By: Rajesh M Kayal
Having received information on 782 Indians holding accounts with HSBC (Switzerland) that was not disclosed in their tax return in India, the government in 2012 made an amendment to Section 149 of the Income Tax Act w.e.f July 1, 2012. The amendment allows tax authorities to reassess income of an Indian assessee for the last 16 years if they have an unaccounted investment or a bank account outside India.
While it may prove to be a tricky exercise for individuals to explain the details of all credits and their source for last 16 years, the Section needs amended explanation on their applicability to NRIs and that the accounts will be reopened for 16 years only if the tax department has specific information on the fact that money in the overseas bank account was earned and remitted from India. The following amendment was made to section 149 read with section 148.
“No notice under Section 148 shall be issued for the relevant assessment year, if 4 years, but not more than 16 years, have elapsed from the end of the relevant assessment year unless the income in relation to any asset located outside India, chargeable to tax, has escaped assessment”.
The amendment is made by Finance Act, 2012 w.e.f., July 1, 2012. Its purpose is to reassess the income of Indian assessee for last 16 years instead of 4 years; in case they have unaccounted investment or bank account outside India and the Section gives power to I-T department to re-assess the income for 16 years instead of 4 years in such cases.
The purpose of this section is to reassess the income and recover taxes and penalty from resident individuals who have or had unaccounted investment or bank accounts outside India. This section is applicable to resident Indians as well as NRIs,
The fact is that each and every NRI has a bank account or investment outside India. Suppose, their assessments are re-opened for last 16 years on these grounds, it will be very difficult for them to explain the detail of each and every credit and source of it. For example, an NRI working as an commission agent in Saudi Arabia, has lot of big entries in his bank account and the difference of debit and credit may be very small, which must be only his income from the business of commission agent. It will be very difficult for him to explain the source of all the credits in his bank account for 16 years. Even more so since as there is no tax in the UAE he is not required to maintain the books of accounts. Even overseas banks will not be in a position to provide the details of sources for each credit and debit to the account holder. Such Indians will be subject to great hardship if provisions of the amended Section 149 is made applicable to them and their assessments are reopened.
In fact out of 782 HSBC (Swiss) account holders more than 10 per cent are non-residents or persons, who opened the account when they were non-residents. They are also subject to inquiry, reassessment, penalty and prosecution by the Tax Department. If a non-resident cannot explain a source of 15-year old credit to their bank account, it will be added to their taxable income after re-assessment. The tax payable including the interest is more than three times the amount of credit entries in their accounts. They will also receive penalty and a prosecution notice from the tax department. These NRIs are victims of the situation and subject to great hardships despite honestly giving statements of their bank accounts to tax department after receiving the notice.
As per Section 5 (1) ( c) in the case of non-resident or resident but not ordinary resident, the income accrued and received outside India is not taxable in India. There are various judgments given by appellate authorities that what is not taxable under Section 5 (1) ( c) cannot be liable to tax and provision of Section 68 and 69 is not applicable to them. Such income cannot be taxed as undisclosed income under the provisions of Section 68 and 69. Considering this, the non-resident shall not be subject to re-assessment or inquiry unless the tax department has proof that such income is accrued and received in India and remitted outside or the source of these credits in overseas bank account is from India . As per the various orders of the appellate authorities, in the case of non-residents, onus is on the tax department to prove that such incomes are remitted from India. In the case of “ DCIT v Finlay Corp. Ltd. (2003) 86 ITD 626 \ (Dehli)” and in the case of Mansinghka Bros. (P) Ltd. v CIT (1984) 147 ITR 361 (Rajasthan), and also in the case of Vodafone International holding B.V. v Union of India in 2012 (Supreme Court), the decisions were given that “Under Section 5 (2) of Income Tax Act, in the case of NRIs the income accrued and received outside India cannot be subject to tax in India. What is not taxable under section 5 (2), cannot be taxed under the provisions of sections 68 and 69 as undisclosed income.” Without considering this, the assessment of NRIs have been re-opened for last 16 years as they were in the list of 782 account holders with HSBC (Geneva). Looking at the sensitivity of the matter in public domain, the income tax department also had no option but to re-open the assessment of non-resident also.
There are lakhs of NRIs who are filling their tax returns in India. They are not disclosing their overseas investments or bank account in their tax returns as they are not required to do so. They may be subject to great hardship any time in the future if their assessments are reopened for 16 years, because of having an overseas bank account or investment. The section requires proper amended explanation added to it about the applicability to the case of non-residents. In the case of Non Residents, their tax assessment shall not be reopened for last 16 only on the ground that they have or had overseas bank account, but the tax department must have specific information, the money in overseas bank accounts are earned and remitted from India.
(The author is a Chartered Accountant practicing for more than 30 years)