Taxmann's Guide to Black Money Law

About the Authors

Mr. Gaurav Jain (B.Com (H), FCA, LL.B)

Mr. Shubham Gupta (B.Com, LL.B)

Preface

The term ‘Black money’, is generally used to refer to illegally earned or undeclared income that is not reported to the Government for tax purposes. The black money so generated becomes virtually untraceable once it leaves Indian shores. However with increased global co-operation in exchange of tax information, it has become increasingly feasible for Government of India to have access to information relating to black money generated in India and parked outside Indian territory. The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (the “Black Money Act”) is another significant stride amongst series of steps taken by the Government of India to curb the menace of black money which is taken outside India. Despite there being special provisions of Income-tax Act being capable of bringing unaccounted money under the Tax gambit, the legislature has enacted this special Act, to deal with the menace of black money parked outside India more effectively and build strong deterrence by providing stricter, stringent punishment for the culprits indulging in generation and safe keeping of Black Money.

The Black Money Act has a broad scope covering across all ‘assets’, ‘located outside’, which are held by an ‘assessee’ in ‘his own name’ or in capacity of ‘beneficial owner’, acquired from an ‘unexplained source’ as well as ‘income’ from a ‘source located outside India’. While the Act borrows a lot from the Income-tax Act, but as can been seen above, the Act introduces new and novel terms as well as new and novel definition of existing terms, of which no reference can be found either in Income-tax or any other law in force and thus require fresh interpretation of law. In addition to this, the Act has bestowed upon the Assessing Officers extensive discretionary powers, which are prone to unfettered and arbitrary use. In fact in experience of the author, such unfettered and arbitrary use of power can be seen on full display, when huge additions are made against an assessee based on complete misinterpretation of law and facts and as well the misapprehension stemming from complexities arising out of Interplay between the Black Money Act and Income-tax Act as well other statutes such as the Evidence Act, etc.

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Additionally the challenge to constitutional vires of the Black Money Act as well as retrospective application of the Act is also pending adjudication in various High Courts across the country, which will be decided in due course of in time.

Thus amongst such upheaval, the purpose of the book is to provide a comprehensive analysis of the provisions of the Act with the help of case laws which has been decided and those pending adjudication as well as circulars and notifications, released by CBDT from time to time. The said case laws as well circulars and notification have been placed strategically with explanation to relevant statutes to provide the reader with a comprehensive analysis with convenience. The book has presented the legal provisions in a concise and precise manner providing a comprehensive coverage of all the provisions of the Black Money Act, without tampering with the intent and spirit of law.

Hope the readers find the same useful in navigating the Black Money Law.

I am very thankful to the editorial team of TAXMANN who are instrumental in publishing this book through their continuous support and efforts. Suggestions and criticisms from all readers would be highly appreciated and acknowledged.

MR. GAURAV JAIN

MR. SHUBHAM GUPTA

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2.6 Estimates of Black Money Stashed Abroad

2.6-1 A chain Email, which first started circulating on the Internet in early 2009, states that Indians have more money in the Swiss banks than all other countries combined. It claims that as per a Swiss Banking Association report in 2006, bank deposits in the territory of Switzerland by nationals of a few countries are as under: India, US$1456 billion, Russia, US $470 billion, UK, US$390 billion, Ukraine, US$100 billion, China, US$96 billion.

2.6-2 It is now evident that there is no organization by the name of Swiss Banking Association, although there is a Swiss Bankers Association (SBA).

On 13 September 2009 Zeenews.com reported a statement from James Nason, Head of International Communications of the SBA, in which, referring to figures being quoted based on the alleged SBA report, he asserted that the SBA had never published any such report and that the story about Indian deposits was a complete fabrication. Thus these figures appear to be a figment of the imagination and the email circulating them baseless and mischievous in intent.

2.6-3 Another report which was circulated in the media stating that Indian nationals held around US$ 1.4 trillion abroad in illicit external assets was based on the 2008 report of Global Financial Integrity (GFI), ‘Illicit Financial Flows from Developing Countries: 2002-2006’. In its November 2010 report,

‘The Drivers and Dynamics of Illicit Financial Flows from India: 1948-2008’, however, it accepted on page 9 that the back-of-the-envelope method used to derive the figure was flawed - the figure was based on GFI’s estimated average illicit outflows of US$ 22.7 billion per annum (over the period 2002-06) multiplied by the 61 years since independence and it is erroneous to apply annual averages to a long time series when illicit flows are fluctuating sharply from one year to the next.

2.6-4 It is however useful to mention here one estimate of the amount of Indian deposits in Swiss banks (located in Switzerland) which has been made by the Swiss National Bank. Its spokesperson stated that at the end of 2010, the total liabilities of Swiss Banks towards Indians were 1.945 billion Swiss Francs (about ` 9,295 crore). The Swiss Ministry of External Affairs confirmed these figures when a reference was made by the Indian Ministry of External Affairs to them. Since the information was publicly available on the website of the Swiss National Bank, the figures of earlier years were also taken and are tabulated in Annexure Table 1. From this Table, it can be seen that bank deposits of Indians in Swiss banks have decreased from ` 23,373 crore in year 2006 to ` 9,295 crore in year 2010.

2.6-5 In Annexure Table 2 the liabilities of Swiss banks towards nationals of various countries have been listed. It can be seen that the deposits of Indians in Swiss banks constitute only 0.13 per cent of the total bank deposits of citizens of all countries. Further, the share of Indians in the total bank deposits of citizens of all countries in Swiss banks has reduced from 0.29 per cent in 2006 to 0.13 per cent in 2010.

2.6-6 These figures are the only authentic information available at this stage about Indian money lying in foreign banks. From these figures, it can be safely concluded that the common belief that Indians hold the maximum deposits in Swiss banks is not correct.”

One of the options suggested for bringing back black money stashed overseas is scheme for voluntary disclosure of such deposits. This option has been successfully adopted by some countries (USA, UK, France, Germany, etc.). In these schemes, only partial benefits in the form of immunity from prosecution were made available in lieu of voluntary disclosure, as taxes along with lumpsum interest and penalty has to be paid. In the past, India has also opted for voluntary disclosure schemes. A similar scheme, targeted at black money stashed abroad can be a one time option, in view of the increasing capacity of tax administration to access information from foreign jurisdiction

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An Act 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 to provide for imposition of tax on any undisclosed

Preamble

foreign income and asset held outside India and for matters connected therewith or incidental thereto.”

Annexure 1

The Finance Minister, in his budget speech, while acknowledging the limitations under the existing law, had conveyed the considered decision of the Government to enact a comprehensive new law on black money to specifically deal with black money stashed away abroad. He also promised to introduce the new Bill in the current Session of the Parliament.

2. In order to fulfil the commitment made by the Government to the people of India through the Parliament, the Undisclosed Foreign Income and Assets (Imposition of Tax) Bill, 2015 has been introduced in the Parliament on 20-03-2015. The Bill provides for separate taxation of any undisclosed income in relation to foreign income and assets. Such income will henceforth not be taxed under the Income-tax Act but under the stringent provisions of the proposed new legislation.”

The salient features of the proposed law, in the bill were as under:

The salient features of the Act and one-time Voluntary disclosure scheme prevalent in the Act is discussed in detail in ensuing chapters infra.

“Return of income

139. (1)

— For the purposes of this section “beneficial owner” in respect of an asset means an individual who has provided, directly or indirectly, consideration for the asset for the immediate or future benefit, direct or indirect, of himself or any other person.

— For the purposes of this section “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.”

Circular No.13 of 2015 - (Annexure 4)

Question No.31: A person is a beneficiary in a foreign asset. Is he eligible for declaration under section 59 of the Act?

Answer: 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 and 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 provided, 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.”

“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 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 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 ‘ ’. 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 the intention of the legislature may go in vain or be left to evaporate in thin air. (See v. 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 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 to section 139(1) cannot be adopted in the context of the BMA. We reject this plea of the learned counsel as well.”

Explanation 4

Explanation 5

“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.”

Explanation 4

Circular No. 13/2015 (Annexure 4)

Question No.14: What are the consequences if no declaration under Chapter VI of the Act is made in respect of undisclosed foreign assets acquired prior to the commencement of the Act?

Answer: As per section 72(c), where any asset has been acquired prior to the commencement of the Act and no declaration under Chapter VI of the Act is made then such asset shall be deemed to have been acquired in the year in which it comes to the notice of the Assessing Officer and the provisions of the Act shall apply accordingly.

India is expected to start receiving information through Automatic Exchange Of Information (AEOI) route under FATCA from USA later in the year 2015. Further, under the multilateral agreement India will start receiving information from other countries under AEOI route from 2017 onwards. As on 18th March 2015, 58 jurisdictions (including India) have committed to share information under AEOI by 2017 and 36 jurisdictions have committed to share by 2018, including jurisdictions which have beneficial tax regime. The multilateral agreement is expected to cover all the countries in the near future. The information under the AEOI will include information of controlling persons (beneficial owners) of the asset. The possibility of discovery of an undisclosed asset may arise at any time in the future; say for example, information of an immovable property can be unearthed if any utility bills/ property tax or even gardener’s/caretaker’s salary has been paid through an existing or closed bank account. Therefore, if any information of an undisclosed foreign asset acquired earlier, say in the year 1975, for $ 100,000 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 per cent 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.

Question No.19: A person has a foreign bank account in which undisclosed income has been deposited over several years. He has spent the money in the account over these years and now it has a balance of only $500. Does he need to pay tax on this $500 under the declaration?

Answer: Section 59 of the Act provides for declaration of an undisclosed asset and not income. In this case the Bank account is an undisclosed asset which may be declared. Tax on undisclosed asset is required to be paid on its fair market value. In case of a bank account the fair market value is the sum of all the deposits made in the account computed in accordance with

Rule 3(1). Therefore, tax and penalty needs to be paid on such fair market value and not on the balance as on date.

Question No. 20: A person held a foreign bank account for a limited period between 1994-95 and 1997-98 which was unexplained. Since such account was closed in 1997-98 does he need to declare the same under Chapter VI of the Act?

Answer: Section 59 of the Act provides that the declaration may be made of any undisclosed foreign asset which has been acquired from income which has not been charged to tax under the Income-tax Act. Since the investment in the bank account was unexplained and was from untaxed income the same may be declared under Chapter VI of the Act. The consequences of non-declaration may arise under the Act at any time in the future when the information of such account comes to the notice of the Assessing Officer.

Question No.21: A person inherited a house property in 2003-04 from his father who is no more. Such property was acquired from unexplained sources of investment. The property was sold by the person in 2011-12. Does he need to declare such property under Chapter VI of the Act and if yes then, what will be the fair market value of such property for the purpose of declaration?

Answer: Since the property was from unexplained sources of investment the same may be declared under Chapter VI of the Act. However, the declaration in this case needs be made by the person who inherited the property in the capacity of legal representative of his father. The fair market value of the property in his case shall be higher of its cost of acquisition and the sale price as per Rule 3(2) of the Rules.

Question No.22: A person acquired a house property in a foreign country during the year 2000-01 from unexplained sources of income. The property was sold in 2007-08 and the proceeds were deposited in a foreign bank account. Does he need to declare both the assets under Chapter VI of the Act and pay tax on both the assets?

Answer: The declaration may be made in respect of both the house property and the bank account at their fair market value. The fair market value of the house property shall be higher of its cost and the sale price, less amount deposited in bank account. If the cost price of the house property is higher the declarant will be required to pay tax and penalty on (cost price - sale price) of the house. If the sale price of the house property is higher the fair market value of the house property shall be nil as full amount was deposited in the bank account. The fair market value of the bank account shall be as determined under Rule 3(1) and tax and penalty shall be paid on this amount. (Please also refer to the illustration under Rule 3(3) for computation of fair market value.)

Further, it is advisable to declare all the undisclosed foreign assets even if the fair market value as computed in accordance with Rule 3 comes to nil. This may avoid initiation of any inquiry under the Act in the future in case such asset comes to the notice of the Assessing Officer.

Circular No. 15/2015 (Annexure 5)

Question No.1: A person, while being a non-resident, earned foreign income, not chargeable to tax in India, (exempt income) which was deposited in a foreign bank account. The person became resident in India in F.Y. 2013-14 and since then only interest is being credited to the account. Such income including interest income has not been offered to tax in India. In such case what should be the disclosure under the tax compliance?

Answer: As stated the person was non-resident for the F.Y. 2012-13 and earlier years, and the foreign income for such years was not chargeable to tax in India for the F.Y. 2013-14 and subsequent years, while he is resident in India, the person’s global income is taxable in India. Accordingly, the declaration of foreign bank account in this case, which has been made partially out of undisclosed income chargeable to tax, may be made. In this case, the value of undisclosed foreign bank account shall be computed as per rule 3(1) of the Rules and a deduction as per section 5 of the Act shall be allowable. Therefore, the value of such account shall be the sum of all credits in the bank account as reduced by income not chargeable to tax in India (exempt income), which has been credited into such account. In this case, exempt income would be the foreign income deposited in the bank account upto the F.Y. 2012-13. Therefore, in effect the value of bank account in this case would be the sum of interest credits into the account since 1.04.2013.

Question No.2: A person was a non-resident from F.Ys. 1996-97 to 201011 during which he was employed in a foreign country. The person received salary which was taxable in the foreign country and credited into a foreign bank account. The person also received contributions to his pension account from his employer. The person became a resident in India in F.Y. 2011-12. Whether the person is required to declare his pension account under the tax compliance?

Answer: As stated, the salary and pension received before F.Y. 2011-12 was not chargeable to tax in India. However, on or after 1-04-2011 when the person became resident in India any accretion to the pension account (in the form of interest, dividend, capital gain or any other sum) is chargeable to tax in India. Therefore, declaration of such account may be made under Chapter VI of the Act. The value of such account shall be the accretions to the account since 1-04-2011.

GUIDE TO BLACK MONEY LAW

AUTHOR : GAURAV JAIN , SHUBHAM GUPTA

PUBLISHER : TAXMANN

DATE OF PUBLICATION : FEBRUARY 2023

EDITION : 2023 Edition

ISBN NO : 9789356226814

NO.OF PAGES : 208

BINDING TYPE : PAPERBACK

DESCRIPTION

Rs. 695 USD 38

This book analyses the legal provisions of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (Black Money Act) in a concise and precise manner, without tampering with the intent and spirit of the law.

The Present Publication is the Latest 2023 Edition, authored by Gaurav Jain and Shubham Gupta. The book features discussion on the following topics:

• [Object and Purpose] of the Black Money Act

• [Comprehensive Analysis of the Black Money Act] along with Case Laws, Circulars & Notifications issued by the CBDT

• [Interplay between Black Money Act & Income Tax Act] has been presented in the book

• [Analysis of Black Money Act] including the following:

• New & Novel Terms in Black Money Act, including

• Undisclosed Foreign Asset

• Undisclosed Foreign IncomeUndisclosed Foreign Income

• Assessee

• Beneficial Ownership

• Provisions of Assessment, Reassessment, Penalties & Prosecution

• Offences made out in the Black Money Act

• Amendments & its Purpose bought in the Black Money Act

• Retrospective/Retroactive Application of the provisions of the Black Money Act and cases that are pending adjudication

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