The ITAT’s All-Things-Considered Approach
Background
This case has all the trappings of a thriller you would find in a Hitchcock movie. From misdeclaration of residential status and address, the discovery of undisclosed foreign assets of huge sums and the sudden vanishing of these amounts, the order of the ITAT, Mumbai makes for a riveting read. That the entire story of alleged evasion revolved around an 86-year old lady makes the issue even more intriguing.
It all started with the Income Tax department receiving certain information from Switzerland in Oct 2014 pursuant to treaty provisions. The information was that Renu T. Tharani (Appellant) had a bank account in HSBC Private Bank, Geneva which showed a peak balance of USD 40 M in the FY 2005-06. For that year, the Appellant had returned a paltry sum of Rs. 170,800 as Income in her returns. It was the department’s contention that this bank account in HSBC Bank, Geneva was not considered in the return of income filed and hence reopened the assessment and brought the sum of Rs. 196 crores as Income in her hands. Subsequent information from Swiss Authorities showed that the account stood in the name of one GWU Investments Ltd of which Appellant was a beneficiary. It was also found that one, The Tharani Family Trust was linked to the said account.
The octogenarian lost her appeal before the First Appeals and carried the matter to the ITAT. Questioning the reopening itself, she also submitted that in any case, she cannot be taxed on the impugned sum. Let us see how.
The reopening was bad in law - Appellant
Appellant submitted she was a Non-resident having stayed permanently in US from as early as 23 March 2004. Her passport also showed that she had stayed in India during FY 2005-06 for less than 60 days, and only had short-stays in the preceding four previous years not exceeding 365 days in all. Given that a Non-Resident had no legal obligation to disclose any foreign assets, nor is liable to any income earned outside of India, there could be no inference of escapement of income liable to tax in India in her hands, so that the reopening itself was invalid. She also reiterated before the ITAT that the information in the possession of the department was incorrect, that she herself did not have a bank account with HSBC Bank and much less was an owner of the account. The account admittedly belonged to GWU Investments Ltd of which the appellant was neither a shareholder nor a director. Therefore, in any case, such amounts could not be brought to tax in her hands.
The reopening was valid – “No one can take advantage of his own wrong”
The return filed by the appellant had certain apparent misstatements. The Tribunal, crucially, found that Mrs Tharani had actually disclosed her status as a Resident in her returns, contrary to what may have been her actual residential status. Incidentally, it was also found that she had filed the returns for Ay 2006-07 mentioning a Bangalore address that she had disposed-off in March 2003. According to the ITAT, the AO was only required to record his satisfaction based on material available on record at the relevant time and any subsequent claim of error in residential status cannot affect the correctness of reasons. Relying on the jurisdictional Court in Multiscreen Media P. Ltd v CIT [ (2010) 324 ITR 54 (Bom)] the ITAT ruled that the requirement of ‘reason to believe’ by a prudent person stood satisfied while the sufficiency of the reasons did not fall for determination at the stage of reopening the assessment. The ITAT also took note of the disproportionate amount discovered by the tax authorities in comparison to the income she had returned. On a totality of circumstances, the ITAT had no hesitation in affirming the reopening.
Would the ITAT have come to the same conclusion if the residential status had been correctly disclosed as ‘Non-Resident’?
The ITAT did not leave this question unanswered. Considering that Appellant left India only on 23 March 2004 to permanently settle in the US, the ITAT found it was too unrealistic to assume that all the money of USD 40 M was earned in just a year and 7 days. The ITAT observed that the AO would have been perfectly justified in reopening the assessment even if her status was correctly declared as Non-Resident, as it was wholly unrealistic to assume that the money at her disposal in the Swiss Bank account reflected income earned outside in a short period of about a year. In doing this, the ITAT has distinguished a number of decisions cited by the appellant that reassessments cannot be done merely for verification or a deeper verification or for clearing the AOs doubts or on the basis of certain assumptions even in cases of non-filing of returns.
Obviously, the magnitude of the sum involved, and the surrounding circumstances tilted the issue of reopening in favour of the department.
Arguments of the Appellant
The submissions of the appellant were mostly by way of affidavits and were on the following lines.
· The Account did not belong to her as it was admittedly in the name of GWU Investments Ltd.
· She was neither a shareholder nor director nor a beneficiary of GWU Investments Ltd.
· She was merely a beneficiary of a discretionary trust by the name ‘The Tharani Family Trust’ of which GWU Investments was the Settlor;
· She would be taxable only upon distribution by the discretionary Trust as held by the Supreme Court in CWT v Estate of HMM Vikramsinhji of Gonda and followed in Harshad Ramaniklal Mehta v DCIT ITA 7307/Mum/2011 dated 4/9/19, Deepak B. Shah and Kunal N. Shah v ACIT in ITA 6065/Mum/2014 dt/30/10/18 and Dwarka Prasad Agarwal v ITO in ITA 491/Mum/2016 dt/5/10/2017;
· That no money has so far been received by the Appellant.
· She is a nonresident for FY 2005-06 and hence there could be no tax liability in respect of such an account under Sec 5 read with Sec 9 of the Income Tax Act.
CWT v Late HMM Vikramsinhji of Gondal – “A square peg in a round hole”
One of the main arguments of the appellant was that she was merely a beneficiary of The Tharani Trust which was a discretionary Trust and that she could be taxed only upon distribution as held by the Supreme Court in CWT v Late HMM Vikramsinhji of Gondal ( Civil Appeal 2312 of 2007). However, the Tribunal noted that the appellant ‘was in no position to throw any light on the trust or its structure’. The Base Note received did not find a mention of this fact. There was only some unsigned draft copy of trust deed as referred in the AO’s remand report, which was neither authentic nor placed before itself in the paper book. Therefore, the Tribunal observed that there was not even minimal evidence of the appellant being a beneficiary of the said trust. What was available from the Appellant were only self-serving statements and letters from a functionary of HSBC Bank confirming that the appellant was not a settlor or trustee of the Trust, not was a recipient of the trust monies, that she was the beneficiary of the trust which itself has since been terminated. The letters from HSBC were given scant respect by the ITAT in the backdrop of indictment worldwide against HSBC and its officials for actively promoting tax manoeuvring and evasion. Reliance of the appellant on the Supreme Court judgement failed as the appellant could not marshal enough evidence to show she was indeed a beneficiary of the discretionary trust. What also comes out clearly is that the strong disapproval of the Tribunal to the conduct of HSBC Bank and the Cayman Islands in assisting tax evasion and money laundering, further complicating matters for the appellant.
Omnia Praesumuntur Contra Spoliatorem – Every presumption is made against a wrongdoer
It is important to note that in the course of reassessment, the Appellant refused to sign the customary Consent Waiver Form to waive her privacy rights and also any objections to furnishing information by HSBC Private Bank, Geneva to the Indian Tax Authorities. The refrain of the Appellant was that it would be illogical or unnecessary to sign the Consent Form as the account itself admittedly did not stand in her name. The refusal to sign the Consent Form was one of the main pillars of the ITAT ruling, with the ITAT taking a strong view that the Appellant hindered the process of investigation and did not come with clean hands. Talking about the effect of withholding evidence, one may quote from Crisp v Anderson, “if a man, by his own tortious act, withheld the evidence by which the nature of his case would be manifested, every presumption to his disadvantage will be adopted”. Applying this well-established principle, the ITAT dismissed the Appellant’s claim that the department had not been able to conclusively prove anything as she actively prevented the department from getting more information by not signing the consent form. In the ultimate analysis, the non-signing of Consent form turned out to be the Appellant’s undoing.
Surrounding Circumstances – Smoke and Mirrors
A Non-Resident not willing to sign a consent form in respect of an account that was not in her name surely cannot be a crime. So, was the appellant merely a victim of circumstances? A look at the surrounding circumstances brings out murkier details, and the ITAT simply refused to wear blinkers in deciding this case. The Indian address of GWU Investments Ltd had the same Indian address as that of the Appellant. The Settlor was registered in a tax haven where secrecy laws prevent disclosure of shareholders of companies registered there. The Settlor had settled the monies in favour of the Trust for which HSBC Guyerzeller Trust Company acted as the Trustee. It was common knowledge that HSBC Bank was notorious for assisting tax evaders across the world in stashing away billions of dollars in accounts in Switzerland and also provided the services of accountants, lawyers, bankers and trust specialists to its customers. In fact, soon after the account with HSBC Bank was discovered by the Indian authorities, the account was mysteriously closed and all the monies transferred to an undisclosed recipient. If that by itself was not enough, GWU Investments Ltd, the Settlor company in the Cayman Islands was also liquidated with no trace of who was behind the company. The anonymity of GWU, a common address for the appellant and GWU, a banker known for nefarious dealings, mysterious closure of the bank account as well as GWU were too much of a coincidence for the ITAT to ignore.
Plus, the fact that such a huge sum was deposited soon after the Appellant acquired her Non-Resident status was the proverbial last straw on the Camel’s back.
Not bound by rigid rules – A balanced approach
The Tribunal observed that as the final fact-finding authority, it cannot be superficial in its assessment of the genuineness of a transaction and that a 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, the preponderance of human probabilities and ground realities. Relying on the Supreme Court in CIT V Durga Prasad More [ (1971) 82 ITR 540(SC)] the Tribunal took a holistic view of the matter rather than be swayed by the hyper-technical submissions of the appellant. The Tribunal also referred to the Supreme Court in Sumati Dayal v CIT [(1995) 214 ITR 801(SC)] to explain that in the given set of circumstances, it would be inappropriate to cast the onus on the department, as direct evidence of illegal transactions would be rarely available, as such transactions take place in secret.
Appellant was not Mother Teresa!
On a test of the totality of circumstances and observing that the Appellant was not a Mother Teresa to whom an unknown person with complete anonymity had settled a trust to given her US 40M, the Tribunal declined to interfere in the order passed by the lower authorities and confirmed the addition of Rs. 196,46,79,146.
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