Have undisclosed foreign assets and income? You could be prosecuted

amarpal_chadhaThe Indian Government has been, for a long time, seeking to curb the menace of black money especially that is hoarded overseas.  Mandating the reporting of foreign assets by a resident and ordinarily resident tax payer in the India Tax Return (ITR) from tax year 2011-12 onwards was an effort in this direction which strengthened with the introduction of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (BMA) effective July 2015.

The BMA has stringent implications for non-disclosure/ inaccurate disclosure of foreign income and assets in the ITR. It includes monetary penalty of ten lakhs along with the risk of imprisonment up to seven years with fine for non-disclosure/ inaccurate disclosure of foreign assets in the ITR.  Given this, the tax payers were provided a one-time opportunity to report their hitherto undisclosed foreign income and assets during the period 1 July 2015 to 30 September 2015 and remit appropriate taxes and penalty by 31 December 2015. Any disclosures made during this window of opportunity would safeguard them from prosecution under specified Acts.

The BMA being a new statute, there have been very few judicial precedents which gave guidance on this law.  In this ruling on the BMA, the Calcutta High Court in the case of Shrivardhan Mohta [1] has upheld the initiation of prosecution under BMA for non-disclosure of foreign bank accounts by the taxpayer.

In this case, a search was carried out by the Income Tax authorities at the tax payer’s residence during which it was found that he held four foreign bank accounts inherited from his deceased mother, which were undisclosed in his ITRs. The tax payer was subsequently asked to furnish his ITRs for tax years 2008-09 to 2014-15 and it was filed by him without disclosing the foreign bank accounts.

While the assessment proceedings were pending, the tax payer approached the Settlement Commission for the tax years 2008-09 to 2014-15. However, his application was declared invalid. Further, he filed an application for rectification of the Settlement Commission’s order which was again rejected.  Subsequently, the Assessing officer (AO) assessed the ITRs under the Income Tax Act, 1961 (ITA) and initiated penalty proceedings under the ITA, taking into consideration the undisclosed foreign bank accounts. The prosecution proceedings were also initiated under BMA, which came into effect, while the assessment proceedings were on.

Aggrieved, the tax payer filed a writ petition with the Calcutta High Court contending that the BMA is applicable prospectively and assets held during tax years prior to the enactment of BMA should not be considered. Furthermore, he was denied the one-time opportunity to disclose foreign income and assets as search proceedings were pending during the disclosure window. He also contended that the AO initiated penalty proceedings against him under the ITA and hence, he should not be punished under both ITA and BMA for the same matter.

The Honourable High Court (HC) upheld the AO’s decision to initiate prosecution proceedings and dismissed the writ petition.  In doing so, the HC held that the taxpayer was given various opportunities to disclose his foreign income and assets which were unutilized. The tax payer had failed to disclose the foreign bank accounts in his ITRs filed pursuant to the search proceedings and also before the Settlement Commission.  Further, HC also noted that he filed his ITRs and approached the Commission while BMA was in effect. Hence, ITRs filed for tax years 2008-09 to 2014-15 will fall under the purview of BMA and the initiation of prosecution proceedings cannot be considered as implementing BMA provisions retrospectively.

The HC also held that the ITA and BMA are separate laws which were in force at the time of the ongoing search proceedings. Proceedings under the ITA and BMA can be initiated as per the provisions of the respective Acts and there is no bar on punishing an offender under different Acts. The bar is only to the punishment of an offender twice for the same offence. In this case, the tax payer is being punished under both the regulations for different offences under different laws.

Therefore, given the penalty and prosecution implications under the BMA, the tax payers should be cautious while filing their ITR and ensure appropriate reporting of foreign assets and income – irrespective of whether the assets are inherited or self-generated. Some examples of foreign assets are bank accounts, shares of foreign parent company received under an employee share plan, jewelry, immovable property, etc. held by a tax payer outside India.

An ambiguity persists whether the prosecution is initiated only for failure to report foreign assets in the ITR or was it for evasion of tax on undisclosed foreign income earned out of the inherited wealth.  The Honourable HC has taken a view that the provisions of BMA can apply in respect of any ITR filed post the enactment of BMA, even if it pertains to a tax year prior to the enactment of the BMA.  Thus, while this ruling does not delve deep into various aspects of the case such as existence of mens-rea for prosecution, balance in the foreign bank accounts etc., it gives us a glimpse of the judiciary’s views on the punitive actions that may be taken under the BMA irrespective of the penal consequences under the ITA.


The author of the blog is Amarpal S. Chadha, Tax Partner and India Mobility Leader, People Advisory Services, EY India

The blog is co-authored by Sreenivasulu Reddy, Tax Director – People Advisory Services, EY India