It is responsibility of Tax Officer to prove that black money belongs to Assessee – ITAT

Section 69 is the weapon of the revenue department to detect the tax evasion in respect of clandestine investments made by the assessee and which are not recorded in the books of accounts, if any, maintained by him. Section 69 also gives power to AO to treat the value of investments as the income of the assessee if the assessee does not offer any explanation or the explanation offered by him is not satisfactory.

According to Section 69, where the assessee has made investments which are not recorded in the books of account, if any, maintained by him for any source of income, and the assessee offers no explanation about the nature and source of the investments or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the value of the investments may be deemed to be the income of the assessee of such financial year.

As per section 69A, where in any Financial Year the assessee is found to be the owner of any money, bullion, jewellery or other valuable articles and such money, bullion, jewellery or valuable articles is not recorded in the books of accounts, if any maintained by him for any source of income and assessee offers no explanation about the nature and source of acquisition of money, bullion, jewellery and other valuable articles or the explanation offered by him is not, in the opinion of the AO, satisfactory, the money and the value of the bullion, jewellery and other valuable articles may be deemed to be the income of the assessee of such financial year.

Let us refer to the case of Mr. Kamal Galani vs ACIT, where the main issue under consideration was whether a holder of foreign currency in a foreign account can be considered as “unaccounted earnings” of a person, who at that time of time was a non-resident.

Brief Facts of the Case:

• Assessee is an Indian Citizen and was resident of United Arab Emirates (UAE) from the year 1979-1991 and thereafter working at Vienna, Australia.
• The assessee was a non-resident in India up to AY 1999-2000. In the year 2001, the assessee came back to India for settling in India.
• Since, then the assessee was filing his return of income in India from AY 2002-03 onwards.
• The assessment was reopened u/s 147 by issue of notice u/s 148, according to the information received from the French Government (Base Document) under the convention of avoidance of double taxation and the prevention of Fiscal Evasion with respect to taxes on Income and capital.
• The said information received was regarding bank accounts in HSBC Private Bank (Suisse), SA, Geneva, Switzerland held by certain persons in India.
• The information received from the French Government revealed that the assessee had opened a bank account in HSBC Bank, Geneva and was also a beneficiary of an account opened with HSBC Bank.
• The account was opened under client name “Dipak Varandmal Galani and/or Kamal Varandmal Galani.
• The account had a maximum credit balance of USD 9,40,191 in November 2015, a balance of USD 4,97,198 as on December, 2005 and USD 3,17,080 in September, 2006.
• Based on said information, the AO reopened the assessment, on the ground that income chargeable to tax had escaped assessment under section 147 due to non-disclosure of existence of bank account in HSBC bank, Geneva.

Order passed by the AO

• AO held that that the assessee could open the bank account with HSBC Bank only after making deposit of at least USD 3 Million.
• AO held that the assessee had maintained the initial deposit of USD 3 million throughout 1998-99 to 2004-05 relevant to AY’s 1999-00 to 2005-06.
• There was accretion to value of investments made in various classes of assets as revealed from the details of such investments.
• The funds were deployed in various assets like loans & advances, bonds and fiduciary deposits. The return on investment in 5 months was almost 7.1%.
• If the same was annualized the annual return came to 17%.
• In the absence of any details forthcoming in this regard, a return was estimated @ 17% annually on investment made by the assessee on USD 3 Million. This worked out to USD Rs. 45.31 per USD.
• Therefore, Rs.2,31,08,100 was added in the income of the assessee for the year under consideration being income earned on his investment of USD 3 Million with the HSBC Bank Geneva.

Appeal to CIT(A)

• Being aggrieved by the assessment order, the assessee appealed before the CIT(A).
• The CIT(A) after considering relevant submissions of the assessee and also taken note of remand report of the AO, rejected legal grounds taken by the assessee challenging validity of reassessment proceedings, on the ground that the AO had initiated and completed reassessment proceedings as per law.
• The CIT(A) confirmed the additions of the AO.
• Aggrieved with the order of CIT(A), assessee appealed before the ITAT.

Observations of the ITAT on the provisions of law

• The AO made additions towards money lying in HSBC bank account, Geneva, on the basis of information from French Government by Government of India in accordance with double taxation avoidance Agreement and opined that the assessee was a beneficial owner of joint account held in the name of his brother.
• The AO has also made additions towards return on investments on initial deposits claimed to have made by the assessee to open bank account @17% on the basis of some comparable cases of similar nature.
• The AO analysed the facts of the case and concluded that the assessee was the owner of bank account and whatever money lying in bank account was undisclosed income of the assessee for income tax purpose.
• It was contention of the assessee before the AO, as well as the CIT(A) that bank account was opened by his brother and his name was included in the bank account for convenience and as a mark of respect to his elder brother, but he was neither owner of the bank account, nor had any interest or right in money lying in bank account.
• The AO has made additions towards amount lying in HSBC bank account, on the sole ground that the assessee was owner of the bank account and he was having beneficial interest in money lying in said bank account.
• Although, the AO had not specifically referred provisions of section 69/69A, but he had invoked section 69/69A to bring amount lying in HSBC bank account as unexplained money of the assessee.
• Therefore, in order to examine, whether money lying in HSBC bank account in the name of the assessee and his brother was unexplained money, which could be taxed u/s 69A, provisions of the said section had to be examined.
• A close look at the provisions of section 69A, made it abundantly clear that in order to bring any money or other valuable articles within the ambit of said section, the AO had to prove that the money belonged to the assessee.
• Of course, the initial burden was on the assessee to prove that the money or other valuable articles found in his position did not belongs to him.
• But, once, the assessee filed necessary evidences to prove that said unexplained money did not belongs to him, then, onus shifted to the revenue to prove that unexplained money belonged to the assessee.
• Unless, the AO proved that unexplained money belonged to the person, he could not make any addition in the hands of the assessee.

Observation of the ITAT on whether money found in HSBC bank account belonged to the assessee or his brother?

• The assessee right from beginning had made it very clear that the bank account belonged to his brother and he was named only as a second holder for the purpose of nomination and for the sake of convenience.
• To justify his claim, the assessee had filed a letter and affidavit from his brother stating that his brother was the owner of the bank account and he had opened a bank account in his capacity as a non-resident.
• From the above, it was clear that the bank account was opened by his brother as a first account holder and the assessee was included in the bank account as a second account holder, which was very clear from the base documents relied upon by the AO, where the assessee’s name appeared as a second account holder.
• Further, as stated above, the bank account was opened in the year 1998 and at the time of opening bank account, the assessee, as well as his brother both were NRI’s residing outside India.
• Further, the base document clearly stated therein that assessee was account holder No.2.
• The passport detail of assessee as per the base document clearly showed him to be residing at Vienna (as place of having establishment) with place of birth as Baroda.
• The copy of same passport was filed on record and which clearly showed that passport was issued in Vienna and renewed through the Embassy of India since, 1993.

• The legal address in base documents was taken from the birth place mentioned in the passport as permanent address, otherwise the address of the assessee in Vienna was also mentioned in passport as taken is present address.
• From the above, it was very clear that the bank account belonged to his brother, but not to the assessee and this fact was further strengthened by the letter of the assessee’s brother, where he had categorically accepted the ownership of bank account and money lying in said bank account.
• These facts were disregarded by the AO without providing any basis for the same.
• The AO had also not disputed that the brother was the account holder and the principle holder of the bank account, but went on to make additions in the hands of the assessee on pure suspicious and surmises by invoking provisions of general clause Act, and further being a second account holder, the assessee was vested with rights and obligations connected with the account and therefore, he was a beneficial owner of the bank account.
• However, at the same time, the AO failed to appreciate that the assessee’s brother by virtue of being a first account holder was also vested with some rights and therefore, the same principle / logic even applied to him.
• Therefore, ITAT was of the considered view that the conclusion drawn by the AO that assessee was a beneficial owner and his brother was not the beneficial owner on the basis of above arguments was highly incorrect.

Observations of the ITAT on other contentions of the AO

• Further, it was the case of the AO that account with HSBC bank, Geneva was opened by resident Indian and black money earned by such resident Indian was stashed abroad without paying taxes/disclosing income in India.
• But the fact remained that in this case, the account was opened in 1998, when the assessee himself and his brother permanently resided outside India and had no intention to come to India at that time.
• Further, both of them have no source of income in India, during the course of their residence abroad.
• Therefore, ITAT was of the view that entire motive as presented by the AO defined all logic of opening of a secret bank account in Geneva, by NRI to stash unaccounted income taxable in India fails.
• The AO mechanically disregarding all explanations furnished by the assessee as to the ownership of the account along with the corroborative materials was contrary to the settled position of law, because, once assessee had provided a reasonable explanation about ownership, then the onus was on the AO to establish that account belonged to the assessee.
• ITAT was of the view that under these circumstances, the AO had erred in making additions towards amount lying in bank account as unexplained money of the assessee.

Observations of the ITAT on additions made towards return on investments @17% pa on year basis

• Once, it was established that bank account did not belonged to assessee and he was not a beneficial owner, then further additions towards estimated return of income on said unexplained money was arbitrary.
• The account was opened by the Appellant’s brother with the British Bank of Middle East.
• Therefore, the reliance placed by the AO on the account opening information appearing on the website of HSBC Bank could not be relied upon.
• Further, the account was opened by the Appellant’s brother in 1998, whereas the website information sought to be relied upon by the AO pertained to accounts sought to be opened at about the time of the assessment proceedings, i.e. around 2013.
• Such reliance on website information was impermissible as the same was merely based on fanciful presumptions.
• The AO had not brought any material on record to justify the use of account opening information at time of assessments to presume and arrive at the conclusion that the same would be applicable to an account alleged to have been opened by the Appellant 15 years earlier.
• It was pointed out that since the assessment was made, the account opening requirements were revised to require an investment or borrowing to be made amounting to an equivalent of USD 5 million.
• This indicated that the account opening requirement underwent changes from time to time.
• The presumption that the account opening requirements stated at the time of the assessment would have been the same as those prevailing when the account was opened 15 years earlier, was erroneous and could not be sustained.

• The AO failed to appreciate that account was opened in The British Bank of Middle East, UAE. The same was subsequently merged / acquired by HSBC Private Bank.
• Hence assumption of USD 3 million was unjustified.
• Further, the AO failed to appreciate that the appellant was an NRI in the year of opening the account, residing out of India for past more than 20 years.
• Further, owning the bank account and the investment by Non-Resident out of sources of funds available abroad was still not taxable in India.
• The AO failed to point out any evidence to prove that the funds of USD 3 million invested in opening bank account represented income from undisclosed sources earned/ accrued to appellant in 1998.
• The Appellant has no sources of income in India up to 2002 and the same was already assessed on record in assessment proceedings.

In complete absence of any source of taxable income in India, the addition u/s 69 made by AO on account of investment of USD 3 million in opening the bank account with HSBC and consequent estimation of return of investment @ 17% PA as Unexplained Investment was highly unjustified. Accordingly, ITAT directed the AO to delete additions made towards amount lying in bank account. Similarly, addition made towards estimated return of investments @17% on said additions was also directed to be deleted. In conclusion, it is the responsibility of the AO to prove that the black money belongs to the assessee.

If the assessee files necessary evidence to prove that the unexplained money does not belong to him, the onus shifts to the revenue to prove that the unexplained money in fact belongs to the assessee. Unless the AO proves that unexplained money belongs to the person, he cannot make any addition in the hands of the assessee. The fact that the assessee is a joint holder of the bank account does not mean that the money belongs to him if the evidence suggests that the money belongs to the other holder.

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