India Tax Officials May Push Back After Failed Evasion Probes

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By Siri Bulusu

An Indian tax court ruling allowing tax assessment officers to restart a failed investigation could set a “nasty precedent” for future tax evasion cases, say tax practitioners.

The Income Tax Appellate Tribunal in New Delhi ruled that unverified evidence wasn’t enough to implicate Shyam Sunder Jindal, chairman of Jindal Group, for nondisclosure of income held in a Swiss HSBC bank account. Instead of dismissing the case, the tribunal ruled April 10 that assessing officers could restart their investigation against Jindal to produce official bank documents.

“The Delhi case will be followed very closely because there are hundreds of tax evasion cases being investigated and the court is offering the assessing officer a fresh chance to bring evidence against the taxpayer,” Amar Gahlot, direct tax consultant at Lakshmikumaran & Sridharan Attorneys, told Bloomberg BNA April 28.

As of May 3, India’s revenue department raised a tax demand of $840 million against 628 individuals or entities accused of tax evasion—some of which are understood to have undisclosed accounts at HSBC Geneva.

Of the demanded amount, $52.2 million has been recovered, according to practitioners.

In another case against Kolkata-based steel manufacturer Bishwanath Garodia, the Kolkata tax tribunal Sept. 10, 2016, “quashed” the tax demand made by revenue authorities, as it was based on leaked evidence and ultimately led to an unsuccessful raid.

“There is a flurry of cases around the 628 individuals,” Gahlot told Bloomberg BNA May 10, adding that the cases concerning Jindal and Garodia “are representative of how the revenue department is going to be able to collect on their demand or not.”

If the Kolkata tribunal’s decision sets precedent then the demand raised by the government will need to subtract all the failed investigations, Gaholt said May 10, but if the Delhi decision is followed, it creates potential for the assessing officers to gather more evidence and make a stronger case.

“Assessing officers may act on a tip-off to the tax department, but if they do not find something over the course of the search, no addition can be made to the taxpayer’s income,” Gahlot said. He added in an email the Delhi ruling “emboldens the tax department in having ample chances to obtain evidences and do investigations,” though he hasn’t been privy to the same information as the assessing officer, and therefore doesn’t know upon what information they acted.

Jindal Case

The original tax assessment order against Jindal in 2014 added 6,907,414 rupees ($107,567) to Jindal’s 2005-2006 income and was made based on unverified evidence provided to tax officers from an unknown source.

Jindal appealed the order with the New Delhi commissioner of appeals, claiming the Swiss bank account didn’t exist.

Tax officers deemed the documents were valid after verifying Jindal’s personal details on the anonymously sourced document—including residence, date of birth and passport number—with government officials.

Jindal denied ownership of the bank account, according to court documents, and claimed he was never allowed to examine the “highly doubtful” information the tax authorities were acting upon.

His home and office were searched, under Section 132 of the Income Tax Act, 1961, in 2011 after Jindal refused to sign a consent waiver allowing HSBC Geneva to disclose any information if it existed.

According to court documents, however, the Delhi tribunal found contradicting statements in the assessing officer’s court order which claimed that their evidence against Jindal was provided by the Swiss government, but also said Indian tax officers were waiting on official bank documents from the Swiss government.

Restarting Investigation

Now granted a chance to restart the investigation, revenue authorities are expected to submit a request to the Central Board of Direct Taxes’ fraud investigations department, called the Foreign Tax & Tax Research Unit, which will contact their Swiss counterpart and ask for cooperation in obtaining official HSBC Geneva bank account details. Through this route, Gahlot said, the taxpayer wouldn’t be required to cooperate by signing a consent waiver.

The India and Switzerland tax treaty includes a provision for the automatic exchange of information, a provision consistent with a global trend to crack down on black money and tax evasion.

“In today’s time, the Swiss government will take the tax authority’s request very seriously,” Gahlot said, adding that if genuine evidence is found, the Indian government will likely take a hard stand against tax evasion and pursue a penalty fee and prosecution.

Gahlot said while the tax tribunals make decisions independent of any political leanings in the government, the tax department has been aptly clear in its stand that it won’t let high net worth individuals off the hook if they are found guilty of tax evasion.

Garodia Case

Assessment officers searched another individual’s premises based on anonymously sourced documents alleging Kolkata-based steel manufacturer, Bishwanath Garodia, had up to $1 million in undeclared income in 2005, and $1.1 million in undeclared income in 2006, hidden in a HSBC Geneva bank account.

Garodia is owner of the Mangal Steel Group, according to court documents, and was a founder of Mangal Steel Enterprise Limited, which reported after-tax profits of $481,421 from an operating income of $14.5 million during financial year 2015-2016.

After initially submitting that he never had the HSBC account in Geneva, court documents state that Goradia filed an affidavit before the Commissioner of Appeals stating that the bank account in question was opened by someone else in his name. He stated that funds from his export business were deposited in the bank account in question, before being moved to Singapore.

Seizing on the leaked information, Indian tax authorities searched Garodia’s home in an attempt to find documents verifying the existence of the Swiss bank account, but found nothing, thus exhausting the tax assessment officer’s ability to further investigate the claim.

The Kolkata tax tribunal ruled in favor of Garodia Sept. 10, 2016, and deemed the search proceedings invalid, as the tax officer’s search didn’t produce any incriminating material.

Appeal, Additional Probe Expected

The Kolkata court granted complete relief to Garodia, but the revenue authorities are expected to appeal the ruling and attempt to investigate the claim using more formalized methods.

“These decisions have once again highlighted importance of corroborative and authentic evidence to support an allegation,” Shailesh Kumar, director of direct taxation at Nangia & Co., told Bloomberg BNA in an email April 28.

Kumar said the leaked HSBC Geneva documents have been considered an important source of information by Indian tax authorities who have initiated search operations in similar cases where Indian nationals were alleged to have wealth held in foreign accounts.

“In light of these decisions, they are also likely to make more efforts to gather supporting evidence before making [income additions] based on [the leaked information],” Kumar said.

To contact the reporter on this story: Siri Bulusu in New Delhi at correspondents@bna.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bna.com

For More Information

The April 10 ruling in the Jindal case is at http://src.bna.com/ort.

The Sept. 10, 2016, ruling in the Bishwanath Garodia case is at http://src.bna.com/orv.

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