Charge of Tax under the Black Money Act, 2015

Understand Charge of Tax on Undisclosed Foreign Income and Assets

Key rules to remember

Charge of tax (Section 3(1))

Tax = 30% × total undisclosed foreign income and asset

Applies for assessment years commencing on or after 1 April 2016. Tax only; penalty and interest are separate.

Total undisclosed foreign income and asset (Section 4(1))

(a) undisclosed foreign income in return + (b) foreign income where no return filed + (c) value of undisclosed foreign asset

Income is from a source located outside India. The asset must be located outside India.

Year of charge for an asset (proviso to Section 3(1))

Taxed on its value in the previous year in which it comes to the notice of the Assessing Officer

Value means fair market value, determined in the prescribed manner.

Computation rule (Section 5(1)(i))

No deduction for expenditure or allowance and no set-off of loss

Applies whether or not the item would be allowed under the Income-tax Act.

Reduction for taxed income: assets in general (Section 5(1)(ii))

Chargeable value = Value of asset − income already assessed or assessable that the asset was acquired from

Income assessed under the Income-tax Act before the year to which this Act applies, or assessable or assessed under this Act, is reduced from the value. The assessee must furnish evidence to the Assessing Officer's satisfaction. No proportion is used for assets other than immovable property.

Reduction for taxed income: immovable property (Section 5(2))

Reduction = Value of asset on the first day of the financial year of notice × (assessed or assessable foreign income ÷ total cost of asset); Chargeable value = Value − Reduction

The proportion applies only to immovable property. Evidence must satisfy the Assessing Officer.

Rounding (Section 79)

Income and asset: nearest ₹100. Amount payable or receivable: nearest ₹10

Method is as prescribed.

No double taxation (Section 4(3))

Income taxed under this Act is not part of total income under the Income-tax Act

Also, Section 4(2) excludes certain assessment variations (transfer pricing and computation provisions) from undisclosed foreign income.

How to solve Charge of Tax on Undisclosed Foreign Income and Assets questions

1. 1Identify the item: is it foreign-source income or an asset located outside India? Financial interest in an entity counts as an asset.
2. 2Check disclosure. For income, was it disclosed in the return filed in time, or was no required return filed? For an asset, was it undisclosed?
3. 3Fix the year of charge. For an asset, it is the previous year in which it came to the Assessing Officer's notice, not the year of acquisition.
4. 4Take the value: fair market value. If the asset is immovable property and a reduction is claimed, Section 5(2) uses the value on the first day of the financial year in which it came to notice.
5. 5Allow no deductions or losses. Then apply the Section 5(1)(ii) reduction only if the assessee furnishes evidence that the asset was acquired from income already assessed or assessable to tax.
6. 6Compute the reduction by asset type. For immovable property, use the proportion: value × taxed income ÷ total cost (Section 5(2)). For any other asset, such as a bank deposit, subtract the income assessed or assessable that funded it (Section 5(1)(ii)). Deduct the reduction from the value.
7. 7Add the income and the net asset value, round off to the nearest ₹100 (Section 79), and apply 30%.
8. 8State that the income is excluded from total income under the Income-tax Act (Section 4(3)) and mention that penalty and interest are charged separately.

Quickest way: Four-line shortcut

Common mistakes in Charge of Tax on Undisclosed Foreign Income and Assets

• Taxing the asset in the year it was acquired.

  Students carry over the habit of taxing income in the year it is earned.

  Fix: Use the proviso to Section 3(1): the asset is charged on its value in the year it comes to the Assessing Officer's notice.

• Using the cost of the asset as the base instead of its current value.

  Cost is the familiar base under the Income-tax Act.

  Fix: The charge is on fair market value. Cost appears only as the denominator in the proportion for immovable property.

• Allowing expenses or loss set-off against undisclosed foreign income.

  Students apply ordinary computation rules.

  Fix: Section 5(1)(i) allows no deduction or set-off, whether or not allowed under the Income-tax Act.

• Reducing an overseas immovable property by the taxed income in rupees, not proportionately.

  The reduction seems to be simple subtraction.

  Fix: For immovable property, Section 5(2) scales the reduction by value ÷ cost. In the Act's illustration of a house property, ₹20 lakh of ₹50 lakh cost gives ₹1 crore × 20/50 = ₹40 lakh.

• Applying the Section 5(2) proportion to a bank deposit or other asset that is not immovable property.

  Students treat the house-property illustration as the rule for every asset.

  Fix: The proportion is for immovable property only. For other assets, Section 5(1)(ii) reduces the value by the income assessed or assessable, if evidence is furnished.

• Including the same income again in total income under the Income-tax Act.

  Students forget the Acts are separate.

  Fix: Section 4(3) keeps income taxed under this Act out of total income under the Income-tax Act.

• Applying the reduction without evidence.

  Students treat the reduction as automatic.

  Fix: The assessee must furnish evidence to the Assessing Officer's satisfaction that the asset came from income already taxed.

Worked examples