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Rashmin Sanghvi & Associates

Chartered Accountants

220, 2nd Floor, Arun Chambers,
Tardeo Road,
Mumbai - 400 034,
Maharashtra, India.

Tel. Nos.: (+91 22) 2351 1878, 2352 5694.

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Home Articles Taxation         Share :

Budget 2016Chapter F

Chapter F. Black Money Declaration Scheme:

13. Black Money Disclosure Scheme:

13.1 Untaxed money is known by different names – Black money, unaccounted income, unexplained incomes, etc. The phrase used more often is “Black Money”. Black Money is prevalent in India and many countries with varying degrees. India is not an exception. This needs to be tackled and therefore the Government has been trying to do this through various measures.

The Government has been taking various steps to reduce Black money. These steps include collection of information globally, enacting specific laws to tackle foreign black money, providing incentive to voluntarily disclose untaxed incomes, making PAN mandatory for many transactions, etc.

A list of some of the important measures taken by the Government are as under:

i) Transfer Pricing – to prevent Indian incomes being transferred to group companies outside India by over-pricing / under-pricing.

ii) Black Money law – to penalise persons who have untaxed income earned abroad.

iii) Prevention of Money Laundering Act (PMLA) – to confiscate property which is represented as clean property but is obtained by undertaking specified crimes like drug trafficking, corruption, etc. Exchange of information on Suspicious Transactions has already started – from the year 2003.

iv) Benami Transactions (Prohibitions) Act – to confiscate property which is held in someone else’s name (benamidar or name lender) but actually belongs to the person who has paid for the same.

v) General Anti-Avoidance Rules (GAAR) – if the purpose of transaction is different than what is sought to be projected, the projected transaction can be ignored. Tax can be charged on the real purpose of the transaction. “Substance” will be given more importance than “form”.

vi) Signing Tax Exchange Information Agreements with various countries.

vii) Actively contributing to Base Erosion and Profit Sharing measures at OECD / G20 forums. Under these steps, international tax rules would be modified to tax income where it actually accrues.

Each measure has a different purpose. We need to consider various measures in totality. With so many laws, it becomes very difficult to hide income and avoid taxes.

The Government has announced “Income Declaration Scheme” in the Finance Bill 2016. While the scheme is to give one opportunity to the people to declare their untaxed income and pay up taxes, there are other implications as well.

13.2 Tax evasion / avoidance:

It has been argued by the professionals in the past that “tax avoidance” is legal and “tax evasion” is illegal. “Tax avoidance” means use of legal rules (read legal loopholes) to minimise the taxes. It is use of “form” over “substance”. The Governments across the world have come to conclusion and have taken steps to remove the difference between tax avoidance and tax evasion.

For Tax avoidance there are now “substance over form” rules, Anti-Avoidance provisions, Transfer pricing rules, etc. The Income Declaration Scheme is not meant for matters which can be dealt with by these rules. It is for plain tax evasion.

An illustration should help to clarify.

A person files a tax return disclosing capital gain of Rs. 10,00,000. This is earned out of sale of house property. During the course of sale, he had taken sale proceeds in cash. Or he had taken sale proceeds in the name of his family members - but as consultancy fee / salary etc. The family members have incomes below taxable limits. Thus no tax has been paid on such incomes. This is clearly tax evasion.

A person sells his property and earns capital gain. He invests the sale proceeds in construction of property within 3 years and saves capital gain tax. Assume that the person has no other taxable income and therefore does not file the tax return. While the income has not been disclosed to the tax department, there is no tax which has been avoided. Can this be considered as tax evasion? No. It is clearly not tax evasion. However see para 13.9 below.

13.3 Past declaration schemes:

In the past, Indian Government has come out with schemes offering immunities from penalty and prosecution for encouraging people to pay tax on past untaxed income. The last scheme was the scheme under Black Money Law in 2015. That was foreign incomes of Indian residents. Before that there was a Voluntary Disclosure Scheme in 1997 for all incomes – Indian and foreign.

There is a view that every Disclosure scheme is unfair to the people who have been paying taxes honestly. The income declaration schemes favour those who have avoided taxes in the past. As per some reports, in 1997, Government had given a declaration to the Supreme Court that it will not come out with any such scheme in future.

However in the interview by Mr. Hasmukh Adhia, financial services secretary published in Economic Times dated 2nd March 2016, it has been clarified that Government has not given any such assurances and Supreme Court also has not told the Government that it cannot come out with such schemes.

In any case, this scheme does not offer complete relief. There is immunity from prosecution. However the tax is payable on current market value of assets in the possession of the person. There will also be penalty payable. Care has been taken to avoid all the tax avoidance loopholes in the present scheme.

13.4 Key features of IDS:

13.4.1 It will be applicable to untaxed Indian income earned upto 31st March 2016. It offers people an opportunity to declare their untaxed income and pay a total of 45% of the untaxed income or assets including surcharge and penalty.

13.4.2 It is proposed to make the scheme effective from 1st June 2016. It will be open upto a date to be notified by the Government.

13.4.3 The IDS applies only to Indian incomes (see paragraph 13.5(vi) below).

13.4.4 The IDS applies to residents and non-residents.

13.4.5 It applies to incomes on which tax was payable and has not been paid. “Undisclosed income” has been defined in S. 180(1) of the Finance Bill.

It should be noted, that there may have been a scrutiny assessment for any year. In that assessment, the income may not have been detected. Such income will also be considered as undisclosed. Thus as long as income has not been taxed – whether scrutiny assessment has taken place or not – it will be considered as “Undisclosed income”.

13.4.6 The declaration will not be used for further proceedings against the person under the Income-tax and Wealth-tax Act. There is immunity under these laws. There is further relief under the Benami Act (see para 13.6 below). There is no relief / immunity under any other law.

13.5 IDS not available under these circumstances:

Under following circumstances the IDS is not available:

i) where under the Income tax Act a notice has been issued of scrutiny, or re-opening of assessment, or where raid / survey has been conducted and the assessment is pending.

ii) where any information has been received from a foreign Government under an agreement signed with the foreign government.

iii) to any person in respect of whom an order of detention has been made under the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974 (COFEPOSA) (subject to some conditions).

iv) in relation to prosecution for certain offences punishable under Indian Penal Code, the Narcotic Drugs and Psychotropic Substances Act, 1985, the Unlawful Activities (Prevention) Act, 1967 and the Prevention of Corruption Act, 1988.

v) to any person notified under section 3 of the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992 (Harshad Mehta scam).

vi) in relation to any undisclosed foreign income and asset which is chargeable to tax under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (i.e. untaxed foreign income of Indian resident). Thus IDS applies only to Indian incomes.


13.6 Benami Transactions (Prohibitions) Act 1988:

The Benami Transactions (Prohibitions) Act 1988 (Benami Act) was enacted in 1988. However it was never implemented. Subsequently in May 2015, some amendments have been made in the act. The amendments have been placed in the Lok Sabha. These have yet to be passed.

The purpose of Benami Act is as follows.

One of the ways of holding income (and assets out of the income) which a person does not want to be disclosed, is to hold the same in some other person’s name. Thus if a person has earned income by way of bribe, he will hold it in some other person’s name. Such other person is known as “benamidar” or name lender. The property will be enjoyed by the bribe earner (beneficial owner of property) but will be held in name of benamidar.

The Act provides that such property can be confiscated by the Government. There are penal consequences as well. (There are of course some exceptions for holding the property in relatives’ names for bonafide purposes.)

It should be noted that Benami Act is not just for untaxed income. It is actually for corruption and other kinds of offences where the person earns income but cannot hold the property in his or her name. They then hold the property in someone else’s name.

The IDS provides that if a declaration is filed under the IDS, the Benami Act will not apply to such income if the following conditions are satisfied:

- the asset declared under the IDS is transferred from the benamidar to the declarant who would have paid the consideration for such asset;
- the asset is transferred within the period notified by the Central Government.

Thus after declaring the income and paying the tax under IDS, the property should be transferred to the true owner. Otherwise under the Benami Act, the property remains liable for confiscation.

13.7 Asset and Valuation rules:

The untaxed income would most likely be in the form of assets. The current value of the assets will be considered for the purpose of taxation under IDS. The valuation rules are yet to be notified. Once these rules are notified we will have more details.

It has been proposed in S. 49 that if the asset has been disclosed under the Income Declaration Scheme, 2016 and tax has been paid on its fair market value, then the fair market value will be considered as the cost of asset for considering capital gains on transfer of such asset at a future date.

13.8 Time barring period under section 149 - Implications of not filing the declaration under this scheme:

13.8.1 Under S. 149 of the Income-tax act, there is a time barring period beyond which the tax department cannot issue a notice. Hence if income is not offered by the person and it is not detected within the prescribed time, there is nothing which the department can do.

Currently the time limit is 8 years from the beginning of the financial year for Indian incomes. Thus incomes earned before 1.4.2008, cannot be taxed if these are not detected before 31.3.2016. For foreign incomes, the time limit is 18 years from the beginning of the financial year.

13.8.2 There is no change in these time-barring periods under the Income tax Act. However under the Black Money law, for foreign incomes of Indian residents, the time limit has been removed. Thus income of any year – going back even upto 50 years – if it comes to the knowledge of the tax department, will be taxable under the Black Money law.

13.8.3 Now under the IDS also, it seems that the time limit has been removed. Under S. 194(c) of the Finance Bill 2016, it is provided that if no declaration is filed for any past income, then the income shall be considered to be of that year, in which the notice for scrutiny assessment etc. has been issued.

Say an income is earned in the year 2000. If it comes to the knowledge of tax department and it issues a notice in 2016, it will be considered as income of 2016. Technically the time barring of 8 years remain, however by treating the untaxed income and the income of the year in which the notice is issued (i.e. 2016), the time barring period is effectively overridden.

It is not necessary that a notice should be issued for the year 2000. Legally the notice cannot be issued for the year 2000 as it is beyond the period of 8 years. The notice may be issued for 2016, but during the course of assessment for 2016, income of Year 2000 comes to light. Such income will be considered as income of 2016 and tax will be levied accordingly.

13.8.4 The relief under IDS by filing a declaration is available for incomes earned upto 31.3.2016. For incomes earned after 31.3.2016, the IDS does not apply.

This leads to a situation where for incomes earned after 31.3.2016, the time-barring period of 8 years is available! Whereas for incomes earned upto 31.3.2016, the time-barring period is not available.

13.8.5 There can be legal challenges to this view. For example, IDS is a scheme for providing relief. A scheme cannot override the law, and make income taxable which is otherwise not taxable. The Government has full rights to roll back any provision, remove time barring period etc. However there should be a proper law for that.

A counter view is that the IDS will be a part of Finance Act 2016. It is a statutory law. It will remain as a statute even after the time for the scheme is over.

This is a controversial matter.

Fair interpretation would be : S. 194(c) extends the period where the assessee himself wants to declare income beyond time barring period. For some reasons, the assessee may want it. However income-tax officer cannot serve notice for a period beyond time barring period.

13.8.6 Implication of considering the income of the year in which notice is issued - As the income will be considered as income of the year in which the notice is issued, there cannot be any interest for the past.

However penalty proceedings may be initiated as income will be considered to have escaped assessment. It came to light only when the tax department found out.

13.9 Some other illustrations and issues:

13.9.1 Kindly refer to the illustration in para 13.2. A person has legally saved tax on capital gain. However due to difference in the views of the tax department and tax payer, can income be considered to have been avoided? Can it be considered as income of the year in which it comes to light?

Will such capital gain be considered as income, or will the value of property acquired out of the capital gain be considered as income?

13.9.2 A person has acquired property due to inheritance. Such property cannot be considered as untaxed income. The person of course needs to establish that it is out of inheritance.

13.9.3 A person has high value property acquired out of incomes earned several years ago. The person may have destroyed the records as he is not required to keep the records for so many years. How can he establish that the property was acquired out of disclosed incomes?

For such situations, a person’s tax return / balance sheet for those years will help. Going by past experience, one does not expect the tax department to go on fishing expedition. Only if the department gets specific records which show that tax has not been paid on past incomes, it may initiate proceedings.

13.9.4 A person has not paid any tax on income earned in 2000. After 2008 (completion of time-barring period), the person may have disclosed the income / assets in his returns. Can the department consider such income as current year’s income by issuing a notice?

13.9.5 The IDS is available to all residents. However there is no immunity under the Companies Act. The Black money Act had provided immunity under the Companies Act also.

Hence untaxed income of companies may get immunity under the Income-tax and Wealth-tax laws, but not under Company Law.

13.9.6 In the interest of clarity and to avoid anxiety, the Government may come out with circulars clarifying the doubts of people.