By TIOL News Service

ALLAHABAD, FEB 24, 2015: THE issues before the Bench are - Whether immunity provided to the holder of India Development Bonds u/s 6 or 7 of RFEIFEB Act, extends to the holder of gifts by an NRI which are later proved to be bogus gifts and Whether such developments bonds seized during search operations as the undisclosed income, are liable to be treated as a case of money laundering. And the verdict goes against the assessee.

Facts of the case

The assessee is an individual. A search was initiated at the premises of assessee and notices u/s 142(1) & 143(2) were issued to the assessee for A.Y 1997-98 on the ground that the assessee had received foreign currency found during the course of a search operation. Accordingly, the assessee was subjected to block assessment. The AO also noticed that certain gifts which had been received by the assessee appeared to be bogus. Accordingly, the AO issued notice for initiation of reassessment proceedings u/s 147/148. The assessee responded to the notice for the reopening of assessment by raising objections which were overruled by the AO. Eventually, a writ petition was filed by assessee challenging the notice u/s 147/148 as well as the notices issued u/s 142(1) & 143(2). The matter was observed by the Division Bench of this court in the light of judgment of earlier Division Bench in case of CIT vs. Usha Omar, wherein it was held that "the immunity provided to the bond holder of India Development Bond in US dollars, u/s 6 & 7 of the Remittance of Foreign Exchange and Investment in Foreign Exchange Bonds (Immunities and Exemptions) Act, which includes that no enquiry to be made from bond holder, regarding the source, is also available to gifts, which are found to be bogus gifts, routing the unaccounted money of the bond holder, through such bonds, by purchasing the bonds for consideration in India". However, finding the interpretation of the Act in the said judgment doubtful, the instant matter is referred for consideration before this Larger Bench.

Having heard the parties, the High Court held that,

++ the issue which has been raised in the instant case is that, according to the AO, the assessee had stated that he was not aware of the names and addresses of the persons from whom the gifts of foreign exchange bonds (FEBs) were claimed as having been received by him and by other members of his family. During assessment, the AO stated that the assessee had informed him that the bonds were received from certain Kirana traders of Kanpur who had gone to Dubai and Singapore and that one Sita Ram Makhija of Kanpur, who was residing in Dubai, had gifted the bonds to the assessee and to the members of his family. Since the documents pertaining to the bonds were seized during the course of the search, the attention of the assessee was drawn to the fact that the name of Sita Ram Makhija was not mentioned in any of the documents and that none of the bonds had been gifted by the said Sita Ram Makhija to the assessee as per the seized documents as the names of transferors, as mentioned in the transfer documents, were other than that of Sita Ram Makhija. According to the AO, the assessee stated that Sita Ram Makhija had arranged the gifts of the bonds to the assessee and his family members in consideration of the assistance which was rendered by the assessee to him at a certain point of time;

++ it is seen that the holder of India Development Bonds (IDBs) has been provided with the immunity u/s 6 & 7 of the Remittance of Foreign Exchange and Investment in Foreign Exchange Bonds (Immunities and Exemptions) Act, (RFEIFEB) which includes that no enquiry to be made from bond holder, regarding the source. Therefore, the issue that has arisen in the instant case is, whether such immunity is also available to gifts, which are found to be bogus gifts, routing the unaccounted money of the bond holder, through such bonds, by purchasing the bonds for consideration in India. The Division Bench of this court in CIT vs. Usha Omer, has expressed the view, that IDBs seized in the search operations were not valid gifts but this was a case of money laundering in which the person had arranged for the bonds and purchased them from his undisclosed income. The observation of the Division Bench that "the recipient of the India Development Bonds will not be expected to disclose the identity from whom the India Development Bonds were received by them under the Scheme" fails to notice the scheme of Section 6 and the ambit of the immunity which is conferred particularly by Section 6(1)(a). On the questions of law referred, this court is of the view that the immunity provided by the legislature must fulfill the requirements of Section 6(1). It is to be noted that u/s 6(1)(a), the immunity would extend only against the disclosure of the nature and source of the investment in the bonds. The immunity would be available to an Non-resident Indian (NRI) or Overseas corporate body (OCB) who or which owns the bonds on the one hand and, on the other hand, to a resident of India to whom a gift of such bonds have been made by an NRI or OCB. Where this requirement of Section 6(1)(a) is not fulfilled, the immunity will not be attracted;

++ consequently, the reference is answered by holding that the immunity which is provided u/s 6(1)(a) of the RFEIFEB Act, extends to a NRI or OCB who or which owns the Foreign Exchange Bonds and to a person resident in India to whom a gift of such bonds has been made by such an NRI or OCB. The immunity would not be applicable where the gift is found not to meet the requirements spelt out in section 6(1)(a). The immunity in clause (a) is against a disclosure of the nature and source of the investment in such bonds; clause (b) is against enquiry or investigation on the ground that such person owns such bonds and in clause (c) is against the reception in evidence of the fact that any of the persons mentioned in clause (a) owns such bonds, in any proceedings relating to an offence or the imposition of any penalty under the Acts in question. Therefore, the judgment of Division Bench of this court in Usha Omer's case requires to be read down so as to confer an immunity only on compliance with the conditions of Section 6 and to the extent legislated.

(See 2015-TIOL-456-HC-ALL-IT-LB)