Powers Of Enforcement Directorate (ED)
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POWERS OF ENFORCEMENT DIRECTORATE (ED)
Under INCOME TAX ACT – DEMONITISATION CASES - PMLA – BLACK MONEY ACT
Introduction
In the modern world due to intermittent introduction of new tax regimes, schemes and increasing complexities in the tax system, it is becoming a task for the commoners or the people without the adequate skills to file their tax returns. This has led to monumental confusion and harassment. United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) in its report has stated that despite GST, India’s tax regime is second most complex in the Asia-Pacific region, which is opposite to the objectives and perspectives designed by our government in entirety.
Post demonetization, with the introduction of Income Declaration Scheme,2016 (IDS), an opportunity was given to tax evaders to disclose their unaccounted income or assets and come out clean by paying the applicable tax, cess and penalty totalling 45% of the undisclosed income. IDS was designed in a manner so as to allow those earners to pay taxes who may have unknowingly not paid tax on certain income or assets bought from the income. For instance, one could have missed paying capital gains tax on the money received from sale of an inherited property. However, it is to state that if a person has filed a disclosure under the scheme, he shall be liable to be questioned on reasonable grounds and would attract all consequences under the Income Tax Act. He may have to prove the absence of any Culpable Mental State, a relatively new concept that was introduced with section 54 of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015. It states that a person has to prove non-existence of culpable mental state (ill intentions) for non-disclosure of the assets and income to claim innocence under this Act. The Income Tax Department thus has the power to question the intentions of the assessee to curb the offence of hoarding black money.
There are different classes of income tax authorities that are competent to initiate proceedings under section 116 of Income Tax Act. These authorities also have power to take cognizance of matters in contravention of Prevention of Money Laundering Act, 2002 and the Black Money Act, 2015. Therefore, we are left with the question as to the ambit of the powers of the Enforcement Authority and the powers vested in them.
Powers of ED under PMLA, 2002
Under section 4 of PMLA, punishment for money laundering may extend to seven years with a fine. ED has authority to attach the property of a person indulging in money laundering under section 5 of the Act. The aforementioned section gives powers to the ED in furtherance of offences committed under PMLA, 2002.
Another provision that has been encircled by various controversies is Section 65 of PMLA, which gives them the opportunity to pick and choose the provisions they want to apply as convenient to them either under CrPC or PMLA.
In Gaurav Joshi vs. Income Tax Officer , it was held that Section 118 of the Income-tax Act and any notification issued thereunder shall apply in relation to the control of tax authorities as they apply in relation to the control of the corresponding income-tax authorities, except to the extent to which the Board may, by notification in the Official Gazette, otherwise direct in respect of any tax authority.
Thereby, it is to state that the authorities that are given powers under the Prevention of Money Laundering Act, 2002, have similar powers as that of an Income Tax officer in determining and attaching the properties if found that such properties are unlawful and in contravention of the provisions of the Act.
Powers of ED under Black Money Act, 2015
Section 10 of the Act provides that for the purposes of making assessment or reassessment, the assessing officer may on “receipt of information from an income tax authority”, proceed under the provisions of this Act.
Section 10(1) provides that it is only the “Assessing Officer” who can issue a notice under the act with the intent to assess or reassess the undisclosed foreign income and asset. Further section 6(1) provides that the Income Tax authorities specified in section 116 of the IT Act shall be the tax authorities for the purposes of this Act. No authority apart from the assessing officer is competent to go in for making assessment or reassessment under the Black Money Act, 2015.
Therefore, in conclusion, it can be said that on “reasonable ground” and on the basis of “reasons to believe”, an assessee if seen in contravention of the provision of Prevention of Money Laundering Act, 2002 and Black Money Act, 2015, can be further prosecuted by the Enforcement Directorate and Section 116 and 118 of the IT Act, gives powers to these authorities as that of an Officer-in-charge under the IT Act.
Unintentional Concealment of Information due to Mistake or Omission
Another aspect to consider is accidental concealment of information of the undisclosed assets and income. In such event, there could be relevant grounds in favour of the assessee in order to protect them from the penalties levied under various provisions of IT Act as well as other statutes. Due to the non-disclosure of the assets or the incomes, penalties could be attached under Section 270A and 271 of the IT Act, 1961, however, it can only be done in case ‘of intentional or deliberative action by the assessee in furtherance of undisclosed income, investments and assets.
In Commissioner of Income-tax v. Angara Satyam , it is stated that if the concealment is of such nature that it involves deliberate furnishing of inaccurate particulars in the making of an original return, such would be regarded as escaping or evading taxes.
Whereas, in Dayabhai Girdharbhai v. Commissioner of Income-tax , it was observed that filing of the revised return after the filing of the original return, will indicate the correction or the omission of the return under the provisions of IT Act and such will not result into deliberate concealment of particulars of the income. In furtherance of penalty there has to be an effective concealment of income and the motive to escape assessment. However, in case the assessee has neither tried to escape assessment nor tried to conceal information of the sources of income, the penalty should not be levied on the account of revised return of income.
In Cement Marketing Co. Ltd. vs. Asst. CST , it was stated that, in the absence of deliberateness, i.e., in-so-far as default in not returning the correct income or in not furnishing true and correct particulars in its respect, would not lead to the inference of the original return being false, i.e., as opposed to a genuine omission/mistake, justifying the levy of penalty. Therefore, it is to say that if the inadequacy while filing the original return is provided with an explanation, whereby the mistake committed by the assessee has been proved to be a bona fide mistake or a genuine one, there can be no penalty or prosecution under the IT Act.
Thus, if an assessee has deviated from filing all the requisite details of their respective income and they wish to file a revised return for divulging the additional sources of income, that had not been disclosed in the original return, which does not result into levying of penalty. Provided that, such alteration is explained as a bona fide or a genuine mistake, which would ultimately result into non- interference of Enforcement Directorate into further investigation or enquiry over the conduct of the assessee.
Powers of ED under Demonetisation Cases
‘Post-demonetisation, the focus is on greater collaboration between the tax department and other investigating agencies to ensure that those caught with big amounts of unaccounted income are simultaneously probed for corruption and criminal activities’. Thus a probe by an ED in cases of undisclosed income, if proved, to be bona fide can be left alone, however with the recent amendments to the law, ED have been empowered to take cognisance of such matters in case the assessee is unable to provide any genuine reasons and the department is of the view that the said income is a source of money laundering or tax evasion.
Rational connection postulates that there must be a direct nexus or live link between the material (i.e. undisclosed income) coming to the notice of the Income-tax Officer/Enforcement Directorate and the formation of his belief that there has been escapement of the income of the assessee. Thus the material should be logical and the facts should not be vague so as to prove the innocence of assessee.
However, there is some ambiguity in the law relating to when ED can initiate an investigation. While the work related to prevention of money laundering has been entrusted to the ED, the agency cannot take up or pursue independent investigations unless another agency such as the CBI, State Police or the Income Tax Department have registered cases concerning the predicate offence.
It is also to be noted that all the proceedings by the ED have to be in conformity with the CrPC as per Sec. 65 of the PMLA Act. Therefore, an equivalent of the FIR, the Enforcement Case Information Report (ECIR) has to be filed, provided that the same has been registered by another agency empowered to file an FIR. The 2019 Amendments also widened the scope of preliminary inquiry by the PMLA and search and seizure measures under Sec. 17 and 18, by disposing of the requirement for the report to be submitted to the Magistrate in preliminary inquiry. The ED can now proceed with the preliminary inquiry if it has reason to believe that a scheduled offence under the PMLA has been committed. Therefore, the ED can proceed to conduct a preliminary inquiry, even where the tax has been paid, if they have reason to believe that he has committed a cognizable offence, and the deposits are proceeds of a crime.
In the SC decision of Rohit Tandon vs The Enforcement Directorate , the accused during the period from 15.11.2016 to 19.11.2016, deposited huge cash worthy of Rs 31.75 crores in Kotak Mahindra Bank in eight different accounts of some ‘Group of Companies’. During arguments, specific query was raised, as to, to whom the money deposited in the various accounts belonged? The accused admitted that the whole money belonged to him however he failed to disclose the ‘source’ of such huge amount.
The accused also did not place on record any document whatsoever to show from which legal source, the cash was procured to be deposit in the bank accounts of strangers.
Lastly, it was submitted by learned senior counsel for accused that accused fully cooperated with the investigating agency and there was no need to arrest him in a case charged under PMLA. He further submitted that the actions of accused as mentioned in the FIR attract implications and as such the correct authority to investigate into the same is the Income Tax Department and not the ED. Per contra, learned Special Prosecutor for ED submitted that as sufficient material surfaced on record against the present accused, he is validly liable to be prosecuted before the ED.
The Court observed that accused’s argument that his only liability was to pay income tax on the unaccounted money / income is invalid. Mere payment of tax on the unaccounted money from any ‘source’ whatever would not convert it into ‘legal’ money. Needless to say, huge deposit of such monies was a sinister attempt / strategy by the accused to convert the ‘old currency’ into new one to frustrate the Demonetization Policy, primarily meant to unearth black money. The possibility of the same being proceeds of crime cannot be ruled out.
Indisputably, the predicate offence is covered in Part A in paragraph 1 of the Schedule in the Act of 2002, in particular sections 420, 467, 471 and 120B of IPC. Indeed, the expression “criminal activity” has not been defined (in PMLA). By its very nature the alleged activities of the accused referred to in the predicate offence are criminal activities. The possession of demonetized currency in one sense, ostensibly, may appear to be only a facet of unaccounted money in reference to the provisions of the IT Act or other taxation laws.
However, the stated activity allegedly indulged into by the accused named in the commission of predicate offence is replete with mens rea. In that, the concealment, possession, acquisition or use of the property by projecting or claiming it as untainted property and converting the same by bank drafts, would certainly come within the sweep of criminal activity relating to a scheduled offence. That would come within the meaning of Section 3 and punishable under Section 4 of the Act, being a case of money laundering, thereby empowering ED to take full cognisance of the offence thereunder.
Conclusion
In conclusion we can derive that the prime objective of PMLA and Black Money Act, is to stop free flow of money that is made out of illegal businesses and activities that are considered to be crime. In cases of questioning by the concerned authorities and the orders passed by the tribunal, there has to be an adequate element of justification of the source of money, allowing the assessee a reasonable opportunity to prove his innocence.
Therefore, in a harmonious reading, we can conclude that the Enforcement Directorate does have the power to make a preliminary inquiry, if not a full-fledged investigation under the PMLA/Black Money Act, if there is sufficient reason to believe that accused has committed a Scheduled Offence or has shown existence of culpable mental state, not merely relying on suspicion but on evidence. Accused has to prove that the money that he deposited was not obtained by criminal activity, either mentioned in the Schedules of PMLA or related laws. He also has to satisfy the ED Officer with manifest evidence that the revised return was filed due to a bona fide omission on his part and that the tax has duly been paid.
