Taxation of Undisclosed Foreign Income and Asset – Interplay Between The Income Tax Act And The Black Money Act

CA Sunil Maloo has analysed the Interplay between the Income Tax Act, 1961 and The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015. He has explained the recent controversy, summary of the legal provisions and also offered valuable advice based on his practical experience of working on Direct tax litigation and Settlement Commission cases

1. Taxation of Undisclosed Foreign Income and Assets (including financial interest in any entity) has been very close to the heart of the Indian Law Makers throughout past one decade. To tackle with this issue, following actions have been taken by the parliament–

a) At one moment of time amendment is brought to the provisions of Section 149 to provide for enhanced time limit upto sixteen years from the end of the relevant assessment year to crackdown the escapement of income due to assets located outside India by reopening the Assessment – vide Finance Act, 2012, w.e.f. 1-7-2012

b) On the other hand, the Legislature has come out with altogether new mechanism in form of a New Act named The Black Money (Undisclosed Foreign Income and Assets) And Imposition Of Tax Act, 2015(hereinafter referred in short as ‘Black Money Act’), which was notified on 27/05/2015 and was made applicable 01/04/2016. The preamble of the new Act reads as under: –

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

2. Both the above statutory provisions apparently seem to be overlapping each other. Therefore, it is important to study and analyse the interplay between both the statues under various situations.

3. Income Tax Act provides for taxation of any undisclosed foreign income / undisclosed foreign asset in the year of accrual of such income or acquisition of such asset whereas the Black Money Act provides for taxation of the undisclosed asset located outside India in the previous year in which such asset comes to the notice of the Assessing Officer.

4. Income Tax Act provides for tax on the value of the foreign asset in the year of acquisition whereas the Black Money Act provides to Tax asset on the value of the undisclosed asset located outside India in the previous year in which such asset comes to the notice of the Assessing Officer.

5. None of the Act is overriding another Act and therefore technically both the Act would be applicable parallelly. However, in the Black Money Act, there are certain provisions which give some clarity, however, at the same time interpretation of these provisions also provides room for controversy which will be ultimately solved through court of law or necessary amendment in law. Interplay between both the Acts is analysed hereunder.

6. Applicability of Black Money Act –Section 3 of the Act, which is the charging section provides that Assessee shall be charged at the rate of thirty per cent on total undisclosed foreign income and asset of the previous year for every assessment year commencing on or after the 1st day of April, 2016. Further proviso to this section says that undisclosed asset located outside India shall be charged to tax on its value in the previous year in which such asset comes to the notice of the Assessing Officer.

6.1 Accordingly, despite being applicable from AY 2016-17, this Act may cover the earlier years transactions of undisclosed asset located outside India such asset comes to the notice of the Assessing Officer after applicability of this Act.

6.2 Therefore, in order to avoid double taxation of the same transaction, necessary provision has been made in Section 5 to provide for set off of earlier taxed income under the Income Tax Act in proportionate manner. The set off is calculated on the amount which bears to the value of the asset as on the first day of the financial year in which it comes to the notice of the Assessing Officer, the same proportion as the assessable or assessed foreign income bears to the total cost of the asset.

6.3 Example -A house property located outside India was acquired by an Assessee in the PY 2009-10 for fifty lakh rupees. Out of the investment of fifty lakh rupees, twenty lakh rupees was undisclosed and assessed to tax in PY 2009-10. Such undisclosed asset comes to the notice of the Assessing Officer in the year 2017-18. If the value of the asset in the year 2017-18 is one crore rupees, the amount chargeable to tax shall be A-B=C where, A=Rs.1 crore, B=Rs. (100 x 20/50) lakh= Rs.40 lakh, C=Rs. (100-40) lakh=Rs.60 lakh.

7. Restrain on Applicability of Income tax Act – Section 4(3) of the Black Money Act –Section 4(3) of the Act provides that the income “INCLUDED”in the total undisclosed foreign income and asset under this Act shall not form part of the total income under the Income-tax Act. This provision is analyses as under-

7.1 This provision is intended to prevent the double taxation of same income under both the Acts parallelly.

7.2 Accordingly, this section provides that once an income is taxed under Black Money Act, then same will not be taxed under the Income Tax Act. however, there is no such express provision in the Income tax Act.

7.3 Further, this is not an absolute exemption from taxability under Income Tax Act, rather a conditional exemption subject tothe fact that such undisclosed foreign income and asset is taxed under the Black Money Act.

7.4 Therefore, on interpretation of the language used and also in the background of the legislative intention, it can be appreciated that unless and until such undisclosed foreign income and asset is taxed under the Black Money Act, same can be taxed under the Income Tax Act.

7.5 Accordingly, merely by virtue of enactment of the Black Money Act, taxation of undisclosed foreign income and asset is not exclusively under the domain of that Act, unless the AO passes the necessary order u/s 10(3) of the Act.

7.6 It is pertinent to note that once a case is assessed under the Black Money Act, then there is no provision available with the Assessee under that Act to approach Settlement Commission. Under the Black Money Act, there is no provision for immunity from penalty and prosecution.

7.7 Whereas, in author’s view,the Assessee can approach Income Tax Settlement Commission and pray for immunity from penalty and prosecution u/s 245H even with respect to the foreign income and asset, if such income and assets are not assessed under the Black Money Act.

8 Similar Question of law pending with Gujarat HC – Recently a Special Civil Application has been filed by the Income Tax Department before the Hon’ble Gujarat High Court challenging the authority and jurisdiction of the Income Tax Settlement Commissionto deal with the undisclosed foreign income and assets. The matter is pending as on date with the Hon’ble Court.

9 Conclusion: – The gist of the matter is that section 4(3) of the Black Money Act creates bar on applicability of the provisions of Income tax Act only if undisclosed foreign income and assets has already been included as income under the said Act and not otherwise. Accordingly, the applicability of Income Tax Act, 1961 or The Black Money (Undisclosed Foreign Income and Assets) And Imposition of Tax Act, 2015 would purely depend on “first come first served” basis.Accordingly, this issue would get more clarity over the period of time by court of law.