Introduction
The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (‘Act’) received the assent of the President on 26 May 2015 and Section 1(3) of the Act provides 1 April 2016 as the commencement date unless otherwise provided in the Act. The said Act was introduced to tackle the issue of undisclosed foreign income and assets held by Indian residents. The intention was to curb the generation and circulation of black money, as well as to bring back illicit wealth stashed abroad.
Controversy regarding the date of commencement of the Act
Section 3(1) of the Act provides for tax in respect of total undisclosed foreign income and assets of the assessee for every assessment year commencing on or after the 1st day of April 2016. Thus, Section 3(1) implicitly provides for commencement of the operation of the Act from 1 April 2015 since the previous year relevant to the AY 2016-17 would be PY 2015-16. ‘Previous year’ is defined in clause (9) of Section 2 of the Act as a period of twelve months immediately preceding the assessment year.
Thus, there was a conflict in the provisions in as much as 1 April 2016 was explicitly mentioned as the date of commencement and on the other hand Section 3(1) implied 1 April 2015 as the date of commencement of the Act. However as mentioned in the introductory para, the Act received the assent of the President only on 26 May 2015 and therefore, it could not have been applied before that unless specifically mentioned in the Act itself. To resolve this, the Central government in exercise of powers conferred by sub-section (1) of Section 86 of the Act issued an order called Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act (Removal of Difficulties) Order, 2015. The said order came into force with effect from 1 July 2015 and substituted the date mentioned in Section 1(3) of the Act as 1 July 2015 instead of 1 April 2016 as mentioned earlier.
One more reason was given to prepone the commencement date of the Act which is albeit not convincing to us. The reason is as follows:
Section 59 of the Act provides for an opportunity to be given to the assessee to make a declaration in respect of any undisclosed asset located outside India and acquired from income chargeable to tax under the Income-tax Act, for any assessment year prior to the assessment year beginning on 1 April 2016 i.e., AY 2015-16 or earlier years. Section 59 further provides that such a declaration must be made on or after the date of commencement of the Black Money Act, but before the date to be notified by the Central Government.
In short, a compliance window was to be given to the assesses for declaration of undisclosed assets located outside India which was acquired from income of AY 2015-16 or earlier years. A concessional rate of 60% as tax and penalty was to be paid and immunity was granted in respect of the said undisclosed asset. On failure to comply with the said compliance window, such undisclosed asset is to be brought to charge under Section 72(c) of the Act. Section 72(c) of the Act deems such undeclared and undisclosed assets to have been acquired or made in the year in which a notice under Section 10 is issued by the Assessing Officer.
The Central government could have very well given the compliance window after the commencement of the Act with effect from 1 April 2016. However, they cited impossibility to do so as one of the reasons for preponing the commencement date of the Act to 1 July 2015. No reason is discernable from the removal of difficulties order regarding the purported impossibility.
Anyways, this later explanation which is unconvincing to us, as a reason to prepone the commencement date of the Act, found favor with the Supreme Court. The Court upheld the validity of the said removal of difficulties order in the case of Union of India v. Gautam Khaitan, [2020] 420 ITR 140 (SC). The Court noted that the Central government had notified the date for making a declaration as 30 September 2015, and the date for payment of tax and penalty as 31 December 2015. The Court further observed that due to such notified dates, an anomalous situation was arising in as much as if the date under sub-section (3) of Section 1 of the Black Money Act, was to be retained as 1 April 2016, then the period for making a declaration would have been lapsed by 30 September 2015, and the date for payment of tax and penalty would have also been lapsed by 31 December 2015. Consequently, the assessee would not have been able to make a declaration under Section 59 of the Act, since the same could have been made only after the commencement of the Act i.e., 1 April 2016. Therefore, to remove this anomalous situation and give benefit to the assesses the date of commencement was preponed to 1 July 2015 so that assesses, who desired to take the benefit of one-time opportunity, could have made declaration prior to 30 September 2015, and paid the tax and penalty prior to 31 December 2015.
The said reasoning with due respect is flawed as the Court failed to note that the removal of difficulties order was notified before the prescription of dates under Sections 59 and 60 of the Act. Removal of difficulties order was notified vide Notification No. 56/2015 whereas the dates under Sections 59 and 60 were notified later same day i.e., 1 July 2015 vide Notification No. 57/2015 dated 1 July 2015. The Central Government could have validly notified the compliance window dates after 1 April 2016 and that cannot be the reason for preponing the commencement date of the Act. Be that as it may, with the final word of the Supreme Court, which is binding on us all, the commencement date of the Act is 1 July 2015.
Applicability of Section 72(c) in respect of persons who were residents but not ordinarily residents and non-residents in FY 2015-16
As on 1 July 2015, which is the opening date for the compliance window, the term ‘assessee’ was defined in Section 2(2) of the Act as follows:
‘assessee’ means a person, being a resident other than not ordinarily resident in India within the meaning of clause (6) of section 6 of the Income-tax Act, by whom tax in respect of undisclosed foreign income and assets, or any other sum of money, is payable under this Act and includes every person who is deemed to be an assessee in default under this Act;
The term ‘resident’ is defined in Section 2(10) of the Act as a person who is resident in India within the meaning of Section 6 of the Income-tax Act.
The charge to tax under Section 3 of the Act was only on the assessee and no other person. The relevant extract of Section 3(1) of the Act reads as follows:
(1) There shall be charged on every assessee for every assessment year commencing on or after the 1st day of April 2016, subject to the provisions of this Act, a tax in respect of his total undisclosed foreign income and asset of the previous year at the rate of thirty per cent of such undisclosed income and asset:
However, the compliance window was open for all the persons including non-residents in as much as Section 59 of the Act uses the term ‘every person’ and not the term ‘assessee’. Section 59 of the Act read as follows:
Subject to the provisions of this Chapter, any person may make, on or after the date of commencement of this Act but on or before a date to be notified by the Central Government in the Official Gazette, a declaration in respect of any undisclosed asset located outside India and acquired from income chargeable to tax under the Income-tax Act for any assessment year prior to the assessment year beginning on 1st day of April 2016…
This was also clarified by the Central Board of Direct Taxes in Circular No. 13 of 2015 dated 6 July 2015
Question 23. A person is a non-resident. However, he was a resident of India earlier and had acquired foreign assets out of income chargeable to tax in India which was not declared in the return of income or no return was filed in respect of that income. Can that person file a declaration under Chapter VI of the Act?
Answer. Section 59 provides that a declaration may be made by any person of an undisclosed foreign asset acquired from income chargeable to tax under the Income-tax Act for any assessment year prior to assessment year 2016-17. Since the person was a resident in the year in which he had acquired foreign assets (which were undisclosed) out of income chargeable to tax in India, he is eligible to file a declaration under section 59 in respect of those assets under Chapter VI of the Act.
It is important to note that although a person who was non-resident as on 1 July 2015 was eligible to avail of the compliance window, he was not liable to compulsorily make a declaration for past undisclosed assets acquired out of income of AY 2015-16 or earlier years. It is because, in the first place, he was not an assessee under the Act and consequently, not chargeable to tax under the Act at all. Section 72(c) of the Act provides that:
‘(c) where any asset has been acquired or made prior to commencement of this Act, and no declaration in respect of such asset is made under this Chapter, such asset shall be deemed to have been acquired or made in the year in which a notice under section 10 is issued by the Assessing Officer and the provisions of this Act shall apply accordingly.’
In my view, this clause (c) can be applied only qua the assessee who were liable to tax under the Act during the subsistence of the compliance window and were, therefore, under an obligation to make a declaration in respect of their past undisclosed assets. Failure to declare as such was penalized in as much as such past undisclosed assets were also bought to tax under the Act in the year of issue of notice for assessment by the Assessing officer.
However, a person who was a non-resident under the Income Tax Act, 1961 during the subsistence of the compliance window from 1 July 2015 to 30 September 2015, is not chargeable to tax under the Act in first place. Such a person could not be said to be under an obligation to disclose his past assets under the compliance window. It would have been bona fide belief of all the persons who were non-residents in the FY 2015-16 that when they are not liable to tax at all under the Act there is no point in making any disclosure of the past undisclosed assets and paying tax and penalty.
Realizing the lacuna in the Act, the definition of the ‘assessee’ was amended by the Finance Act, 2019 with retrospective effect from 1 July 2015 and it read as follows:
‘(2) ‘assessee’ means a person, - (a) being a resident in India within the meaning of section 6 of the Income-tax Act, 1961 in the previous year; or
(b) being a non-resident or not ordinarily resident in India within the meaning of clause (6) of section 6 of the Income tax Act 1961 in the previous year, who was resident in India either in the previous year to which the income referred to in section 4 relates; or in the previous year in which the undisclosed asset located outside India was acquired
Provided that the previous year, in case of acquisition of undisclosed asset outside India, shall be determined without giving effect to the provisions of clause (c) of section 72’
There was no fresh compliance window prescribed by the Central Government for self-declaration of assets by the non-residents since they were now bought within the ambit of the Act. The one-time compliance window as per Section 59 of the BMA was only operational till 30 September 2015.
It is important to note the opening words of Section 72(c) of the BMA, which read as follows: where any asset has been acquired or made prior to commencement of this Act, and no declaration in respect of such asset is made under this Chapter, such asset shall be deemed to have been acquired. It is implicit in retrospective applicability of this draconian deeming fiction that the person who is being subjected to this deeming fiction should be provided a one-time opportunity for coming clean i.e., making voluntary disclosure of assets with reasonable penalty.
When fresh liability and new charge was created on non-residents also in respect of BMA, it was incumbent upon the Central government to notify a fresh compliance window for declaration of the assets by such non-residents. That would have ensured that Section 72(c) is invoked only against those non-residents, who fail to file any declaration even during such new window.
In the absence of such fresh window for filing declaration, non-residents, who were not required to disclose any assets during the initial compliance window under Section 59 of the BMA in 2015, there can be no allegation of failure and hence, the applicability of Section 72(c) qua such non-residents does not arise.
Conclusion
To reiterate and sum up, Section 72(c) applies only if there was a failure in spite of there being a liability to disclose and a window to disclose. In the case of non-residents there was no liability to disclose in 2015, as such liability arose only due to retrospective amendment of BMA in 2019. When that liability arose in 2019, the compliance window was no longer open to disclose. Therefore, the persons who were non-residents in FY 2015-16 cannot be said to be at fault and made subject to the draconian deeming fiction provided in Section 72(c) of the BMA.
The said legal position will also apply in the case of residents but not ordinarily residents in FY 2015-16, since they too were initially excluded from the definition of ‘assessee’ in 2015 and were only included retrospectively from 2015 vide Finance Act, 2019.
[The authors are Partner and Principal Associate, respectively, in Direct Tax practice at Lakshmikumaran & Sridharan Attorneys, Mumbai]
