ASSESSMENT OF UNDISCLOSED INCOME

HIDAYATULLAH NATIONAL LAW UNIVERSITY

TAXATION LAW PROJECT

ON

ASSESSMENT OF UNDISCLOSED INCOME

SUBMITTED TO

Mr. RANA NAVNEET ROY

SUBMITTED BY

DEVENDRA DHRUW

SEMESTER 5

ROLL NO. 59

SUBMITTED ON 23RD OCTOBER 2017

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 ASSESSMENT OF UNDISCLOSED INCOME

CONTENTS

1. ACKNOWLEGEMENT.........................................................................................3
2. INTRODUCTION..................................................................................................4
3. OBJECTIVE OF STUDY.......................................................................................5
4. RESEARCH METHODOLOGY............................................................................5
5. LEGAL DEVELOPMENT: HIGHLIGHTS OF THE UNDISCLOSED FOREIGN
INCOME AND ASSETS (IMPOSITION OF TAX) BILL, 2015 .......................6
6. SCHEME OFASSESSMENT U/S 153A..............................................................9
7. SUPREME COURT’S OBSERVATION.............................................................12
8. CONCLUSION………………………………………………………..…………17
9. BIBLIOGRAPHY & WEB REFERENCES………………………….…………18

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 ASSESSMENT OF UNDISCLOSED INCOME

ACKNOWLEDGEMENT

I would like to sincerely thank the Taxation Law Teacher Mr. Rana Navneet Roy for giving
me this project on the “Assessment of Undisclosed Income” which has widened my
knowledge on the Provision related to assessment of undisclosed income. His guidance and
support has been instrumental in the completion of this project . Thank you Sir for your
consistent support.

I’d also like to thank all the authors, writers and columnists whose ideas and works have
been made use of in the completion of this project.

My sincere gratitude also goes out to the staff and administration (HNLU) for the
infrastructure in the form of our library and IT lab that was a source of great help in the
completion of this project.

I would also like to thank my friends who have given me constant support through guidance
and inputs which has led to the completion of this project.

Devendra Dhruw
Semester V
Roll No.59

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 ASSESSMENT OF UNDISCLOSED INCOME

INTRODUCTION

 The parallel economy in India exists on a scale that is unrivalled anywhere else in the
world, estimates of total unaccounted money generated by india and circulating around the
world economy vary from anywhere between $1.2 trillion to south $500 billion. Such a
substantial sum if brought into the mainstream would no doubt add significant impetus to
India’s economy. No doubt everyone is clamoring for such money to be accounted for and
for the perpetrator to be brought to  book.
The scope of Assessment u/s 153A of the Income Tax Act, 1961 has been a controversial
aspect since long. Though recently it has been settled courtesy to the announcement of the
Undisclosed Foreign Income and Assets (Imposition of Tax) 2015 ( The Black Money Bill)
which has lead to certain legal development and judicial clarification; nevertheless the
verdict of Apex Court on the same is yet awaited.

The usual queries pertaining to the Assessment u/s 153A of the Act is:

"What is the Legislative Intention behind making Assessment/Reassessment u/s 153A and
the definite scope thereunder"

After analyzing it has been conceived that the said section generated bivalent view:-

- On one hand it is clear that 153A is for Search Assessment, so basically undisclosed
income should be assessed;

- While on the other hand some are of the view that 153A assessments are de-nevo, as it
prescribes that if a return is filed under this section then provision of this Act shall apply
accordingly as if such return were a return required to be furnished under  section 139.

Above conflict and contradiction about the burning issue here had caused a perplexity
among the taxation fraternity across the country until the happening of recent developments.

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OBJECTIVE OF STUDY:

Critically examine the concept of ‘Assessment of Undisclosed Income’ to study its scope,
merits and new provisions in regard to the same.

RESEARCH METHODOLOGY:

This project work is both descriptive & analytical in approach and is based on the researches
carried out to study Assessment of Undisclosed Income.

Books & other references as guided by faculty of Taxation Law have immensely helped in
the completion of the project.

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 ASSESSMENT OF UNDISCLOSED INCOME

Legal Development: Highlights of the Undisclosed Foreign

Income and Assets (Imposition of Tax) Bill, 2015 

In order to fulfil the commitment made by the Government to the people of India through
the Parliament, the Undisclosed Foreign Income and Assets (Imposition of Tax) Bill, 2015
has been introduced in the Parliament on 20.03.2015. The Finance Minister, in his budget
speech, while acknowledging the limitations under the existing law, had conveyed the
considered decision of the Government to enact a comprehensive new law on black money
to specifically deal with black money stashed away abroad. He also promised to introduce
the new Bill in the current Session of the Parliament. The Bill provides for separate taxation
of any undisclosed income in relation to foreign income and assets. Such income will
henceforth not be taxed under the Income-tax Act but under the stringent provisions of the
proposed new legislation. The salient features of the Undisclosed Foreign Income and
Assets (Imposition of Tax) Bill, 2015 are as under:

Scope – The Act will apply to all persons resident in India. Provisions of the Act will apply
to both undisclosed foreign income and assets (including financial interest in any entity).

Rate of tax – Undisclosed foreign income or assets shall be taxed at the flat rate of 30
percent. No exemption or deduction or set off of any carried forward losses which may be
admissible under the existing Income-tax Act, 1961, shall be allowed.

Penalties – Violation of the provisions of the proposed new legislation will entail stringent
penalties. The penalty for non-disclosure of income or an asset located outside India will be
equal to three times the amount of tax payable thereon, i.e., 90 percent of the undisclosed
income or the value of the undisclosed asset. This is in addition to tax payable at 30%.
Failure to furnish return in respect of foreign income or assets shall attract a penalty of
Rs.10 lakh. The same amount of penalty is prescribed for cases where although the assessee
has filed a return of income, but he has not disclosed the foreign income and asset or has
furnished inaccurate particulars of the same.1

1
www.indiacode.nic.in/acts-in-pdf/2015/201522.pdf , Press Release for the announcement of the Bill in the
Parliament.

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 ASSESSMENT OF UNDISCLOSED INCOME

Prosecutions – The Bill proposes enhanced punishment for various types of violations. The
punishment for willful attempt to evade tax in relation to a foreign income or an asset
located outside India will be rigorous imprisonment from three years to ten years. In
addition, it will also entail a fine. Failure to furnish a return in respect of foreign assets and
bank accounts or income will be punishable with rigorous imprisonment for a term of six
months to seven years. The same term of punishment is prescribed for cases where although
the assessee has filed a return of income, but has not disclosed the foreign asset or has
furnished inaccurate particulars of the same. The above provisions will also apply to
beneficial owners or beneficiaries of such illegal foreign assets. Abetment or inducement of
another person to make a false return or a false account or statement or declaration under the
Act will be punishable with rigorous imprisonment from six months to seven years. This
provision will also apply to banks and financial institutions aiding in concealment of foreign
income or assets of resident Indians or falsification of documents.2

Safeguards – The principles of natural justice and due process of law have been embedded
in the Act by laying down the requirement of mandatory issue of notices to the person
against whom proceedings are being initiated, grant of opportunity of being heard, necessity
of taking the evidence produced by him into account, recording of reasons, passing of orders
in writing, limitation of time for various actions of the tax authority, etc. Further, the right of
appeal has been protected by providing for appeals to the Income-tax Appellate Tribunal,
and to the jurisdictional High Court and the Supreme Court on substantial questions of law.
To protect persons holding foreign accounts with minor balances which may not have been
reported out of oversight or ignorance, it has been provided that failure to report bank
accounts with a maximum balance of upto Rs.5 lakh at any time during the year will not
entail penalty or prosecution. Other safeguards and internal control mechanisms will be
prescribed in the Rules.3

One time compliance opportunity – The Bill also provides a one time compliance
opportunity for a limited period to persons who have any undisclosed foreign assets which
have hitherto not been disclosed for the purposes of Income-tax. Such persons may file a
declaration before the specified tax authority within a specified period, followed by payment

2
Ibid.
3
http://www.incometaxindia.gov.in/news/notification-of-the-black-money-and-imposition-of-tax-rules-
2015-03-07-2015.pdf , reference to the Official Bare Text

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of tax at the rate of 30 percent and an equal amount by way of penalty. Such persons will
not be prosecuted under the stringent provisions of the new Act. It is to be noted that this is
not an amnesty scheme as no immunity from penalty is being offered. It is merely an
opportunity for persons to come clean and become compliant before the stringent provisions
of the new Act come into force.4

Amendment of PMLA – The Bill also proposes to amend Prevention of Money Laundering
Act (PMLA), 2002 to include offence of tax evasion under the proposed legislation as a
scheduled offence under PMLA. Thus, in keeping with the commitment of the government
for focused action on black money front, an unprecedented and multi-pronged attack has
been launched to root out the menace of black money. The Government is confident that this
new law will act as a strong deterrent and curb the menace of black money stashed abroad
by Indians.5

Scheme of Assessment u/s 153A:

It is evidently inscribed in the law that an assessment u/s 153A is different from regular
assessment. The section can be provoked only when a search is initiated u/s 132 or books of
account, other documents or any assets are requisitioned u/s 132A after 31.5.2003. Also to
4
ibid
5
ibid

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 ASSESSMENT OF UNDISCLOSED INCOME

be highlighted that it is during the course of search itself, such generally incriminating
documents or papers etc. or unaccounted assets are found.

The provision u/s 153A should be read in conjunction with the provision contained in
section 132(1), the reason being that the latter deals with search and seizure and the former
deals with assessment in case of search etc., thus, the two are inextricably linked with each
other, which implies that existence of books of account, incriminating documents or
unaccounted assets is or are sine qua non of making the assessment under this provision.
Therefore, if nothing is found during the course of search, the step of making assessment or
re-assessment u/s 153A is not only erroneous it also serves no purpose.6

Mutually contradictory provisos to section 153A(1) & its harmonious reading

The provision of section 153A starts with non-obstante clause with reference to sections
139, 147, 148, 149, 151 and 153. It requires the AO to issue a notice to the Assesse for filing
the return in respect of each assessment year falling within six assessment years
immediately preceding the assessment year relevant to the previous year in which the search
or the requisition is made. First proviso is reiteration of the provision containing clause (b)
of section 153A (1) that the AO shall assess or reassess the total income of each of the six
assessment years.7

The second proviso contemplates that if any of the aforesaid six assessments is pending on
the date of initiation of the search or requisition, the same shall abate. A comprehensive
reading of section 153A reveals apparent contradiction in the first proviso and the second
proviso. Amongst the salutary rules, the rule of harmonious construction is the most
imperative one. As per the said rule, a statue must be read as a whole i.e. unabridged version
is essential and one of the provisions of the Act should be construed with reference to other
provisions in the same Act so as to make a consistent enactment.8

Abatement: legal meaning

6
www.indiankanoon.org/search/?formInput=undisclosed%20income
7
ibid
8
www.taxindiaonline.com/RC2/inside2.php3?filename=bnews_detail , Debate on assessment of undisclosed
income

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The word 'abatement' is referable to something, which is pending alive, or is subject to

deduction. The abatement refers to suspension or termination of the proceedings either of
the main action, or the proceedings ancillary or collateral to it. The proceedings, which have
already terminated are not liable for abatement unless statute expressly provides for such
consequence thereof.

Pending: legal meaning

The word 'pending' occurring in the second proviso to Section 153A of the Act, is also
significant. It is qualified by the words 'on the date of initiation of the search', and makes it
abundantly clear that only such assessment or reassessment proceedings are liable to abate.
In other words, Assessments which are not pending i.e. Competed Assessments as on the
date of Search would hold their base and would not abate.

Only pending Assessments as on the date of Search shall abate. The legislature is clear that
any appeal, revision or rectification proceedings, if pending as on the date of Search shall
not abate. Circular No.7 of 2003 dated 5.9.2003 issued by the Commissioner of Income Tax
has clarified the position in Para 65.5 as follows:-

"The Assessing Officer shall assess or reassess the total income of each of these six
assessment years. Assessment or reassessment, if any, relating to any assessment year
falling within the period of six assessment years pending on the date of initiation of the
search under section 132 or requisition under section 132A, as the case may be, shall
abate. It is clarified that the appeal, revision or rectification proceedings pending on the
date of initiation of search under section 132 or requisition shall not abate ……….."

Accordingly as far as completed assessments are concerned, they do not abate and pending
appeals etc. in respect thereof continue to exist notwithstanding the fact that the search has
been made. Thus a completed assessment becomes final unless some incriminating material
is found in the course of search. Otherwise the AO will be empowered to undo what has
already been completed and has become final.9

9
ibid

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Extracts from Memorandum of Finance Bill, 2003

In the Memorandum explaining the provisions of Finance Bill 2003, it was observed that the
existing provisions (at that time) for single assessment of undisclosed income for block
period were introduced for avoidance of disputes, early finalisation of such assessments and
reduction in multiplicity of proceedings. However, since there were parallel proceedings
namely regular assessment proceedings as well as assessment of block assessments for
undisclosed income had amounted to multiplicity of proceedings. In order to avoid
multiplicity of proceedings, a scheme of single assessment in respect of assessment years for
which ASSESSMENT PROCEEDINGS are pending, Section 153 A to Section 153C of the
Act were proposed to be introduced.10

If the AO is allowed to assess / reassess the total income for all six assessment years as per
first proviso to section 153A, in contradiction of the second proviso, particularly when there
is no incriminating material etc., then the same will not only multiply assessment
proceedings but will multiply even the appellate proceedings. Primarily this can never be the
intention of the Legislature.11

Supreme Court's observation:

The Supreme Court in the case of  Parshuram Pottery Works Co. Ltd. Vs ITO, Circle-1,
Ward A, Rajkot12  observed that

"It has been said that the taxes are the price that we pay for civilization. If so, it is essential
that those who are entrusted with the task of calculating and realising that price should

10
Girish Ahuja & Ravi Gupta , Simplified Approach to Income Tax , Sahitya Bhawan Publishers an
Distributors Ltd., Agra
11
ibid
12
2002-TIOL-573-SC-IT

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familarise themselves with the relevant provisions and become well-versed with the law on
the subject. Any remissness on their part can only be at the cost of the national exchequer
and must necessarily result in loss of revenue. At the same time, we have to bear in mind
that the policy of law is that there must be a point of finality in all legal proceedings, that
stale issues should not be reactivated beyond a particular stage and that lapse of time must
induce repose in and set at rest judicial and quasi-judicial controversies as it must in other
spheres of human activity."

It is important to note that all reassessments such as under sections 147, 263 etc. have to be
made within well-defined limits subject to satisfaction of pre-conditions and, therefore,
similar limitation may have to be read in the instant provision. Therefore, making any
Assessment which is already completed will also require the satisfaction of pre-conditions
as contemplated in section 153A, its first proviso, its second proviso read with section 132.
The Assessment u/s deals with search cases, therefore, the concept of undisclosed income
u/s 132(1)(c) will come into picture.

The second proviso to section 153A is intended to avoid two assessments for the same year.
Therefore, proper construction would be that in respect of completed assessments, the
assessment shall be made only if incriminating documents etc. are found. Therefore, the
term "assess and reassess" appearing in section 153A(1)(b) means that assessment shall be
made in case of pending assessments and reassessments shall be made in respect of
completed assessments where incriminating material is found.

In support of the above discussion, we have following recent judicial pronouncements on

the matter:-

1. CIT Vs. Smt. Shaila Agarwal Allahabad High Court13,

2. ALL CARGO GLOBAL LOGISTICS LTD Vs. DCIT Mumbai ITAT Special Bench 14,
13
2011-TIOL-778-HC-ALL-IT

14
2012-TIOL-391-ITAT-MUM-SB

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The summary of the various scenario explaining the provisions of section 153A as referred
in Para 41 of the Judgment of the Mumbai ITAT Special Bench in case of ALL CARGO
GLOBAL LOGISTICS LTD Vs. DCIT, (Supra) extracts of which is reproduced as under15:-

 
Scenario Scope for Section 153A
Since no return has been filed, the entire
I No return of income is filed by
income shall be regarded as undisclosed
the Assessee (whether or not
income.
time limit to file return of
income has expired) Consequently, AO would have the
authority/jurisdiction to assess the entire
income, similar to jurisdiction in regular
assessment under section 143(3).

No requirement to restrict to documents

found during the course of search.
Since return filed is even pending to be
II Return of Income filed by the
processed, the return would be treated as
Assessee – Return yet to be
pending before the assessing officer.
processed under section 143(1)
Consequently, AO would have the
authority/jurisdiction to assess the entire
income, similar to jurisdiction in regular
assessment under section 143(3).
Since intimation is not akin to assessment
III Return of Income filed by the
and time limit for notice u/s. 143(2) has not
Assessee - Return processed
expired, even though return has been
and Intimation issued under
processed, it will be case where return has
section 143(1) - Time limit for
not attained finality.
issue of notice under section
143(2) not expired. Consequently, AO would have the
authority/jurisdiction to assess the entire

15
Vinod K. Singhania, Monica Singhania, Students Guide to Income tax , Taxmann Publications Private Ltd.

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income, similar to jurisdiction in regular

assessment under section 143(3).
Return of income of the assessee shall be
IV Return of Income filed by the
treated as having been accepted and attained
Assessee Intimation passed or
finality.
not passed under section
143(1) and time limit for issue AO loses jurisdiction to verify the return of
of notice under section 143(2) income.
has expired
Since, no assessment would be pending there
would be no abatement of any proceedings.

Accordingly, the scope of assessment under

section 153A would be restricted to
incriminating material found during the
course of search.
Pending regular assessment proceedings
V Notice under section 143(2)
would abate and would converge/merge in
issued and assessment pending
proceedings under section 153A.
under section 143(3)
Accordingly, the scope of assessment under
section 153A would cover the pending return
filed as well and would not be restricted to
incriminating material found during the
course of search.
Since regular assessment proceedings have
VI Assessment under section
been completed and are not pending, there
143(3) completed
would be no abatement of proceedings.

AO loses jurisdiction to review the

completed assessment.

Accordingly, the scope of assessment under

section 153A would be restricted to

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incriminating material found during the

course of search.
Proceedings under section 147 Pending assessment/reassessment
VII
pending where:- proceedings under section 147 would abate
and would converge/merge in proceedings
(a) Assessment originally
under section 153A.
completed under section
143(3); Accordingly, the powers of the assessing
officer, in both the cases, shall extent to:
or
(a) assess income that could validly be
(b) No assessment earlier
assessed in the pending proceedings under
completed under section
section 147, and
143(3)
(b) income to be assessed on the basis of
incriminating material found in the course of
search.

The final conclusion of the Mumbai ITAT Special Bench in case of ALL CARGO
GLOBAL LOGISTICS LTD Vs. DCIT16, on the issue is as under:-

a) In assessments that are abated, the AO retains the original jurisdiction as well as
jurisdiction conferred on him u/s 153A for which assessments shall be made for each of the
six assessment years separately;

b) In other cases, in addition to the income that has already been assessed, the assessment
u/s 153A will be made on the basis of incriminating material, which in the context of
relevant provisions means – (i) books of account, other documents, found in the course of
search but not produced in the course of original assessment, and (ii) undisclosed income or
property discovered in the course of search.
16
supra

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The other earlier contradictory judgments in the matter, have been disapproved by the
Special bench in case of ALL CARGO GLOBAL LOGISTICS LTD (Supra), therefore at
this juncture same are not referred.

Application of above principles to Section 153C Assessments:-

According to the scheme of Assessment of Other Person, as a result of Search u/s 132 of the
Act, AO of the searched party shall hand over such seized paper/ assets to the AO having
jurisdiction over the case of such other person, and he is required to assess or reassess
income of such other person in accordance with the provisions of  section 153A. Therefore,
above principles shall be applicable mutatis mutandis for assessment u/s 153C too.

Therefore, the completed Assessment on the basis of "Assessment Year Specific

Incriminating Documents / transactions or seized asset" should only be reopened under the
provisions of the first proviso to section 153A of the Act and not otherwise.

According to the ITAT Pune Bench, in the case of Sinhgad Technical Education Society Vs.
ACIT (ITA Nos. 114 to 117/PN/10 dated 28/01/2011) it was held that section 153C
assessment sans "speaking" & "incriminating" documents are void.

CONCLUSION

Thus it can be precised that an assessment or reassessment u/s 153A arises only when a
search has been initiated and conducted. Therefore, such an assessment has imperative link
with the initiation and conduct of the search. As per section 132, the search can be
authorized on satisfaction of one of the three conditions enumerated earlier. Consequently,
while interpreting the provision contained in section 153A, all these conditions should be
taken into account. In absenteeism of any incriminating material re-assessment of the
previously completed assessment, in contradiction to second proviso to section 153A, would
result in multiplicity of not only Assessment Proceedings but also Appellate proceedings,
which is not at all intended by the legislature.

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Also, about the Black Money Bill, the researcher feels the need to put out the following
critique, While the act may have the best of intentions, the undue powers, specifically the
prosecution provisions that is provides to the tax officers are a cause of concern. Tax
authorities need to be sensitized to tax payer needs and thrusting such power in their hands
without due training can be dangerous. The provisions will impact only a small percentage
of tax payers in total but will end up creating enormous hassles for those who have multiple
assets and inadvertently miss out of declaring as asset abroad. The taxation of assets on fair
market value (FMV) also seems excessive, as the total income that escapes assessment in
such cases would equate to the cost of asset and not the fair market value. In this case where
such an asset depreciates in value the tax department would also stand to lose precious
revenue. Criticisms of the bill aside, the repercussions of this bill will have to be dealt with.
The collateral damage in this case will expatriates and their relatives living in India, as well
as Indians who have moved back to India after stints abroad, provided all of them own
foreign assets or maintain foreign bank accounts. Such Individuals will have to ensure that
they diligently declare all such assets in their returns of income or they may be liable for
heavy tax, penalties and prosecution under this act.

BIBLIOGRAPHY:
 Income Tax Act,1961
 Girish Ahuja & Ravi Gupta , Simplified Approach to Income Tax , Sahitya Bhawan
Publishers an Distributors Ltd., Agra
 Vinod K. Singhania, Monica Singhania, Students Guide to Income tax , Taxmann
Publications Private Ltd.
 Bhagwati Prasad, Law and practice of Income Tax, Navaman Prakashan , Aligarh.

WEBLIOGRAPHY:
 www.lawyersclubindia.com

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 www.incometaxindia.gov.in
 www.indiankanoon.org

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