The recent judgement of Income Tax Appellate Tribunal, Mumbai, in the case of Renu T Tharani, a NRI being charged to tax for the $39.7 million deposit in HSBC Geneva is being hailed as a landmark precedent for repatriation of black money to India. Unfortunately, the celebration is premature and misplaced.

The case originates from a “base note” received by the Income Tax department from their French counterparts under India-France tax treaty, containing a list of Indian nationals and residents holding bank accounts in HSBC Private Bank Geneva. Renu Tharani’s son Mahesh T Tharani, reportedly an importer of home decoration items and an Indian citizen at the time of opening the account in 2001-’02, was on the list. He was the director of GWU Investment Limited, a Cayman company that held the HSBC account in question.

The judgement abnegates the basic tenets of tax, trusts and evidence law and confirms the charge on specious notions, hearsay and Google search. It makes a mother accountable for something that is ex-facie explainable by her son. The sustained institutional efforts of the Income Tax department over the last 10 years to arm itself with remarkable investigative powers, specially under international tax treaties, have not been weaponised to bring condemnatory evidence on record.

It may be tempting to dismiss these as innocuous lapses. But in international tax matters, these are often fatal in appellate proceedings, and inhibit enforcement of the judgement in treaty countries from where the assets are ordered to be repatriated to India. Symbolism is meaningless if it doesn’t ring the cash coffers.

Taxing a non-resident

Under the Income Tax Act 1961, the global income of a person resident in India (that is, someone who has stayed in India for more than 182 days in the previous year) is taxed in India. The income of a non-resident is not taxed in India, except for earnings that arise out of a business connection, income source or an asset in India. Under various Double Tax Avoidance Agreements, most non-residents get tax credit in their home countries for taxes paid in India. In either situation, citizenship is irrelevant. In Renu Tharani’s case, it was an accepted position that in the relevant assessment year 2005-2006, she was not resident in India. Therefore, only that income which is deemed to accrue or arise in India was taxable by Indian tax authorities.

When the matter came up in appeal, the right course for the Income Tax Appellate Tribunal should have been to adjudicate: (a) whether Renu Tharani was in fact a non-resident under Income Tax Act; (b) if yes, whether the HSBC deposit are within scope of income chargeable to tax; (c) if yes, whether the deposit is an “income deemed to accrue or arise in India”; (d) if yes, whether the HSBC letters stating that Renu Tharani was not the account holder, signatory or beneficiary was admissible as “primary evidence” under Indian Evidence Act 1872; (e) if no, whether she had any control over the HSBC account, so as to disbelieve that she was merely a discretionary beneficiary of the family trust, and therefore liable to pay tax on the settlement despite not receiving anything from the HSBC deposit.

The burden of proof in issues a, b and c vested with the Income Tax department and d and e vested with Tharani. The Income Tax Appellate Tribunal, as the final fact-finding authority, should have proceeded to frame the issues in sequence and adjudicate each as per law. The sequence was important because if the Income Tax department couldn’t prove that the money in the HSBC account arose in India, then Renu Tharani’s defence that she received none of it was otiose.

Let alone a sequential adjudication, in its findings running into 27 paragraphs in 20 pages, the Income Tax Appellate Tribunal does not even whisper the relevant provisions of section 5(2), 6 & 9 of the Income Tax Act, any provisions of Indian Evidence Act 1872, Indian Trust Act 1882 or its cognate Swiss or Cayman law provisions. The Constitutional rights of a citizen against self-incrimination (described in Article 20 of Constitution) and expropriation (Article 300A of the Constitution) also find no mention.

Conjecture and hearsay

What the Income Tax Appellate Tribunal does instead is nothing short of parody of justice. It taunts Tharani, an octogenarian, as “not being Mother Teresa”, castigates HSBC Bank as “an organisation with a globally established track record of hoodwinking tax authorities worldwide” and denigrates the Cayman Islands, a sovereign nation, as being “known for an atmosphere conducive to hiding unaccounted wealth and money laundering”.

As a background, the Income Tax Appellate Tribunal first reprints two BBC reports on how the HSBC account holders came to be exposed. It then relies upon the press release of the US Department of Justice reporting a settlement with HSBC Geneva under US laws. The relevance of that under Indian law is not explained. There is none. The Income Tax Appellate Tribunal doubles down the hearsay by reproducing what it calls as “trust structure from the HSBC website”. None of these are recorded in the judgment as evidence adduced by the parties, subject to cross-examination or any known rules of evidence.

The Income Tax Appellate Tribunal then uses Google to translate the base note from French into English. The base note ex-facie records GWU as the “beneficial owner” of the account, but the Income Tax Appellate Tribunal understands that owner to be Renu Tharani. The note states clearly that the family trust is the owner of the underlying company, but the Income Tax Appellate Tribunal disregards that too on the ground that the information comes at the “fag-end” of the note.

“Running with the hare and hunting with the hounds” is how Renu Tharani’s conduct is condemned – on the pretext that she refused to sign a consent waiver that would have let the Income Tax department bypass Swiss information exchange laws. In the opinion of the Income Tax Appellate Tribunal, the whole case turns on this singular point. The Income Tax Department could have sought that information from Switzerland under India-Switzerland tax treaty, as amended in 2011 for exchange of information, without any consent from Renu Tharani. But the Swiss authorities would have to be convinced that the information India sought was “foreseeably relevant” for tax administration – in other words, that India was not on a fishing expedition.

Information on how the funds were layered (a common device used to hide the origin of funds is to layer it like onions), and which entities were used as intermediaries, could also be had from Cayman Islands on the basis of information exchange treaty operationalised from 27.12.2011. Each such information received would have been admissible as direct evidence under the Incom Tax Act.

Nationalism tax

The Income Tax Appellate Tribunal ignores all that. It does not interrogate the Income Tax department, at least not on paper, treating it instead with kid gloves. In the final analysis, the judgement of the Income Tax Appellate Tribunal gives imprimatur to the ideology of nationalism tax. Its source can be traced to a 2011 report titled Indian Black Money Abroad In Secret Banks and Tax Havens presented by a task force commissioned by LK Advani when he was Bharatiya Janata Party President. Its members were S Gurumurthy (now a government-appointed member of the board of the Reserve Bank of India), Ajit Doval (now National Security Advisor), R Vaidhyanathan and Mahesh Jethmalani (now member of Home Ministry’s criminal law review board).

The task force recommended nationalising all “monies, assets and bank accounts held abroad by or for the benefit of Indian nationals without declaring the same to Indian authorities” as the panacea to the black money menace. Subramaniam Swamy (then in Janata Party, and now a BJP MP) has echoed these sentiments since at least 2011.

Enacting such a tax legislation, or implementing it through other means, would foul the Constitution Articles 20 and 300A, renege India’s international treaty obligations and imperil Indian businesses abroad to retaliatory impositions by foreign governments. The task force didn’t seem to worry about that as it condescendingly called nations like Switzerland “tiny-tots”. Policymakers must however take note, especially considering past misadventures such as demonetisation, and now the unprecedented economic challenges in wake of Covid-19.

Chief Justice Sharad Arvind Bobde at an event at the Income Tax Appellate Tribunal in New Delhi in January. Credit: IANS

Towards a predictable policy

Tax policy and its attendant judicial pronouncements form the bedrock of a nation’s economic robustness. Speaking at the Income Tax Appellate Tribunal foundation day earlier this year, Chief Justice of India SA Bobde commented that “while tax evasion is a social injustice to fellow citizens, arbitrary or excessive tax also results in social injustice by a government”. He was echoing Nani Palkhivala’s lecture from 1965 titled “The Ideology of Taxation”.

Palkhivala, perhaps one of free India’s most respected jurists, a man who is credited for “almost single handedly saving the Indian democracy” for his arguments in the Kesavananda Bharati case in 1973 had teasingly said that: “Time has come for the parliament to enact a new law: Prevention of Cruelty to Taxpayers Act, which should override all fiscal legislations.”

Unfortunately, the Income Tax department’s arguments before the Income Tax Appellate Tribunal in Tharani’s case, and the tribunal’s acceptance of it, achieves the polar opposite of what Chief Justice Bobde and Palkhivala’s wisdom would command. Immediate corrective measures are in order.

Kabeer Shrivastava is an advocate at the Delhi High Court.