The Black Money (Undisclosed Foreign Income & Assets) & Imposition of Tax Act, 2015 ("BMA") is a strict taxation law that seeks to heavily tax and criminally punish taxpayers having undisclosed foreign incomes and assets located outside India. This article seeks to examine an illustrative case scenario of investigation/inquiry under the BMA and its interplay with the income tax law.
The taxpayer files his returns regularly with the income-tax department. However, to his surprise, he receives a summons from the Directorate of Intelligence and Criminal Investigation requiring him to submit certain information regarding certain foreign incomes that he has earned in the past years. The taxpayer has erroneously and inadvertently not declared such incomes in his tax returns filed in India.
I. Provisions under the BMA
Nature of the law: The BMA is truly a taxing statute and levies tax and penalty, besides providing for prosecution.
Civil/Monetary implications: Section 3 of the BMA provides for levy of tax ('black money tax') on undisclosed foreign income and asset at the rate of 30%. The Act provides a complete procedure for levy of this black money tax through assessment. Section 41 provides for levy of penalty equivalent to 3 times of the black money tax. Thus, in case a certain amount is found to be hit by this act, a total of 120% of such amount would become payable (in the form of 30% tax plus penalty equivalent to 3 times of the tax). However, the penalty will not be imposable in cases where the undisclosed foreign assets are bank accounts having an aggregate balance of less than Rs. 5,00,000/- (Section 42 and Section 43 of BMA).
Criminal implications: Section 50 provides for criminal prosecution for non-disclosure of foreign assets in the income-tax return (at the same time, Section 49 provides for prosecution in case the return itself is not filed). This prosecution may be initiated irrespective of the proceedings for levy of black money tax. Further, Section 51 provides for criminal prosecution for evading black money tax - this prosecution would be initiated upon the completion of the proceedings for the levy of black money tax under Section 10 of the BMA.
The ITA and BMA are partly exclusive: In case black money tax is paid on certain income/asset, income-tax under the ITA would not be required to be paid on the said income/asset in view of Section 4(3) of the BMA. However, there is no similar provision under the ITA. In other words, if income-tax is paid under the ITA on any undisclosed foreign income/asset, the said income/asset may still be taxed under the BMA.
BMA, period of applicability: It is to be noted that the BMA came into force on 01.07.2015. Further, Section 3(1) of the BMA provides that the black money tax shall be leviable from AY 2016-17 onwards. Thus, the applicability of this law has to be analyzed with respect to receipts made (or, income earned) on the basis of this date, and the following would be a correct split for the purpose of interpreting and understanding the applicability of the BMA:
Receipts by any person till 30.06.2015 ('Pre-BMA receipts'), and
Receipts by such person on or after 01.07.2015 ('Post-BMA receipts')
Regarding the assets which have been acquired prior to 01.07.2015, Section 72(c) of the BMA provides that such assets would be considered as acquired in the year in which the assessing officer ('AO') detects the same and issues a notice u/s 10 of the BMA. Thus, this provision seems to make the applicability of the BMA retrospective. However, the same will have to be considered in light of the rule against retrospectivity.
Subject matter of BMA: The BMA provides for levy of tax and other adverse implications relating to something called as 'undisclosed foreign income and asset'. The BMA further defines this term in Section 2(12) to include two components i) undisclosed income from a source located outside India and ii) value of an undisclosed asset located outside India.
The first component implies that if a person has any income from a source located outside India and he does not disclose the same in his return of income, BMA would be applicable.
The second component which covers undisclosed asset located outside India has been further defined in Section 2(11) to mean an asset located outside India for which the owner has no satisfactory explanation. This implies that assets, regarding which the owner has a satisfactory explanation for the funds used to acquire the same, would be outside the purview of BMA.
In other words, BMA is applicable on undisclosed incomes from sources located outside India or unexplained assets located outside India. Besides this, it is to be noted that for the years under consideration, the BMA is applicable only to persons who are tax residents of India.
II. Provisions under the ITA
Levy of income-tax: Section 4 of the ITA provides for the levy of income-tax on an annual basis. Further, Section 5 of the ITA provides for levy of income-tax on his global income who is a resident of India. Section 6, inter alia, provides that any person who is in India for a period of more than 182 days in any given year, shall be considered a tax resident for such year.
Tax to be levied when income accrues or arises: Section 5 of the ITA provides for levy of tax on the income when it accrues or arises or, is received. However, the subject matter being 'income', only when a certain amount becomes 'income', shall the tax be leviable. This aspect is discussed in greater detail in later paragraphs.
Assessment of income: Upon the filing of income-tax return, a person's case might be picked up for scrutiny wherein an assessing officer checks the correctness of such returns.
In case this is not done, the assessing officer is empowered to later reopen the case and carry out the assessment. The time limit for this is 6 years from the end of the relevant assessment year. However, this time limit is 16 years from the end of the assessment year in case of incomes from assets located outside India.
It is to be noted that this reopening can only be done on the basis of some information that comes to the knowledge of the assessing officer regarding the incorrectness of the returns filed (in legal terms, when 'income has escaped assessment').
Disclosure of foreign income/assets: The income-tax return contains a schedule for disclosing foreign assets (Schedule FA). This schedule was first introduced in A.Y. 2012-13 in a basic form and then with the enactment of BMA, this schedule (since 2015-16) requires exhaustive information to be submitted, including the following:
Various types of securities accounts e.g. debt instruments, custodial accounts etc.
Financial Interest in any entity
Details of immovable property, or any other capital asset located outside India
Accounts in which the assessee has signing authority
Details of trusts created outside India (whether as settlor, trustee or beneficiary)
Any other income derived from source outside India
Non-disclosure of the particulars required under Schedule-FA, would attract criminal prosecution under the BMA (it is to be noted that no separate return is required under the BMA, and that Act relies upon the compliance made under the ITA itself).
Legal basis for calling for information: Section 133 empowers an officer of the income-tax department to call for information from any person. Further, sub-section (6) of this section provides that any information that may be useful for any inquiry or proceedings under the ITA may be called for. Generally, this section is used for obtaining information from third parties (i.e. from a party other than the one against whom the proceedings are underway). Non-compliance of such notice would attract a penalty u/s 272A (2) of the ITA amounting to Rs. 100/- per day till the date the information is submitted.
III. Disclosure of receipts
Disclosure requirement: As explained above, various incomes earned during a particular year from foreign sources or assets (including bank accounts) held outside India during such year are required to be disclosed in the return of income since A.Y. 2012-13 and particularly so after A.Y. 2016-17.
Revising the return: In case any part of the above information is not submitted as required in the income-tax return, one way is to file the same by way of revised return u/s 139(5) of the ITA. However, filing of the revised return can also be done within a limited period of time (till the end of the relevant assessment year).
Approaching the Board: Beyond such time period, an assessee may approach the Board for condonation of delay and the same may be allowed (though this is done only in exceptional circumstances) u/s 119(2)(b) of the ITA. However, such condonation is done only in cases where there is a genuine hardship to the assessee which needs to be mitigated e.g. claim of any deduction or benefit. In order to go through this Board route of filing a revised return, the aggrieved person would have to prove that there is genuine hardship caused and also supplement reasons for the incorrect returns filed so far. Further, the section mentions that the basis of allowing such extension of time should be some exemption, deduction, refund or any other relief. Unless the above requirements are met, it would be difficult to seek relief under this route and obtain a condonation of delay for revising the past returns.
Disclosure through the fresh s. 148 return: As we shall discuss later, in case a reopening notice is issued in any person's case u/s 148 of the ITA, there would be a requirement to file a fresh return. At this juncture, if the disclosures are entirely and accurately made, it can be interpreted that the disclosure requirement is met and criminal prosecution under the BMA doesn't arise.
IV. Inquiry proceedings before the I&CI wing
Information sought: In our illustration, the Directorate of Intelligence & Criminal Investigation of the Income Tax Department seeks to obtain certain information regarding certain foreign incomes that the taxpayer has earned in the past years.
Result of the inquiry: Upon the submission of the information as sought above, the I&CI wing may accept the Client's submissions and rest the matter as closed. On the other hand, if the I&CI wing is not satisfied with the merits of the submissions, it may proceed to initiate criminal prosecution u/s 50 of the BMA. This would be by way of filing criminal complaint in the court (the procedure shall be that followed in the case of a private complaint under the Code of Criminal Procedure, 1973). It shall also prepare a report on the findings and forward the same to the A.O. for commencing assessment proceedings under the BMA. Since in our illustration the non-disclosure is with respect to foreign incomes, action under the ITA is unlikely to be initiated, and the Department would proceed only under the BMA.
V. Proceedings before the A.O. under BMA
The officers of the Investigation Wing of the Income-tax Department (which is an establishment separate from the I&CI wing) have been made the Assessing Officers (A.O.) for the purposes of the BMA.
Assessment proceedings for levy of black money tax: Upon being convinced about the existence of undisclosed foreign incomes and assets in the case of any person, which have not been disclosed / offered to tax under the ITA, the A.O. serves a notice u/s 10(1) of the BMA, marking the initiation of proceedings under BMA. As discussed in paragraphs above, these proceedings will be concerned with examining whether there is any 'undisclosed foreign income and asset' that needs to be dealt with under BMA. In case, the findings are against the person, an order would be passed by the A.O. u/s 10(3) of the BMA levying the black money tax, along with levy of penalty.
Criminal implications: Consequently, criminal prosecution may also be filed u/s 51 of the BMA for evasion of the black money tax.
Inapplicability of BMA when the source of income is in India: It may be kept in mind here that the subject matter of BMA is 'undisclosed foreign income and asset'. As explained above, this includes two components - undisclosed income from a source located outside India and unexplained asset outside India. If it may be proved by the taxpayer that the foreign incomes, though received outside India, have been earned by a business conducted in India or by a profession exercised in India, it may be argued that the first component i.e., undisclosed income, would not be applicable. Further, the assets resulting from such India-sourced income would stand explained and the second component i.e., undisclosed asset, would also not be applicable. The BMA as a whole, thus, would not apply.
Interrelationship between ITA and BMA: The above BMA proceedings would be impacted by and subject to the conclusions drawn / orders passed by the A.O. under the ITA, for instance, if proceedings under s. 148 of the ITA are also initiated.
VI. Proceedings before the A.O. under the ITA
As discussed above, section 4(3) read with section 5(1)(ii)(a) of the BMA provides that prior to AY 2016-17, incomes which have been offered to tax under the ITA would not be covered under the BMA.
Self-disclosure before the A.O.: Now, in case of certain receipts which have escaped disclosure in the return of income (and the routes of revising the return or approaching the Board are not available), any person may approach the A.O. and make a full and complete disclosure (also refer to the discussion on disclosure above). The ITA does not provide for any such procedure but such disclosure can very well form the basis of a reasonable belief for the A.O. to reopen the assessment. In all likelihood, in the interest of the revenue, the A.O. would in such a case reopen the case and bring such additional amounts to tax. This procedure, though, is entirely at the discretion of the A.O.
Information passed by the I&CI wing: Alternatively, for the periods prior to the BMA coming into force (i.e. till AY 2015-16), the I&CI wing may write to the A.O. under the ITA, for levy of income-tax by reopening of the cases for those years.
Assessment in reopening proceedings: Thus, the basis of reopening of the case under the ITA may be either the self-disclosure, or a report from the I&CI wing. In both the cases, the A.O. may decide to reopen the case and issue a notice for the same under Section 148. In case such a notice is issued under the ITA, the person shall be required to file a fresh return u/s 148 of the ITA. Such return would contain the same details/particulars as the disclosure made to the A.O. referred to above. Reassessment shall be completed as per provisions of the ITA (after being given opportunities of being heard, filing objections and submissions etc., and convincing the A.O. that the disclosures represents the true set of accounts). The reassessment order shall be passed by the A.O., and if the disclosure is exhaustive, the fresh return filed should be accepted.
Disclosure, along with payment of tax: In case the disclosure to the A.O., as mentioned in the previous paragraph, is made after the deposit of tax (along with interest), along with the challans exhibiting proof of payment, the procedure would be similar to the above. Besides demonstrating bona fide intent, this approach would be conclusive (in case the assessment is completed accepting the fresh return) with respect to the Pre-BMA receipts over which only the ITA would be applicable. In case the A.O. accepts the disclosure and the return filed u/s 148, there may be no penalty leviable and consequently no prosecution would also be initiated.
Originally published on Oct 17, 2022.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.