Foreign Shareholding Duly Disclosed Not Taxable Under Black Money Act; Debit Note Not Undisclosed Asset/Income

Issue:

Whether a foreign shareholding, acquired and duly disclosed in a prior assessment year’s income tax return, can be subsequently taxed as an “undisclosed foreign asset” under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (BMA, 2015).
Whether a debit note found during a search, indicating a transaction between two corporate entities, can be considered an “undisclosed foreign asset” or “undisclosed foreign income” of the assessee under the BMA, 2015, merely because the assessee holds shares in one of the entities.

Facts:

Foreign Shareholding: The assessee held 5% shares in IWL, a Hong Kong-incorporated company. The Assessing Officer sought to add this investment as an undisclosed foreign asset under the BMA, 2015, for assessment year 2019-20. However, the Commissioner (Appeals) found that the shares were purchased in assessment year 2007-08 and were duly disclosed in the return for that year. The Commissioner (Appeals) also noted that Section 4(1)(c) of the BMA, 2015, which refers to undisclosed foreign assets, does not link such assets to their declaration in the Income Tax Return (ITR).
Debit Note as Undisclosed Asset/Income: During a search at the assessee’s premises, a debit note dated May 7, 2010, issued from IWL to one S, China, was discovered. The Assessing Officer charged the value of this debit note as an undisclosed foreign asset/income, claiming the assessee was the beneficial owner of the foreign company (IWL). The Commissioner (Appeals) deleted this addition, reasoning that a debit note is merely a notification to a debtor for payment and not an actual payment. He further clarified that if the value of the debit note were to be treated as income, it should be assessed in the year it was earned, whereas an undisclosed foreign asset is assessed in the previous year it comes to the Assessing Officer’s notice.

Decision:

Foreign Shareholding: The Commissioner (Appeals)’s decision to delete the addition was upheld. Since the assessee had duly disclosed the shareholding in the relevant prior assessment year (2007-08), it could not be taxed as an undisclosed foreign asset in a subsequent year under the BMA, 2015.
Debit Note as Undisclosed Asset/Income: The Commissioner (Appeals)’s decision to delete the addition related to the debit note was affirmed. The debit note pertained to a transaction between two corporate entities, and no evidence was found during the search to suggest that the assessee had received the amount in cash or kind. Therefore, it could not be considered an undisclosed foreign asset or income of the assessee.

Key Takeaways:

Prior Disclosure under BMA, 2015: An asset located outside India that was duly disclosed in a previous income tax return cannot be subsequently treated as an “undisclosed foreign asset” under the Black Money Act. The focus of the Act is on assets that were never disclosed.
Nature of Debit Notes: A debit note is a financial instrument indicating a debt or a notification for payment; it does not, in itself, represent an actual receipt of income or an undisclosed asset by an individual, especially when it pertains to transactions between corporate entities and there’s no evidence of the individual’s direct benefit or receipt.
Timing of Assessment under BMA, 2015: For undisclosed foreign income, the assessment should be in the year the income was earned. For an undisclosed foreign asset, it is assessed in the previous year in which it comes to the notice of the Assessing Officer. This distinction is crucial for proper application of the Act.

IN THE ITAT DELHI BENCH ‘H’

Additional Commissioner of Income-tax

Himanshu Gupta

Prakash Chand Yadav, Judicial member
and BRAJESH KUMAR SINGH, Accountant member

BMA No.15 (DEL) of 2023
CO No.136 (Del) of 2023
[Assessment Year 2019-20]

MAY 7, 2025

Ruches Sinha, Adv. for the Appellant. S.K. Jadhav, CIT-DR for the Respondent.

ORDER

Prakash Chand Yadav, Judicial Member.- The present appeal of the Revenue and cross objections of the assessee are arising from order of the Ld. CIT(A)-31, Delhi, dated 03.08.2023 having DIN & Document No.: ITBA/COM/S/91/2023-24/1054202415(1) and relates to Assessment year 2019-20. The assessee has also filed Cross objection.

2. The Revenue has raised following grounds of appeal:-

1. Whether on the facts and circumstances of the case and in law, Ld. CIT(A) is correct in deleting the addition by stating that the addition should have been made in A.Y. 2011-12 instead of A.Y. 2019-20 and ignoring the finding of the AO that the debit note mentioning of USD 200,000 (equivalent to Rs. 1,30,23,210/-) was an asset which was receivable by the assessee in F.Y. 2010-11 but the assessee did not disclose this assets in his ITR of A.Y. 2011-12. The undisclosed foreign assets came to the notice of the AO in F.Y. 2018-19 and the same was assessed to tax in A.Y. 2019-20.

2. Whether on the frets and circumstances of the case and in law, Ld. CIT(A) is correct in deleting the addition of Rs.8 on account of investment in the share of Innovation Worldwide Limited and ignoring the fact that under provision for reporting the foreign asset or income in Schedule- FA has existed since A.Y. 2012-13 and the assessee should have reported the investment in IWL from A.Y. 2012-13 but the assessee reported since A.Y. 2017-18 subsequent to search on 28.11.2017.

3. Whether on the facts and circumstances of the case and in law, Ld. CIT(A) is correct in ignoring the fact that the assessee was beneficial owner of 5% share in IWL within the meaning of Explanation to section 139(1) of the Act.

4. Whether on the facts and circumstances of the case and in law, Ld. CIT(A) is correct in ignoring the fact that the assessee was contributor in the 5% shareholding of IWL.

5. (a) Whether on law and facts of the case the order of the Ld. CIT(A) is erroneous and not tenable in law and on facts.

(b)The appellant craves leave to add, alter or amend any/all of the grounds of appeal before or during the course of the hearing of the appeal.”

3. Brief facts of the case as coming out of the orders of the authorities below are that the assessee is an individual and assessed to tax in Delhi. A search and seizure action was conducted on 28^th November, 2017 in the case of Vrindawan Group which includes the assessee and his family members. During the course of Black Money Act(BMA) proceedings, the Assessing Officer observed that the assessee is holding 5% shares in M/s Innovation Worldwide Ltd, a company incorporated in Hong Kong. The Assessing Officer further observed that at the time of search, statement of the assessee was also recorded on 01.12.2017, in which statement the assessee categorically admitted that he was holding shares of M/s Innovation Worldwide Ltd. Hong Kong. Thereafter, the Assessing Officer observed that the assessee has not disclosed the above investment in shares of Hong Kong company in his Income Tax Return for AY 2016-17 and hence the assessee is liable to be proceeded under the provisions of this Act within the meaning of section 31(c) of Black Money Act. Further, the Ld. Assessing Officer observed that a debit note of US $ of 2 lakhs issued from M/s Innovation Worldwide the Hong Kong Company to one Southwest Minerals Ltd, China was found at the premises of the assessee. The AO took a view that since the assessee was beneficial owner of the Hong Kong Company it is incumbent on assessee. The AO was of the view that assessee ought to have disclosed this amount as his income from foreign under the Black Money Act. Similarly, the Assessing Officer observed that the assessee has not disclosed these facts in the return of income filed for AY 2016-17 onwards. At last, the Assessing Officer made an addition of Rs.1,30,00,000/- on the ground that the assessee has not disclosed this income from foreign assets in the return of income as per law.

4. Aggrieved with the order of the Assessing Officer, the assessee filed an appeal before the Ld. CIT(A). The Ld. CIT(A) after examining the entire gamut of facts allowed the appeal of the assessee.

5. Aggrieved with the order of the ld. CIT(A), the revenue is in appeal before us.

6. The ld. DR appearing on behalf of the Revenue vehemently argued that the ld. CIT(A) has failed to appreciate that the assessee was holding the share of Hong Kong Company and was beneficial owner of one debit note of US $ 2 Lakhs. The Ld DR further contended that the assessee has never disclosed these transactions in the Return of Income (ROI) for AY2016-17 and hence they are taxable in the year, when it comes to the notice of the Assessing Officer. The Ld. DR relied upon the order of the Assessing Officer.

7. The ld. Counsel for the assessee while supporting the order of the ld. CIT(A) has pointed that it is a matter of fact that the assessee has disclosed the share holding in the return of income filed for AY 2007-08, when these shares were acquired by the assessee and also in the return of income filed in response to the notice of 153A of the Act. He drawn our attention to the paper book page-3. He further draws the attention of the Bench towards the finding of the prosecution Court TIS HAZARI in complaint case No.7331/2019, wherein, the learned Court has observed as under: –

“In the present case, it is the admitted position that the assets / share acquired by the accused is already declared in the form of a note in the Income Tax Return u/s 139 for the assessment year 2007-2008. Declaration of the assets in the prescribed schedule ‘FA’ do not arise in AY 2007-2008 because schedule FA came into picture later on. In para 5.1 of the sanction order Ex. CW-1/B, it is stated that the provision for reporting foreign assets in schedule FA has existed since assessment year 20122013. Therefore, the declaration by way of a note given in the ITR of the assessment year 2007-2008 should have been considered by the department and it cannot be said that the accused willfully failed to disclose the assets.

8. Ld Counsel for the assessee relied on the order of CIT(A). It is pertinent to note that during the course of hearing the Bench has asked a query from the DR as to whether any question related to the debit note of USD 2 lakh has been raised to assessee at the time of recording of statement. Ld DR fairly stated that no question had been put forth to the assessee.

9. We have heard the rival submissions and perused the material available on record. The Ld CIT(A) while deciding the appeal of the assessee has observed as under: –

“6.1. I have carefully considered the submissions of the appellant and the assessment order. Firstly, regarding investment in the share of IWL, it has been contended that the same was purchased in A.Y. 200708 out of accounted sources for Rs. 19,790/- and was duly disclosed in the ITR for A.Y. 2007-08 and therefore cannot be taxed as an undisclosed foreign asset. I have considered this contention and find that the fact of acquiring the shareholding and payment from banking channels was duly reported by the assessee in the ITR for A.Y. 200708. In fact, a prosecution complaint was filed by the department u/s 50 of BMA regarding failure of the assessee to disclose his shareholding in IWL in the ITR for A.Y. 2016- 17. The ACMM (Special Acts) Central District Tis Hazari Court in the matter of “Income Tax Officer v. Himanshu Gupta for A.Y. 2016-17 in case no.7331/2019” decided in favour of the assessee and pronounced the order on 19.03.2021 whose relevant extract is reproduced as under:

“The sanctioning authority instead of considering the return u/s 153A of the Income Tax Act relied upon the return u/s 139 of the Income Tax Act which stood obliterated and become non-est in view of mandate in (Neeraj Jindal). The argument that the return being filed is an afterthought is also not tenable because in return 31.03.2018 for the A.Y. 2017-8 accused has already declared the asset in schedule FA which was much prior to the issuance of show cause notice dated 11.03.2019 and the authority given to the complainant dated 16.04.2018. From the admitted facts on record it is clear that the ingredients of section 50 of the Black Money (UFIA) and Imposition of Tax Act, 2015 are not attracted in the present case and the accused Himanshu Gupta, S/o Shri Ganesh Chand Gupta is discharged”

6.2 In respect of the disclosure of said shareholding in IWL in ITR for A. Y. 2007-08, it was further observed in the above order as follows:

15. From the bare perusal of the said provision, it is clear that the legislature has used the expression “Willfully fails”. It is admitted position in this case that the accused has self-declared the fact of holding of 5% share (i.e. 01 share of Rs. 19,790/-) in foreign company WL, Ilong Kong in its statement u/s 132(4) of the Income Tax Act Ex. CW-1/C. A bare perusal of reply to the question no.6 and 7 shows that the disclosure made by accused is voluntarily and not in response to any confrontation of documents. Accused further clarified that the assets were disclosed in his balance sheet through CA firm R.N. Marwa.

16. In his reply dated 22.03.2019 Ex. CW-1/H the accused has clearly stated that the disclosure regarding the acquisition of 01 share was made by him in the ITR for assessment year 200708. The said documents were also filed along with the reply to the department and the complainant has filed the same on record as part of complaint. Page no.57 of complaint clearly records the declaration in respect of the share acquired by the accused in IWL, Hong Kong. The said declaration is reproduced below:

“Notes: – That the assessee during the previous year 2006-2007 has become the owner of one equity share of Innovation Worldwide Ltd. a company incorporated under the laws of Hong Kong having its registered office at Hong Kong Remittance was sent through official banking channels under the liber Remittance Scheme for Resident Indian Citizen of the RBI vide A.P.(DIR Series) Circular 64 dated 04.02.2004 then prevalent.”

17. Page 65 of the complaint is the bank account statement submitted by the accused showing the source of funds and the banking channels through which the 01 share of Rs. 19,790/-was acquired. CW-1 Mr. Salil Bijur in his cross examination admitted that the documents submitted by the accused were verified by the sanctioning authority through him.

18. From the aforesaid admitted record, it is apparent that the accused 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. In these circumstances, from the admitted facts, it is apparent that the ingredients of willful failure to disclose the assets as required in Section 50 of BMIT Act is

6.3. It is seen that in the above order in the case of the assessee, he has not been found to be guilty of non-disclosure of his shareholding in IWL in the TR for A.Y. 2016-17. Notwithstanding such finding, even otherwise, the fact of non-disclosure of any foreign asset in the ITR does not automatically mean that such asset falls under the purview of an undisclosed Foreign Asset as defined in Section 2(11) of the BMA, which reads as follows:

“Undisclosed asset located outside India” means an asset (including financial interest in any entity) located outside India, held by the assessee in his name or in respect of which he is a beneficial owner, and he has no explanation about the source of investment in such asset or the explanation given by him is in the opinion of the Assessing Officer unsatisfactory”

6.4 From the above definition, an asset is considered as undisclosed foreign asset only if the source of investment therein is not satisfactorily explained. However, as held in the order quoted above, 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.

6.5 Regarding the further contention that the AO has ignored the universally acceptable concept of a corporate entity being a separate legal entity separate from its shareholders, and which can hold assets and earn income as per its objects, and that the said foreign company is subject to governance and assessment laws as a separate entity, and further contention that the circumstances did not warrant lifting of the corporate veil, it is seen that 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. In fact, from the operational portion of the order at Para 13.2(e), it is not clear whether the value has been charged to tax as an asset or income. In case the amount mentioned in the debit note is sought to be taxed as undisclosed asset then it is noteworthy that 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 by way of establishing corresponding credit to the bank account or otherwise. Even in that case, it would be the value of such bank account, containing such credit, which could have been charged to tax under the BMA and since the AO has not brought any bank account statement on record, charging the value of such bank account is also not possible. Further, in case the value of debit note is charged as income by the AO, then as per the scheme of the BMA, undisclosed foreign income is to be assessed during the year in which such income was earned but with respect to undisclosed foreign asset, the position of law under BMA is different in as much as undisclosed foreign asset is to be assessed in the previous year in which it comes to the notice of the AO. This is evident from the Proviso to section 3(1) of the BMA which reads as follows:-

“Provided that an undisclosed asset located outside India shall be charged to tax on its value in the previous year in which such asset comes to the notice of the Assessing Officer”

6.6 It is thus noticeable that the BMA lays down different criteria for the year in which undisclosed foreign income and undisclosed foreign asset are to be charged to tax. In this regard, it would be appropriate to refer to the provisions of the section 4 of the BMA which defines the undisclosed foreign income and asset of any previous year. It is noteworthy that as per section 4(1)(a) and section 4(1)(b), foreign income which is not declared in the ITR is considered as undisclosed foreign income, whereas as per section 4(1)(c), which refers to undisclosed foreign assets, there is no such linkage with the declaration of such assets in the ITR. This means that for judging whether an asset is undisclosed, no reference is required to be made with the ITR of the corresponding year, whereas any undisclosed income can only be charged to tax under BMA, if at all in the respective year viz., A.Y. 2011-12 and not in A.Y. 2019-20. Therefore, the act of the AO in charging the value of debit note to tax under BMA is not sustainable either as income or as an asset. Accordingly, the addition of Rs. 1,30,23,200/- on this issue becomes untenable and is hereby deleted.”

10. We further observe 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 at page 123 of the paper book. This factual finding has also been affirmed by the Ld. prosecution court in the case of assessee.

9. 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 8^th 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.

10. 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.

11. So far as the cross objections filed by the assessee is concerned the counsel for the assessee has not pressed the same and hence the same are dismissed as withdrawn.

12. In the result, the appeal of the revenue and cross objections of the assessee are dismissed