ISSUE FOR CONSIDERATION
A few years back, around 2011, the Government of France shared certain
information with the Government of India concerning deposits in several bank
accounts with HSBC Bank, Geneva, Switzerland held in the names of Indian
nationals, or where such nationals had a beneficial interest. The information
was received in the form of a document known as ‘Base Note’ wherein various
personal details of account holders such as name, date of birth, place of
birth, sex / gender, residential address, profession, nationality, date of
opening of bank account in HSBC Bank, Geneva and balances in certain years, etc.,
were mentioned.
A number of cases
have since then been reopened on the basis of the ‘Base Note’, leading to
reassessments involving substantial additions and sizable consequential
additions which are being contested in numerous appeals across the country
mainly on the following grounds:
(i) the assessee is a resident of a foreign
country and his income is not taxable in India,
(ii) the source of income of the assessee in India
has no connection with the bank deposits concerned,
(iii) the bank account was not opened or operated by
the assessee,
(iv) the bank account was not in the name of the
assessee,
(v) the bank account was in the name of a private
trust which was a discretionary trust and the assessee had not received any
payment or income from the trust,
(vi) the reopening was bad in law.
In addition to the
above defences, the assessees have also contended that the additions were made
on the basis of unauthentic material (the ‘Base Note’), that copies of the
material relied upon were not provided, or that adequate opportunity of hearing
was not provided, or that the principles of natural justice were violated on
various grounds, and also that the A.O. had failed in establishing his case for
addition and in linking the deposits to an Indian source.
More than 20 cases
have been adjudicated by the Tribunal or the courts on the issue of the
additions, some in favour of the Revenue, some against the Revenue and in
favour of the assessee, either on application of the provisions of the
Income-tax Act, 1961 or on the grounds of natural justice. Most of these
decisions have been rendered on the facts of the case. In a few cases, the
issue involved was about the possibility of taxing an income in India for a
year during which the assessee was a non-resident and was the beneficiary of a
discretionary trust under the Income-tax Act, 1961. In one of the cases, one of
the Mumbai benches of the Tribunal held that no addition could be made on
account of such deposits in the assessment year in the hands of the assessee who
was a non-resident and had not received any money on distribution from the
trust in that year. As against this, recently in another case, another Mumbai
bench of the Tribunal held that the addition was sustainable even when the
assessee in question was not a resident for the purposes of the Act and claimed
to be a beneficiary of a discretionary trust.
THE DEEPAK B. SHAH CASE
The issue came up
for consideration in the case of Deepak B. Shah 174 ITD 237 (Mum).
The assessees in this case had filed income-tax returns which were processed
u/s 143(1). Subsequently, the Government of India received information from the
French Government under DTAA that some Indian nationals and residents had
foreign bank accounts in HSBC Bank, Geneva, Switzerland which were not
disclosed to the Indian Tax Department. This information was received in the
form of a document known as ‘Base Note’ wherein various personal details of
account holders, such as name, date of birth, place of birth, sex / gender,
residential address, profession, nationality, date of opening of bank account
in HSBC Bank, Geneva and balances in certain years, etc., were mentioned. After
receiving the ‘Base Note’ as a part of the Swiss leaks, the Investigation Wing
of the Income Tax Department conducted a survey u/s 133A at the premises of one
Kanu B. Shah & Co. During the course of the survey proceedings, the ‘Base
Note’ was shown to the assessees Deepak B. Shah and Kunal N. Shah and it was
indicated that the Revenue was of the view that both the assessees had a
foreign bank account. The said foreign bank account was opened in 1997 by an
overseas discretionary trust known as ‘B’ Trust, set up by a Settlor, an NRI
since 1979 and a non-resident u/s 6. Both the assessees with Indian residency
were named as discretionary beneficiaries of the said trust.
The A.O. added peak
balance in the hands of both the assessees at Rs. 6,13,09,845 and Rs.
5,99,75,370 for assessment years 2006-07 and 2007-08, respectively. The same
additions were also made in the case of Dipendu Bapalal Shah who created the
private discretionary trust known as Balsun Trust.
On appeal, the
CIT(A) affirmed the addition to the tune of half of the peak balance in the
hands of both the assessees to avoid double taxation. The CIT(A) confirmed the
addition to the tune of Rs. 3,06,54,922 and Rs. 2,74,007 (sic) in
A.Ys. 2006-07 and 2007-08 u/s 69A of the Act in both the cases.
In the appellate
proceedings of Dipendu Bapalal Shah, the CIT(A) set aside the addition on the
basis that as an NRI none of his business monies earned outside India could be
brought to tax in India, unless they were shown to have arisen or accrued in
India. He also held that there was no linkage of the amounts to India and the
Revenue had not discharged its duty on this issue. The said order of the CIT(A)
in the case of Dy. CIT vs. Dipendu Bapalal Shah 171 ITD 602 (Mum.-Trib.)
was upheld by the Tribunal on the ground that the contents of the affidavit
dated 13th October, 2011 were not denied or proved to be not true by
the A.O. Further, it was held that the bank account with HSBC Bank, Geneva was
outside the purview of the IT Act as Dipendu Bapalal Shah was a non-resident
Indian.
In the second
appeal, the assessees reiterated the undisputed facts about the ‘Base Note’ of
2011, denied knowledge of any such bank account and highlighted that no
incriminating material was found during the course of the survey; the Settlor
had created and constituted an overseas discretionary trust known as ‘Balsun
Trust’ by making a contribution to the said trust from his own funds / sources
with Deepak and Kunal as discretionary beneficiaries of the said trust; during
the years under consideration, they did not receive any distribution of income
from the said trust as no such distribution was done by the trust during those
years; the Settlor was a foreign resident since 1979 and was a non-resident u/s
6 of the Act; the Settlor and both the assessees in their respective assessment
proceedings had filed their sworn-in affidavits; the affidavit of the Settlor was
sworn before the UAE authority, stating on oath that he had settled an offshore
discretionary trust with his initial contribution, none of the discretionary
beneficiaries had contributed any funds to the trust, and none of the
beneficiaries had received any distribution from the trust.
The sworn
affidavits of the assessees stated that they were not aware of the existence of
any of the accounts in HSBC Bank, Geneva, that they never carried out any
transactions in relation to the said account, nor received any benefit from the
said account, and that they had not signed any documents nor operated the said
bank account. A clarificatory letter from HSBC Bank, Geneva was also filed
stating that they had neither visited nor opened or operated the bank accounts
and that no payments had been received from them or made to them in relation to
the said account; the addition was made in three hands but the Commissioner
(Appeals) deleted the addition in the hands of the Settlor, which order of
deletion was also upheld by the coordinate bench of the Tribunal, holding that
the contents of the affidavit of the Settlor were not declined or held to be
not true by the A.O.
It was explained
further that the bank account of HSBC Bank, Geneva was out of the purview of
the IT Act, as the Settlor was a non-resident Indian since 1979; looking to the
decision of the coordinate bench holding that the money belonged to the
Settlor, who was a non-resident, and the income of the non-resident held abroad
was not assessable in India unless it was shown to have arisen or accrued in
India; since it was held by the Tribunal that the amount in the HSBC account in
Geneva was owned by the Settlor who was a non-resident, there was no
justification or reason to sustain the order of the Commissioner (Appeals); the
Revenue had completely failed to show any linkage of the foreign bank account
with Indian money; addition had been made u/s 69A and it was a sine qua non
for invoking section 69A that the assessee must be found to be the owner of
money, bullion, jewellery or other valuable articles. The money was held in the
name of the Settlor, who claimed to be the owner of the said deposits from his
own funds / sources, and the Revenue had failed to bring any cogent and
convincing materials on record which proved that the assessees were owners of
the money in the HSBC account.
It was further
contended that the Settlor was the owner of the HSBC Bank account, Geneva and
the assessees were discretionary beneficiaries which led to the positive
inference that they were not the owners of the said account and hence the
additions u/s 69A could not be sustained; the assessees had not made any
contribution to, nor done any transaction with, the said trust at all; the
income of the trust could not be added in the hands of the beneficiaries and
the trustees, as the representative assessees, were liable to be taxed on the
income of the trust; if the discretionary trust had made some distribution of
income during the year in favour of the discretionary beneficiaries, only then
was the distributed income taxable in the hands of the beneficiaries; but
nothing of the sort had happened nor had the assessees received any money as
distribution of income by the discretionary trust; so long as the money was not
distributed by the discretionary trust, the same could not be taxed in the
hands of the beneficiaries.
It was explained
that as per the provisions of sections 5 and 9 read with sections 160-166 of
the IT Act, qua a trust, the statute clearly prescribed a liability to
tax in the hands of the trustee, and stipulated that a discretionary
beneficiary having received no distribution would not be liable to tax. As
such, the provisions required to be read strictly and no tax liability could be
imputed to the assessees as discretionary beneficiaries when the statute
specifically provided otherwise.
The Revenue
contended that the affidavits filed were self-serving documents without any
corroborative or evidentiary value; in the affidavit of Dipendu Bapalal Shah,
there was no detail of his family members, and, therefore, the said document
was self-serving without any evidentiary value; the confirmation submitted by
HSBC Bank had confirmed the names of Deepak B. Shah and Kunal N. Shah (the
assessees); the names of the assessees had been mentioned in the information
received by the Government of India as a part of Swiss Leaks in relation to
HSBC Bank, Geneva by way of the ‘Base Note’; the assessee had refused to sign
any consent paper, which clearly showed that the said transactions were proved
beyond doubt that these two assessees had a connection with the said bank
account; the assessees did not co-operate at any stage of the proceedings; in
such clandestine operations and transactions, it was impossible to have direct
evidence or demonstrative proof of every move of the assessee and that the
income tax liability was to be assessed on the basis of parameters gathered
from the inquiries, and that the A.O. had no choice but to take recourse to the
material available on record.
The Tribunal, on
due consideration of the contentions of both the parties, vide
paragraphs 14, 15, 17 and 18 of the order held as under:
‘14. Further, the bank account of HSBC Bank, Geneva is out of the
purview of the IT Act, as Mr. Dipendu Bapalal Shah is a non-resident Indian
since 1979. In the case of the two appellants before us, the same amount was
added in AYs 2006-07 and 2007-08 which was reduced by Ld. CIT(A) to one half of
the total additions to avoid any double taxation affirming the additions to
that extent. Looking to the decision of the coordinate bench holding that the
money belonged to Mr. Dipendu B. Shah who is non-resident and the income of the
non-resident held abroad is not assessable in India unless it is shown to have
arisen or accrued in India. Since it is held by the ITAT that the amount in
HSBC Account in Geneva is owned by Mr. Dipendu Bapalal Shah who is non-resident
we do not find any justification or reasons to sustain the order of Ld. CIT(A)
when the Revenue has completely failed to show any linkage with foreign bank
account with Indian money. We find that addition has been made by the A.O. u/s
69A of the Act to justify the addition on account of peak balance. We agree
with the contentions of the Ld. AR that it is sine
qua non for invoking section 69A of the IT Act, the assessee must be found
to be the owner of money, bullion, jewellery or other valuable articles and
whereas in the present case the money is owned and held by Mr. Dipendu Bapalal
Shah a foreign resident in an account (with) HSBC, Geneva and also admitted
that he is the owner of the money in the HSBC Account Geneva.’
‘15. In the present case the money is held in the name of Mr. Dipendu
Bapalal Shah who vehemently claimed to be owner of the said deposits from his
own fund / sources and the Revenue has failed to bring any cogent and
convincing materials on record which proved that the two appellants are owners
of the money in HSBC Account.’
‘17. In the present case, undisputedly Mr. Dipendu Bapalal Shah is owner
of HSBC Bank account, Geneva and the appellants are discretionary beneficiaries
which leads to positive inference that the appellants are not the owners of the
said bank account and hence the additions under section 69A cannot be
sustained. In the present case before us, admittedly both the appellants,
namely Deepak B. Shah and Kunal N. Shah are discretionary beneficiaries of the
“Balsun Trust” created by Mr. Dipendu Bapalal Shah and the two
appellants have not made any contribution nor done any transaction with the
said trust at all. In our opinion in the case of discretionary trust, the
income of the trust could not only be added in the hand of beneficiary but the
trustees are the representative assessees who are liable to be taxed for the
income of the trust. If the discretionary trust has made some distribution of
income during the year in favour of the discretionary beneficiaries only then
the distributed income is taxable in the hands of the beneficiaries but nothing
of the sort has happened nor two appellants have received any money as
distribution of income by the discretionary trust. So long as the money is not
distributed by the discretionary trust, the same cannot be taxed in the hands
of the beneficiaries. Similarly, in the present case before us, the deposits held
in HSBC, Geneva account cannot be taxed in the hand of beneficiaries /
appellants at all.’
‘18. So applying the ratio laid down by the Hon’ble Apex Court in the
abovesaid two decisions, we are of the considered view that the additions
cannot be made and sustained in the hands of the appellants as the Balsun Trust
is a discretionary trust created by Mr. Dipendu Bapalal Shah and said trust has
neither made any distribution of income nor did the two beneficiaries /
appellants receive any money by way of distribution. While the Department has
failed to bring any conclusive evidence to establish nexus between these two
appellants and the bank account in HSBC, Geneva and more so when Mr. Dipendu
Bapalal Shah has owned the balance in the HSBC, Geneva bank account, we are not
in agreement with the conclusions of the CIT(A) in sustaining the additions
equal to fifty percent of the peak balance in the hands of both the appellants.
Considering the facts of the two appellants, in view of various decisions as
discussed hereinabove, we hold that the order of CIT(A) is wrong in assuming
that the said money may belong to these two appellants and such conclusion is
against the facts on record and based on surmises and presumptions.
Accordingly, we set aside the order of Ld. CIT(A) and direct the A.O. to delete
the additions made u/s 69A in respect of HSBC Bank account for assessment years
2006-07 and 2007-08 in the case of both the appellants before us.’
In the result, the
appeals of the assessees were allowed and the additions made in their hands
were deleted.
THE RENU T. THARANI CASE
Recently, the issue
arose in the case of Renu T. Tharani 107 taxmann.com 804 (Mum).
The assessee in the case was an elderly woman in her late eighties. On 29th
July, 2006 she had filed her income tax return for A.Y. 2006-07 disclosing a
returned income of Rs. 1,70,800 in Ward 9(1), Bangalore. Her case was
transferred to Mumbai under an order dated 20th December, 2013
passed u/s 127 of the Act. The return was not subjected to any scrutiny and the
assessment thus reached finality as such. The investigation wing of the Income
Tax Department received information that the assessee had a bank account with
HSBC Private Bank (Suisse) SA Geneva. Based on the information, this case was
reopened for fresh assessment on 30th October, 2014 by issuance of a
notice u/s 148.
She responded by
stating that she had neither been an account holder of HSBC nor a beneficial
owner of any assets deposited in the account with HSBC Private Bank (Suisse)
SA, Switzerland, during the last ten years. It was further stated that HSBC
Private Bank (Suisse) SA had also confirmed that GWU Investments Ltd. was the
holder of account number 1414771 and, according to their records, GWU
Investments Limited used to be an underlying company of Tharani Family Trust,
of which Mrs. Renu Tharani was a discretionary beneficiary, and that the
Tharani Family Trust was terminated and none of the assets deposited with them
were distributed to her. It was further stated that the ‘Base Note’ issued was
inaccurate, as she did not have any account with HSBC Bank Geneva bearing
number BUP_SIFIC_PER_ID_5090178411 or any other number.
It was explained
that the income of a discretionary trust could not be taxed in her hands as per
the decision in the case of Estate of HMM Vikramsinhji of Gondal, 45
taxmann.com 552(SC), wherein it was held that in the hands of the
beneficiary of a discretionary trust income could only be taxed when the income
was actually received, but in her case she had not received any money in the
capacity of beneficiary. It was submitted that in the light of the abovesaid
facts, there was no reason why the A.O. should insist on asking the assessee to
provide the details of the account standing in the name of GWU Investments
Ltd., as she was in no position to provide the details for the reasons
mentioned to the A.O.
However, none of
the submissions impressed the A.O. He rejected the submissions made by the
assessee and proceeded to make an addition of Rs. 196,46,79,146, being an
amount equivalent to US $3,97,38,122 at the relevant point of time, by
observing as follows:
‘12. The
assessee has not provided the bank account statement in which she is the
discretionary beneficiary nor has explained the sources of deposits made in the
said account… not acceptable because of the following reasons:
(a) It is surprising that she does not know about
the Settlor of the Trust as well as the sources of deposits made in the HSBC
account. No bank account statement has been provided nor the source of deposits
made in the account explained by the assessee even after specific queries were
raised on this.
(b) It is also surprising that as a beneficiary
she did not receive any assets when the Tharani Family Trust was terminated and
if that be so, then where all the money went after termination of the Tharani
Family Trust is open to question and the same remains unexplained.
(c) Even though the returned income were not
substantial, these facts show that she is having her interests in India.
Considering the
facts of this case, the decision of the Hon’ble ITAT, Mumbai in the case of Mohan Manoj Dhupelia in ITA No. 3544/Mum/2011 etc. is
directly applicable to this case.
In absence of
anything contrary, the only logical conclusion that can be inferred is that the
amounts deposited are unaccounted deposits sourced from India and therefore
taxable in India. This presumption is as per the provisions of section 114 of
The Indian Evidence Act, 1872.
Thus, as per the
provisions of section 114 of The Indian Evidence Act, 1872 also, it needs to be
held at this stage that the information / details not furnished were
unfavourable to the assessee and that the source of the money deposited in the
HSBC account is undisclosed and sourced from India.’
Aggrieved, the
assessee carried the matter in appeal but without any success. The CIT(A)
confirmed the conclusions so arrived at by the A.O. He noted as under:
‘21. The focus
of the submission is shifting responsibility on Assessing Officer without
furnishing any supplementary and relevant details. Vital facts (at cost of
repetition) regarding the entities involved / persons are as under:
A. Smt. Renu Tharani is the beneficiary of
Tharani Family Trust.
B. Smt. Renu Tharani is the sole beneficiary.
C. Tharani Family Trust is the sole beneficiary
of GWU Investments Ltd.
D. Smt. Renu Tharani holds interest in GWU
Investments Ltd. through Tharani Family Trust.
E. Income attributable directly or indirectly to
GWU Investments Ltd. or Tharani Family Trust pertains to Smt. Renu Tharani.
F. GWU Investments Ltd. having address in Cayman
Islands has investment manager as Shri Haresh Tharani, son of the appellant.
The holding
pattern of entities concerned and the contents of the base note cement the
issue. The fact that the appellant is sole beneficiary implies that there is
never a case of distribution and all income concerning the asset only belongs
to her, i.e., will accrue or arise only to her from the moment beneficial
rights came to the appellant.’
Coming to the
quantum of additions, however, the CIT(A) upheld the stand of the assessee and
gave certain directions to the A.O.
On second appeal,
the assessee stated that she was admittedly a non-resident assessee, inasmuch
as the impugned assessment was framed on the assessee in her residential status
as ‘non-resident’, and it was thus not at all required of her to disclose her
foreign bank accounts, even if any. It was explained that unlike in the United
States, where global taxation of income of the assessee was on the basis of
citizenship, the basis of taxability of income outside India, in India, was on
the basis of the residential status of the assessee. The fundamental principles
of taxation of global income in India were explained in detail to highlight
that unless someone was resident in India, taxability of such a person was
confined to income accruing or arising in India, income deemed to accrue or
arise in India, income received in India and income deemed to have been
received in India. None of those categories covered the income, even if any, on
account of an unexplained credit outside India.
The assessee
pointed out that since 23rd March, 2004 she was regularly residing
in the United States of America, and that, post the financial year ended 31st
March, 2006 onwards, the assessee was a non-resident assessee. In this
backdrop, she was not required to disclose any bank account outside India or
report any income outside India unless it was covered by the specific deeming
fiction which was admittedly not the case for her. It was, therefore, contended
that any sums credited in the bank account in question could not be taxed in
her hands.
Attention was
invited to a coordinate bench decision in the case of Hemant Mansukhlal
Pandya 100 taxmann.com 280, 174 ITD 101 (Mum), wherein it was inter
alia held that where additions were made to the income of an assessee who
was a non-resident since 25 years, since no material was brought on record to
show that funds were diverted by the assessee from India to source deposits
found in a foreign bank account, the impugned additions were unjustified. It
was thus contended that she, too, being a non-resident, such an income in
foreign bank deposits, even if that were so, could not be taxed in the hands of
the assessee.
It was further
contended that when the account did not belong to the assessee, there was no
question of the assessee being in a position to furnish any evidence in respect
of the same; that she did not have information whatsoever about the source of
deposits in this account, and the assets held therein; that the account was
held with GWU Investments Limited with which the assessee had no relationship
whatsoever; she at best was a beneficiary of the discretionary trust, settled
by GWU Investments Limited, but then in such an eventuality the question of
taxability would arise only at the point of time when the assessee actually
received any money from the trust by relying on the judgment in the case of Estate
of HMM Vikramsinhji of Gondal (Supra), in support of the proposition;
that the entire case of the A.O. was based on gross misconception of facts and
ignorance of the well-settled legal position.
It was reiterated
that the assessee did not have any account with the HSBC Private Bank (Suisse)
SA, and yet she was treated as the owner of the account. The account was of the
investments, but was treated as a bank account. The assessee was a
non-resident, taxable in India in respect of her income earned in India, and yet
the assessee was being taxed in respect of an account which undisputedly had no
connection with India. Denying the tax liability in respect of such an account
at all, it was submitted that if at all it had tax implications anywhere in the
world, the liability was in the jurisdiction of which the assessee was a
resident. The assessee was taxable only on disbursement of the benefits to the
beneficiary, but then the beneficiary was being taxed in respect of the corpus
of the trust. The impugned additions were, even on merits, wholly devoid of any
substance.
The Revenue in
response vehemently relied upon, and elaborately justified, the orders of the
authorities below by highlighting that it was a case in which a specific
information had come to the possession of the Government of India, through
official channels, and this information, amongst other things, categorically
indicated that the assessee was a beneficiary and beneficial owner of a
particular account which had peak assets worth US $3,97,38,122 and that the
genuineness of the account was not in doubt and had not even been challenged by
the assessee, which reality could not be wished away. It was contended that the
IT Department had discharged its burden of proof by bringing on record
authentic information received through government channels about the bank
relationships which were unaccounted in India and unaccounted abroad, and
whatever documents the assessee had given were self-serving documents and
hyper-technical explanations, which did not contradict the official information
received by the Government of India through official channels, and it did in
fact corroborate and evidence the existence of the account with the assessee as
beneficiary and, in any case, the documents submitted could not be considered
enough to discharge the burden of the assessee that the evidences produced by
the Department were not genuine or the inescapable conclusions flowing from the
same were not tenable in law.
It was highlighted
by the Revenue that all that the assessee said was that she had no idea as to
who did it, and passed on the blame to a Cayman Island-based company which was
operating the said account, but then the Cayman Island company could not be a
person unconnected with the assessee. It was inconceivable that a rank outsider
would be generous enough to put that kind of huge money at her disposal or for
her benefit but, as a beneficiary, she was expected to know the related facts
which she alone knew. The fact of the Swiss Bank accounts being operated
through conduit companies based in tax havens was common knowledge and, seen in
that light, if the assessee had an account for her benefit in a Swiss Bank,
whether she operated it directly or through a web of proxies, the natural
presumption was that the money was her money which she must account for.
It was also pointed
out that within months of her changing the residential status, the account was
opened and the credits were afforded. Where did this money come from?
Obviously, in such a short span of time that kind of huge wealth of several
millions of dollars could not be earned by her abroad, but then if she had
shown that kind of earning anywhere to any tax authorities, to that extent, the
balance in Swiss account could be treated as explained. The technicalities
sought to be raised were of no use and the judicial precedents, rendered in an
altogether different context, could not be used to defend the unaccounted
wealth stashed away in the assessee’s account with HSBC Private Bank, Geneva.
In a brief
rejoinder, the assessee submitted that the sweeping generalisations by the
Revenue had no relevance to the facts before the Tribunal. The hard reality was
that the account did not belong to the assessee and that there was no direct or
indirect evidence to support that inference. The assessee was only a
beneficiary of a trust but the taxability in her hands must, at best, be
confined to the monies actually received from the trust; that admittedly GWU
Investments Ltd. was owner of the account in which the assessee was neither a
director nor a shareholder; and that, in any case, nothing remained in the
account as the same stood closed now. It was then reiterated that the assessee
was a non-resident and she could not be taxed in respect of monies credited,
even if that be so, in her accounts outside India; that there was no evidence
whatsoever of the assessee having an account abroad, that whatever evidence had
been given to the assessee was successfully controverted by her, that she was a
non-resident and her taxability was confined to the incomes sourced in India,
and that, for the detailed reasons advanced by her, the impugned addition of
Rs. 196,46,79,146 in respect of her alleged and non-existent bank account in
HSBC Private Bank (Suisse) SA Geneva must be deleted.
The Tribunal deemed
it important to recall the backdrop in which the information about the
assessee’s account with the HSBC Private Bank (Suisse) SA was received by the
Government of India to also refresh memories, and certain undisputed facts,
about the ‘HSBC Private Bank Geneva scandal’ as it was often referred to. In
paragraph 23 of the judgment, it detailed the backdrop. In paragraph 24, it
also referred to one more BBC report, which could throw some light on the
backdrop of this case, and found the report worth a look at by reproducing
extensively from it. The Tribunal further noted that those actions of the HSBC
Private Bank (Suisse) SA had not gone unnoticed so far as law enforcement
agencies were concerned, and the bank had to face criminal investigations in
several parts of the globe, and had to pay millions of dollars in settlement
for its lapses. In paragraph 26, it explained that the above press reports were
referred to just to set the backdrop in which the case before them was set out,
and, as they explain the rationale of their decision, the relevance of the
backdrop would be appreciated.
The Tribunal took it upon itself to examine the trust structures
employed by HSBC Private Bank since a lot had been said about the assessee
being a discretionary beneficiary of a trust which was said to have the account
with HSBC Private Bank (Suisse) SA Geneva. The Tribunal found that it would be
of some use to understand the nature of trust services offered by HSBC Private
Bank, as stated on their website even on the date of the decision.
It noted that the
assessee had shifted to the USA just seven days before the beginning of the
relevant previous year, and it would be too unrealistic an assumption that
within those seven days plus the relevant financial year, the assessee could
have earned that huge an amount of around Rs. 200 crores which, at the rate at
which she did earn in India in the last year, would have taken her more than
11,500 years to earn. Even if one went by the basis, though the material on
record at the time of recording reasons did not at all indicate so, that the
assessee was a non-resident for the assessment year, which was, going by the
specific submissions of the assessee, admittedly the first year of her
‘non-resident’ status, it was wholly unrealistic to assume that the money at
her disposal in the Swiss Bank account reflected income earned outside India in
such a short period of one year.
The Tribunal took a
very critical note of the fact that the assessee had, in response to a specific
request from the A.O., declined to sign ‘consent waiver’ so as to enable the IT
Department to obtain all the necessary details from the HSBC Private Bank
(Suisse) SA, Geneva which aspect of the matter was clear from the extracts from
the assessee’s submissions dated 25th February, 2015 filed by the
A.O. as follows:
‘……..we would
like to submit that the letter from HSBC Private Bank dated 5th
January, 2015 categorically states that the assessee does not have any account
in HSBC Private Bank (Suisse) SA in Switzerland, hence question of providing
you with CD of HSBC Bank account statement does not arise. Also, the question
of signing the consent waiver does not arise as the assessee does not have any
account in HSBC Private Bank (Suisse) SA.’
The Tribunal
observed that the net effect of not signing the consent waiver form was that
the A.O. was deprived of the opportunity to seek relevant information from the
bank in respect of the assessee’s bank account; if she had nothing to hide,
there was no reason for not signing the consent waiver form; all that the
consent waiver form did was to waive any objection to the furnishing of
information relating to the assessee’s bank account, i.e. HSBC Private Bank
(Suisse) SA Geneva in her case. The Tribunal found it necessary to take note of
the above position so as to understand that the assessee had not come with
clean hands and, quite to the contrary, had made conscious efforts to scuttle
the Department’s endeavours to get at the truth.
Proceeding with the
consent letter aspect, the Tribunal further observed that clearly, therefore,
the consent waiver being furnished by the assessee did not put the assessee to
any disadvantage so far as getting at the actual truth was concerned. Of
course, when the monies so kept in such banks abroad were legal or the
allegations incorrect, the assessee could always, and in many a case assessees
did, co-operate with the investigations by giving the consent waivers. The case
before the Tribunal, however, was in the category of cases in which consent
waiver had been emphatically declined by the assessee, and thus a deeper probe
by the Department had been successfully scuttled.
On the aspect of
the consent, the Tribunal found it useful to refer to a judgment of the
jurisdictional Bombay High Court on materially similar facts, wherein the Court
had disapproved and deprecated the conduct of the assessee in not signing the
consent waiver form, in the judgment reported as Soignee R. Kothari’s
case in 80 taxmann.com 240. The Tribunal noted that it
was also a case in which the assessee, originally a resident in India, had
migrated to the USA and in whose case the information by way of a ‘Base Note’
was received from the French Government under the DTAA mechanism (as in the
assessee’s case), about the existence of her bank account with the same bank,
i.e. HSBC Private Bank (Suisse) SA Geneva; it was a case in which the assessee
had declined to sign the consent waiver form outright, and taken a stand that
the question of signing the consent waiver form did not arise. Neither such a
conduct could be appreciated, nor anyone with such a conduct merited any
leniency, the Court had held in that case.
The Tribunal
observed that on the one hand the assessee had not co-operated with the IT
authorities in obtaining the relevant information from HSBC Private Bank (Suisse)
SA Geneva, or rather obstructed the flow of full, complete and correct
information from the said bank by not waiving her rights to protect privacy for
transactions with the bank, and, on the other hand, the assessee had complained
that the IT authorities had not been able to find relevant information.
Obviously, those two things could not go together.
The Tribunal found
that while the claim of the assessee was that she was a discretionary
beneficiary of the Tharani Family Trust, that fact did not find mention in the
‘Base Note’ which showed that the assessee was the beneficial owner or
beneficiary of GWU Investments Ltd.; that in the remand report filed by the
A.O., there was a reference to some unsigned draft copy of the trust deed
having been filed before him but neither the deed was authentic nor was it
placed before the Tribunal in the paper-book. The assessee had not submitted
the trust deed or any related papers but merely referred to a somewhat
tentative claim made in a letter between one Mahesh Tharani, apparently a
relative of the assessee, and the HSBC Private Bank (Suisse) SA, an
organisation with a globally established track record of hoodwinking tax
authorities worldwide. Nothing was clear, nor did the assessee throw any light
on the same. The letter did not deny, nor show any material to controvert, what
was stated in the ‘Base Note’ i.e. GWU Investments Ltd. and the assessee were
linked as beneficial owners. There was no dispute that the account was in the
nominal name of GSW Investments Ltd., but the question was who was the natural
person / beneficial owner thereof. As for the trust, there was no corroborative
evidence about the statement, but nothing turned thereon as well. The assessee
being the discretionary beneficiary owner of the trust, and beneficial owner of
the underlying company, was not mutually exclusive anyway; but the claim of the
assessee being a discretionary beneficiary of the trust was without even
minimal evidence.
As regards the
reference to the judgment in the case of the estate of HMM Vikramsinhji
of Gondal (Supra), the Tribunal noted that it was important to
understand that it was a case in which a discretionary trust was settled by the
assessee and the limited question for adjudication was taxability of the income
of the trust, after the death of the Settlor and in the hands of the
beneficiary. The observations had no relevance in the context of the case of
the assessee; firstly, neither was there any trust deed before the Tribunal,
nor the question before it pertained to the taxability of the income of the
trust; secondly, beyond a mention in the ‘Base Note’ as a personnes légales
liées (i.e. related legal persons), there was no evidence even about the
existence, leave aside the nature, of the trust; thirdly, the point of
taxability here was beneficial ownership of GWU Investments Ltd., a Cayman
Island-based company, by the assessee; finally, even if there was a dispute
about the alleged trust, the dispute was with respect to taxability of funds
found with the trust and the source thereof. Clearly, therefore, the issue
adjudicated upon in the said decision had no relevance in the present context.
The very reliance on the said decision presupposed that the assessee was
discretionary beneficiary simplicitor of a discretionary family trust,
and nothing more – an assumption which was far from established on the facts of
the case.
As regards the
question of income which could be brought to tax in the hands of the assessee,
being a non-resident, and certain errors in computation on account of duplicity
of entries, etc., the Tribunal had noted that the CIT(A) had given certain
directions which it had reproduced in paragraph 18 of the Order, and those
directions were neither challenged nor any infirmities were shown therein. Obviously,
therefore, there was no occasion, or even prayer, for interference in the same.
In the end, the
Tribunal while confirming the order of the A.O. read with the order of the
CIT(A), nonetheless recorded that their decision could not be an authority for
the proposition that wherever the name of the assessee figured in a ‘Base Note’
from HSBC Private Bank (Suisse) SA Geneva an addition would be justified in
each case. The mere fact of an account in HSBC Private Bank (Suisse) SA Geneva
by itself could not mean that the monies in the account were unaccounted,
illegitimate or illegal. The conduct of the assessee, the actual facts of each
case, and the surrounding circumstances were to be examined on merits, and then
a call was to be taken about whether or not the explanation of the assessee
merited acceptance. There could not be a short-cut and a one-size-fits-all
approach to the exercise.
OBSERVATIONS
The provisions of
the Income-tax Act, 1961 extend to the whole of India vide section 1 of
the Act. Section 4 of the Act provides for the charge of income tax in respect
of the total income of the previous year of a person. The total income so
liable to tax includes, vide section 5 of the Act, the income of a
person who is a non-resident, derived from whatever source which is received or
is deemed to be received in India or has accrued or arisen or is deemed to
accrue or arise to him in India. A receipt by any person on behalf of the
assessee is also subject to tax in India. The scope of the total income subject
to tax in case of a resident is a little wider inasmuch as, besides the income
referred to above, he is also liable to tax in respect of the income that
accrues or arises to him outside India, too, unless the person happens to be
Not Ordinarily Resident in India.
Section 9 expands
the scope of the income that is deemed to have accrued or arisen in India even
where not actually accrued or arisen in India and the income listed therein, in
the circumstances listed in section 9, such income would be ordinarily taxable
in India even where belonging to a non-resident, subject of course to the
provisions of sections 90, 90A and 91 of the Act.
The sum and
substance of the provisions is that the global income of a resident is taxable
in India, irrespective of its place of accrual. In contrast, income in the case
of a non-resident or Not Ordinarily Resident person is taxed in India only
where such an income is received in India or has accrued or arisen in India or
where it is deemed to be so received or accrued or arisen.
In both the cases
under consideration the assessees were non-residents and applying the
principles of taxation explained above, the income could be taxed in their
hands only where such income for the respective assessment years under
consideration was received in India or had accrued or arisen in India or where
it was deemed to be so. In both cases, the deposits were made during the
relevant financial year in the bank account with HSBC Geneva, Switzerland held
in the name of the discretionary trust or its nominee during the period when
the assessees in question were non-residents for the purposes of the Act. In
both the cases, the provisions of section 5 were highlighted before the
authorities to explain that the deposits in question did not represent any
income of the assessee that was received in India or had accrued or arisen in
India or where it was deemed to be so. In both cases, the assessees were the
beneficiaries of discretionary trusts and had not received any money or income
on distribution by the trust and it was explained to the authorities that the
additions could not have been made in the hands of the beneficiaries of such
trusts. In both the cases, the authorities had sought the consent of the
assessees for facilitating the investigation with the Swiss bank and collecting
information and documents from the bank – and in both the cases the consent was
refused.
In the first case
of Deepak B. Shah, the Tribunal found that the assessee was a non-resident for
many years, and the A.O. had failed to establish any connection between the
deposits in the impugned bank account and his Indian income. No addition was
held to be sustainable by the Tribunal in the hands of the non-resident
assessee on account of such deposits which could not be considered to be
received in India or had accrued or arisen in India or was deemed to be so. In
this case, the bank account was in the name of a discretionary trust of which
the assessee was a beneficiary and the Settlor of the trust had admitted the
ownership of the funds in the bank account and these facts weighed heavily with
the Tribunal in deleting the additions. It held that a beneficiary of the
discretionary trust could be taxed only when there was a receipt by him during
the year, on distribution by the trust.
And in the second
case, of Renu T. Tharani, the assessee, aged 83 years, a resident of the USA
for a few years, was a sole beneficiary of a discretionary trust who operated
the HSBC Geneva bank account. The addition was made in the hands of the
beneficiary assessee on account of deposits in a foreign bank account held in
the name of a company, whose shares were held by a discretionary trust, the
Tharani Beneficiary Trust; in the course of reopening and reassessment, and on
appeal to the Tribunal, the addition was sustained in spite of the fact that
not much material was available for linking the deposits to the Indian income
of the assessee for the year under consideration, and the fact that the
assessee was a beneficiary of the discretionary trust from which she had not
received any income on distribution during that year.
In the latter
decision, the assessee had brought to the attention of the Tribunal the
decision in the case of Hemant Mansukhlal Pandya, 100 taxmann.com 280
(Mum) but that did not help her case. The fact that the assessee had
refused to grant the consent, as required under the treaties and agreements,
for facilitating the inquiry and investigation by permitting the authorities to
obtain documents from the foreign bank, had substantially influenced the
adjudication by the Tribunal. That the bank account was closed and the trust
was dissolved with no trail was also a factor that was not very helpful. The
fact that the trust was in a tax haven, Cayman Islands, and was managed by
‘professional trustees’ did not help the case of the assessee. The Tribunal
gave due importance to the international reports on the clandestine movement of
funds to go to the root of the source. It was also not very happy with the
genuineness of the evidences produced or their authenticity and also with the
withholding of information by the assessee, as also with the limited
co-operation extended by her.
The fact that the
assessee in the latter case had ceased to be a resident only a few years in the
past and had left India just a year before the year of deposit, and that the
quantum of deposits was very huge, might have influenced the outcome in the
case, though in our opinion these factors were not determinative of the
outcome. It is true that the deposits were made during the year under
consideration, but it is equally true that during the year under consideration
the assessee was a non-resident and therefore the addition to the income could
have been sustained only if it was found to have been received in India or was
linked to Indian operations. The fact that the assessee was a beneficiary of a
discretionary trust and the bank account was not in her name but in the name of
the company that belonged to the trust, coupled with the fact that the assessee
had not received any money on distribution from the trust during the year, are
the factors which weighed in favour of not taxing the assessee, but although
considered, these did not inspire the Tribunal to delete the addition.
The decisions of
the Apex Court relating to the taxation of a discretionary trust were held by
the Tribunal to be delivered in the context of the facts of the cases before
the Court and not applicable to the facts and the issue before it. In case of a
discretionary trust, the beneficiaries could be taxed only on receipt from the
trust on distribution of income by the trust. Please see Estate of HMM
Vikramsinhji of Gondal 45 taxamnn.com 552 (SC); and Smt. Kamalini
Khatau 209 ITR 101 (SC).
The Tribunal in the
first case of Deepak B. Shah approved the contention of the assessee that the
addition in his hands was not sustainable in a case where the bank account was
in the name of the discretionary trust and the assessee was only the
beneficiary. It also upheld that the addition could not have been sustained
when no income of the trust was distributed amongst the beneficiaries. Its
decision was also influenced by the fact that the Settlor of the trust had
admitted the ownership of the account and the addition made in the Settlor’s
hands was deleted vide an order of the ITAT, reported in 171 ITD
602 (Mum) in the name of Dipendu B. Shah on the ground that the
Settlor was a non-resident during the year under consideration.
As against that, in
the latter case of Renu T. Tharani, all the three facts that influenced the
Tribunal in the Deepak B. Shah case were claimed to be present. But those facts
did not deter the Tribunal from sustaining the addition, perhaps for the lack
of evidence acceptable to it to satisfy itself and delete the addition on the
basis of the evidence available on record. Had proper evidence in support of
the existence of a discretionary trust or in support of the non-resident source
of the funds been available, it could have strengthened the case of the
assessee.
There was no
finding of the A.O. to the effect that there was, nor had the A.O. established,
any Indian connection to the deposits. If the deposits were considered to be
made out of her income while she was in India, then such income should have
been taxed in that year alone, and not in the year of deposit.
A receipt in the
hands of a non-resident in a foreign country is not taxable under the Indian
tax laws unless such a receipt is found to be connected to an Indian activity
giving rise to accrual or arising of income in India. Please see Finlay
Corporation Ltd. 86 ITD 626 (Delhi); Suresh Nanda 352 ITR 611 (Delhi);
and Smt. Sushila Ramaswamy 37 SOT 146; Saraswati Holding Corporation 111
TTJ Delhi 334; and Vodafone International Holding B.V. 17
taxmann.com 202 (SC).
Besides various
unreported case laws, the issue of addition based on the said ‘Base Note’
concerning the deposits in HSBC Bank account Geneva, Switzerland arose in the
following reported cases:
1. Mohan M. Dhupelia, 67 SOT 12 (URO) (Mum)
2. Ambrish Manoj Dhupelia, 87 taxmann.com 195
(Mum)
3. Hemant Mansukhlal Pandya, 100 Taxmann.com 280
(Mum)
4. Shravan Gupta, 81 taxmann.com 123 (Delhi)
5. Shyam Sunder Jindal, 164 ITD 470 (Delhi)
6. Soignee R. Kothari, 80 taxmann.com 240 (Bom).
The first two cases
were decided by the Tribunal against the assessees, while the later cases were
decided in favour of the assessee mainly on account of the failure of the A.O.
to establish the nexus of the bank deposits to an Indian source of income or to
adhere to the rules of natural justice or to obtain authentic documents.
A deposit in the
foreign bank account of a trust wherein the assessee was a beneficiary of a
trust was held to be taxable in the hands of the assessee for A.Y. 2002-03 for
the inability of the assessee to render satisfactory explanation in the course
of reopening and reassessment which were also held to be valid. Please see Mohan
M. Dhupelia, 67 SOT 12 (URO) (Mum). Also see Ambrish Manoj
Dhupelia, 87 taxmann.com 195 (Mum).
The assessee, a
non-resident since 25 years, was found to have a foreign bank account in HSBC
Bank Geneva in his name for which no explanation was provided by the assessee,
staying in Japan for A.Y. 2006-07 and 2007-08. The addition made by the A.O.
was deleted on the ground that the A.O. had not brought on record any material
to show that the income had accrued or arisen in India and the money was
diverted by the assessee from India. As against that, the assessee had proved
that he was a non-resident for 25 years. Please see Hemant Mansukhlal
Pandya, 100 Taxmann.com 280 (Mum).
In the absence of a
nexus between the deposits found in a foreign bank account and the source of
income derived from India, the addition made for A.Y. 2006-07 and 2007-08 on
account of deposits in HSBC Account Geneva on the basis of a ‘Base Note’ in the
hands of the assessee who was a non-resident since 1990, was deleted. The
assessee was a Belgian resident. Please see Dipendu Bapalal Shah 171 ITD
602 (Mum).
For A.Y. 2006-07,
the A.O. had made additions to the total income on account of deposits in a
foreign bank account with HSBC Geneva. The assessee claimed complete ignorance
of the fact of the bank account. The addition was deleted on the ground that it
was made on the basis of unsubstantiated documents which were not signed by any
bank official and were without any adequate and reliable information. Please
see Shravan Gupta, 81 taxmann.com 123 (Delhi).
The addition was
made by the A.O. to the assessee’s income in respect of undisclosed amount kept
in a foreign bank account HSBC, Geneva, Switzerland. However, the same was set
aside due to non-availability of authentic documents and requisite information
to be relied upon by the A.O. to make the addition. Please see Shyam
Sunder Jindal, 164 ITD 470 (Delhi).
