A flurry of summons from the Income tax (I-T) investigation wing and the Enforcement Directorate (ED) over the past fortnight has come as a rude reminder to many that despite paying tax they may have a brush with the law.
Thousands of recipients of such letters have been caught in a stern, yet often ignored, provision of the statute that requires a mandatory disclosure of all foreign assets like ownership in a company, properties, and accounts with overseas banks, three persons familiar with the development told ET.
Nonetheless, many hold back such information due to their unfamiliarity with the law, laxity in the filing of tax returns, and fears that such declarations could trigger more queries from the tax office.
But, there is a stiff cost to such non-disclosures, as many are discovering: a penalty of ₹10 lakh a year under Black Money Act (BMA) - so, if a bank account was opened five years ago and has remained a 'secret' since then, the basic fine will be ₹50 lakh if the assesse is unable to convince tax authorities.
"About 3,500 notices have been issued in Mumbai itself. None of these names are in the Panama, Pandora, HSBC leaks. But they have owned foreign assets which weren't declared," said a senior I-T official.
A person is exposed to penalty even if the overseas investment was out of tax-paid earnings and funds were transferred through banking channels using the Reserve Bank of India's liberalised remittance scheme which allows a resident to invest $250,000 a year abroad.
Some of the summons relate to remitting money that was transferred from another member of the family who has exhausted individual LRS limit for the year. If such fund transfers are not established as a 'gift' to the family member, it could be construed as 'borrowing' - and therefore a violation - by the latter as LRS investments cannot be with borrowed money.
"Based on the judicial pronouncement in the case of 'Kanan Devan Hills Plantations Company Private Limited v. ACIT', assessees may take a stand that Indian tax laws are a maze of complexity and for an Individual it is very difficult to understand the various compliances/disclosures to be done. However, this is not an excuse for non-compliance," said Mitil Chokshi, senior partner at Chokshi & Chokshi LLP, a tax, audit and advisory firm.
Since a decade the 'FA Schedule' has been included in the tax return forms for declaration of foreign assets or accounts where an assessee is a legal owner, or a beneficiary, or a beneficial owner.
"Penalty for non-reporting foreign assets cannot be invoked in cases where bank balances are less than INR 5,00,000. Invocation of penalties and other proceedings under BMA for bank accounts shut prior to 1 July 2015 (introduction date of BMA) could be challenged as unconstitutional. Responses to such summons will need utmost attention at the end of taxpayers as the implications under BMA are quite harsh." said Ashish Mehta, partner at Khaitan & Co.
This time around, the summons are not the customary fishing expedition notices that the I-T department used to issue in the past. Each person is being asked about specific assets. Most of the summons are from the I-T's investigation cell while some have been issued by ED, according to a senior chartered accountant.
"These notices have been issued based of foreign suspicious transactions reporting shared by the Financial Intelligence Unit. The notices have been sent to assessees as well as the respective foreign jurisdictions," said another tax official requesting anonymity. "Also given the interim action plan shared by CBDT recently, the department has been also asked to prioritise foreign asset cases. Initial notices have been sent under section 131 of the IT Act. Only if some specific evasion is detected can we invoke the Black Money Act. However, that will happen at a later stage," added the official.
The questions posed to the assesses are: their nature of activity in India, details of remittances abroad, financial interest in companies abroad, was tax paid on earnings from these assets, names of overseas service providers, and bank statements of the offshore companies (if the assesse concerned is a significant shareholder).
Offshore asset matters would boil over into ED's domain if it's found that funds have been moved using the hawala route, or an overseas bank account has been funded by another party.