2026 (1) TMI 1506 - AT - Income Tax

Black Money Act classification of foreign shares acquired by dividend reinvestment held as income, not undisclosed asset; addition deleted

Interpretation of the Black Money Acts scope focused on whether foreign shares acquired by automatic dividend reinvestment constitute 'undisclosed assets ... Black Money - “undisclosed assets located outside India” within the meaning of section 2(11) of the BMA Act - proceedings under section 10(3) of BMA - undisclosed foreign income by applying the proviso to section 3(1) of BMA Act - fundamental condition prescribed under section 2(11) of the BMA Act for treating an asset as an “undisclosed asset located outside India” - HELD THAT:- Shares of “Baxter International Inc.” were acquired by the assessee under the Employee Stock Purchase Plan and subsequent Dividend Re-investment Plan, and that the source of such acquisition, namely dividend income, stands explained and is duly recorded by the Assessing Officer himself in the assessment order. We further find merit in the contention of the Ld. AR that the deeming fiction contained in the proviso to section 3(1) of the BMA Act applies only to undisclosed assets and not to undisclosed income. In the present case, what has been sought to be taxed is dividend income, which by its very nature constitutes income and not an asset. The conversion of such income into further shares through an automatic reinvestment mechanism does not alter the character of the original receipt, particularly when the source thereof is neither unaccounted nor unexplained. Therefore, the invocation of section 3(1) read with section 10(3) of the BMA Act is legally unsustainable on the facts of the present case. There is no element of tax evasion or concealment, and no prejudice has been caused to the revenue, particularly when the assessee would have otherwise been eligible to claim relief under section 90 of the Income-tax Act, 1961. The ratio laid down in Sri Srinjoy Bose [2023 (6) TMI 22 - ITAT KOLKATA], Vikash Marda [2025 (1) TMI 276 - ITAT KOLKATA] and Akhilesh Singh [2024 (7) TMI 130 - ITAT KOLKATA] squarely applies to the facts of the present case. We hold that the shares of “Baxter International Inc.” cannot be treated as “undisclosed assets located outside India” within the meaning of section 2(11) of the BMA Act, and consequently, the addition made under section 10(3) of the BMA Act is unsustainable in law. Accordingly, the impugned order of the Ld. CIT(A) is set aside and the addition made by the Ld. AO is deleted. Decided in favour of assessee. Issues: (i) Whether shares acquired under dividend reinvestment qualify as 'undisclosed asset located outside India' under section 2(11) of the BMA Act and can be charged under section 10(3); (ii) Whether the proviso to section 3(1) (deeming of acquisition year) and section 72(c) of the BMA Act could be invoked where the source of investment (dividends) was explained and foreign tax was withheld; (iii) Whether invocation of section 72(c) by the appellate authority without prior notice violated principles of natural justice.Issue (i): Whether the shares obtained by automatic dividend reinvestment are 'undisclosed assets located outside India' and liable to tax under section 10(3) of the BMA Act.Analysis: The shares arose from dividend receipts that were shown to have been taxed abroad (withholding) and the assessing officer recorded the source as dividend income. The statutory definition of 'undisclosed asset' requires non-disclosure and inability to satisfactorily explain the source. The character of the original receipt as income does not change merely because it was reinvested automatically into additional shares when the source is explained and disclosed in Schedule FA in subsequent returns.Conclusion: The shares are not 'undisclosed assets located outside India' under section 2(11) and the addition under section 10(3) is not sustainable in favour of the assessee.Issue (ii): Whether the proviso to section 3(1) and section 72(c) can be applied to tax the dividend income converted into shares when the source was explained and foreign tax withheld.Analysis: The proviso to section 3(1) operates in relation to undisclosed assets and is a deeming fiction about the year of acquisition of such assets. Where the contested charge seeks to tax dividend income (an income, not an asset) and the source of investment is explained with foreign withholding tax having been paid, applying the deeming fiction to treat the income as an undisclosed asset is inconsistent with the statutory scheme. Further, section 72(c) presupposes existence of an undisclosed asset as defined under the Act.Conclusion: The proviso to section 3(1) and section 72(c) cannot be validly invoked on the facts; this conclusion is in favour of the assessee.Issue (iii): Whether invocation of section 72(c) by the appellate authority without prior notice offended natural justice.Analysis: Section 72(c) was not invoked by the assessing officer in the assessment order; it was relied upon by the appellate authority. Invocation of a provision not previously applied without giving notice to the taxpayer denies an opportunity to be heard on that specific contention.Conclusion: Invocation of section 72(c) by the appellate authority without notice violated principles of natural justice and is against the assessee.Final Conclusion: On the substantive issues decided, the assessment addition under section 10(3) read with the proviso to section 3(1) is unsustainable because the asset was acquired from an explained source of dividend income (with foreign tax withheld) and the deeming/section 72(c) route was inapplicable; accordingly the appeal is allowed and the addition is deleted.Ratio Decidendi: Where a foreign asset is acquired from an explained source of income (documented dividends with foreign withholding tax) and the source is disclosed, the asset does not qualify as an 'undisclosed asset located outside India' under section 2(11) of the BMA Act, and the proviso to section 3(1) (deeming of year of acquisition) and section 72(c) cannot be applied to convert that income into an undisclosed asset for taxation absent prior notice and an unexplained source.