Income Tax Judiciary No Black Money Liability When Assets Belong to Foreign Partner: ITAT Delhi

Income Tax- No Black Money Liability When Assets Belong to Foreign Partner: ITAT Delhi .....

ACIT Vs Deepak Jain (ITAT Delhi) ITAT Deletes ₹31.48 Crore Black Money Addition for Lack of Beneficial Ownership; No Black Money Liability When Assets Belong to Foreign Partner: ITAT Delhi; ITAT Delhi Quashes Black Money Additions Based on Nominee Shareholding; Penalties Under Black Money Act Unsustainable When Asset Ceased Before 2012–13; Tribunal Holds No Jurisdiction to Tax Non-Existent Foreign Assets Under BMA; Revenue Cannot Switch from Income Tax Act to BMA: ITAT Delhi Applies Doctrine of Election; ITAT Delhi Rules BMA Inapplicable to Defunct Foreign Companies and Accounts Closed Before 2015 The case involved cross-appeals filed by both the Revenue and the assessee under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (BMA) for Assessment Year 2018–19. The Assessing Officer (AO) had determined undisclosed foreign income and assets of ₹31.48 crore under Section 10(3) of the BMA, treating the assessee as the beneficial owner of two foreign companies—Alabama Assets Ltd. and Meadow Offshore Ltd., incorporated in the British Virgin Islands—and levied penalties under Sections 41 and 43. The Revenue appealed against the Commissioner of Income Tax (Appeals) [CIT(A)]’s order that reduced the addition to ₹3.14 lakh and deleted penalties, contending that the CIT(A) wrongly restricted the addition to the assessee’s nominal 1/1000 shareholding despite the AO’s finding that he was the beneficial owner of the companies’ entire bank deposits. The assessee appealed against the partial sustenance of addition and penalty, contending that the BMA could not apply retrospectively to companies and accounts that had ceased to exist years before the law came into force on 1 July 2015. The assessee maintained that both companies were struck off in 2010–2011, their bank accounts closed by 2010, and that all funds were invested by a UAE national, Mr. Alhammadi, under a joint venture for lighting projects in the Middle East. He claimed to have held only one share in each company as a nominee shareholder, with no capital contribution, control, or income. The AO, however, concluded that Alhammadi was merely a façade to conceal true ownership and made additions of the entire credits in the companies’ bank accounts, amounting to ₹31.48 crore, applying Rule 3 of the BMA Valuation Rules. Before the CIT(A), the assessee challenged the jurisdiction of the AO under Section 10(1) of the BMA, arguing that the information received from the International Consortium of Investigative Journalists (ICIJ) had already been investigated under the Income Tax Act (IT Act) since 2013, and that proceedings under the BMA were impermissible once action had been initiated under another statute. He also contended that the assessment was time-barred and violated natural justice. The CIT(A) upheld the jurisdictional validity but accepted the assessee’s contention that his ownership was only nominal. The CIT(A) restricted the addition to ₹3,14,855, representing 1/1000th of the total credits, and proportionately reduced the penalty under Section 41. The penalty under Section 43 was deleted, as the requirement to disclose foreign assets in return forms arose only from Assessment Year 2012–13, whereas the foreign entities and their accounts had ceased to exist prior to that period. During the proceedings, the AO had relied on information received under the Foreign Tax and Tax Research (FT&TR) Division of CBDT, which showed that the companies’ records were maintained in Singapore and were set up for investment purposes, not for lighting business. The AO further observed that the assessee failed to produce the Memorandum of Understanding (MOU) and its termination documents, despite being directed to do so. The assessee, however, relied on contemporaneous evidence and the affidavit of Mr. Alhammadi, notarized in the UAE, confirming that he had funded both companies entirely, that the assessee held one share merely as a nominee, and that after termination of the MOU in 2010, all assets and bank balances remained with him. The ITAT Delhi noted that these facts were supported by contemporaneous records, including incorporation documents, balance sheets, and the affidavit of Alhammadi found during a 2017 search. The Tribunal observed that the assessee had consistently stated, since the initial investigation in 2013, that he had not made any investment in the foreign companies and that the bank accounts were closed years before the BMA came into force. On examining the evidence, the ITAT held that the credits in the bank accounts of the foreign entities could not be treated as undisclosed foreign income or assets of the assessee, as the companies were distinct legal entities and the funds belonged to Alhammadi. The affidavit, balance sheets, and correspondence found during search had evidentiary value under Sections 132(4A) and 292C of the IT Act, creating a presumption of truth that was not rebutted by the Revenue. Importantly, the ITAT held that the BMA cannot be applied to foreign companies or bank accounts that had ceased to exist before 1 July 2015, the date on which the Act came into force. Further, once the Revenue had initiated and pursued proceedings under the Income Tax Act, it could not later invoke the BMA for the same facts under the doctrine of election. The Tribunal concluded that the entire addition under Section 10(3) of the BMA was unsustainable and directed its deletion. Consequently, penalties under Sections 41 and 43 were also set aside. In conclusion, the ITAT partly allowed the assessee’s appeals and dismissed all three appeals of the Revenue. The Tribunal held that the assessee could not be treated as the beneficial owner of the foreign bank deposits, as his role was only that of a nominee shareholder, and that the BMA had no retrospective application to assets or companies that no longer existed prior to its commencement. FULL TEXT OF THE ORDER OF ITAT DELHI These appeals are filed by the Revenue and Assessee against orders of the Ld. CIT(Appeals) in restricting the addition made by the Assessing Officer u/s 10(3) of Black Money (undisclosed and foreign income and assets) and Imposition of Tax Act, 2015 (BMA) and partly deleting the penalty levied u/s 41/43 of BMA, by the Revenue and the assessee challenged the order of the Ld. CIT(Appeals) in partly sustaining the addition and penalty under BMA. BMA No.01/D/2025, AY 2018-19 (Revenue Appeal): Revenue in its above appeal raised the following effective grounds: 1. “Whether on the facts and circumstances of the case and in law, Ld. CIT(A) is correct in deleting the addition of Rs.31,45,40,437/-by stating that the addition should be restricted to proportionate amount of beneficial shareholding held by the assessee in both foreign companies, which is 1 by 1000 shares, and ignoring the finding of the AO that the entry of Sh. Alhammadi, U.A.E. is nothing but to cover up of whole investment of the assessee and the assessee is the beneficial owner of the deposits as appearing in the foreign bank accounts of the above stated entities. Accordingly, the entities and their bank accounts were solely operated by the assessee during the relevant period. 2. Whether on the facts and circumstances of the case and in law. Ld. CIT(A) is correct in deleting the addition of Rs.31,45,40,437/- as the assessee had not declared the foreign assets even after the opportunity provided by the Govt. of India before the promulgation of Black Money(Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015. 3. That the order of the CIT (A) is perverse, erroneous and is not tenable on facts and in law.” BMA No.02/D/2025, AY 2018-19 (Revenue Appeal): Revenue in its above appeal raised the following effective grounds: 1. “Whether on the facts and circumstances of the case and in law, Ld. CIT(A) is correct in deleting the addition of Rs.31,45,40,437/- and thereby cancelling the penalty u/s 43 of the BMA by stating that the penalty is not applicable as the aggregate balance in one or more bank accounts does not exceed Rs.5,00,000/- at any time during the previous year, and ignoring the finding of the AO that the entry of Sh. Alhammadi, UAE is nothing but to cover up of whole investment of the assessee and the assessee is the beneficial owner of the deposits as appearing in the foreign bank accounts of the above stated entities. Accordingly, the entities and their bank accounts were solely operated by the assessee during the relevant period. 2. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is correct in deleting the addition of Rs.31,45,40,437/- and thereby cancelling the penalty u/s 43 of the BMA by stating that the penalty as the assessee had not declared the foreign assets even after the opportunity provided by the Govt. of India before the promulgation of Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015. 3. That the order of the CIT(A) is perverse, erroneous and is not tenable on facts and in law.” BMA No.03/D/2025, AY 2018-19 (Revenue Appeal): Revenue in its above appeal raised the following effective grounds: 1. “Whether on the facts and circumstances of the case and in law, Ld. CIT(A) is correct in deleting the addition of Rs.31,45,40,437/- and thereby limiting the penalty u/s 41 of the BMA to 3 times of tax of Rs.3,14,855/- by stating that the addition should be restricted to proportionate amount of beneficial shareholding held by the assessee in both foreign companies, which is 1 by 1000 shares, and ignoring the finding of the AO that the entry of Sh. Alhammadi, UAE is nothing but to cover up of whole investment of the assessee and the assessee is the beneficial owner of the deposits as appearing in the foreign bank accounts of the above stated entities. Accordingly, the entities and their bank accounts were solely operated by the assessee during the relevant period. 2. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is correct in deleting the addition of Rs.31,45,40,437/- and thereby limiting the penalty u/s 41 of the BMA to 3 times of tax of Rs.3,14,855/- as the assessee had not declared the foreign assets even after the opportunity provided by the Govt. of India before the promulgation of Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015. 3. That the order of the CIT(A) is perverse, erroneous and is not tenable on facts and in law.” BMA No.06/D/2024, AY 2018-19 (Assessee Appeal): Assesseein its appealraised the following grounds: 1. “That the Ld. CIT(A) erred in facts and in law in not appreciating that the foreign entities in question were struck off in the year 2010 and 2011 as also the bank accounts in relation to the said entities being closed in the year 2009 and 2010, the provisions of the Black Money Act, being applicable from AY 2016-17 and onwards, the same cannot be applied retrospectively to assets having ceased to exist prior to the promulgation of the Act. 2. The Ld. CIT(A) erred in law and on facts in not recognizing that the AO assumed jurisdiction under Section 10(1) of the Black Money Act without satisfying the mandatory jurisdictional condition of “receipt of information” as prescribed under Section 10 of the Act. 3. The Ld. CIT(A) erred in law and on facts in not appreciating that when proceedings were initiated under IT Act, proceedings under BMA are prohibited in as much as since the appellant, in facts of the present case, was under investigation with tax authorities since 2013 and consequently was debarred from making declaration (one-time voluntary compliance) under section 59 of the BMA; proceedings, if any could have been initiated under the IT Act and not BMA. 4. Without Prejudice, even assuming that the tax authorities were in possession of valid information for the assumption of jurisdiction, the Ld. CIT(A) erred in law and on facts in not appreciating that the alleged information having come to the knowledge of the tax authorities in 2013, initiation of present proceedings after inordinate delay of 3.5 years from the promulgation of the Act on 01.07.2015, renders the present proceedings barred by limitation. 5. The Ld. CIT(A) erred in law and on facts in not appreciating that the undisclosed income sought to be brought to tax admittedly pertains year prior to the AY 2018-19, in relation to which the present proceedings are initiated, the Respondent is bringing the said undisclosed foreign income to tax in incorrect assessment year, warranting quashing of the proceedings. 6. The Ld. CIT(A) erred in law and on facts by not appreciating that critical information and documents essential for completing the assessment were not provided to the petitioner. Without prejudice to the fact that non-availability of said documents demonstrates that the AO lacked a valid basis to assume jurisdiction under Section 10(1) of the Black Money Act; even if such documents existed, their concealment violates natural justice, rendering the proceedings null and void. On Merits 7. That the Ld. CIT(A) erred in law and on facts in confirming the addition of undisclosed asset to the extent of Rs.3,14,855/- and not deleting the entire addition made by the AO holding that the “appellant was not able to conclusively establish the source of investment for acquiring that I share”. 8. The Ld. CIT(A) erred in law and on facts in not appreciating that the finding that “the appellant was not able to conclusively establish the source of investment for acquiring that I share” is contrary to his own findings that “that the statements recorded prior to the date of search under section 131 of the Act by the Investigation Wing as well as during the course of search u/s 132(4) of the Act, categorically established the version of the appellant that the aforesaid foreign companies were incorporated and owned by Mr. Alhammadi.” 9. The Ld. CIT(A) erred in law and on facts in not appreciating that the finding that “the appellant was not able to conclusively establish the source of investment for acquiring that I share” is also contrary to his own findings that “the appellant being a meagre shareholder, had no control or link with the source of investment in the foreign companies or utilization of fund, to be called beneficiary thereof.” 10. The Ld. CIT(A) erred in law and on facts in not appreciating that the finding that “the appellant was not able to conclusively establish the source of investment for acquiring that I share” is contrary to the facts on record which show that assets held by the companies were specifically earmarked as belonging to Mr. Alhammadi and at the time of closure of bank accounts funds were transferred / utilized at behest of Mr. Alhammadi without any benefit accruing to the appellant. 11. That Ld. CIT(A) erred in law and on facts in holding that the appellant was not able to conclusively establish the source of investment for acquiring that I share” withoutappreciating that in the facts of the case, it is well established thati) the appellant did not provide any consideration/investment into the company, ii) the appellant was only a nominal and negligible shareholder in the company, iii) the appellant was never in position to avail any benefit from the company, and iv) in the entire life cycle of the company, the appellant did not benefit from the aforesaid BVI entities, which is also not disputed the Ld CIT(A). 12. Each of the above grounds is independent and without prejudice to one another. The appellant craves leave to add, alter, amend or withdraw any ground or grounds of appeal at any time before or during the course of hearing of the appeal.” BMA No.07/D/2024, AY 2018-19 (Assessee Appeal): Assessee in its appeal raised the following grounds: 1. “That the Ld. CIT(A) erred in facts and in law in not appreciating that the order u/s 10 of the Black Money Law is bad in law in account of various jurisdictional infirmities raised by the Appellant during the course of the proceedings before Ld. AO and Ld. CIT(A), thus the proceedings u/s 41 being consequential is also bad in law. 2. That the Ld. CIT(A) erred in facts and in law in not appreciating that while Assessment u/s 10 was done by the ADIT, Faridabad and the penalty notices dated 23.03.2021 were also issued by the same officer, however, the notice dated 26.03.2021 and subsequent proceedings including the order u/s 41 of the Act are passed by ACIT, Central Range-7, Delhi, without notice of change in jurisdiction. 3. That the Ld. CIT(A) erred in law and on facts in confirming the addition of undisclosed asset to the extent of Rs.3,14,855/- and not deleting the entire addition made by the AO holding that the “appellant was not able to conclusively establish the source of investment for acquiring that I share”. 4. The Ld. CIT(A) erred in law and on facts in not appreciating that the finding of the CIT(A) in the order dated 18.10.2021, passed adjudicating the quantum appeal that “the appellant was not able to conclusively establish the source of investment for acquiring that I share” is contrary to the facts on record as also the own finding of the CIT(A), thus the proceedings u/s 41 being consequential is also based on erroneous finding of fact. 5. The Ld. CIT(A) erred in law and on facts in not appreciating that use of the word “may” in Section 41 clearly indicates that the imposition of such a penalty is not mandatory. The Assessing Officer would need to independent apply mind as to the addition made in the quantum order, justifying the imposition of penalty. 6. The Ld. CIT(A) erred in law and on facts in not appreciating that the underlying addition in the quantum order u/s 10(3) as also the addition sustained by the Ld.CIT(A), being based on mere estimation, penalty cannot be mechanically initiated and/or imposed.” 2. Brief facts are that the aforesaid appeals have been filed in connection with assessment order dated 01.08.2019 passed under section 10(3) of the Black Money (Undisclosed and Foreign Income and Assets) and Imposition of Tax Act, 2015 (hereinafter referred to as “the BMA”) assessing undisclosed foreign income/assets of the assessee at Rs.31,48,55,300/- and imposing penalties on that basis vide order dated 22.10.2024 and 23.10.2024 passed under section 41 and 43 of the BMA, respectively. 3. The facts containing list of dates and various events pertaining to these appeals are tabulated as under:- Date Particulars Page No. 2005 Memorandum of Understanding between the Assessee and Mr. Alhammadi, resident of UAE, for undertaking business of Lighting Solutions for Automobiles and Infrastructure in UAE and South East Asia. 15 05.07.2005 M/s Alabama Assets Ltd was incorporated, M/s Articorp Ltd. was appointedas nominee director on behalf of Mr. Alhammadi and the assessee. 90 29.08.2005 M/s Articorp Ltd resigned on 29.08.2005 and Execorp Ltd was appointed in its place. 29.08.2005 M/s Sharecorp was allotted 1 share of face value 1 USD as nominee share holder on behalf of the assessee 90 September, 2005 A sum of USD 200,000/- was remitted by the Alhammadi in the bank account of M/s Alabama Assets Ltd. as share capital. 19 30.09.2005 Mr. Alhammadi was sole appointed as Director of Alabama Assets Ltd. on the said date 999 shares of Alabama Assets Ltd. were allotted to Mr. Alhammadi. 90 18.08.2008 M/s Meadow Offshore Ltd. was incorporated. The bank account of the company was opened thereafter and the money in such bank account was infused by M/s Alabama Assets Ltd. as share capital Mr. Deepak Jain