Facts of the Case:
The assessee, an individual, was employed with Baxter India Pvt. Ltd. and later worked abroad. Under the Employee Stock Purchase Plan (ESPP), he acquired shares of Baxter International Inc. Dividends earned on these shares were subject to US withholding tax. Under a Dividend Re-investment Plan (DRIP), the net dividend (after US tax deduction) was automatically reinvested into additional shares. The dividend was not credited to his personal bank account. For AYs 2014-15 to 2016-17, dividend income was not offered to tax in India. From AY 2016-17 onwards, the assessee disclosed the foreign assets in Schedule FA of his return. Based on information received, the Assessing Officer (AO) initiated proceedings under Section 10(3) read with Section 3(1) of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (BMA). The AO treated the reinvested dividend amount as an “undisclosed asset located outside India” and taxed it in AY 2019-20 (the year it came to notice).The CIT(A) upheld the addition and also invoked Section 72(c) of the BMA Act.
Contention of Assessee:
The Assessee contended that AO himself acknowledged the source of dividend income and once source is explained, the asset cannot fall within Section 2(11) of BMA.
The Assessee further contended that proviso to Section 3(1) of BMA applies only to “undisclosed assets” not to “undisclosed income”. Dividend income, even if not declared, cannot be re-characterised as an asset merely because it was reinvested.
Contention of Revenue:
The Revenue contended that assessee was resident during relevant years and therefore global income was taxable in India. Dividend income was not disclosed and thus became “undisclosed income”.
The Revenue contended that such income was converted into shares; therefore, resulting shares constituted “undisclosed foreign assets”. Accordingly, as per the proviso to Section 3(1) of BMA, an undisclosed asset is taxable in the year it comes to the notice of the AO.
Ruling:
The Tribunal held that where the source of investment, namely dividend income, stands duly explained and is acknowledged in the assessment order itself, the foundational requirement for treating the resultant asset as an “undisclosed asset located outside India” under Section 2(11) of BMA is not satisfied. In the absence of failure to explain the source, the deeming provisions of the proviso to Section 3(1) of BMA cannot be invoked. The Tribunal clarified that the proviso applies exclusively to “undisclosed assets” and not to income; dividend, by its intrinsic character, constitutes income, and its automatic reinvestment into shares does not convert it into an undisclosed asset.
Editors Note:
The Tribunal reaffirmed that BMA is a stringent penal statute and must be strictly construed. The definition under Section 2(11) cannot be diluted. The ruling reinforces conceptual clarity between undisclosed foreign income and undisclosed foreign assets and therefore mere non-disclosure of income under the Income-tax Act does not automatically trigger BMA consequences.
Citation:- Ketan Ramesh Dhamanaskar v Addl. CIT Central Range-7 (BMA No.10/Mum/2024) of Hon’ble Mumbai Tribunal