Bofors and income-tax

[pawansingla]

The recent order of the Income-tax Appellate Tribunal affirming the order of the Assessing Officer (AO) asking the alleged Bofors middleman, the late Win Chadha, to cough up tax on the commission received by him abroad has stirred an hornet's nest. It has brought back attention on a matter that was given up, sadly due to lack of in-house forensic skills sharp enough to follow the trails leading to distant shores and due to lack of cooperation from nations whose banks are alleged to have harboured the the alleged kickbacks. There is a view, however, that the tribunal order does not say anything new on the issue and therefore the Opposition's 'I-said-so' triumphalism is unwarranted and out of place.

The Piara Singh case

The income-tax proceedings against Win Chadha are a throwback to a very old case involving a gold smuggler, Piara Singh, decided by the apex court long ago. Piara Singh was caught along the Indo-Pak border and was found in possession of gold for which he had no explanation. The Customs authorities confiscated the gold and handed him over to the income-tax authorities who in turn asked him to pay tax on the unexplained income. Under the law, any asset for which there is no explanation as to its source is deemed to be arising out of unexplained income. Piara Singh successfully convinced the apex court that he might have fallen foul of the Customs law, but not of the income-tax law because in computing one's income, all expenses must be allowed. The apex court saw merit in his submissions and held that dispossession of one's asset (gold confiscated by the tax authorities) is allowed as a loss incidental to one's business or trade. This verdict has been dissected and discussed ad nauseam in knowledgeable tax forums and many have questioned allowance of confiscation under law as a legitimate expenditure because there is a vast difference between money lost by a bank through a dacoity (Nainital Bank's case decided by the Supreme Court in favour of the bank) and goods lost through confiscation for wrong-doings; but one has to concede that calling upon a person to pay income-tax on an asset/income he has been dispossessed of would be a double-whammy for him.

Retrospective amendment

One wonders whether Piara Singh would be twice as lucky if the Department were to reopen the case in the light of a retrospective amendment made to Section 37 (1) vide insertion of Explanation 1 by the Finance (No.2) Act, 1998 which reads as follows: For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure. The point, however, is not whether the Piara Singh case should be revisited by the Department. The point is about two Departments of the Government acting in tandem. Those who contemptuously shrug off the tribunal verdict in Win Chadha's case should at least concede that whatever evidence unearthed by the assiduous AO should be examined afresh by the investigating agencies, including the Central Bureau of Investigations (CBI) which has been in a tearing hurry to close the file for lack of evidence and lack of cooperation from abroad.

Ultimate authority

That the tribunal has upheld the findings of the AO bolsters the case of the department given the fact that under the law the tribunal is the ultimate fact-finding authority and its views can be challenged only on the grounds of misinterpretation of law. Win Chadha evidently was a resident and ordinarily resident of India in the financial years for which the tax demand was raised, making him liable to pay tax in India on his global income. It would be instructive and illumining for the investigating agencies to learn from the income-tax files so that they can nail a larger lie, if any. Of course, this is assuming the CBI has not already done so. The point is if the Customs authorities could hand over Piara Singh to the their income-tax counterparts, there is no reason why the income-tax authorities should not hand over Win Chadha papers to the Enforcement Directorate and the CBI halted in its tracks by the allegedly complicated web of money transfers that cloud and obfuscate evidence as to the ultimate beneficiaries of the payoffs. Chadha's assessment orders could provide vital clues to the investigating authorities and it would be churlish to shrug off the tribunal verdict as being of no consequence to the main case. While the dead don't come back to life to spill the beans, an attempt can be made to link the income assessed to the larger issue of kickbacks. If Chadha and his estate have not been able to adduce satisfactory evidence of foreign income or expenditure incurred by Chadha giving rise to the inference of undisclosed income, that could be a pointer to a larger malaise overlooked either by design or by accident. – www.thehindubusinessline.com