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Karnataka High Court quashes prosecution proceedings initiated under Black Money Act for alleged offences committed prior to enactment of the law

The Black Money (Undisclosed Foreign Income and Assets) Imposition of Tax Act, 2015 (‘the BMA’) was enacted on 1st July 2015. The BMA seeks to deal with the issue of evasion of taxes in India by Indian tax residents having undisclosed foreign assets and income. The BMA not only levies tax, penalties and interest on such undisclosed foreign assets and income, but also provides for prosecution in specific circumstances.

Given the special nature and object of the BMA, there are certain deeming provisions therein to enable the Indian government to initiate proceedings under the BMA and recover taxes. Essentially, the proceedings can be initiated under the BMA in the year such undisclosed foreign assets come to the notice of the tax officer, irrespective of when they were actually acquired.

In particular, section 72(c) of the BMA provides that where any asset has been acquired or made prior to commencement of this Act, and no voluntary declaration in respect of such asset is made, such asset shall be deemed to have been acquired or made in the year in which a notice under Section 10 is issued by the tax officer, and the provisions of BMA shall apply accordingly. However, recently the Karnataka High Court in the case of Dhanashree Ravindra Pandit[1] has held that criminal prosecution initiated for acts done prior to the enactment of BMA are not valid under Article 20 of the Indian Constitution.

For ease of reference, Article 20(1) of the Constitution of India, dealing with “Protection in respect of conviction for offences”, states as under:

“No person shall be convicted of any offence except for violation of a law in force at the time of the commission of the act charged as an offence, nor be subjected to a penalty greater than that which might have been inflicted under the law in force at the time of the commission of the offence.”

The Karnataka High Court was dealing with a batch of cases involving the members of the same family. In essence, the facts of the cases were as under:

  • Companies were incorporated in the years 2008 and 2009 in British Virgin Islands (‘BVI’) where the members of the family were directors.
  • One of these companies opened a bank account in Singapore in 2009 wherein certain foreign currency receipts were recorded in 2010.
  • Thereafter, these companies were struck-off in BVI and the bank account in Singapore was closed in 2010.
  • The know-your-customer (‘KYC’) documents submitted at the time of opening the document identified the respective members as directors of these companies.
  • Basis the above-information received by the Indian tax authorities in 2018, proceedings under BMA were initiated in 2018 which culminated into initiation of prosecution proceedings against these individuals.
  • The individuals filed petitions before the Karnataka High Court against initiation of prosecution proceedings under BMA.

The petitioners argued that the proceedings were initiated in case of foreign companies which were incorporated and struck off almost 5 years before the BMA was enacted. Further, the petitioners were only directors in these companies and not shareholders. Hence, the proceedings were invalid under Article 20 of the Constitution of India i.e. a person can be proceeded against only for any violation of law at the time of commission of offence and not any law that would come in future. Since the petitioners had not violated the applicable income-tax law when the alleged offences were committed, the prosecution proceedings were liable to be quashed.

On the other hand, the tax authorities argued that section 72(c) of the BMA is retrospective in operation and hence, the petitions be dismissed and proceedings against the petitioners be continued.

The Karnataka High Court analysed the facts of the case and the provisions of the BMA in detail and after relying on various judgments dealing with BMA and Article 20 of the Constitution of India, held that the prosecution initiated against the petitioners did not and cannot pass constitutional muster under Article 20 of the Constitution of India. The observations of the Karnataka High Court are reproduced below:

“Non-disclosure of an assessment of the tax return for the year 2007-08 or 2009-10 cannot be used to criminally prosecute these petitioners, for an act that has come into force in the year 2015. The law, as on the date alleged, was not the law of such disclosure of assessment. Therefore, the criminal law cannot be set into motion against the petitioners in the aforesaid facts of the case, as it cannot pass muster of Article 20 of the Constitution of India. A caveat, this Court is considering the criminal liability fastened upon the petitioners by the prosecution including under Section 72(c) of the Act and the consideration has led to an unmistakable conclusion that it falls foul of Article 20 of the Constitution of India. The Special enactment is a statute. Article 20 comes under Chapter III of the Constitution of India, a fundamental right. Constitution of India is not a statute. It is the fountain head of all statutes including the special statute. Therefore, the rigour of any provision of the Act should pass muster of Article 20 of the Constitution of India and it fails to pass such muster in the case at hand and the failure leads to obliteration of the crime against the petitioners.”

Our comments

The constitutionality of the BMA and its deeming provisions has been a subject matter of debate and litigation in certain cases. The above-mentioned judgment of the Karnataka High Court, in the context of prosecution proceedings, has held that section 72(c) of the BMA cannot be applied for acts done prior to the enactment of the BMA. The fact that the alleged assets did not exist in the year when the information came to the notice of the tax authorities also seems to have played a role in the judgment of the Karnataka High Court. Given that article 20 of the Constitution of India covers both conviction and penalties, whether this judgment can be relied upon to contest any penalties levied under BMA, especially for offences committed prior to enactment of BMA, requires further consideration. Nevertheless, while section 72(c) has not been struck-down per se, it is likely that the tax authorities will appeal against this judgment before the Supreme Court of India given its significance across similar cases.

 

The views expressed in this article are personal and those of the authors and is not intended as a solicitation or an advertisement of the firm’s services or any invitation or inducement of any sort. The content provided is for informational purposes only and should not be construed as professional advice. Readers are encouraged to seek professional guidance tailored to their specific circumstances before making any decision based on the information presented.

[1] TS-440-HC-2024 (KAR)

 

AUTHORS: Abbas Jaorawala (Senior Director & Head-Direct Tax) | Yukta Kamra (Associate)

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