ITAT decision in the case of Renu T. Tharani (ITA No. 2333/Mum/2018) : An analysis

This is an interesting decision arising out of the list of HSBC accounts leaked by an ex-employee of the Bank to the French authorities. This decision is interesting as much for the detailed information it contains about the whistle-blower and the sequence of events as also for some omissions of consideration of some factual and legal issues, and finally for the fair declaration by the author of decision not to treat this as a precedent but to examine each HSBC account case on its own merits. The ITAT limited the discussion to two issues; (i) validity of reopening the assessment, and (ii) validity of addition of Rs. 196.46 crores appearing as peak balance in an investment account with HSBC as income of the assessee for AY 2006-07. Let’s look at a capsule of the facts.

Facts:

·      Assessment year: 2006-07 (Previous Year 2005-06)

·      Assessee shifted permanently to US on 23rd March 2004.

·      HSBC account was opened on 28th July 2004 by a Company owned by a Trust of which assessee was a discretionary beneficiary.

·      Assessee had a miniscule income and some assets in India.

·      In the original tax return for AY 2006-07 the assessee was shown as “Resident”.

·      Notice for reopening assessment was issued in October 2014.

·      Later, during reassessment, assessee led evidence to prove she was a non-resident.

·      Reassessment was completed treating the assessee as non-resident.

·      Assessee refused to sign a ‘Consent Form’ to enable the government to seek detailed information from HSBC about the account in question.

·      Assessee obtained letters from HSBC that clearly stated that the assessee was only a discretionary beneficiary of a Trust that owned the Company which owned the account, and that the assessee was not a signatory to the account.

·      The Bank also confirmed that the said account was subsequently closed, and no funds were distributed to the assessee.

·      The sum of Rs. 196.46 crores (USD 3,97,38,112) did not represent money in an account but peak value of investments.

The order does not reveal if at all there was any inquiry into the assessee’s business activities and sources of income in India which could yield such large income, or into her family members in India or outside India and the nature and extent of their income earning apparatus. It also appears that the assessee has not volunteered any such information.

Legal Issues:

Based on the above facts, the following legal issues which were raised and considered at different stages were:

·      Residential status of assessee.

·      Validity of reassessment on the basis of information about HSBC account, especially when the income, if any, could be not assessed in the hands of a non-resident.

·      In the absence of any distribution by the Trust, can the assessee (a discretionary beneficiary) be assessed for any income (including deemed income) being investments owned by the Trust?

·      Was the investment held in HSBC by the Company owned by a Trust really “money at the disposal of the assessee”?

·      Was not the decision of the Supreme Court in CWT Rajkot vs. HMM Vikramsinhji of Gonda: (2014) 45 taxmann.com 552 (SC) applicable in this case?

Apart from the above issues, to my mind, it appears that the following pertinent legal issues were not raised/discussed:

·      Which provision of the Income-tax Act was applied for the addition? Section 68 or 69 or any other? The order does not reveal this.

·      Was there no challenge to the issue of limitation on the notice for reopening the assessment? The extended period of limitation applies only when the income relating to any asset located outside India, chargeable to tax, escapes assessment.

·      If the whistle-blower’s disclosure and the ‘base note’ is acceptable as evidence, why would not a signed letter from the Bank stating that the assessee was never a signatory to the account and that on closure, no asset or income was distributed to her, be equally acceptable?

Decision of the ITAT:

After elaborate discussion on the issues raised, the decisions of the Hon’ble ITAT and my observations on the same are as under:

·      The reopening was held to be valid.

-         In my submission, the Hon’ble ITAT wrongly noted at para 10 of the order that the assessee had permanently shifted to US only seven days before the beginning of the relevant previous year, and that she could not have earned nearly Rs. 200 crores in that short period. This finding is flawed because the assessee shifted to US on 23rd March 2004, i.e., more than a year before beginning of the previous year, 2005-06. Whether or not she earned any income is an entirely different issue, unconnected to her residential status.

-         Hon’ble ITAT also refer to the amount mentioned in the Base Note as ‘money at her disposal’ whereas the evidence suggests that the money was never at her disposal. Even though the assessee was not forthcoming about the Trust and its details, and the revenue didn’t seem to have made any inquiry in that regard, the limited evidence appears to have been selectively applied to create doubt against the assessee and that doubt was used to confirm actions of the lower authorities.

·      The addition was confirmed.

·      The issue that would make all the difference to the addition on merits was the residential status of the assessee. The assessee has at all stages led enough evidence to establish that she was a non-resident in the relevant previous year, and that status appears to have been accepted in the reassessment order itself (and not disputed by the department at any other stage)

·      The Hon’ble ITAT did not provide a ruling on that issue at all. In their order, the ITAT referred to the decision of CIT(A) as discussed and reproduced in para 18 of their order, and left the issue undecided saying the assessee did not challenge that part of the CIT(A) order on any infirmities. But, in the relevant part of the CIT(A) order, there is no adjudication on whether the amount mentioned in the Base Note could at all be assessed in the hands of a non-resident. The discussion and decision, instead, was on certain double additions and the CIT(A) had directed the AO to ensure there would not remain any double addition.

·      The ITAT also distinguished the Supreme Court decision in CWT vs. HMM Vikramsinhji of Gonda (supra) on the specious ground that in the case before the Supreme Court there was a Discretionary Trust, but in this case there was no evidence regarding a trust and its actual contents. While a ‘base note’ forms the sole foundation of a case, ignoring all other evidence as mentioned in that note and subsequent official letters from the Bank does appear untenable.

·      Thus, in my humble submission, this decision of the Hon’ble ITAT is open to successful challenge on several grounds. As a guidance to assessees facing similar issues, I daresay this decision reaffirms the need to establish one’s own case on robust foundation of facts. Relying entirely on technicalities alone, without offering a good factual foundation, encourages an assessing officer to make an addition on suspicion, and the appellate authorities to confirm the assessment on conjectures and surmises alone. This damages the assessee’s case and sets a bad precedent.