The Economic Times, a leading business daily has reported that the Indian Tax authorities have now set their sights on in-bound investments to track unaccounted / suspect  investment sources. The report can be accessed in the following link:

“Inbound M&A deals on I-T department’s radar; total tax demand may exceed Rs 4,000 crore

Our Comment

As the report states, only those investments which are from “suspicious” sources have been targeted for action. While cracking down on suspicious investment sources is welcome and in line with the stated intent of the Government to cleanse the economic ecosystem, the reported action under Section 68 seems to be beyond the mandate of law.

Prima facie, it appears to be a mis-application of a proviso which was introduced in the taxing statute from fiscal 2013-14 by Finance Act, 2012. As per the said proviso, monies received by privately held and closely held companies, in the form of Share capital , Share application and Share premium is “presumed” to be its  “unexplained income”, unless the “residents” contributing such monies can explain the source of funding.

The above amendment was introduced to plug the loop-hold of white washing unaccounted sums by introducing the same as share capital, and is clearly intended to operate only where such monies have been received from resident persons.It appears that the Taxman has mis-construed the provision to be applicable even for share capital contributions received from foreign sources. Thus, while the intent behind the action appears to be above board, the means adopted to secure the intent looks questionable, and may not stand judicial scrutiny.

Interestingly, the window for voluntary disclosure of unaccounted monies held abroad under the Black Money legislation introduced by the Government came to a close recently [on September 30, 2015] which was soon followed by stern statements by the Finance Minister suggesting that those who are hoarding monies and have not come forward with disclosure would have to pay the price. It is not apparent whether the reported actions have any link to the ‘harsh action’ that the Honorable Finance Minister warned of.