribes that the appeal shall not be admitted unless at the time of filing of the appeal the assessee has paid the tax along with penalty and interest thereon on the amount of liability which has not been objected to by him. In the view of author, the said condition imposed under the Rules is ultra vires the Act as the Government was empowered to merely prescribe the form and manner in which appeal could be filed and not to impose any conditions. It may also be argued that section 249 of Income Tax Act provides for a similar condition and therefore, a conscious absence of such condition in the Black Money Act indicates that the legislature has never intended imposition of such condition and the executive has exceeded its jurisdiction by imposition of such a condition. Further, there is also no clarification as to whether the penalty is required to be paid even in case where penalty is leviable but has not been levied on the portion of undisputed liability. However it is difficult to apprehend the penalty that may be levied on such portion and pay the penalty prior to filing of quantum appeal.

It is also strange to note that, as per section 17(1) whereas in the case of appeal against assessment; the Commissioner (Appeals) has wide powers to confirm, reduce, enhance or annul the assessment; in case of appeal against penalty, the powers are restricted either to confirm or cancel such order. One fails to understand as to why the powers to reduce or enhance penalty has not been provided by the Act. However, interestingly, section 17(3) provides that no enhancement of penalty shall be made unless appellant has been given opportunity of being heard. Therefore, there is contradiction in section 17 of the Act.

6.4  Appeals to Tribunal Section 18 provides for appeal to Tribunal. Whereas sub-section (1) provides for filing an appeal by assessee aggrieved by an order passed by the Commissioner (Appeals) or Commissioner; sub-section (2) provides for appeal to be filed by the AO on the direction of the Commissioner. The time period for filing appeal is 60 days from the date on which the order sought to be appealed against is communicated. The time limit for filing cross objections is 30 days from the date on which notice of appeal being filed to the Tribunal is given. The maximum period for which the Tribunal can condone the delay in filing appeals is one year.

Rule 7 provide that an appeal u/s. 18(1) (i.e. appeal by the assessee) shall be made in Form 3 and shall be accompanied by a fee of Rs.25,000/-. The memorandum of cross-objections shall be made in Form 4. It is strange to note that whereas Form 3 is prescribed for filing appeal by the assessee before the Appellate Tribunal [Section 18(1)], there is no form prescribed for filing appeal by the AO [Section 18(2)]. This seems to be a drafting error.

The Act neither contains any provision for rectification by tribunal of its own order of mistake apparent from the record nor provision for granting stay by the Tribunal. However, it is a well settled principle that both the said powers are inherent to exercise of appellate powers by any appellate authority.

6.5 Stay & Recovery of Demand – Section 30 provides that any amount specified as payable in a notice of demand under section 13 shall be paid within a period of 30 days of the service of the notice. It further provides that the AO may, on an application made by the assessee, before the expiry of a period of thirty days or the reduced period or during the pendency of appeal with the Commissioner (Appeals), extend the time for payment, or allow payment by instalments, subject to such conditions as he may think fit to impose in the circumstances of the case. Further, where an assessee defaults in paying any one of the instalments within the time fixed, he shall be deemed to be an assessee in default in respect of the whole of the then outstanding amount. However, there is absence of any provision similar to 220(6) of the Income Tax Act, 1961 which empowers the AO to grant stay of demand. It is also interesting to note that the no format of challan has been prescribed for making payment under the Act even after a lapse of more than 5 years from notification of the Act.

Section 35 provides that a manager of the company shall be jointly & severally liable for payment of amount due under the Act if amount cannot be recovered from the company unless he proves that non-recovery cannot be attributed to any neglect, misfeasance or breach of duty on his part. It may be noted that section 179 of Income Tax Act provides for recovery of dues from directors only in case of a Private Limited company whereas the present Act empowers recovery in any type of company.

7. Conclusion

Recently, five years lapsed from the date on which the Act received the assent of the President. However, despite, a lapse of period of almost five years, the Act, rules and procedure lack the desired clarity by a taxing statute. The legislature and the Government of India must bring appropriate modifications for enabling effective application of the Act. As agreements with various tax jurisdictions for automatic exchange of information have been entered in the recent past, the assessment under the Black Money Act may gear up in near future.

Author Bio

Qualification: CA in Practice
Company: Singrodia & Co. LLP
Location: Mumbai, Maharashtra, IN
Member Since: 13 Jun 2020 | Total Posts: 1
Jigar Mehta is Chartered Accountant specialising in Direct Tax Litigation Practice. He has been awarded Shri S Paramsivam Memorial Prize, Proficiency certificate & certificate of Merit for securing AIR-1 in Tax Management Course Exam by ICAI. View Full Profile

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