Black Money Act: Report all foreign assets in tax returns

Published: February 26, 2019 12:52:25 AM

Recently, the action of the tax authorities was challenged in a writ petition before the Calcutta High Court in the case of Shrivardhan Mohta Vs Union of India.

In Mohta’ case, a search and seizure was conducted by the income tax authorities on the taxpayer on March 17, 2015, wherein details of undisclosed foreign bank accounts was found. (Illustration: Rohnit Phore)

By Shuddhasattwa Ghosh

Tracking and bringing back illegally stashed money/ assets abroad and curbing such activities has been a priority for India. There was a need for a specific legislation to comprehensively and effectively deal with the issue and the government in 2015 introduced “The Black Money (Undisclosed foreign income and assets) Imposition of Tax Act 2015 (BMA)”.

Black Money Act
BMA, effective from July 1, 2015, applies to persons who are residents of India (other than not ordinarily residents) and contains provisions in the form of levy of 30% tax and three times penalty along with prosecution proceedings. BMA offered a one-time compliance window for a limited period as an opportunity for taxpayers to come clean and voluntarily disclose overseas undisclosed assets relating to tax year prior to 2015-16.

Recently, the action of the tax authorities was challenged in a writ petition before the Calcutta High Court in the case of Shrivardhan Mohta Vs Union of India. While this case pertains to a resident domiciled individual, the principle can be applicable to a resident employee working in multiple jurisdictions.

Mohta vs Union of India case
In Mohta’ case, a search and seizure was conducted by the income tax authorities on the taxpayer on March 17, 2015, wherein details of undisclosed foreign bank accounts was found. The taxpayer was then directed to file the income tax return (ITR) for financial years 2008-09 to 2014-15.

The taxpayer did not disclose the details of the foreign bank accounts held in the said ITRs as well. The assessment proceedings were concluded and the income earned from the foreign bank account was duly taxed by the income tax department. Further, it initiated penalty proceedings. Also, it issued notice to the taxpayer under BMA for failure to disclose the details of foreign assets and wilful attempt to evade tax under BMA. After considering the reply of the taxpayer, it granted sanction to prosecute the taxpayer under BMA which was appealed by the taxpayer to the High Court. The Calcutta High Court upheld the prosecution for non-disclosure of foreign assets.

Two most important observations of the High Court were:
n Inheritance does not prevent the taxpayer from disclosing the asset and it is an unacceptable excuse.
n Failure to report the foreign bank account attracts the provisions of the BMA and is a prosecutable offence.

The High Court has taken a view that any tax return filed post enactment of BMA can be subjected to BMA prosecution for defaults, even if tax return pertains to period prior to enactment of BMA(while this position is debatable, currently this is the jurisprudence on the matter). This decision has huge impact with respect to residents as to what they are declaring in their ITRs. BMA requires that foreign assets be reported irrespective of whether they are earning any income or not. In this era of frequent cross-border movements of employees, they may have bank accounts abroad.

Even non-mobile employees may have ESOPs granted by an overseas holding / group company and such ESOPs qualify as foreign assets. While non-exclusion of such items in ITR could be due to lack of knowledge, such default do expose the individual to punitive actions under BMA. Hence, it’s important that due diligence is conducted by the individual and effective guidance is ensured by the employer (in case of salaried individual) at the time of filing of tax return.

-The writer is tax partner, People Advisory Services, EY India. Inputs from Rahul Agarwalla, senior tax professional, EY. Views expressed are personal.

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