Delhi HC ruling could make it difficult for taxmen to question foreign income prior to FY 2005

A recent court ruling may help some tax evaders go scot-free for concealing foreign income or assets. At the very least, the judgement passed by the Delhi High Court earlier this month is likely to make it difficult for the taxman to question overseas earnings and assets prior to March 31, 2005. This includes money in tax-haven banks, overseas properties and interests in offshore trusts and applies to non-resident Indians as well. The ruling was passed on a case filed by 84-year-old Brahm Datt.

The case

Datt, who was working in Jordan and Iraq between assessment years (AY) 1984-85 and 2003-04, had filed tax returns in India for income generated in India. In his statement, he told tax officers that while he did not maintain any account with a foreign bank in his personal capacity, as a non-resident Indian (NRI) he had contributed about $2-3 million at the time of settling of an overseas trust out of income earned from sources outside India.

On March 24, 2015, the Income Tax Department sent Datt a notice under Section 148 of the Income Tax Act for initiating reassessment proceedings for AY 1998-99. Datt then moved the court questioning whether such a notice can be issued for a particular AY for concealment of foreign income since six years had lapsed.

The taxman's stand

Section 148 of the Act allows the tax department to send out Income Escaping Assessment notices to taxpayer. The time limit for the issue of such a notice is six years from the end of the assessment year (AY) for which income has escaped assessment. A report in The Economic Times added that this provision in the law applies to income that was earned in India but on which no tax was paid.

In 2012, an amendment to the IT Act increased the time limit for issuing such notices for undisclosed income earned outside India or assets acquired abroad to 16 years. In other words, the taxman can issue Income Escaping Assessment notices for AY 2012-13 anytime till March 31, 2019, when it comes to a taxpayer's income in India. But for income from abroad, the department is empowered to send out such a notice any time before April 1, 2029.

Since Datt was an NRI, the tax department believed the 2012 amendment to the Act would apply.

The Court's ruling

The Delhi High Court, however, held that such a notice for AY 1998-99 cannot be issued on 2015 as the prescribed period of six years had lapsed in March 2005.

"This ruling will help assesses who had concealed income before the 16-year time limit came into effect on July 1, 2012, but had not received any notice within six years - between 2006 and 2012 - for income earned in any year prior to 2005," senior chartered accountant Dilip Lakhani told the daily.

However, the good news is that the ruling will reportedly also spare taxpayers - residents as well as NRIs - with legitimate income from harassment by income tax officials.   

Tax evaders still need to beware

According to Lakhani, the taxman still holds an ace up its sleeve to crack down on tax evaders. The department can decide to invoke the Black Money Act to chase evaders at any point in time "as there is no time limit on issue of notice under this Act".

A senior professional dealing in foreign exchange laws and PMLA further told the daily that the tax department has been sending notices to even those who had invested abroad under RBI's liberalised remittance scheme. In at least three cases that the source is advising, notices have been served to individuals who had invested in Resurgent India Bonds that were issued by SBI in 1998.

The Central Board of Direct Taxes (CBDT) in an August circular also made it clear that cases involving foreign black money would be kept out of the purview of the June amendment in the income tax law that increased the threshold monetary limits for the tax department to file appeals at various levels, from appellate tribunals to the Supreme Court, in order to reduce the number of pending tax litigations.

(Edited by Sushmita Choudhury Agarwal)

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