Prosecution Under Black Money Act For Inherited Foreign Bank Accounts

After the introduction of the Black Money Act, several questions as to the dealing with undisclosed foreign accounts inherited by the assessee were raised. In this article, we will discuss the provisions of the Black Money Act along with the judgment by the Calcutta High Court in the case of Shrivardhan Mohta v. UOI, that deals with the issue at hand.

‘Black money’ has been a matter of debate and discussion in the Indian economy and law since the times of independence. The parallel economy, run using the unaccounted black money, has taken a toll on the mainstream economic development and the increasing might of the parallel economy also showcases the increasing corruption in the society.
 
The Indian government, in 2016, had implemented demonetization of currency as a policy measure to curb the parallel economy and get rid of black money. However, as mentioned several times, most of the black money arises out of denial of income by the tax payers. This money might be in foreign bank accounts as well, like the Swiss Bank, which makes it even more difficult to prosecute the culprits and impose penalties.
 
While several laws already exist in relevance of black money, like the Prevention of Money Laundering Act and the Foreign Exchange Management Act, some other legislations have also joined the fleet.
 
While the government is actively working for increasing accountability for black money in terms of legal and policy reforms, they are also working on creating a network of municipal laws and international treaties against tax evasion and money laundering. An automatic exchange of information along with tax treaties with several countries adds to the legal nexus webbed by the government, in addition to which are two prominent laws namely the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 and the Fugitive Economic Offenders Act, 2018.
 
Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015
 
The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (hereafter the BM Act) is a landmark legislation enacted to create a deterring effect on illegal foreign transactions and bring back the undisclosed Indian money abroad.
 
The act provides a mechanism of separate taxation over undisclosed foreign income and assets stashed by the citizens of India. As per Section 2 of the act, an assesee shall be a person residing in India as per the definition provided in Section 6 of the Income Tax Act.
 
For a person not residing in India or is not an ordinary resident of India, to ascertain if tax shall be levied on undisclosed assets and income or not, the legislation mentions that the person should be the resident of India during the previous year when undisclosed income earned or asset acquired outside India.
 
The basic intent behind implementation of this legislation was to impose tax liability on those assets and incomes on which no tax was charged under the Income Tax Act.
 
The act prescribes a flat rate of 30% applicable as tax liability on undisclosed incomes and assets in foreign countries. No deductions, exemptions, carry forward or set-off shall be available while computing tax liability under the BM Act, unlike the Income Tax Act.
 
The legislation is a penal law which imposes imprisonment along with penalty. Any person found wilfully abstaining from disclosing his foreign assets and income and evading tax shall be imprisoned and a penalty to three times the amount of tax evaded or 90 percent of the value of undisclosed foreign assets or income shall be imposed on the said person.
 
The value of the assets or income shall be computed as per the value of the undisclosed funds in the year when the same came to the knowledge of the Assessing Officer and not as per the year when the assets were bought or the income was generated. However, as per the act, the assessment needs to be done for the undisclosed income or asset in the year when the same has come to the notice of the Assessing Officer and not in a subsequent year.
 
Along with this, failure to file returns disclosing foreign income and assets shall also attract a penalty of Rs. 10 Lakh.
 
It is worth noting that the taxation rate of 30% on undisclosed income as per Income Tax Act’s Section 68 to 69D was increased to 60% via the Finance Act of 2017. A 25% surcharge on the tax along with 4% cess on tax and surcharge and 10% penalty on tax is also applicable under the Income Tax Act.
 
The income once assessed in the Income Tax Act cannot be accessed in the BM Act and vice versa, however, the status on whether the choice on the applicability of acts is with the assessee or the Assessing Officer isn’t mentioned in the legislation.
 
While a person can be held responsible for non-disclosure of assets or incomes arising out of their own work, what shall be the case when such undisclosed asset is inherited from a deceased assessee? This matter was dealt by the Calcutta High Court in the much-debated case of Shrivardhan Mohta v. Union of India and Ors. (WP No. 568 of 2018).
 
Facts of the Case
 
During search and seizure proceedings under the Income Tax Act initiated against the petitioner, Shrivardhan Mohta, in 2015, the authorities found details of four bank accounts held by the petitioner in the HSBC Bank, Singapore. The petitioner claimed that the overseas bank accounts were owned by his mother and were passed on to him in inheritance after her demise.
As per a notice issued by the Assessment Officer, the petitioner furnished returns of income for Assessment Year 2009-10 to Assessment Year 2015-16. During the pendency of assessment, the petitioner approached the Settlement Commission set-up under the Income Tax Act for settlement of tax liabilities. However, during furnishing reports and even while approaching Settlement Commission, the petitioner didn’t disclose the overseas bank accounts.
 
The application before Settlement Commission was declared invalid and the Assessing Officer raised demand against the funds contained in the foreign bank account at the conclusion of the assessment. Penalty proceedings were also commenced against the petitioner under the Income Tax Act.
 
During the happening of the above, the BM Act became applicable which imposed stringent penalties on non-disclosure of assets and incomes, including imprisonment and three times tax liability as penalty. After the operation of BM Act, the Central Board of Direct Taxes had opened a one-time compliance window for voluntary disclosure of previously undisclosed assets and incomes. However, the petitioner didn’t avail the opportunity maintaining that no simultaneous proceedings would be initiated against him under the BM Act because the same were going on under the Income Tax Act.
 
However, proceedings were sanctioned against the petitioner under Section 50 and 51 of the BM Act.
 
Against this sanction, the petitioner approached the Calcutta High Court under Article 226 of the Constitution.
 
Contentions
 
The petitioner claimed that BM Act cannot be applied retrospectively, and thus, shall not be applicable in his case.
 
The petitioner also contended that he had no mens rea to commit a crime and as per CIT v Alwar Ali, proceedings under two legislations cannot be initiated against him. He was also barred from exercising the one-time compliance window due to pendency of proceedings under Income Tax Act, thus there was no non-disclosure and proceedings under the BM Act can’t be initiated against him.
 
In response to these arguments, the Tax Authorities stated that double jeopardy won’t be applicable in this case as the provisions applicable on the petitioner were fiscal in nature, under the Income Tax Act and the BM Act was penal in nature. Additionally, the authorities relied on the case of Gujarat Travancore Agency, Cochin v CIT stating that mens rea isn’t a requirement under the BM Act.
 
High Court’s Decision
 
The High Court of Calcutta held that the opportunities available to the petitioner for disclosure of overseas bank accounts, i.e. during assessment and while approaching Settlement Commission, arose when the BM Act was operational. The petitioner didn’t avail either opportunity which resulted in non-disclosure and applicability of BM Act, thus the question of retrospectivity was ruled out.
 
The court further observed that as per Section 71 of the BM Act, the act won’t be applicable only where an order of detention has been made under the Conservation of Foreign Exchange And Prevention of Smuggling Activities Act 1974. However, the proceedings under the BM Act can be initiated as they are prosecution proceedings.
 
While rejecting the petition, the court accepted the revenue authorities’ arguments stating that double jeopardy isn’t applicable in this case and there isn’t any need to prove mens rea under the BM Act.
 
Analysis
 
The judgment by the Calcutta High Court is landmark because it clarifies several matters pertaining to the BM Act. As per the judgement, though the BM Act was brought into force from 1st July 2016, the applicability of the act shall be from 1st April 2016. This has increased the scope of applicability of the act and has made the enforcement of the act extend to the people who would’ve otherwise had not been subject to the provision of the BM Act.
 
Additionally, the judgment made it clear that the disclosure of foreign assets and incomes should also be a subject-matter of the BM Act, even in cases of inherited foreign assets and incomes. Inheritance wasn’t allowed as an excuse for non-disclosure of foreign assets, making it clear that inheritance doesn’t hinder disclosure of foreign assets. It is the responsibility of the person inheriting the overseas asset to disclose it as soon as the legal rights over the same are passed on to the assessee.
 
Conclusion
 
In conclusion, it can be ascertained that non-disclosure of overseas assets on account of inheritance after demise of original assesee shall not be entertained. Disclosure of overseas foreign asset requires to be done by the assesse claiming right over it at the first instance after passing on of the property. Inheritance of the properties shall be a subject matter of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 and penalties on the same shall be applicable as per the act.
 
The decision of the High Court is a wakeup call for those assessees as well who have assets overseas inherited by them but haven’t disclosed the same. Before they come in the knowledge of the Assessing Officer, such asseessees should disclose them and pay the required tax liability, since ignorance of law is no excuse.