India: Prosecution Under Black Money Act For Inherited Foreign Bank Accounts

Last Updated: 8 April 2019
Article by Rishabh Shroff, Kunal Savani and Pratyush Khanna

The scourge of 'black money' has been a persistent issue for India, becoming a major political issue in the recent past. The problem of black money leads to challenges on multiple fronts, greatest of them being denial of revenue to the Government. The parallel economy created by black money deprives the government of its due share of individual income tax, which in turn leads to reduced funds available for much needed government spending and stimulus. Socially, the problem of black money gives rise to further corruption and enhanced class inequality.

Since coming to power in 2014, the current Government has taken up the issue of black money as a major point of reform and has been gradually escalating its efforts to bring black money, both in India and abroad, to tax. Some of the major measures include establishing the multilateral mechanism for Automatic Exchange of Information, information exchange mechanisms with various countries under the respective tax treaties, the demonetisation drive, enactment of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (BM Act) and the Fugitive Economic Offenders Act, 2018.

Mr. Piyush Goyal, whilst presenting the interim budget for Financial Year 2019-20, mentioned that the efforts of the Government have led to bringing undisclosed income of about INR 1,300 billion to tax, led to seizure and attachment of assets worth approximately INR 500 billion, and compelled holders of large cash currency to disclose their source of earnings. Further, according to the Government, domestic assets worth INR 69 billion and foreign assets worth INR 16 billion have been attached.1

Under the Income Tax Act, 1961 (ITA), persons falling within the ambit of 'Resident and Ordinarily Resident' in India, who have assets outside India, are required to furnish details of such assets and income earned outside India in their annual income tax return. The BM Act was enacted to deter the concealment of black money abroad, by providing for a harsh penalty regime for undisclosed foreign income and assets. In this regard, the recent Calcutta High Court (HC) judgement of Shrivardhan Mohta v. Union of India and Ors. (WP No. 568 of 2018)2 has created some controversy.

Factual Background

In the said case, search and seizure proceedings were carried out against the petitioner (Mr. Shrivardhan Mohta), by the tax authorities on March 17, 2015. During the proceedings, the authorities found evidence of four foreign accounts held in HSBC Bank, Singapore. According to the petitioner, he received the bank accounts as inheritance from his deceased mother. The petitioner was called upon to furnish return of income disclosing the assets for the relevant assessment years. During pendency of assessment proceedings, the petitioner approached the Settlement Commission (a body under the ITA that can be approached to settle tax liabilities). However, his settlement application was declared invalid. Subsequently, assessment against the petitioner was completed while taking foreign assets into consideration and penalty proceedings under ITA were also initiated.

During the assessment proceedings, the BM Act became operational. The BM Act prescribes harsh penalties, including imprisonment of up to ten years for wilful attempt to evade tax, and a monetary penalty of three times the amount of tax payable (in addition to the tax due) for non-disclosure of foreign assets. In order to bring the petitioner under the garb of this stringent regime, sanction was granted for prosecution of the petitioner under the BM Act. The petitioner initiated writ proceedings against this in the HC.

Petitioner's Contentions

The petitioner put the following submissions before the HC:

  • The petitioner was barred from availing the disclosure opportunity under the BM Act due to proceedings pending under the ITA. Consequently, proceedings under the BM Act for concealing foreign assets cannot be initiated.
  • BM Act is a fiscal statute that came into effect on April 1, 2016 and cannot have retrospective effect.
  • There was no mens rea on part of the petitioner so as to initiate proceedings against him under the BM Act.
  • Prosecution under the BM Act and the ITA would cause the petitioner to suffer from double jeopardy.

Tax Authorities' Contentions

The tax authorities presented arguments to disregard the contentions of the petitioner with regard to the applicability of the BM Act, retrospective action and double jeopardy.

HC's Decision

The HC, agreeing with the tax authorities, dismissed the writ while observing that:

  • Even without the opportunity to disclose under the BM Act, the petitioner had sufficient opportunities available to him — through return filing after the search and seizure proceedings and in the settlement application, which were not availed by him. Thus, bar of disclosure under the BM Act is not sufficient to prevent proceedings against the petitioner under the BM Act.
  • The restriction on voluntary disclosure under the BM Act lies in a different chapter of the BM Act from the provisions under which prosecution of the petitioner is sought. Being a taxing statute, the BM Act needs to be strictly construed. Hence, the disclosure restriction cannot prevent authorities from initiating proceedings under the BM Act.
  • The disclosure opportunities available to the petitioner post the search and seizure and in the settlement application were after the BM Act came into effect. Therefore, there is no retrospective effect given to the BM Act.
  • Since the BM Act provides for imprisonment while the ITA does not, double jeopardy is not applicable in the present facts.
  • The question of mens rea (intention or knowledge of wrongdoing) was reserved for the criminal proceedings.

Analysis

While the HC's judgement provides clarity on certain matters, it leads to some difficult issues. According to the judgement, the BM Act came into force on April 1, 2016. However, it was brought into force on July 1, 2016 and was subsequently made effective from April 1, 2016 by the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act (Removal of Difficulties) Order, 2015, dated July 1, 2016. Thus, it is clear that the BM Act is being applied strictly from April 1, 2016, even though the statute was brought into force at a later date.

The HC has decided to give the BM Act the widest possible amplitude in terms of the time period of its applicability. The actions carried out even before the BM Act was enacted are being brought under its purview and the persons associated with such actions are being prosecuted under the said statute. This would mean that the time of enforcement of the BM Act can no longer be used as a reliable defence by taxpayers prosecuted under it. Thus, an Indian resident with foreign assets, falling within the ambit of the BM Act, would be better advised to make the requisite disclosures under BM Act, even if the assets in question relate to a time period before the BM Act came into effect.

The BM Act allows for taxing of 'undisclosed foreign assets and income'. The HC's judgement has made it clear that the statute has been given a wide ambit, including inherited assets that have not been disclosed. The HC, in fact, observed that inheritance, as an explanation of not disclosing foreign assets is an 'unacceptable excuse'. According to the HC, inheritance of assets does not prevent anyone from disclosing them.

These observations from the HC give an insight towards the stringent degree to which the judiciary seeks to apply the BM Act. Even if the foreign assets have not been acquired by the individual by his own action but have instead been passed to him by way of inheritance or gift, it would not detract the authorities from prosecuting him under the BM Act. The fact as to whether the foreign assets had been disclosed or not by the transferor of the foreign assets is irrelevant under the BM Act. As soon as the transferee gets the legal right over the foreign assets, he should disclose them to the tax authorities.

For example, Mr. A makes provision for his grandson Mr. B to inherit a bank account in Britain. Upon Mr. A's death in 2019, Mr. B acquires the legal right over the foreign asset, i.e. the bank account. At such time, whether or not Mr. A had disclosed the foreign asset to the tax authorities, Mr. B would be under an obligation to make such disclosure. Not doing so may make him likely to face prosecution under the BM Act.

While the HC dismissed the issue of double jeopardy, we believe that this issue needs further examination. This is based on the argument that the ITA provisions also provide for imprisonment of a taxpayer for false verification, which the taxpayer either knows or believes to be false, or does not believe to be true. This is similar to the offence of wilful failure to furnish / disclose details in income tax returns under BM Act, which also provides for imprisonment. Since both statutes provide for the same punishment for the same offence, the issue of double jeopardy is still not settled, and may one day be decided by the Supreme Court of India.

Conclusion

The HC's decision gives clarity on the issue of possible prosecution under the BM Act even when an individual is restricted from voluntarily disclosing under it. Looking at the stringent provisions of the BM Act and the tax authorities' increasing focus on foreign assets, it is imperative for Resident and Ordinarily Resident in India under the ITA to disclose foreign income and assets in their tax returns. It is clear that the BM Act is being enforced for the assets held / action done even before it was brought into force and taxpayers are being prosecuted for non-disclosure of foreign assets, even if they had not played any active role in acquiring those assets and were simply passed down to them through inheritance.

For taxpayers who already own foreign assets, the HC's judgement serves as an impetus to carry out a health check of their past transactions and disclosures and see if everything is in order. If the taxpayer believes there to be a case of non-compliance, he should seek legal advice and even explore approaching the tax authorities before tax authorities identify the issue themselves. For taxpayers who are about to acquire foreign assets, through legal means under Indian law, it is imperative that the structuring of the same is done carefully and proper compliances followed. Hopefully, a prudent approach may save you from prosecution under the BM Act.

Footnotes

1 Budget Speech, Interim Budget 2019-2020

2 http://164.100.79.153/judis/kolkata/index.php/casestatus/viewpdf/WP_568_2018_14022019_J_241.pdf

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