Legal route clouds Income-Tax department's hopes of tax recovery from NRIs, FPIs

The income-tax (I-T) department has raised concerns over the fate of their initiatives to corner tax dues from the illegal account holders who stashed away funds in HSBC’s Geneva branch, as well as foreign portfolio investors (FPIs) who failed to pay minimum alternate tax. Indeed, it is going to be a long battle for the department to recover tax dues as both HSBC account holders and foreign investors moved court.

The concerns assume importance amid the confusion over retrospective tax issues and the recent decision by the government to stop pursuing the Vodafone case.

"We are going as per the I-T law. Raising demand with respect to penalty is the part of the prosecution process. It is obvious that law will take its own course, we cannot force penalty till the time matter gets concluded,” a senior I-T official told dna.

According to tax officials, the matter will just get prolonged in the legal battle, putting the tax recovery in the limbo.

Five foreign investors teamed up and filed a writ petition in Bombay high court, and the matter is going to be heard on May 6. On the other hand, four NRIs whose names figured in the HSBC black money list, last week filed a writ petition before the court, seeking stay on demands raised by the tax sleuths.

Aberdeen Asset Management, on Tuesday, won temporary relief from a tax bill it was facing after the UK-based firm filed its challenge with the high court in response to a claim for a minimum alternative tax (MAT) payment of about Rs 20 lakh. Granting a stay on initiating any penalty proceedings against Aberdeen, the court asked the I-T department to submit its response by June 10, sources said.

The tax department had slapped demand notices for collecting Rs 608 crore from 68 FPIs on minimum alternate tax (MAT), and was anticipating to make it to a whopping Rs 40,000 crore by covering all foreign investors. In the other case, the department recently ordered Central Depository Services Ltd (CDSL), a leading securities depository handling demat accounts, to attach the accounts of around 20 individuals, mostly NRIs, named in the HSBC black money list. This was the first big move to attach assets from money launderers who have stashed away money abroad.

The I-T department has been probing 200-plus NRIs, where it is suspected that they have stashed their illicit money in their accounts in HSBC’s Geneva branch, anticipating the recovery to the tune of Rs 2,300 crore.

“HSBC account holders claim that it is unfair to levy tax demand on those who stayed abroad for almost a decade, and have no business in India. Undoubtedly, petitioners must have strong ground for challenging the tax department,” Bhawna Doshi, tax expert with KPMG, told dna.

“Having account in Swiss bank does not mean that the money is illegitimate. The probe should be based on evidence, not assumptions,” added Bhawna.

Mitil Chokshi, partner, Chokshi & Chokshi, believes that the department cannot penalise or prosecute as appeals are pending, it should proceeded with penalty, prosecution and attachment post the decision of the quantum appeal with CIT(A). “No person can be punished if he proves that there is a reasonable cause for failure,” said Chokshi.

The issue recently gained momentum, when foreign investors, one after the other, got tax demand notices from the tax authorities claiming the huge payment of dues.

Tax experts, who dna spoke to, feel that the Supreme Court's verdict will settle the entire issue of applicability of MAT on capital gains made by FPIs. “We are hopeful that the apex court verdict will be in favour of foreign investors. In that case, the government will automatically drop the prosecution against all FPIs,” said Doshi.

Recently, the government and Castleton Investments Ltd, a Mauritius-based foreign investor, agreed to accomplish hearings in the apex court on their tax dispute pending since 2013.

Castleton had approached the SC against a 2012 ruling by the Authority of Advance ruling (AAR), which had said the company would have to pay MAT on capital gains arising from sale of shares.