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Black Money

Black Money

CA Naresh Ajwani

The article considers some aspects of black money. This subject is an involved subject and has several facets - psychological, philosophical, legal, ethics, etc. In this article, the focus is more on income-tax law. The main issue considered is that people generate black money. Then they want to invest the same in business. What are the key provisions for such transactions!

It may be appreciated that not all illegally acquired money is black money. Illegally acquired money means money acquired in violation of a law. However what if the law (or the regime which has made the law) is itself extremely offensive! For example, regime under the Nazi rule; autocrat's rule; harsh communist rule, etc. This article does not deal with such black money.

1. Black money - meaning :

1.1 Black money is not just a stock of money. When people talk about the size of black money they really do not understand the character of the problem. Black money is also a flow, a process. A flow which constantly keeps changing.

Illustration: What is the quantity of water in a river - say Ganga river? Nobody knows. It keeps fluctuating everyday. What was humidity in the air yesterday becomes ice on the Himalayas today and becomes water in Ganga tomorrow. In a few days the water will flow to the sea. Water will continue to change its form and size.

Similarly, Mr. A may have black money today. He goes to a hotel and spends the money. It becomes white money for the hotel. Mr. B may have huge amount of black money. He buys property from a builder. The black money goes from Mr. B to the builder. The builder pays the money to the contractor who brings in sand across the border. For all the labourers and other people employed in extraction and transport of sand, the money received is white money.

1.2 Black money continuously changes in to white money and white money continuously changes into black money. Money constantly crosses the political border - whether through the banking system or otherwise. Once the money has gone abroad, for the receiver it may be white money. There can be no reasonably good estimate of the size of black money. Assuming some one has a good estimate of the black money today, tomorrow that estimate will become outdated.

1.3 Black money generally refers to income / wealth on which income-tax has not been paid. However that need not be the only meaning. Black money can refer to wealth generated by violating any other law.

Wealth generated by evading excise duty, customs, VAT, etc. can be black money.

Wealth generated by earning incomes from illegal activities can also be black money. For example, wealth earned from corruption, drugs, bribing, etc. can also be black money.

"Converting" illegally acquired funds and projecting these as legally acquired funds, can also be considered as black money. Prevention of Money Laundering Act is enacted for this purpose only.

Different laws deal with different illegal activities. One has to consider consequences under all laws.

2. Typical ways to project income as legal :

2.1 Gifts - If an Indian resident receives a gift from anyone, it is a Capital receipt. There is no income-tax on Capital receipts. This is an accepted principle in India.

An Indian resident may transfer his black money abroad through hawala channels, and receive gifts from non-residents. This amount was prima facie not taxable till a few years ago.

The Government has amended section 56. It provides that any receipt of a sum of money, or specified property from anyone who is not a "relative" of the recipient, will be considered as a taxable income.

Thus the concept of Capital receipt has been amended. Planning by way of receipt of a gift has been almost clubbed.

However assuming that the gift is from a relative, does it conclusively mean that the receipt is not liable to tax? See paragraph 2.2 below.

2.2 Section 68, etc. of the Income-tax Act :

The income-tax act has provisions which require the recipient to establish the nature and source of the receipts. There are various sections dealing with different kinds of transactions.

Section 68 - Cash credits.
Section 69 - Unexplained investments.
Section 69A - Unexplained investments.
Section 69B - Investments not fully disclosed.
Section 69C - Unexplained expenditure.

Section 68 provides that if any person receives any funds, then the income-tax department can ask for satisfaction of the nature and the source of funds. This includes the following :

- Identity of the donor. This can be established by providing a copy of passport, or some authentic document.

- The genuineness of the gift. i.e. the fact that the transactions is a gift and not some income projected as a gift. The recipient may establish the identity and the capacity of the donor. However a confirmation from the donor that he has given a gift, along with bank statements will be necessary.

- Capacity of the donor to give the gift. Documents like a tax return, salary certificate - especially if the amount is large.

The above principles apply to most of the transactions described in the sections above.

The primary onus is on the assessee who has received the funds. Mere confirmation from the donor, or the fact that the entry is by cheque, is not sufficient to discharge the onus.

These principles can apply to other kinds of transactions. Some of these are discussed below.

2.3 Loan - There is an Indian company which receives a loan from a BVI company. For the Indian company, the loan is a credit of funds. The identity, genuineness of the loan, and capacity of the lender to give the loan, needs to be established by the Indian company to the satisfaction of the assessing officer.

Merely because the lender is a foreign company, does not mean that the assessing officer cannot ask for the details.

In BVI, there is no need to maintain books of account. There is no requirement of audit. The fact that there is no need of accounts / audit, cannot be an excuse for not establishing the source. The assessee may well have to establish the receipt of funds with the help of bank statements, etc.

2.4 Issues of shares :

Say an Indian resident sends the funds by hawala to a Singapore company. The Singapore company's shares are nominally held by a consultant in Singapore. The Singapore company invests Rs. 100 crores in the Indian company which is owned by the Indian resident.

As in the above situations, the identity, genuineness and capacity of investor has to be established.

Will it be sufficient to claim that the Singapore company is a foreign company and therefore no further details can be asked for?

Generally, if the investor is a foreign company, the details of the source of foreign company's funds is not asked for. However the fact that it is a foreign investor, is not sufficient. Depending on the situation, the capacity of the Singapore company to invest, can be questioned. The assessing officer need not stop at this if he has reasons to doubt the bonafides of the source of funds of the Singapore company. He can ask for prima facie proof that Singapore company has acquired the funds in a bonafide manner.

If it is established that the Singapore company had obtained funds by issue of shares, then the assessing officer can ask for prima facie evidence as to who are the beneficial share holders.

3. Other Laws :

There can be several laws which one may be violating in order to earn black money. If it is established that the person has black money, it can lead to other questions. A few examples are given below.

3.1 Under FEMA, remitting the funds through non-banking channels is a violation of the rules. It is referred to as hawala transactions.

Holding the funds abroad is also a continuing violation.

If a person does not bring in export proceeds but deposits the same outside India, it is a violation.

3.2 Under Prevention of Money Laundering Act, if the funds have been obtained out of scheduled offences, and the same are projected as clean money, it is a violation of PMLA. There are several violations listed in the PMLA Schedule. If the person is a Government servant, it may lead to examination of corruption charges, and therefore PMLA.

3. Summary - In the past few months, we have read several scams being reported. The fact that the funds are coming from abroad may no longer be sufficient excuse. One should be prepared for establishing the ultimate source of funds.