Gidwani Case Challenging Foreign Black Money Tracking

January 25, 2016 : There are wheels within wheels when it comes to black money and Swiss accounts. The taxmen, having gone after those they suspect, may soon sense that most cases are not the open-andshut kind.

Avan Nelum Gidwani, a Parsi lady married to a Sindhi gentleman, is one among the many who was slapped with a tax demand, penalty and prosecution notice in connection to an undisclosed account with HSBC Geneva. Now after a year, it’s the tax office which may find itself in a Catch-22 situation.

A fortnight ago, Mrs Gidwani produced a piece of paper — a certificate from the British bank — that says that the account was not in her name but was in the name of a trust. She, along with her husband and son, were beneficiaries of an offshore trust called Shelshy. But this new evidence — which demonstrates that the money is with the trust and nothing may have ever been distributed to her — will now have to be considered by the IT department. This is the first time such a document has come up before a tax tribunal.

What would the taxman do? Well, it can always raise a tax demand on the discretionary trust. But that would be awkward as the trust’s settlor and trustees could well be non-residents. Chasing them would be a far cry, even beyond the jurisdiction of our authorities. So, the million dollar question is: can the tax department stick to its earlier tax demand on Mrs Gidwani?

That may not be easy. On one hand, it’s tough for the assessing officer to straightaway make a fresh demand on Mrs Gidwani because there may be not any ready evidence that she had earned income from the trust. On the other hand, if the department swallows its pride and drops the demand and penalty, it could set a precedent. It would weaken hundreds of cases where tax officers are chasing people who are not direct account holders but beneficiaries of trusts that are allegedly holding hidden wealth of Indians.

Most named in the HSBC list are beneficiaries of offshore trusts. The conventional understanding, backed by Supreme Court rulings, is that unlike a ‘specific’ trust where the beneficiaries are known and their entitlements are fixed, the income of a ‘discretionary’ trust cannot be treated as income of the beneficiaries if there is no distribution to the beneficiaries.

Since her appeal was pending, Avan Gidwani had filed a writ petition before the Bombay High Court after she received the prosecution notice. The court did not quash the notice but directed the Commissioner of Appeals — the first appellate authority under the tax law — to decide the matter in three months.

After her appeal was dismissed, she moved the Income tax Appellate Tribunal — the second appellate body — and within a few days filed a stay petition. The Tribunal, which granted a stay and admitted the certificate from HSBC as fresh evidence, on January 8 said that the document should be submitted to the tax department for its consideration.

The taxman can’t share the list of HSBC account holders with the Enforcement Directorate, though the latter may be keen to get hold of it. That’s because the finance ministry has always held that this was data obtained under India’s tax treaty with France. Such information can be used only to recover tax and not haul up people for irregular transactions in foreign currency – the kind of stuff ED deals with.

The tussle between Avan Gidwani and the tax department is a story that would be closely tracked by all who have been pulled up in connection with overseas bank accounts as well as by the tax office which may be eventually forced to change tack depending on the outcome.

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