The Income Tax Appellate Tribunal (ITAT) dismissed the Revenue’s appeals and upheld the assessee’s cross-objections, holding that credits in the bank accounts of foreign companies owned by nominee shareholders do not constitute undisclosed foreign income under the Black Money Act, and that a notice under section 10(1) is void if it fails to specify the relevant financial year.
Background & Facts
The Dispute
The assessee, Nimit Rai Tiwari, and his wife, Ankita Rai Tiwari, were nominee shareholders of two foreign entities - Suncell Holdings SA (SHSA), a British Virgin Islands company, and M/s. Sino Star Minerals Pte Ltd (SSMPL), incorporated in Singapore. Both companies held bank accounts with BNP Paribas. The Revenue assessed undisclosed foreign income under the Black Money (Undisclosed Foreign Income and Asset) & Imposition of Tax Act, 2015 (BMA) for Assessment Year 2019-20, adding Rs 2,25,53,976 to the assessee’s tax liability.
Key Facts
- Shareholdings: Each spouse held 25,000 no-par-value shares in SHSA; Nimit held 150,500 shares in SSMPL.
- Company timelines: SHSA’s bank account was closed suo-moto on 30 April 2014; the company was struck off on 01 May 2015. SSMPL was incorporated on 19 December 2014.
- Credits received: SHSA received USD 1,96,248 (≈Rs 1,27,97,370) and SSMPL received USD 150,000 (≈Rs 97,56,615) from loans and commissions between FY 2012-13 and FY 2014-15.
- Statutory notices: AO issued a summon u/s 131(1A) on 11 April 2016; a notice u/s 10(1) of the BMA was issued on 04 June 2018.
- Returns disclosed: The assessee disclosed the SSMPL shareholding and bank account in Schedule FA of the ITR for AY 2016-17 onward; SHSA was not disclosed for AY 2019-20 as the company no longer existed.
Procedural History
- 11 April 2016: AO summons u/s 131(1A) demanding details of SHSA and SSMPL.
- 22 April 2016, 02 May 2016, 15 July 2016: Assessees submitted replies with required details.
- 04 June 2018: Revenue issued notice u/s 10(1) of the BMA.
- 07 June 2023: LD CIT (A) order dated 23 March 2021 (assessment) made additions of Rs 2,25,53,976.
- 13 July 2026: Hearing before ITAT.
- 06 August 2026: ITAT delivered the present order.
Parties' Positions
- Revenue (Appellant): Argued that the credits in the foreign bank accounts were undisclosed foreign income/asset and that the notice u/s 10(1) was valid.
- Assessee (Respondent): Contended that the companies were separate legal entities, the shares were no-par-value (no consideration), the loans were genuine, and the notice was barred by limitation and jurisdictional defect.
Relief Sought
The assessee sought deletion of the addition of Rs 2,25,53,976, reversal of the penalty, and confirmation that the BMA notice was invalid.
The Legal Issue
Whether the credits in the bank accounts of foreign companies, held by the assessee and his wife as nominee shareholders, constitute undisclosed foreign income/asset liable to tax under the Black Money Act, and whether a notice issued under section 10(1) of the Act is valid when it does not specify the relevant financial year.
Arguments Presented
For the Revenue (Appellant)
- The AO’s assessment was based on the definition of “beneficial owner” under Explanation 4 to section 139(1) of the Income-Tax Act, treating the assessee as the beneficial owner of the foreign assets.
- The notice u/s 10(1) was issued within the statutory framework and therefore valid.
- The loans and credits were unexplained and therefore chargeable as undisclosed foreign income.
For the Assessee (Respondent)
- Citing Bacha F. Guzdar v. CIT and ITAT precedents, the assessee argued that a company is a separate juridical person; no share-holding, especially of no-par-value shares, creates a tax liability in the shareholder’s hands.
- The notice u/s 10(1) was void for failing to mention the relevant financial year, a jurisdictional requirement per ACIT v. Ajay Kumar Patel and the CBDT guidelines.
- The loans were genuine, supported by additional evidence admitted by the AO on remand; therefore, the credits should not be treated as undisclosed.
The Court's Analysis
The Tribunal first examined the statutory definition of “beneficial owner” and observed that the assessee held no-par-value shares, meaning no consideration was paid. It relied on Bacha F. Guzdar and the principle that a shareholder does not acquire ownership of a company’s assets. The Court noted that the foreign companies were distinct legal entities and that the income earned by them could not be taxed in the hands of the shareholders.
"The notice issued under section 10(1) of the BMA Act, 2015 dated 04.06.2018 is void ab initio as it failed to specify the relevant Financial Year/Assessment Year for which the assessment was proposed."
The Tribunal then addressed the procedural defect, quoting the CBDT guidelines that a notice under section 10(1) must be issued preferably within 30 days of the end of the year in which the information came to the AO’s notice. Since the AO became aware of the foreign assets on 11 April 2016, the notice issued on 04 June 2018 was beyond the permissible period and lacked the required financial-year specification, rendering it jurisdictionally infirm.
Regarding the substantive addition, the Court observed that the AO had, on remand, accepted the additional evidence establishing the creditworthiness of the lenders (V.L. Sharma and S.B. Sharma) and the genuineness of the loans. Consequently, the basis for treating the credits as undisclosed vanished. The Tribunal also highlighted that the commission income of USD 32,565 recorded by SHSA was a company transaction, not an individual one, and that the AO had failed to consider the corresponding debit entries, which resulted in a net loss.
In light of the above, the Tribunal concluded that the additions of Rs 2,25,53,976 and the penalty were unsustainable and should be deleted.
The Verdict
The Revenue’s appeals are dismissed. The addition of Rs 2,25,53,976 made under the Black Money Act is deleted. The penalty imposed under BMA No. 14/DEL/2026 is also deleted. The assessee’s cross-objections are allowed, confirming that the foreign company credits are not taxable in the assessee’s hands and that the notice under section 10(1) is void.
What This Means For Similar Cases
Company as Separate Legal Entity
- Shareholders of foreign companies, especially where shares are no-par-value, cannot be treated as owners of the company’s bank balances.
- Tax liability arises only on income directly received by the individual, not on corporate earnings.
Validity of Section 10(1) Notice
- A notice must expressly state the financial year/assessment year; omission renders it jurisdictionally defective.
- The notice must be issued within 30 days of the year in which the information came to the AO’s notice, failing which the assessment is barred by limitation.
Burden of Proof on Beneficial Ownership
- The assessing authority must produce concrete evidence that the shareholder exercised control over the foreign assets.
- Acceptance of third-party loan documents and creditworthiness evidence can defeat the addition of undisclosed income.
