Black Money Act: Charging Section, Valuation, Penalties and Prosecution

Introduction

Foreign assets, and incomes earned from them by Resident Indians, have caught the tax department's eye since the introduction of the draconian Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (Black Money Act). The Black Money Act came into effect on 1 July 2015 and applies from AY 2016-17.

The Government's intent was to penalise Resident Indians who had undisclosed foreign assets and incomes and did not offer them to tax in India during the one-time compliance window provided before the Act came into force. A Resident and Ordinarily Resident ("ROR") is taxable in India on global income, so the Black Money Act applies to foreign assets and incomes held by RORs. Even so, Non-Residents and those who are Resident but Not Ordinarily Resident ("RNOR") have also received notices under the Act.

Foreign assets and incomes: the Income-tax Act perspective

A few important aspects of the Income-tax Act, 1961 ("ITA") must be kept in mind when dealing with foreign assets and incomes:

• Schedule FA (Foreign Assets) was introduced in the income tax return from AY 2012-13. Every ROR who holds a foreign asset (as legal, beneficial or joint owner), earns income from it, or is a beneficiary, trustee or signatory in a foreign trust, account or other foreign asset must fill it in. Non-Residents and RNORs need not.
• Foreign assets are reported as on 31 December of the previous year, and foreign income in Schedule FA is reported for January to December (calendar year).
• Although disclosure is on a calendar-year basis, income is offered to tax on a financial-year basis (April to March).
• The exchange rates for converting income are adopted under Rule 115 of the Income-tax Rules, 1962.
• Schedule FA requires disclosure of foreign depository accounts (including secondary accounts), custodian accounts, listed equity and debt interests, cash value insurance or annuity contracts, financial interests in any entity (such as unlisted securities), immovable property, other capital assets, accounts in which the assessee is a signatory, trusts in which the assessee is a settlor, trustee or beneficiary, and any other income from a foreign source.

A reconciliation of foreign income is therefore needed. Suppose Arjun, an ROR, holds 100 shares of Google Inc. and earns USD 100 in dividends from January to December 2024, of which USD 30 relates to January to March 2024. From January to March 2025 he earns a further USD 35. The dividend taxable for April 2024 to March 2025 is the INR equivalent of USD 105 (100 + 35 - 30), while the amount disclosed in Schedule FA is the INR equivalent of USD 100.

ESOPs from a foreign entity. If the assessee holds vested but unexercised options under a stock option scheme, it is advisable to disclose them as a right under Table D (any other capital asset outside India) at a nil value. Once exercised, disclosure moves to Table A3. There is no statutory requirement to disclose ESOPs at the vesting stage, but disclosing them as a right as a precaution helps avoid unnecessary litigation or enquiry.

The Income Tax Department may levy a penalty under Section 270A of the ITA for misreporting foreign income, at two times the tax payable. However, since the Black Money Act deals specifically with such cases, if proceedings are initiated and an order is passed under Section 10 of the Black Money Act, the penalty is three times the tax under Section 41.

Even if tax has been paid on foreign income in India and it forms part of the computation of income, it must still be disclosed in Schedule FA. There have been cases where an assessee paid tax on foreign income and disclosed the asset in Schedule AL but missed Schedule FA, which has led to litigation.

Once an addition and consequential penalty are initiated under the Black Money Act, the assessing officer cannot make the same additions or levy penalties for the same offence under the ITA. The Delhi ITAT affirmed this in DCIT, Central Circle-05, Delhi v. Ashok Kumar Singh (ITA Nos. 426 and 427/Del/2022).

If a foreign asset or income is inadvertently omitted from a return under Section 139(1), or the return is not filed by the due date, it can be disclosed through a revised return under Section 139(5) or a belated return under Section 139(4) before 31 December of the assessment year. After that, an updated return under Section 139(8A) is available.

However, Section 139(8A) prohibits filing an updated return to disclose undisclosed foreign assets and incomes after a notice under the Black Money Act has been received. The Black Money Act itself is silent on updated returns, probably because Section 139(8A) did not exist when the Act was enacted. It would be in the interest of all stakeholders for the Government to expressly recognise an updated return as due compliance under the Black Money Act.

Key definitions under the Black Money Act

Section 2(2): assessee

• An ROR earning foreign income and holding a foreign asset; or
• A Non-Resident or RNOR who was an ROR in the previous year in which the foreign income was earned or the foreign asset was acquired

Section 2(11) read with Section 4: undisclosed asset located outside India

The definition is exhaustive. An undisclosed asset located outside India is an asset held by the assessee as legal or beneficial owner, and income from it, which has not been disclosed in the return under Section 139(1), 139(4) or 139(5) of the ITA, and for which the assessee has no satisfactory explanation of the source of investment. So even if the asset is disclosed in the return, the Act is triggered if its source is not established.

Under Section 4, undisclosed income taxed under the Black Money Act does not form part of total income under the ITA, relieving the assessee of double taxation.

Charging section (Section 3)

Undisclosed foreign assets and undisclosed foreign income are chargeable to tax at 30% of their value. The Act specifies the year of taxability: an undisclosed asset is taxed on its value in the year in which it comes to the notice of the assessing officer. Even if the asset was acquired 50 years ago, if it comes to notice in the current year, it is taxed under the provisions applicable for the current year. In other words, there is no time bar under the Black Money Act.

Two aspects therefore need to be determined to calculate the tax: the date of valuation and the amount of valuation.

Valuation date and valuation under the rules

Under Explanation 2 to Rule 3 of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Rules, 2015 ("the Rules"), the valuation date is the first day of the previous year in which the asset comes to the notice of the assessing officer, that is, 1 April of that previous year.

The Rules prescribe valuation methods for the following classes of assets:

• Bullion, jewellery, precious stones, archaeological collections, drawings, paintings, sculptures or any other work of art
• Quoted shares and securities
• Unquoted equity shares
• Unquoted shares and securities other than unquoted equity shares
• Immovable property
• Foreign bank accounts
• Interest in a partnership firm, LLP or AOP
• Any other asset not covered above

The exchange rate for conversion into INR is the Reserve Bank of India ("RBI") reference rate on 1 April of the previous year. If no RBI reference rate is available for a currency, it is first converted into USD at the rate of the central bank of the country where the asset is located, and then into INR at the RBI reference rate on that date. If a USD rate is also unavailable, the rate of another bank regulated in that country may be used.

Penalties

Section 41: penalty for undisclosed income and assets

The assessing officer may levy a penalty of three times the tax computed under the Black Money Act. The real outflow is therefore not 30% but 120% of the undisclosed income or asset.

Section 42: failure to furnish a return

A penalty of INR 10 lakh applies where an assessee fails to file a return under Section 139(1) of the ITA in which disclosure of foreign income and assets was required. No penalty applies if the aggregate value of undisclosed foreign assets (other than immovable property) is INR 20 lakh or less. For this INR 20 lakh threshold, unlike the general valuation rules, conversion uses the SBI TT buying rate on the first day of the previous year, not the RBI reference rate.

Section 43: return filed but information not or inaccurately disclosed

This applies where a person files a return under Section 139(1), 139(4) or 139(5) of the ITA but fails to disclose, or inaccurately discloses, foreign assets and income. The same INR 20 lakh threshold (excluding immovable property) and SBI TT buying rate apply.

Appeal under the Black Money Act

An aggrieved taxpayer can contest an order under the Black Money Act just as under the ITA. The appellate hierarchy is the same: CIT(A), ITAT, High Court and Supreme Court.

Prosecution under the Black Money Act

Since enactment, the rigorous prosecution provisions have been a major point of contention. Section 48 states that prosecution proceedings operate independently of the other provisions of the Act and do not depend on an assessment order under Section 10. Imprisonment ranges from 6 months to 10 years, with a fine. A contravention of Section 51 also attracts the Prevention of Money Laundering Act, 2002 ("PMLA"), as it is a scheduled offence under the PMLA.

Under the ITA, CBDT Instruction No. 5051/1991 restricts prosecution of assessees aged 70 or more at the time of the offence. The Black Money Act has no such relief for senior citizens, even where their bona fides are well substantiated. The only remedy is an appeal before the District Court, Metropolitan Magistrate or a higher court.

There is one breather: prosecution is not triggered if the return disclosing the foreign income and asset is filed before the end of the assessment year to which it relates. It must be a return under Section 139(1) or 139(5), not a belated return under Section 139(4).

Is the Act retrospective?

Whether the Black Money Act applies to assessment years before AY 2016-17 remains sub judice. In Smt. Dhanashree Ravindra Pandit and Others v. DDIT (Inv.) (Criminal Petition No. 101368 of 2019), the Karnataka High Court held that the Act does not apply retrospectively, as that would violate Article 20 of the Constitution: a person cannot be penalised for an act that was not an offence, under a law that did not exist, at the time it was committed. The Income Tax Department has appealed to the Supreme Court, where the matter is pending.

In the past three to four years there has been extensive litigation on the Black Money Act, including its retrospective application, the assessing officer's discretion in levying penalties, simultaneous additions under the ITA and the Black Money Act, and disclosure of foreign assets in different schedules of the return. Advisers should check the details of their clients' foreign assets and incomes, because even where assets are disclosed, non-disclosure of the foreign income from them may be treated as undisclosed income, and the possibility of prosecution cannot be ruled out.