Taxman may use black money act to trace closed foreign accounts

The taxman can use the Black Money Act to go after even those secret foreign bank accounts which were closed well before the new law came into existence, according to a tax tribunal ruling last week. Under the Black Money (Undisclosed Foreign Income & Assets) and Imposition of Tax Act, which came into force on July 1, 2015, the year in which the tax department gets hold of any information is the year for which income is deemed to have been earned by the person in question.

The holder of an old, undisclosed offshore bank account that continues to exist after 2015 would understandably find himself on the wrong side of law for having failed to report it and come clean by paying tax. But what about accounts which were closed and ceased to exist before 2015? Can money that was lying in such an account be brought under tax?

The point was raised by senior advocate Percy J Pardiwalla while representing one Rashesh Manhar Bhansali who, according to intelligence inputs received by the I-T department, had operated two undisclosed bank accounts which were closed in October 2008 and May 2011. Bhansali had appealed before the Income tax Appellate Tribunal challenging the order of the Commissioner of IT (Appeals). When asked whether he or his family members own any offshore companies or bank accounts, Bhansali had denied.

However, according to ITAT, under the black money law what is relevant is the date on which the tax assessing officer notices the acquisition by an assessee of undisclosed assets located outside India. Thus, “it is immaterial as to whether it existed at the point of time of taxation, or, for that purpose, even at the point of time when the provisions of the BMA came into existence,” said the ITAT Mumbai bench comprising Pramod Kumar (vice-president) and Ravish Sood (judicial member), in its ruling on November 2, 2021. ITAT upheld the tax department’s stand.

According to sections in the legal circle, this provision of the law again could come under legal scrutiny in future as Article 20 of the Constitution states that one cannot be punished under a law which did not exist at the time the offence was committed. The Black Money law was passed to overcome the limitations in existing statutes like the Income tax Act, and tax undisclosed funds parked in foreign bank accounts and often held through discretionary trusts.

Significantly, summons issued by the investigation wing of the I-T department has asked many who have been named in the Pandora papers to share details of bank accounts which no longer exist and firms that were dissolved. According to tax practitioners, in the run up to the passage of the Black Money Act and negotiations with various tax haven jurisdictions for entering into information-sharing pacts, many had closed their foreign bank accounts.