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Penalty for non - disclosure of foreign assets in Income Tax Return
Category: Reported & Unreported Decisions, Posted on: 21/11/2023 , Posted By: KPB
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Mumbai Tribunal in the case of Ms. Shobha Thawani  has upheld penalty of Rs. 10 lakhs per assessment year (Rs. 30 lakhs) levied under the Black Money Act, 2015 for non-disclosure of foreign financial assets held by the assessee in her return of income despite the investment being made through LRS scheme and income arising from the foreign asset being offered for taxation.

Shobha Harish Thawani v/s. JCIT, Mumbai
BMA 01, 02, 03/Mum/2023
A.Y.: 2016-17 to 2018-19
Facts of the case

In the fiscal year 2014-15, the assessee and her husband jointly invested in Global Dynamic Opportunity Fund Ltd., with the assessee’s share in the investment being 40%. This investment was funded through a transfer of funds from the assessee’s  Indian bank account to her bank account held with HSBC Bank in Jersey. It's noteworthy that these fund transfers were conducted in accordance with the Liberalized Remittance Scheme (LRS) under the Foreign Exchange Management Act, 1999 (FEMA), as permitted by the Reserve Bank of India.

In the taxpayer's income tax return for the assessment year 2016-17, she duly declared the interest income generated from the foreign investment and included it in her taxable income. Subsequently, when the investment was sold, the capital gains arising from the sale were also accurately reported and subjected to taxation in the taxpayer's income tax return for the assessment year 2019-20. However, there was a lapse in disclosure concerning the foreign investment in the taxpayer's income tax returns for the assessment years 2016-17 through 2018-19.

Following this omission, the Assessing Officer issued a show-cause notice to the taxpayer, proposing a penalty of Rs. 10 lakhs for each assessment year under Section 43 of the Black Money (UFIA) Act 2015 (BMA), relating to the non-disclosure of assets in Schedule FA of the income tax returns filed by the taxpayer for the aforementioned assessment years.

Despite the taxpayer's explanation, the Assessing Officer opted not to accept the taxpayer's submissions and proceeded to levy a penalty of Rs. 10 lakhs for each assessment year. This decision was subsequently upheld by the Commissioner of Income Tax (Appeals). In response to these developments, the taxpayer, feeling aggrieved by the penalty imposition, decided to file appeal before the second appellate authority, namely the Income-tax Appellate Tribunal (ITAT).


Issue before the Tribunal

  • Is penalty u/s. 43 of the BMA imposable merely for non-disclosure in Schedule FA of Income Tax return even when the source of acquisition of which is established, and income derived from it is offered to tax? 
  • Should the levy of penalty u/s. 43 of the BMA be disregarded considering it as an inadvertent error on the part of the assessee to disclose the details in Schedule FA of the ITR?


Arguments of the Assessee

Before the Tribunal, the assessee prayed for the penalty proceedings against her to be dropped and made following supporting arguments:
  • Source for the foreign investment was from the transfer of funds from her Indian bank account under the Liberalised Remittance Scheme permitted by the RBI.

  • The source of funds for the foreign investment was clearly explained and income arising from such foreign investment was also offered to tax and thus does not fall within the purview of undisclosed foreign income

  • Non – disclosure in Schedule FA of the I.T. return of the assessee was an inadvertent mistake on the part of the assessee.

  • The foreign assets were duly disclosed by the assessee in her return of income filed for the A.Y. 2019-20.

  • The intention of the law behind enacting the BMA was to tax citizens of India on non-disclosure of foreign assets held by the residents that were acquired through the generation of black money

  • The power to levy penalty u/s. 43 of the BMA is a discretionary power as the section uses the words “may levy penalty” and the Assessing Officer erred in not taking cognizance of the submitted details and imposing the penalty.

  • Once the foreign assets are already assessed under the provisions of the Income Tax Act, such assets shall be excluded from the purview of undisclosed foreign assets under BMA.

  • Even in the assessee’s husband’s return of income, same non-disclosure has occurred but after examining the same set of evidences (as produced before the Assessing officer in the case of the assessee), no penalty was levied. The Assessing officer is not correct in taking a different stand in assessee’s case with regard to the same foreign assets.


Arguments of the Department

  • Levy of penalty u/s. 43 of the BMA is with respect to non-disclosure of foreign assets held by the residents.
     
  • There is no onus on the AO to demonstrate that the funds or assets in these accounts were owned by the assessee or beneficially owned by him as the penalty under section 43 of the Act is not with respect to ownership of such assets but with respect to non-disclosure of the same in the return of income.

  • The penalty under section 43 of the Act is to ensure compliance with disclosure requirements of the return else the column in the return will itself become otiose or redundant.

  • Although the source is explained and income arising out of the foreign asset is offered to tax, this does not discharge the onus of the assessee to disclose the asset in Schedule FA of the income tax return as per the term "fails to furnish any information" is sufficient to include in its ambit non-disclosure of a foreign asset. 


ITAT held - 

  • Although the asset cannot be classified as undisclosed since the source for its acquisition is established, the ambit of sec 43 under BMA for levy of penalty is not restricted to undisclosed assets. It is apparent from the language of sec 43 that the disclosure requirement is not only for the undisclosed asset but any asset held by the assessee as a ‘beneficial owner or otherwise’.

  • Although the assessee claims that the non-reporting is a bonafide mistake, there is nothing on record in support of that claim.

  • Penalty under section 43 is levied for non-reporting of overseas investments and not for making investments from unaccounted money.

  • The Assessing officer, after examining the facts of the case, formed his opinion to levy penalty. Thus, he exercised his discretion judiciously. There is no evidence to show that the Assessing officer levied penalty in an arbitrary or unjustified manner and penalty was confirmed by the second appellate authority also. 


Comments

The Second Appellate Authority upheld the penalty based on a strict interpretation, departing from the precedent set in the case of Leena Gandhi Tiwari delivered by a co-ordinate bench of the Mumbai ITAT. In the aforementioned case, it was held that the mere omission of a foreign asset in the income tax return does not, by itself, constitute sufficient grounds for imposing a penalty under the BMA. It is noteworthy that Section 43 grants the Assessing Officer discretionary power to "may" impose the penalty, indicating that the penalty is not mandatory in all cases of oversight, and there is no direct cause-and-effect relationship between the lapse and the penalty. Unless there are sufficient prima facie reasons to at least doubt bonafides well demonstrated by the assessee, an assessee cannot be visited with penal consequences. In rendering this decision, the Hon'ble ITAT relied on the Supreme Court's judgment in the Hindustan Steel Ltd.

In the instant case Hon’ble ITAT has departed from the earlier tax-payer beneficial ruling and relies heavily on the fact that the taxpayer’s claim of a bona fide mistake is not supported by evidence. Nevertheless, this ruling by the Tribunal has established a precedent for imposing penalties for non-disclosure. It is imperative for taxpayers to exercise vigilance when filing their tax returns and to avoid inadvertent errors in disclosing foreign assets and income.


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