A recent case decided by the ITAT has created unease amongst India's tax planners, whose job it is to prepare an elaborate smokescreen to hide the truth from the taxman thereby facilitating tax avoidance and at times, blatant tax evasion. Indian Courts and Tribunals, steeped in common law doctrines and overtly reliant on precedence, have so far lent a helping hand in this endeavour in which it is only the fisc that is the loser. The tax planner obviously gets the fat fees, the judiciary gets its opportunity to berate the tax administration and, of course, the evader gets scot free. It is in this cosy world that the present decision rendered on the 16th of July, 2020, caused some disturbances. Of course, this is not the first time that such turbulence has occurred. The judgement of the Supreme Court in the McDowell case created similar flutter decades ago and was nicely put to rest by the Supreme Court itself. It is therefore with some circumspection that I analyse here the order of the ITAT, Mumbai.

The affected person is unfortunately an old lady of more than 80 years and is perhaps an unwitting though willing victim of wrong advice- one Mrs Renu Tikamdas Tharani, alleged holder of an account in the famous HSBC Private Bank, Geneva. The accounts came to light following a data theft by one Herve Falciani who worked as a technical analyst on data migration involving client records and took the opportunity to transfer records onto personal devices. The Tribunal order gives us a great deal of information about the origin of the leaks from Mr. Herve Falciani and his conduct and motivations. To cut a long story short, Falciani fled to France in 2008 and according to one version the French Police raided his place on a Swiss warrant issued in 2009 and recovered the stolen discs. The French however did not extradite him since he also had French nationality but used the data to prosecute French tax evaders. They also asked for information about the French account holders that was refused by the Swiss on the ground that the same was stolen data.

In June 2011, the French government spontaneously shared the information relating to Indian accounts with the Indian government under the exchange of information article of the India-France Double tax avoidance agreement. In August, 2011, the Indian Express reported that 700 odd accounts were received from the French authorities and investigation was under way. There is a double tax avoidance agreement between India and Switzerland. The tax department sought information about the names mentioned in the accounts from the Swiss government. Initially, the Swiss government took the stance that the information asked for related to stolen data and information could not be shared in the absence of further evidence.

In the meantime, probably under pressure from the peer review group, Switzerland first amended its treaty with India in 2011. While it brought the article relating to exchange of information, more or less in line with the OECD standard, it still contained a number of limitations; one of them was that full details of the person for whom the information was required was to be mentioned. Subsequently there was a competent authority agreement between India and Switzerland wherein, it was specified that the identification could be provided by other means than by indicating the name and address of the person concerned.

But even under the revised agreement, information could be exchanged in respect of the fiscal year 2011 onwards. Thus, no information could be exchanged in respect of periods that fell prior to the coming into effect of the revised provision. Again, as a result of global pressure, Switzerland changed its stance and agreed to share prior period information about those accounts that other governments had received from some other state and not where the state itself got the information from a stolen source.

We may note here that in 2012, considering the fact that gathering information relating to foreign assets is time consuming and fraught with procedural hassles, through an amendment in section 149, the normal time limit for reopening of assessment was increased from 6 years to 16 years in cases where income in relation to any asset outside India has escaped assessment and it was also made clear that the provisions would apply for even assessment years prior to 2012. A deeming provision was introduced in section 147, Explanation 2 to the effect that income shall be deemed to have escaped assessment where a person is found to have a foreign asset or any financial interest in any entity outside India. It is thus obvious that the government was aware of foreign assets or interests of Indian taxpayers and was preparing for the long haul.

The taxpayer involved in the current case, Mrs Tharani, had filed her return of income for the year 2005-06 on the 29th of July, 2006 as a resident of India showing a total income of 178000 with a Bangalore address. Apparently there was a property in Bangalore in her name that was sold the year before. So, why she filed a return of income for 2006 remains a mystery. There was no action on the part of the tax department, probably, her return was just processed. It is obvious that her name subsequently figured in the Falciani list. The case was centralized in Bangalore in December, 2013 and the Assessing Officer,(Central), Bangalore issued a reassessment notice on 31.10.2014.

As per the information received by the AO, the taxpayer was the holder of an account in HSBC Private Bank, Switzerland and the peak balance in that account was USD 9738122. The case was reopened and t he final assessment order in the case was passed on 17.1.2018, making an addition of INR 196.46 crores at a conversion rate of INR 44.61 to a dollar. It is this order that was challenged in appeal, first before the CIT(A) and then before the ITAT. The order of the Tribunal upholding the action of the tax authorities is remarkable for a number of reasons as will be discussed below.

On reopening:

The main argument of the taxpayer was that the HSBC private bank account mentioned by the AO was not in her name and she had no signing authority over any bank account in Geneva and hence there was no question of any income escaping assessment. We may note that the tax department had from the official sources obtained a base note that mentioned that the taxpayer was the beneficial owner of the relevant bank account; the date of opening of the account was 28th July 2004 and that one GWU Investments limited actually held the power of administration of the account. The taxpayer argued that the said GWU Investment was a Cayman Island based company and the taxpayer was neither a director nor a shareholder thereof; and in any case that source of deposits made in Geneva was obviously not in India.

It was then pointed out that since 23rd March 2004, the taxpayer was regularly residing in the USA, and that for the relevant AY, she was non-resident in as much as her stay in India in the year did not exceed 182 days and her stay in India during the previous 4 financial years was less that 365 days and in the relevant year her stay was for less than 60 days, thereby satisfying all the conditions for being a non-resident. Under the Act, at any event a non-resident's income from outside India was not taxable in India and hence there was no taxable income that could have escaped assessment in India even if there were any foreign income. It was also argued that at the relevant time, there was also no obligation to disclose any foreign asset, if any.

It is well settled that at the stage of the reopening of an assessment, what is required is a prima-facie reason to believe and that sufficiency of the reasons are not relevant. From the base statement as reproduced in the tribunal order, it is seen that it clearly mentions the taxpayer as the beneficial owner of the account and that the account was active at the relevant time even though the actual client of the account was GWU Investments Limited and the legal structure was Tharani Family Trust. At some other place, it has been mentioned that the peak credit in the account was USD $ 3,97,38,122/- during the financial year relevant to the Assessment Year 2006-2007 & a peak balance of USD $ 23,55,851.60 during the financial year relevant to Assessment year 2007-2008.Whether these were parts of the base statement or was subsequently gathered by the tax officer is not very clear. But the fact of beneficial ownership of the taxpayer cannot be denied. Therefore, it was not difficult for the ITAT to deal with and dismiss the first objection.

As for the second and more difficult argument of the taxpayer not being non-resident during the year, again the Tribunal found that the taxpayer had filed her return in a ward meant for residents and that in the return she had indicated her status as resident. At the time of reopening of assessment, that information is sufficient. Although not important for the particular circumstances of this case, the Tribunal found that the taxpayer had shifted to the US only 7 days before the beginning of the FY and even if she was a non-resident, it was the first year of her non-resident status and considering her past declared income in India, it would be unrealistic to assume that the money at her disposal in the Swiss Bank account reflected income earned outside India in such a short period and therefore whether she was a resident or not during the year, the AO would be justified in holding the prima facie view that income had escaped assessment in India.

This observation is significant because whenever we discuss the scope of total income of a non-resident, we tend to axiomatically think that once taxpayer has become non-resident in a year, the tax department loses the jurisdiction to question the source of any alleged foreign income (unless derived from an Indian business). If it can be shown either through direct evidence or through surrounding circumstances, as in the instant case, that the income originated in India, assessment can be reopened even in the case of a non-resident.

On merits:

On being asked to explain the investments as mentioned in the base note, the taxpayer's defence was that she was not the owner of the account in question; that the account did not belong to her, that she had no control of the company that managed the trust and that she was a merely discretionary beneficiary in a family trust and no distribution has ever been made by the said trust. A letter was also obtained from HSBC Private Bank to the effect that she neither had an account in the said bank nor was a beneficial owner of any asset deposited in the bank for the last 10 years; adding that GWU Investments Limited used to be an underlying company of Tharani Family Trust for which she was a discretionary beneficiary and that the family Trust was terminated and none of the assets deposited with them were distributed to Mrs Tharani.

The taxpayer also reiterated the same in an affidavit wherein she hypothesized that HSBC Bank in Geneva might have asked GWU Investments Ltd the proof of identity & proof of address of all the potential beneficiaries & beneficial owners and the company might have provided her passport as a proof of identity & proof of address and that perhaps was the reason why the base note mentioned her name and address.

The tax officer had asked her to produce her Swiss bank account statement which she didn't. He asked her to submit a consent waiver form that would have enabled the tax department to directly access the bank account from the bank concerned. The Tribunal gives the details of the consent waiver form which in effect absolves the bank from the charge of violating any data protection and banking secrecy laws of Switzerland.

Referring to section 114 of the Evidence Act, the tax department drew adverse inference that the information withheld was unfavourable to the taxpayer and the source of money deposited in the HSBC account was undisclosed and had source in India. The tribunal agreed that such a consent waiver does not put the taxpayer to any disadvantage in getting at actual truth adding that when the monies kept in such banks abroad are legal or the allegations are incorrect, the taxpayer can always, cooperate in the investigations by giving the consent waivers. By refusing to give such consent, the taxpayer has indeed scuttled any deeper probe by the tax department.

One can perhaps take a view that doing so would amount to self-incrimination but then this is not a criminal case and once the tax department has gotten hold of the basic data and if indeed the taxpayer was not involved, it would certainly have helped if she had signed the consent waiver.

In this case, the tax department had obtained the information from the government authorities and the clear mention of the taxpayer as the sole beneficiary of an account operated by a trust company couldn't have been displaced by obtaining a mere letter from a private bank whose credentials and history in facilitating tax evasion though creation of accounts in secrecy jurisdictions including Caymans has been mentioned in great details in the order of the tribunal. The Tribunal also mentions in details the use of discretionary trust for the purpose of tax planning.

The tribunal also points to the fact that the Swiss Bank account was closed within a short time of the information about the account coming to the notice of the government of India and the money lying in the account was transferred back to GWU Investments Ltd in Caymans where, as reported in the G20/OECD peer review report, it is impossible to find out about beneficial ownership since Caymans does not have a regular system of monitoring the ownership of companies and partnerships. The tribunal further added that the process of covering the tracks did not end with the closure of the Swiss account; in fact the company itself was subsequently struck off the records and (it seems on the tribunal's own research), the company no longer exists.

That Caymans is a tax haven and used for purpose of dissimulation is something that is notorious. However, it seems that it is the first time that a tribunal has taken judicial notice of the same to buttress its conclusion. We may note, in particular, the following observation

"As a final fact finding authority, this Tribunal cannot be superficial in its assessment of genuineness of a transaction, and our call is to be taken not only in the light of the face value of the documents sighted by the assessee but also in the light of all the surrounding circumstances, preponderance of human probabilities and ground realties. (…) Hon'ble Supreme Court has, in the case of Durga Prasad More, observed that" human minds may differ as to the reliability of a piece of evidence but in that sphere the decision of the final fact finding authority is made conclusive by law". This faith in the Tribunal by Hon'ble Courts above makes the job of the Tribunal even more onerous and demanding and, (…) it does require the Tribunal to take a holistic view of the matter, in the light of surrounding circumstances, preponderance of probabilities and ground realities, rather than being swayed by the not so convincing, but apparently in order, statements and letters and examining them, in a pedantic manner, with the blinkers on."

The tribunal summed up its overall finding by the following observation that has been widely reported in the media:

"Viewed in the light of factual backdrop of the case, and in the light of the above legal position, no reasonable person can accept the explanation of the assessee. The assessee is not a public personality like Mother Terresa that some unknown person, with complete anonymity, will settle a trust to give her US $ 4 million, and in any case, Cayman Islands is not known for philanthropists operating from there; if Cayman Islands is known for anything relevant, it is known for an atmosphere conducive to hiding unaccounted wealth and money laundering, and that does not advance the case of the assessee. (…). Cayman Island is one of the few jurisdictions in the world where public records of the beneficiaries of firms and companies, like GWU Investments Ltd, are not maintained, and it is only with effect from 2023, that is if the promises made by the Government of Cayman Islands can be believed at face value, that such public records will be maintained. That is an ideal situation, as on now, for holding the unaccounted monies through a web of proxy corporate entities. The only persons who are privy to vital information about these transactions are the persons who are privy to these transactions- maybe as owner, as settlor, as beneficiaries or as facilitators or even as accomplices in these manoeuvrings, and when they decline to share the correct information, and thwart further probe in the matter, investigations reach a cul-de-sac. (…)"

As we have noticed, the main defence of the taxpayer was twofold- that she was not a resident of India in the relevant year and that she was only a beneficiary of a family discretionary trust and in the absence of any distribution, no income could be taxed in her hands. It may be true that the taxpayer was indeed non-resident in the year concerned and even if the return of income was wrongly filed that should not make much of a difference. Although not discussed in detail, the CIT(A) had directed the addition to be made under section 69/69A/69B of the ITA. These sections do not make any distinction between a resident and non-resident and is applicable to any assessee. Moreover, section 5 that determines the scope of income is subject to other provisions of the Act, meaning thereby that section 5 will be subject to the deeming provisions of the Act like section 68, 69 etc.

It is quite likely that she was only a beneficiary of a private discretionary trust. In fact, the order of the CIT(A) indicates that a family trust was created by her father for her benefit. Why she chose not to disclose anything about the trust is not comprehensible. In the event, as rightly pointed out by the Tribunal, no trust deed was relied on prompting the Tribunal to observe that something is rotten in the Kingdom of Denmark.

While concluding the ITAT made an important observation that this decision cannot be an authority for the proposition that wherever name of a taxpayer figures in a base note from HSBC Private Bank, an addition will be justified in each case. "The mere fact of an account in HSBC Private Bank (Suisse) SA Geneva, by itself, cannot mean that the monies in the account are unaccounted, illegitimate or illegal." The conduct of the taxpayer, actual facts of each case and the surrounding circumstances are to be examined, on merits, and then a call is to be taken about as to whether the explanation of the taxpayer merits acceptance or not.

The Tribunal's order has nevertheless attracted attention of the political executive. It has been reported (ET 27 July, 2020) that the PMO has sought an urgent report and that the CBDT has asked field formations to report on a particular format the actionable and non-actionable cases to be submitted immediately. This is an important step as there were many prominent names in the HSBC list that came out in the open following the ICIJ investigations that partnered with the Indian Express in 2015. It is necessary to ensure that uniform standard is applied in appropriate cases.

In the meantime, a lot of clarity needs to be incorporated regarding private trusts. I have earlier written on the subject of private discretionary trusts. These are opaque instruments, particularly when the trustee is a non-resident. There is no reason why the government cannot bring appropriate regulation relating to discretionary trusts.