Black Money Act - Retrospective Taxation and Constitutional Safeguards: A Landmark Judgment by the Karnataka High Court

Introduction

The High Court of Karnataka at Dharwad Bench delivered a significant judgment on June 7, 2024, in the case of Smt. Dhanashree Ravindra Pandit v. The Income Tax Department. This judgment addresses the legal complexities surrounding criminal petitions filed under Section 482 of the Criminal Procedure Code (Cr.P.C.) to quash proceedings under Section 50 of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (referred to as "the Act"). The core issue revolves around the retrospective application of tax laws and the constitutionality of applying the Act to events that occurred before its enactment.

Facts of the Case

1. Parties Involved: Petitioners: Smt. Dhanashree Ravindra Pandit and her family members, all businesspeople and directors of certain business establishments. Respondent: The Income Tax Department, represented by its Deputy Director of Income Tax (Investigation), Belagavi.
2. Background and Events Leading to the Case: During the financial year 2007-08, specifically on March 17, 2008, Gleaming Snow Worldwide Limited was incorporated as a British Virgin Islands (BVI) Company. On May 12, 2009, Oriental Success Universal Corporation was incorporated as a BVI Company. Subsequently, a bank account for Oriental Success Universal Corporation was opened in UBS, Singapore on June 12, 2009. The bank account had deposits of USD 16,000 on January 8, 2010, and USD 40,000 on March 16, 2010. This account was closed, and the Corporation was struck off by November 2, 2010.
3. Government Actions and Legal Proceedings: The Government of India enacted the Black Money Act on July 1, 2015, aimed at curbing the menace of black money and undisclosed foreign income and assets. Following the Act's enforcement, on March 14, 2018, the Government of India issued a notification appointing an officer in Panaji, Goa, as the Assessing Officer under the Act. On March 26, 2018, the Assessing Officer issued summons to the petitioners under Section 8 of the Act, marking the commencement of assessment proceedings. On April 9, 2018, one of the petitioners tendered an oral deposition before the Assessing Officer. Subsequently, on June 25, 2018, formal assessment proceedings were initiated for the financial year 2018-19 and assessment year 2019-20. Approximately six months later, the Income Tax Department issued two show cause notices on February 21, 2019, and March 14, 2019, asking the petitioners to explain why prosecution should not be initiated against them under Sections 50 and 52 of the Act.
4. Petitioners' Response and Arguments: The petitioners responded with interim replies on February 21, 2019, and additional replies on March 14, 2019, arguing that the companies in question had been closed and struck off the records by 2010, long before the Act came into force in 2016. They argued that they were merely directors, not shareholders, and hence could not be held liable for violations of a law that did not exist at the time of the alleged offenses. The petitioners emphasized Article 20 of the Indian Constitution, which prevents prosecution under retrospective laws. They contended that the proceedings lacked jurisdiction as the alleged violations occurred before the Act was enacted.
5. Income Tax Department's Stance: The Department maintained that Section 72(c) of the Act permits retrospective application, treating undisclosed assets acquired before the Act's enforcement as acquired in the year the notice was issued if not declared. They argued that the matter involves significant public interest and national security, necessitating the retrieval of undisclosed foreign assets, regardless of the acquisition date. The Department presented evidence from tax authorities in the British Virgin Islands and Singapore, indicating the petitioners' involvement with Oriental Success Universal Corporation and the associated bank account in UBS, Singapore.

Key Issues

1. Retrospective Application of the Act: Whether the provisions of the Black Money Act can be applied retrospectively to penalize actions that took place before its enactment.
2. Constitutional Validity: Whether the application of the Act to past events violates Article 20 of the Indian Constitution, which prohibits ex post facto laws that criminalize actions retrospectively.
3. Jurisdiction and Procedural Validity: Whether the proceedings initiated by the Income Tax Department were within the legal jurisdiction and procedural bounds stipulated by the Act and related laws.

Key Arguments

For the Petitioners:

1. Non-Retrospective Application: The petitioners argued that the Act, which came into force in 2016, cannot apply to their actions between 2007-2010. They cited Article 20 of the Constitution, emphasizing that individuals cannot be prosecuted under a law that was not in force at the time of the alleged offense.
2. Directorship and Ownership: The petitioners, who were directors but not shareholders, contended they should not be held liable for undisclosed foreign assets that the companies (now defunct) might have held.
3. No Financial Interest Post-2010: By 2010, all financial interests and assets in question had been dissolved or closed. Thus, there were no existing undisclosed foreign assets when the Act was enforced.

For the Respondents:

1. Section 72(c) of the Act: The respondents argued that Section 72(c) allows for the Act to apply retrospectively, treating assets acquired before the Act as deemed to be acquired in the year the notice was issued if not declared.
2. Public Interest and National Security: Emphasized the Act's intention to recover black money and protect national security, asserting that any undisclosed assets, regardless of when they were acquired, should be brought within the legal purview.
3. Legal Precedents: Cited various precedents that support the retrospective application of laws in specific contexts, especially where public interest is at stake.

Findings of the Court

Justice M. Nagaprasanna meticulously analyzed the legislative intent, constitutional provisions, and the specific facts of the case. The key findings include:

1. Retrospective Application and Article 20: The court reaffirmed the constitutional protection under Article 20 against retrospective criminal legislation. It held that the petitioners could not be prosecuted under the Act for actions that predated its enactment, as it would violate the fundamental rights guaranteed by the Constitution.
2. Interpretation of Section 72(c): While Section 72(c) allows for certain retrospective applications, the court concluded that it could not be stretched to include criminal liability for actions taken before the law existed. Legal fiction cannot override constitutional safeguards.
3. Procedural and Jurisdictional Compliance: The court found procedural lapses in the manner the Income Tax Department initiated proceedings. The notifications and notices issued did not fully comply with the procedural requirements under the Act, further weakening the prosecution's case.

Detailed Analysis of Relevant Provisions of the Black Money Act

The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, is a comprehensive legislation aimed at addressing the issue of black money and undisclosed foreign assets. The judgment refers to several key provisions of the Act to substantiate the court's decision:

1. Section 2: Definitions: Section 2(11): "Undisclosed asset located outside India" refers to any asset (including financial interest in any entity) located outside India, held by the assessee in his name or in respect of which he is a beneficial owner, without satisfactory explanation about the source of investment. Section 2(12): "Undisclosed foreign income and asset" encompasses the total amount of undisclosed income from a source located outside India and the value of an undisclosed asset located outside India.
2. Section 3: Charge of Tax: Section 3(1): Imposes a tax on every assessee for every assessment year commencing on or after April 1, 2016, at the rate of thirty percent of the total undisclosed foreign income and asset. Section 3(2): Defines the "value of an undisclosed asset" as the fair market value determined in a prescribed manner.
3. Section 10: Assessment: Section 10(1): Authorizes the Assessing Officer to serve notice on any person to produce accounts, documents, or evidence for assessment. Section 10(2): Allows the Assessing Officer to make necessary inquiries for obtaining full information about undisclosed foreign income and assets. Section 10(3): Mandates the Assessing Officer to assess or reassess the undisclosed foreign income and asset based on obtained evidence. Section 10(4): Provides for assessment to the best of judgment if the person fails to comply with the notice.
4. Chapter V: Offences and Prosecutions: Section 50: Punishes failure to furnish information about an asset located outside India in the return of income, with rigorous imprisonment ranging from six months to seven years and a fine. Section 51: Penalizes willful attempts to evade tax, with rigorous imprisonment ranging from three years to ten years and a fine. Section 52: Addresses false statements in verification, punishable with rigorous imprisonment ranging from six months to seven years and a fine.
5. Section 72: Removal of Doubts: Section 72(a): Clarifies that benefits, concessions, or immunities under the Act apply only to persons making declarations. Section 72(b): States that assets not declared and taxed under the Act will be charged to tax in the previous year in which the declaration is made. Section 72(c): Provides that if an asset acquired before the commencement of the Act is not declared, it will be deemed to have been acquired in the year the notice is issued by the Assessing Officer, thereby applying the Act retrospectively.

Relevant Judicial Decisions Referred by the Court

1. Kumaran v. State of Kerala (2017) 7 SCC 471: Context: The Supreme Court discussed the scope and limitations of legal fictions created by statutes. Relevance: The court emphasized that legal fictions should not be extended beyond their intended purpose. Justice M. Nagaprasanna applied this principle to Section 72(c) of the Black Money Act, concluding that criminal liability cannot be imposed retrospectively based on a deeming provision.
2. Rao Shiv Bahadur Singh v. State of Vindhya Pradesh (1953) 2 SCC 111: Context: This Constitution Bench judgment interpreted Article 20 of the Indian Constitution, which prohibits retrospective application of criminal laws. Relevance: The court held that individuals cannot be convicted for actions that were not offenses under the law at the time they were committed. This principle was crucial in deciding that the petitioners could not be prosecuted under the Black Money Act for actions predating its enactment.
3. Union of India v. Gautam Khaitan (2019) 10 SCC 108: Context: The Supreme Court examined the Black Money Act and its provisions for dealing with undisclosed foreign assets. Relevance: The judgment highlighted the stringent measures and punishments under the Act. However, it also noted the need for procedural compliance and adherence to constitutional safeguards. Justice M. Nagaprasanna referred to this case to emphasize that procedural lapses and constitutional violations could invalidate prosecutions under the Act.

Potential Impact

The judgment has significant implications for tax law enforcement and the broader legal landscape concerning retrospective legislation:

1. Clarification on Retrospective Criminal Liability: Reinforces the constitutional limitation on the retrospective application of criminal laws, ensuring that individuals are protected from ex post facto laws.
2. Tax Compliance and Enforcement: While the ruling limits the retrospective reach of the Black Money Act, it emphasizes the importance of procedural rigor in tax enforcement. Authorities must adhere to due process to sustain prosecutions.
3. Legislative and Policy Adjustments: The legislature may need to revisit and possibly amend provisions of the Black Money Act to ensure clarity and compliance with constitutional mandates, particularly concerning retrospective applications.
4. Public Awareness and Legal Strategy: Enhances public awareness about the limits of retrospective legislation and encourages legal practitioners to challenge similar provisions on constitutional grounds.

Conclusion

The Karnataka High Court's decision in the Dhanashree Ravindra Pandit case underscores the delicate balance between legislative intent and constitutional protections. By quashing the proceedings initiated under the Black Money Act for actions that predated its enactment, the court has set a precedent that safeguards individual rights against retrospective criminal liability. This judgment not only influences future tax enforcement actions but also reinforces the constitutional doctrine that laws must not operate to the detriment of individuals retroactively.

Disclaimer: The views expressed in this article are personal and do not represent the official stance of any organization. This content is for informational purposes only and is not intended as legal advice. Consult a professional for advice specific to your situation. The author is not liable for any errors or omissions.

Author

Sunil Maloo (JAIN) | [email protected]

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