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Taxmen Get Edge in Old Foreign Asset Cases

The Income Tax (I-T) Department now has an upper hand in chasing undisclosed foreign asset cases that were reopened before 2021. A tax tribunal, last week, has questioned the oft quoted rulings by the high court and Supreme Court on the grounds that higher courts had overlooked a key explanation in the earlier law.

The flow of information on unaccounted offshore bank accounts, trusts and companies is never real-time – involving a cumbersome process under the Exchange of Information provisions of tax treaties with various jurisdictions.

When data on unaccounted foreign bank accounts started trickling in some years ago, the law was amended in July 2012 to empower tax authorities to go back and reopen completed tax assessments (where concealed assets abroad were detected), up to 16 years as against six years for other taxpayers.

However, this new arsenal to I-T officials was blunted after the amendment was judicially interpreted as ‘prospective’ – the changed law could only be used in cases which had not become ‘time-barred’. Thus, no case before 2006 – six years prior to the year of amendment – could be reopened even if unaccounted overseas assets were detected. The Delhi High Court accepted the argument of taxpayers that since the amendment was not specifically stated to be ‘retrospective’ it was only applicable for cases which had not attained finality in 2012. (So, if data on a foreign bank deposit in 2000 was dug out in 2015, the reopening was rejected on the basis that 2000-01 assessment has already attained finality in 2007.) The high court ruling was later upheld by the Supreme Court.

But this accepted view has now been overturned by the Mumbai bench of the Income Tax Appellate president Pramod Kumar and judicial member Suchitra Kamble. The case pertains to a Mumbai resident whose assessment for 1999-2000 was reopened in 2015after the I-T office came to know about an HSBC Geneva account of a trust set up by the person’s father-in-law. This trust had over $3 million in the account and the corpus of the trust included State Bank of India’s Resurgent India Bonds.

“This ruling will not result in opening of new cases as the reassessments law was substituted in 2021 and the sixteen years reopening period is no longer relevant.

However, taxpayers in whose case reassessments were previously reopened beyond the period that had become time-barred as ruled in the Brahm Dutt ruling (i.e., the Delhi High Court matter) will need to weigh their strategies,” said Ashish Mehta, partner at the law firm Khaitan & Co.

The new reassessment provisions (introduced from April 2021) also provide that no notice can be issued under the new law if such notice could not have been issued under the applicable old reassessment provision timelines. “It is widely believed that this restriction was inserted in view of the Brahm Dutt ruling. In light of the reasoning given in this ITAT decision, it will be interesting to see if that position is tinkered with or retained,” said Mehta.

ITAT, a quasi-judicial authority and the final fact-finding body, has sent the matter back to the Commissioner (Appeals), which constitutes the first level of appeal, to decide the matter on appeals. According to the tribunal, the higher courts did not take into account a key explanation under Section 149 of the Income Tax Act which gives the law retrospective effect. It also held that the legislature has full powers to enact retrospective amendment if that is considered appropriate. S-ET

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