MAY 01, 2015

By Pradip R Shah, CA

IN this part we shall examine two important terms viz. Undisclosed Asset Located Outside India (UFALOI) and Undisclosed Foreign Income and Asset (UFIA) in detail.

Basis of Charge

S. 3(1) levies tax on viz.

a) Tax on Undisclosed FI and Asset of the Previous Year; and

b) Tax on Undisclosed asset located outside India in the previous year in which such asset comes to the notice of the Assessing officer.

Cases covered under clause (a) are relating to non-disclosure for AY 2016-17 and onwards. There is no provision for levying tax under UFIA for AY 2015-16 and prior years.

Clause (b) covers the cases wherein existence of FA has come to the knowledge of AO. In such cases, tax will be levied for the Previous Year wherein the AO comes to know about it. In such cases, the Assessee might have become owner of the FA at any point of time in the past. There is no time limit laid down herein.

Types of Cases Covered

S. 3(1) covers following three types of cases:

a) ROR having FI derived from FA

In such cases, FI is derived from FA. Hence, tax is levied on FI and FA.

b) ROR deriving FI but not having any FA

Cases wherein there may not be any FA but FI is derived by the Assessee will be covered herein.

c) ROR not deriving any FI but having FA

Proviso to S. 3(1) covers the cases wherein no income is derived but there exist FA.

As can be seen, UFIA tries to levy tax on the current UFI and of the past years by levying tax on UFA.

What is Income for UFI?

As explained in the First part, the term"income" will be as defined under S. 2(24) of ITA. It is very wide definition and, therefore, while understanding implications of UFIA, one should keep this aspect in mind too. It includes certain transactions which in the source country may not be considered as income. However, when such transactions are tested with reference to provisions of S. 2(24) of ITA, tax liability may arise.

UFIA repeatedly refers to the term"undisclosed" in various contexts but it has not been defined under section 2 of UFIA. However, S. 4(1) makes provision for it under three different scenarios:

a) Non-disclosure in the RoI Filed

S. 4(1)(a) provides that any income derived from a source located outside India which has not been disclosed in the RoI furnished within the time specified in Explanation 2 to sub-section 139(1), 139(4) and 139(5), shall be treated as"undisclosed". These sections refer to various dates by which the RoI should be filed by the Assessee (i.e. filing of RoI by 31st July, 30th September, 30th November, Revised Return and before expiry of one year from the end of the relevant assessment year). It should be noted that requirement herein is very specific i.e. disclosure in ITR and in the format as provided therein. Mere writing a letter to AO will not serve the purpose. In fact, any attempt to do so may create more problems.

b)   Non-filing of RoI

Clause 4(1)(b) refers to the case wherein source of FI is located outside India and no RoI has been filed. If the FI derived by an Assessee is subject to tax under ITA and no RoI as required u/s 139 has been filed, it will be treated as"undisclosed". In such cases also, FI will be subject to tax under UFIA.

c)   Non-disclosure of FA

Clause 4(1)(c) refers to an asset located outside India which has not been disclosed. Here, the period of holding of such an asset is not important. FA held even for a day will require disclosure under ITA otherwise it may be treated as undisclosed under UFIA.

Computation of Tax on UFI

Section 3(1) of the Bill provides to levy tax on"total undisclosed foreign income and asset of the previous year at the rate of thirty percent of such undisclosed income and asset". Its main features are as under:

Since the law is going to be applicable w.e.f. Ass. Yr. 2016-17 it will cover all the cases wherein Foreign Income (FI) from Foreign Sources (FS) during the period from 1 st April, 2015 to 31 st March, 2016 has not been disclosed in Income Tax Return filed for the said year. As the Previous Year 2015-16 has already commenced, all those who derive any income from FS will have to disclose the same in Income Tax Return (ITR) to be filed in July, 2016. If not done so, provision of S. 3(1) will get invoked with applicable consequences.

In the same manner any FA held on 1 st April, 2015 and onwards will be subject to tax under UFIA. S. 3(1) while levying charge refers to"asset of the previous year". Therefore, UFA if held for even one day will become subject to tax under UFIA. Considering the fact that the FY 2015-16 having already commenced, it will not be possible to avoid provisions of UFIA by relinquishing FA or any interest therein.

Should One disclose FI for AY 2015-16 i.e. FY 2014-15?

Although it is provided that UFIA is applicable for the FY commencing from 1-4-2015, question that may arise is whether it will be advisable to disclose such income for FY 2014-15 (AY 2015-16). Whether disclosure of FI in ITR for AY 2015-16 which is falling due in July, 2015 can help? This will have following consequences:

a) Payment of tax at higher rate as compared to tax paid otherwise

b) Shortfall in payment of advance tax leading to payment of interest u/s 234B and C

c) Disclosure of FS of income which may lead to reopening of past assessment. In this case, one can make use of opportunity which is proposed to be provided under UFIA.

Consequences of Disclosure of FI in ITR for AY 2015-16

Any disclosure of FI in ITR for AY 2015-16 will serve limited purpose as tax compliance will be with respect to FI only. However, disclosure of it in ITR will provide source of FA to the AO. S. 10 of UFIA empowers the AO to issue notice on receipt of information about FI or FA from any Income Tax Authorities or any other authority under any law.

One will have to wait and see the how proposed scheme for tax compliance for undisclosed FI and FA as provided under section 59 provides for such cases.

Whether all of the FI will be taxable @ 30%?

If the FI is disclosed in the RoI for AY 2015-16, tax will be applicable at the Scheduled rate which may be less than 30%. Assessee may also be entitled for relief under Double Tax Avoidance Agreement (DTAA) or any exemption under ITA depending upon the facts of each case.

Disclosure made in AY 2015-16 and earlier years but not in AY 2016-17?

What will happen if disclosure of FI and / or FA might have been made in AY 2015-16 or earlier years but not in AY 2016-17 or any other year thereafter? It should be noted that requirement is with reference to disclosure made in RoI filed for each year. Therefore, any non-disclosure in RoI for AY 2016-17 or thereafter will make it undisclosed FI and / or FA. This is despite the fact that IT Department being fully aware about FI and FA of the assessee. Therefore, all the ROR having FA and / or FI will have to be most careful in filing of RoI. At times, such ROR do not file RoI as taxable income in India is less than threshold limit. However, under UFIA, ROR having FI and / or FA will have to file RoI without fail and disclose FI and FA.

What will happen if disclosure is made for FI but not for FA in ITR for AY 2016-17?

In that case, tax will have to be paid on FI as per the provisions of ITA. However, disclosure of it will provide the AO source of FA which was not disclosed in the past. Since no disclosure has been made for FA, provisions of S. 3(1) of UFIA will get invoked leading to all the consequences.

It should also be noted that the AO may invoke provisions of S. 149(1)(c) of ITA and re-open the case. In the case of income in relation to any asset located outside India, as per the said section, the AO can issue notice for 16 years.

Non-disclosure in ITR for AY 2016-17

Tax on Undisclosed Foreign Asset

FI can be from FA and sources other than FA i.e. to say pension, consultancy fees etc. If FI has not been disclosed it might have become FA either in the form of bank balance or receivable from someone. Since it gets converted into an asset, question of levying tax on asset will arise. Keeping this aspect in mind, Proviso to S. 3(1) provides 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." Thus, levy of tax on the asset will automatically lead to levy of tax on income not disclosed in the past.

As can be seen, it is not necessary to relate back such an asset to the year in which income had become an asset. It will become taxable in the year in which it has come to knowledge of the AO. Thus, the Assessee will not get an opportunity of splitting the income over a different period of time and reducing the tax liability.

A problem may arise in the case of FA which was capital receipt when it was received in the past and not taxable. In such cases, no benefit will be available and tax will have to be paid on its value.

Another problem which will be encountered in non-disclosure of FI in AY 2015-16 and / or 2016-17 will be that under UFIA benefit of the provisions of DTAA cannot be availed. This is for the reason that there is no provision for relief for double taxation under UFIA as provided under section 90 and 91 of ITA. Therefore, if it is possible to avail any benefit under DTAA, it will be advisable to disclose the FI in RoI for AY 2015-16 and thereafter.

In the case of FA, on which amount tax is to be paid?

Proviso to S. 3(1) specifically makes it clear that tax is required to be paid on the value of UFA. Here, value refers to"market value" and not the cost of acquiring such FA. Rules are proposed to be provided for computation of market value of the FA.

Value of an Undisclosed Asset

It may so happen that the Assessee may not be having any income from FA. In such case, the provisions of S. 4(1)(a) and (b) as explained above will not be applicable. In order to take care of such cases, Clause 4(1)(c) provides that value of such FA will be considered as"undisclosed". Generally, RoI contains details of income from various sources wherein specific details regarding various assets held are not provided. However, looking to provision in this respect, format of ITR for AY 2015-16 and thereafter may get changed and the Assessee may be required to provide details of assets extensively.

Will there be double taxation i.e. under ITA and UFIA?

While assessing income under ITA, a situation may arise wherein disallowances / additions may be made in computing income from business, capital gain or transfer pricing etc. from a source outside India. Applicability of provisions of UFIA herein may lead to double taxation. In order to avoid the same, it is provided in clause 4(2) that any disallowances / additions made under the provisions of S. 29 to 43C, 57 to 59 and 92C of ITA shall not be included in the income computed under UFIA.

In the same manner, S. 4(3) provides that FI and /or FA included under UFIA will not form part of total income under ITA.

In view of this, the question of double taxation of the same income will not arise. As can be seen, ITA and UFIA have been made complementary to each other.

How to compute FI?

S. 5(1) provides that FI and FA will be computed without permitting any deduction in respect of any (a) expenditure (b) allowance or (c) set-off of any loss. However, deduction shall be permitted in respect of income which has been assessed under ITA and FA has been acquired out of it. But it will be subject to satisfaction of AO and producing necessary documentary evidences.

It should be noted that computation of tax on FI and FA under UFIA is independent of provisions of ITA and, therefore, no relief, deductions, exemptions which may be otherwise available under ITA will be permitted. Thus, the cost of non-disclosure will be too high.

In the next part we shall examine provisions relating to penalties leviable and prosecution under UFIA.

Also See : Black Money Bill - Black is Beautiful but becoming Painful - Part I