Srinidhi Karti Chidambaram vs. PCIT (Madras High Court)

198. Before proceeding with any action, it is the duty of the assessing officer to arrive at a conclusion, as to whether, there is an undisclosed income under Section 2(11) and a duty is cast on the assessing officer to form an opinion, under Section 2(11). Expression, “undisclosed source of investment” depends on the existence of the above and the opinion is dependent on each one of the facts. Show cause notice issued is totally extraneous to Section 2(11) of the Act.

199. At this juncture, it is pertinent to consider, what “satisfaction” means. “Satisfaction” means to be satisfied with a state of things, meaning thereby, to be satisfied in one’s own mind. Satisfaction is essentially a conclusion of mind. The word “satisfied” means, “makes up its mind”.

Reference can be made to the decision, Blyth vs Blyth reported in (1966) 1 All England Reporter 541, Smith,J., in Angland vs Payne reported in (1944) NLLR 610, 626 stated that “satisfied” means, a mind which has reached a clear conclusion.

200. Referring to the clarifications on tax compliance, on undisclosed foreign income and assets, Circular No.13 of 2015, dated 06.07.2015, issued by the Central Board of Direct Taxes (TPL Division), Department of Revenue, Ministry of Finance, Government of India, on the frequently asked questions and answers given by the Board and in particular, to Question No.18 and the answer given, Mr.Gopal Subramanium, learned Senior Counsel submitted that there was a serious flaw in the software prepared by the Department in Schedule FA of the Income Tax Returns and therefore, Question No.18 came to be raised by the assessees and answered by the Board. Question No.18 and the answer are extracted hereunder:

“Question No.18: A person holds certain foreign assets which are fully explained and acquired out of tax paid income. However, he has not reported these assets in Schedule FA of the Income-tax Return in the past.

Should he declare such assets under Chapter VI of the Act?

Answer: Since, these assets are fully explained they are not treated as undisclosed foreign assets and should not be declared under Chapter VI of the Act. However, if these assets are not reported in Schedule FA of the Income-tax return for assessment year 2016-17 (relating to previous year 2015-16) or any subsequent assessment year by a person, being a resident (other than not ordinarily resident), then he shall be liable for penalty of Rs.10 lakhs under Section 43 of the Act.

The penalty is, however, not applicable in respect of an asset being one or more foreign bank accounts having an aggregate balance not exceeding an amount equivalent to Rs.5 Lakhs, at any time during the previous year.”

201. Reading of the question raised and the answer given by the Board, makes it clear that when a person holds certain foreign assets, which are fully explained and acquired, out of tax paid income, but the assessee did not report the said assets in Schedule FA of the Income Tax Returns, in the past and as to the specific question of the assessee, as to whether, he should declare such assets under Chapter VI of the Black Money Act, the Central Board of Direct Taxes, in its letter, dated 06.07.2015, has opined that, if the assets are not reported, in Schedule FA of the Income-tax return for assessment year 2016-17 (relating to previous year 2015-16) or any subsequent assessment year by a person, being a resident (other than not ordinarily resident), then he shall be liable for penalty of Rs.10 lakhs under Section 43 of the Act. Penalty, however, is not applicable in respect of an asset, being one or more foreign bank accounts, having an aggregate balance not exceeding an amount equivalent to Rs.5 Lakhs, at any time during the previous year.

202. In the case on hand, the assessees have furnished the details of the assets in Schedule FA of the Income-Tax returns, under Section 139(5). Thus, even taking it for granted that the assessees have omitted to furnish the details in the returns under Section 139(1) of the Act, in the light of the decision of Central Board of Direct Taxes, prosecution cannot be launched, but at best, there could only be penal proceedings.

203. Income Tax Department and Government of India have introduced a scheme, called as, “Income Declaration Scheme, 2016”, which has come into force, on the first day of June, 2016. Chapter IX of the Finance Act, 2016 and Section 183 deals with declaration of undisclosed income and it reads thus,

“183. (1) Subject to the provisions of this Scheme, any person may make, on or after the date of commencement of this Scheme but before a date to be notified by the Central Government in the Official Gazette, a declaration in respect of any income chargeable to tax under the Income-tax Act for any assessment year prior to the assessment year beginning on the 1st day of April, 2017-

(a) for which he has failed to furnish a return under section 139 of the Income-tax Act;

(b) which he has failed to disclose in a return of income furnished by him under the Income-tax Act before the date of commencement of this Scheme;

(c) which has escaped assessment by reason of the omission or failure on the part of such person to furnish a return under the Income-tax Act or to disclose fully and truly all material facts necessary for the assessment or otherwise.

(2) Where the income chargeable to tax is declared in the form of investment in any asset, the fair market value of such asset as on the date of commencement of this Scheme shall be deemed to be the undisclosed income for the purposes
of sub-section (1).

(3) The fair market value of any asset shall be determined in such manner, as may be prescribed.

(4) No deduction in respect of any expenditure or allowance shall be allowed against the income in respect of which declaration under this section is made.”

204. As per Section 196(d) of Income Declaration Scheme, 2016, the provision of the scheme shall not apply, in relation to any undisclosed foreign income and asset which is chargeable to tax under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (22 of 2015).

205. Under the Scheme, even in case of (i) failure to furnish a return, under Section 139 of the Income Tax Act; (ii) failure to disclose in a return of income furnished by him under the Income-tax Act, before the date of commencement of this Scheme; and (iii) in the case of escaped assessment, by reason of omission or failure to furnish a return under the Income-tax Act or to disclose fully and truly all material facts necessary for the assessment or otherwise, the assessees can make a declaration to disclose fully or truly, all material facts necessary for assessment or otherwise.

206. The expression, “or otherwise”, has been used in Section 186(1)(c) of the Act, let us consider few decision as to how the words or otherwise has been interpreted by the Courts.

In the light of the above decisions and discussion, we are of the considered view that Section 55 Block Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 is not attracted. There was no failure to furnish any information relating to any foreign asset or investment.

The Company has filed the original return of income, as well as the revised return of income within the time stipulated under the Income Tax Act, 1961.

An assessee can file a revised return of income or even more than one revised return of income under Section 139(5) of the Income Tax Act, 1961 as long as it is filed within time. Revised return of income is the only relevant return of income that can be relied upon or referred to. Revised return of income obliterates or effaces any earlier return of income. A return of income has many schedules and all the schedules are part of the ‘return of income’ referred to in Section 139 of the Income-tax Act. Offence under Section 50 is made out only if, in the return of income under sub-section (1) or sub-Section (4) or Sub- Section (5) of Section 139 of the Income-tax Act, there has been a wilful failure to disclose any information relating to foreign asset.

214. It is an admitted fact that the foreign asset in each case was acquired with money that was disclosed in the books of account of the assessee (and tax paid) and which was remitted through banking channels under schemes approved by the RBI. There is no allegation of Black Money or unaccounted money or money that has escaped tax or money that was remitted through illegal channels. It is not disputed by the Income-Tax department – that the source of investment was tax paid money remitted through banking channels in accordance with schemes approved by the RBI.

215. In the case of the petitioners, the asset was ultimately disclosed in Schedule FA and in the case of Karti P Chidambaram, in the Original return of income and, in the other three cases, in the Revised return of income filed within the due date.

216. Though reliance was placed to paragraph Nos.5 and 7 of the Order dated 03.05.2018, that this Court directed the Authority to bear in mind all the relevant provisions of the Income Tax Act and Black Money Act and the implications that they may throw. But the Authorities were also directed to grant the Petitioners due and proper opportunity to present their side of the case and disregarding the directions of this High Court, the Authority, without applying his mind to the two questions set out in the Order and without giving an opportunity to the noticees/assessees, proceeded to sanction prosecution and filed the complaints against the Petitioners on 11.05.2018, in view of the foregoing discussions, it is not necessary to delve into the said aspect.

217. In the light of the decisions, on the power coupled with duty and on consideration of the materials, we are of the view that the Sanctioning Authority has failed to consider the above, and has come to an erroneous conclusion that the case deserve prosecution for non-disclosure of the details of the asset in the return filed under Section 139(1) of the Act. Sanction order deserves to be set aside and accordingly, set aside.

218. Going by the definition of Section 50 of the Black Money Act, read with Section 2(11) of the Act, and in the light of the above discussion and decisions, we are of the view that the offence under Section 50 is not made out. Consequently, complaints filed in C.C.Nos.4482 to 4485 of 2018 dated 11.05.2018 are quashed.