2025 (5) TMI 1397 - AT - Income Tax

Black Money - Undisclosed investment in shares of company in Hong kong - AO took a view that since the assessee was beneficial owner of the Hong Kong Company it is incumbent on assessee - HELD THAT - It is a matter of fact that the assessee has disclosed the share holding in M/s Innovation Worldwide Limited Hong Kong in the return of income filed for AY 2007-08. Copy of the same is there. This factual finding has also been affirmed by the Ld. prosecution court in the case of assessee. It has been observed that the appeal of the revenue against the order of the prosecution court has also been dismissed by the Ld Session Court vide its order dated 8th December 2023 considering all these facts and circumstances we are of the view that there is no error in the observations of the Ld. CIT(A) in holding that the assessee has duly disclosed the share holding with the Income Tax Department. So far as the amount involved in debit note is concerned it is also a matter of fact that this debit note pertains to transaction entered into between two corporate entities and even after search nothing has been found from the premises of the assessee which would show that in fact the assessee has received this amount in cash or kind. Therefore there is no error in the order of the ld. CIT(A) in deleting the addition. We affirm the same.

Summary

The core legal questions considered by the Tribunal in this appeal relate to the taxability and disclosure requirements of foreign assets and income under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (hereinafter "BMA"). Specifically, the issues are:

1. Whether the addition made by the Assessing Officer (AO) of Rs. 1,30,23,210/- on account of a debit note of USD 200,000 issued by a foreign company should be sustained in Assessment Year (AY) 2019-20, or whether it should have been assessed in AY 2011-12, considering the asset was allegedly held in FY 2010-11 but not disclosed in the Income Tax Return (ITR) for AY 2011-12.

2. Whether the addition of Rs. 8 on account of investment in shares of Innovation Worldwide Limited (IWL), a Hong Kong company, is justified given the assessee's failure to report the investment in Schedule FA from AY 2012-13 onwards, and whether the reporting from AY 2017-18 post-search suffices.

3. Whether the assessee was the beneficial owner of the 5% shareholding in IWL within the meaning of Explanation to section 139(1) of the Income Tax Act, and the implications thereof.

4. Whether the assessee was a contributor to the 5% shareholding of IWL and the relevance of this fact for taxability.

5. Whether the order of the CIT(A) is erroneous or unsustainable on law and facts.

Issue-wise Detailed Analysis

1. Taxability of the Debit Note of USD 200,000 and Year of Assessment

Legal Framework and Precedents: Under the BMA, an "undisclosed asset located outside India" is defined in section 2(11) as an asset held by the assessee or in respect of which the assessee is a beneficial owner, where the source of investment is not satisfactorily explained. Section 3(1) of the BMA provides that undisclosed foreign assets are chargeable to tax in the previous year in which they come to the notice of the Assessing Officer. Section 4 distinguishes between undisclosed foreign income and undisclosed foreign assets, with different charging provisions.

Court's Interpretation and Reasoning: The Tribunal noted that the debit note is a mere notification of payment due and not an asset or income per se. The AO failed to establish that the debit note amount was credited to any bank account or otherwise received by the assessee. The Tribunal emphasized the separate legal entity principle, observing that the foreign company is distinct and governed by its own laws. The AO's attempt to tax the debit note as either income or asset under BMA was found unsustainable. Furthermore, the Tribunal highlighted that if treated as income, it should be assessed in the year earned (AY 2011-12), not in AY 2019-20 when it came to the AO's notice.

Key Evidence and Findings: No bank statements or evidence of receipt of funds by the assessee were produced. The debit note was issued by IWL to a third party, Southwest Minerals Ltd., and found at the assessee's premises during search. The AO did not question the assessee about this debit note during recording of statement.

Application of Law to Facts: The Tribunal applied the statutory provisions distinguishing undisclosed foreign income and assets, and the requirement of satisfactory explanation of source. Since the debit note was not shown to be an asset or income in the hands of the assessee, addition was deleted.

Treatment of Competing Arguments: The Revenue's argument that the debit note represented undisclosed foreign asset or income was rejected on the basis of lack of evidence and legal principles of corporate entity and taxability timing.

Conclusion: The addition of Rs. 1,30,23,210/- on account of the debit note was deleted as untenable.

2. Addition of Rs. 8 on Account of Investment in Shares of Innovation Worldwide Limited (IWL)

Legal Framework and Precedents: Schedule FA under the Income Tax Rules mandates disclosure of foreign assets from AY 2012-13 onwards. Section 50 of BMA penalizes willful failure to disclose foreign assets. The concept of "willful failure" requires that the assessee intentionally concealed the asset.

Court's Interpretation and Reasoning: The Tribunal found that the assessee had disclosed the acquisition of 1 share of IWL in the ITR for AY 2007-08, when the share was acquired, along with the source of funds through official banking channels. The Tribunal relied on a prosecution court order which held that the assessee had not willfully failed to disclose the asset. The Tribunal further held that mere non-reporting in Schedule FA from AY 2012-13 onwards does not amount to willful concealment if the asset was already disclosed in the earlier return.

Key Evidence and Findings: The assessee's ITR for AY 2007-08 contained a note declaring ownership of the share in IWL, supported by bank statements evidencing the source of funds and remittance through official channels. The prosecution court and Sessions Court affirmed that the assessee was not guilty of willful non-disclosure.

Application of Law to Facts: The Tribunal applied the statutory definition of undisclosed foreign asset and the requirement of willful failure. Since the assessee had disclosed the asset and source of investment, the addition was not sustainable.

Treatment of Competing Arguments: The Revenue contended that the assessee should have reported the asset in Schedule FA from AY 2012-13 onwards and that reporting only from AY 2017-18 was insufficient. The Tribunal rejected this, emphasizing the initial disclosure and absence of willful concealment.

Conclusion: The addition of Rs. 8 on account of investment in IWL shares was deleted.

3. Beneficial Ownership of the 5% Shareholding in IWL

Legal Framework and Precedents: Explanation to section 139(1) of the Income Tax Act defines beneficial ownership in the context of income and asset disclosure. The concept is crucial for determining tax liability on foreign assets held directly or indirectly.

Court's Interpretation and Reasoning: The Tribunal observed that the AO failed to establish that the assessee was the beneficial owner of the debit note or that the corporate veil should be lifted to tax the assessee directly for the company's assets or income. The AO's approach ignored the separate legal entity principle. The Tribunal found no basis to treat the assessee as beneficial owner of the debit note transaction or undisclosed income.

Key Evidence and Findings: The assessee's admission of shareholding was noted, but no evidence was found that the debit note amount was beneficially owned by the assessee. No questions were posed to the assessee regarding the debit note during recorded statements.

Application of Law to Facts: The Tribunal applied the principle that a company is a separate legal entity and that beneficial ownership must be clearly established to tax the shareholder for company assets or income.

Treatment of Competing Arguments: The Revenue's argument that the assessee was beneficial owner was rejected due to lack of evidence and failure to pierce the corporate veil.

Conclusion: The assessee was not held to be beneficial owner of the 5% shareholding in a manner attracting tax under BMA.

4. Contribution to the 5% Shareholding of IWL

Legal Framework and Precedents: Contribution to shareholding is relevant for determining beneficial ownership and disclosure obligations under the Income Tax Act and BMA.

Court's Interpretation and Reasoning: The Tribunal did not find any substantive evidence that the assessee was a contributor to the 5% shareholding beyond the declared single share. The AO's contentions were not supported by material evidence.

Key Evidence and Findings: The assessee's disclosure and bank statements showed acquisition of one share only. No further evidence of contribution was found.

Application of Law to Facts: Without evidence of contribution, the AO's attempt to tax on this ground was unsustainable.

Treatment of Competing Arguments: Revenue's assertions were not substantiated; the Tribunal relied on documentary evidence and judicial findings.

Conclusion: The assessee was not a contributor to the 5% shareholding beyond the disclosed share, and no addition was warranted.

5. Overall Legality and Tenability of the CIT(A) Order

Legal Framework and Precedents: The appellate authority's role is to examine facts, evidence, and law to determine correctness of AO's order. The principles of natural justice, burden of proof, and statutory interpretation apply.

Court's Interpretation and Reasoning: The Tribunal found that the CIT(A) correctly analyzed the facts, relied on documentary evidence, prosecution court findings, and legal provisions. The CIT(A) rightly distinguished between undisclosed foreign income and assets, and applied the correct year of assessment for charging tax.

Key Evidence and Findings: The prosecution court's order, bank statements, ITR disclosures, and absence of evidence on receipt of debit note amount were pivotal.

Application of Law to Facts: The Tribunal applied the statutory provisions of the BMA and Income Tax Act consistently with judicial precedents and principles of tax law.

Treatment of Competing Arguments: The Revenue's grounds were considered but found lacking in evidentiary support and legal merit.

Conclusion: The CIT(A) order was upheld as legally sound and factually justified.

Significant Holdings

"The fact of acquiring the shareholding and payment from banking channels was duly reported by the assessee in the ITR for A.Y. 2007-08... The ingredients of section 50 of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 are not attracted in the present case."

"An asset is considered as undisclosed foreign asset only if the source of investment therein is not satisfactorily explained. However, as held... the source of investment in share of IWL is adequately explained. Therefore, the addition of Rs. 8 on account of value of the share of IWL is not tenable and is hereby deleted."

"The AO has charged the value of debit note issued by IWL to Southwest Minerals Ltd. on 07.05.2010 as Undisclosed Foreign Asset/Income... such debit note would not be covered under the scope of asset since it is a mere notification to the debtor for payment of dues and hence it is not an actual payment unless shown to be so by the AO... charging the value of such bank account is also not possible... the addition of Rs. 1,30,23,200/- on this issue becomes untenable and is hereby deleted."

"The BMA lays down different criteria for the year in which undisclosed foreign income and undisclosed foreign asset are to be charged to tax... any undisclosed income can only be charged to tax under BMA in the respective year viz., A.Y. 2011-12 and not in A.Y. 2019-20."

"The assessee had already declared the acquisition of the share in IWL, Hong Kong including source of funds in his return of income for the assessment year 2007-08 and nothing was suppressed from the Income Tax Department."

"The appeal of the revenue and cross objections of the assessee are dismissed."