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Relevant previous year for chargeability to tax

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June 8, 2021

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6 mins read

Relevant previous year for chargeability to tax – Undisclosed Foreign Income – Section 3

The provisions of the Black Money Act are applicable with effect from July 1, 2015. In such a case, the question which arises is, what would be the taxability of undisclosed foreign income under the BMA, which was earned before July 1, 2015,  and which is not invested in the form of any foreign asset ?

Since the Black Money Act is applicable prospectively with effect from July 1, 2015, any undisclosed foreign income earned before that date would not be taxable under the BMA.

However, where such undisclosed foreign income (earned prior to July 1, 2015) is still lying as balance in the foreign bank account or in the form of property situated outside India, and where   such asset is discovered by the AO after July 1, 2015, the provisions of the Black Money Act would apply to tax value of such undisclosed foreign assets.

EXAMPLE : – Undisclosed foreign income earned before the date of BMA coming into force

Mr . Depesh was a tax resident of India during PY 2014-15 . He earned rental income from property situated outside India during the PY 2014-15, which was not disclosed in his income-tax return . Whether he would be covered under the Black Money Act in respect of such income ?

SOLUTION : –

The Black Money Act does not cover undisclosed foreign income earned prior to July 1, 2015 . Rental income from property situated outside India shall not be covered under the Black Money Act as rental income pertained to period prior to July 1, 2015. However, such undisclosed income would be taxable as per the provisions of the Income-Tax Act .

Relevant previous year for chargeability to tax – Undisclosed Asset Located outside India – Section 3

Background 

Where any undisclosed foreign asset , which was acquired by the assesse in any earlier years, is discovered by the Assessing Officer, tax would be determined on the fair market value of such foreign asset as per Rule 3(1) of the Black Money Rules. [Valuation mechanism has been discussed in detail in Para 10 of this chapter].

However, the issue which arises is, which would be the year, for which the fair market value shall be considered, i.e, the year of acquisition or the year when it is  discovered by the Assessing Officer ?

For example, suppose, Mr. A had acquired house property outside India in 1990 when its fair market value was Rs 1,00,000. When such house property is discovered by the AO in 2017-18, its value has increased to Rs 50,00,000. What would be the fair market value of such property for the purpose of the  Black Money Act ?

According to the provisions of Section 3 of the BMA, the undisclosed foreign asset,  shall be charged to tax on its fair market value in the previous year,  in which such asset is discovered by AO, even if such asset was acquired before the enforcement of the Black Money Act (i.e., before July 1, 2015).

EXAMPLE : –

S acquired a bungalow in UK in 1980 when she was resident in India, out of undisclosed income , which was chargeable to tax in India. The AO discovered such bungalow in the PY 2017-18.  Whether market value of bungalow in the PY 2017-18 would be charged to tax under the Black Money Act ?

SOLUTION : –

The provisions of the Black Money Act are applicable from July 1, 2015 . However, in case of undisclosed foreign assets, the year in which such asset is discovered by the AO would be the relevant previous year in which tax shall be charged even if such asset was acquired prior July 1, 2015 . Thus, the fair market value of the bungalow [as per Rule 3(1)] in the PY 2017-18 would be charged to tax under the Black Money Act .

For any queries, please write them in the Comment Section or Talk to our tax expert

Arinjay Jain

Bio of author

Arinjay is a Chartered Accountant with more than 20 years of post-qualification experience. He worked as Director, in the M&A Tax Division at KPMG in India. Presently, he is advising several MNCs in UAE on Economic Substance Regulations and impact of the UAE Corporate Tax Law on their business and clients across globe on International Tax issues . He is a well recognised Trainer of International Tax and UAE Corporate Tax. The areas of service include the following : - Advise and Compliance relating to International Tax Issues; Advise relating to UAE Corporate Tax Issues; Advise and Compliance relating to UAE Economic Substance Regulations; Advise and Compliance relating to Indian Income Tax Issues; Other connected matters from a Regulatory perspective.

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