The recent order of the Delhi High Court has changed the scope of enforcement of black money law for persons who have been forced to remain in India. This development has created a complication for the Income Tax Department as persons who are prevented from leaving the country – including deported fugitives, defaulters subject to the Lookout Circular, extradited suspects or those cooperating with investigating agencies – cannot automatically be compelled to reveal details of their foreign bank accounts, businesses or assets.The Delhi High Court has stayed the Income Tax Department’s direction requiring Dubai-based businessman Rajiv Saxena, who was extradited to India in January 2019 in the AgustaWestland case, to furnish information about his foreign assets, according to an ET report.
What does the Delhi High Court order mean?
As a result, tax authorities cannot routinely enforce the Black Money Act (BMA) merely because a person has been deemed ‘resident’ after staying in India for more than 181 days against their will. Under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, effective from 1 July 2015, individuals classified as residents are required to disclose foreign assets in their income tax returns.
The Income Tax Department had said that the Income Tax Act does not differentiate between voluntary and involuntary residence. It argued that since the petitioner has been residing in India since January 30, 2019, he should be considered resident and hence subject to the provisions of the black money law.The court said that if during the proceedings, the petitioner is not found to qualify as a resident, then action cannot be taken under the BMA.According to the Income Tax Act, residents have to pay tax on income earned both in India and abroad, while non-resident Indians are not taxed on their foreign earnings. Although the Income Tax Department had sought information about Saxena’s foreign assets considering him a resident, but it had not issued any formal order in this matter.This raises the issue of whether the BMA can be applied if periods of involuntary stay are excluded. In such a situation, the person will be considered a non-resident, and the provisions of the BMA will not apply to non-residents. Introduced by a government that prioritized the fight against corruption, the BMA was intended to address limitations in the Income Tax Act and enable taxation on undeclared assets held abroad, including money held in Swiss and offshore bank accounts, assets held through discretionary trusts in tax havens and stakes in unlisted companies where the real beneficial owners remain hidden.
What legal experts are saying:
“There can be many reasons for involuntary migration, including passport revocation,” said Ashish Karundiya, founder of CA firm Ashish Karundiya & Co. “There is no ambiguity in the intention of the Department. This was clearly recognized in the circulars No. 11/2020 and 2/2021 issued in which blanket relaxations were not provided, even as limited, case-by-case relaxations were allowed during the COVID-19 pandemic, when movement was restricted and many non-residents were stranded here.”It appears that the tax authorities believe that granting relief beyond truly exceptional circumstances would weaken the legal framework. Such an approach, he said, could leave some individuals without recognized residency in any country, rendering them effectively tax-stateless – an outcome that the Income Tax Act neither envisages nor intends. Because the department followed a case-by-case policy at that time, many NRIs who were unable to travel abroad during the pandemic had to connect with the tax authorities on their residential status.Ashish Mehta, partner at law firm Khaitan & Co, told ET that the Black Money Act does not establish a separate process to decide residential status. Instead, it entirely depends on the classification prescribed under the Income Tax Act, 1961. Under these provisions, residence is largely determined by the number of days a person is physically present in India. He said this classification creates the basic framework for determining tax liability and disclosure requirements related to foreign income and assets. He also pointed out that shortly before the BMA came into force, the Delhi High Court, in its 2015 judgment in the Suresh Nanda case, had ruled that periods of compulsory or involuntary stay in India should be excluded while calculating the period of presence to determine residential status.
