Background

A person who qualifies as a Resident and Ordinary Resident (ROR) of India in any Fiscal Year (FY) and holds specified foreign assets, is required to report details of those foreign assets in the ‘Foreign Assets’ (FA) schedule of Income Tax Return (ITR) form irrespective of whether or not he has taxable income in India in that FY.

Reporting of foreign assets in the Indian income-tax returns was made mandatory effective FY 2011-12 and therefore, an appropriate disclosure regarding foreign assets is mandatory for RORs in their ITR if they hold any of the following assets:

• Foreign depository accounts

• Immovable property outside India

• Any other capital asset outside India (like Jewellery, vehicles, and paintings)

• Foreign bank accounts

• Financial interests in any entity held outside India

• Foreign accounts where you are an authorised signatory

• Foreign Custodian Accounts

• Trusts outside India or any other foreign source of income.

• Foreign Securities (Restricted stock options, Bonds, Mutual Funds, Exchange Traded Funds)

Any misreporting/underreporting of income and assets in Indian tax filings may result in penal consequences and, in fit cases, prosecution proceedings may also be launched under The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (hereinafter referred to as ‘BMA’) and Income Tax Act, 1961 (IT Act).

The Government introduced BMA to curb black money, or undisclosed foreign assets and income and imposes tax and penalty on such income. The BMA came into effect on 1 April 2016.

In case the taxpayer fails to disclose details of the Foreign Assets or furnish inaccurate particulars of the foreign assets, then it may attract a penalty of INR 1 million as per Section 43 of BMA and also, he may be punishable with rigorous imprisonment for a term which shall not be less than 6 months and may extend to 7 years with fine.

In this regard, recently, the Mumbai Tax Tribunal¹ had an occasion to examine the applicability of penalty provision in case of non-reporting of foreign assets in the FA Schedule of ITR.

We, at BDO in India, have summarised the ruling of the Mumbai Tax Tribunal and provided our comments on the impact of this decision hereunder:

Facts of the case

The Taxpayer invested in foreign financial assets from her Indian bank account in the FY 2014-15 through a liberalised remittance scheme under the Foreign Exchange Management Act (FEMA). The said foreign asset is a general investment along with her husband in “Global Dynamic Opportunity Fund Ltd” where the taxpayer holds 40% of the share. The taxpayer has not reported details of foreign assets in the FA schedule in ITR filed for FYs 2015-16 to 2017-18 and therefore, the tax authorities have issued a show cause notice to the taxpayer requiring to show cause why penalty under section 43 of BMA should not be levied.

The taxpayer submitted a response contesting that it was an inadvertent error on her part not to disclose the foreign asset in Schedule FA of the Income-tax return. Further, the taxpayer submitted that the funds were transferred into that foreign account from her Indian bank account and in the FY 2018-19 she already disclosed the details of the foreign assets in the FA schedule of ITR and thereby her intention was not to hide details as this was an inadvertent error in those years. The taxpayer requested to tax authorities to drop the penalty proceedings considering the error committed by her was not intentional. However, the tax authorities have not accepted the submissions of the taxpayer and proceeded to levy a penalty of INR 1 million for each of the fiscal years under consideration under section 43 of the BMA. Aggrieved by the order, the taxpayer filed an Appeal with the first appellate authority i.e. CIT(A).

The taxpayer submitted the following contentions before the CIT(A) arguing that these foreign assets were not undisclosed:

• The impugned assets are not undisclosed assets located outside India as the income arising from these assets was duly offered to tax in her tax returns.

• The intention of the law behind enacting the BMA was to impose tax/ penalty on the non-disclosure of foreign assets held by the residents and that the spirit of the letter should be appreciated.

The CIT(A), after considering the submissions of the taxpayer, upheld the penalty by holding that:

• For the purpose of section 43 of the BMA, there is no onus on the tax authorities to demonstrate that the funds or assets in these accounts were owned by the taxpayer or beneficially owned by him.

• Section 43 of the Act has two limbs with respect to non-disclosure -

  • the first being failure to furnish any information sought in the return and

  • second being furnishing of inaccurate particulars in such return relating to any asset located outside India

• The term "fails to furnish any information" is sufficient to include in its ambit the non-disclosure of a foreign asset.

• The penalty under section 43 of BMA is not with respect to ownership of such assets but with respect to non-disclosure of the account in which the assets were held. The lapse could have been treated as a technical lapse if the taxpayer was not aware of the said asset/ account or if someone else was operating the said account which was not the case in this matter.

• The disclosure of a foreign account in the return is not merely a technical requirement without any purpose. It enables the department to ensure proper investigation and hence, a non-disclosure of an item in the return is required to be viewed with disfavour even if the taxpayer did not display a contumacious conduct. The penalty under section 43 of BMA  is to ensure compliance with disclosure requirements of the return else the column in the return will itself become redundant.

• The taxpayer has defaulted on her obligation to discharge the onus cast on her to truly disclose the ownership of the account while filing her return of income.

In light of the above discussion, CIT(A) passed the order in favour of the tax authorities mentioning the tax authorities are correct in proceeding to levy the penalty under section 43 of the BMA. Aggrieved by the order of CIT(A), the taxpayer filed an appeal with the Mumbai Tax Tribunal.

Mumbai Tax Tribunal Ruling

The Mumbai tax tribunal has made the following observations and upheld the order of CIT(A) by confirming the levy of penalty under section 43 of the BMA for non-disclosure of foreign assets in the return of income filed by the taxpayer:

• Section 43 of the BMA contains provisions for the levy of penalty for failure to furnish the return of income, information or inaccurate particulars about an asset (including financial interest in any entity) located outside India.

• From the plain reading of the section, it is clear that if a person who is ROR while filing the tax return of income fails to furnish or files inaccurate particulars of investment outside India, then the person is liable for penalty under section 43 of BMA. The disclosure of foreign investments/assets is to be made in the return of income-Schedule FA. Thus, it is apparent from the language of Section 43 of BMA that the disclosure requirement is not only for the undisclosed asset, but any asset held by the taxpayer as a beneficial owner or otherwise.

• Given this, the argument that the penalty under section can be levied only with respect to undisclosed assets is not tenable. Undisputedly, the taxpayer in the instant case has not disclosed the foreign asset in the tax return.

• Even if it is assumed that in the light of the expression “may” used in section 43 of BMA, the tax authorities have the discretion to levy a penalty, the taxpayer failed to substantiate that the tax authorities have exercised their discretion extravagantly. The tax authorities after examining the facts of the case, formed their opinion to levy a penalty. The tax authorities exercised their discretion judiciously. No material is brought before the tribunal to show that tax authorities levied penalty under section 43 of BMA in an arbitrary and unjustified manner. The contention that the assets are not undisclosed assets may be factually true, but a penalty under section 43 of BMA is levied for non-reporting of overseas investments and not for making investments from unaccounted money.

• The provisions of Section 43 of the BMA do not provide any room not to levy a penalty even if the foreign asset is disclosed in books since the penalty is levied only towards non-disclosure of foreign assets in schedule FA.

BDO in India Comments

The disclosure of foreign assets in the FA schedule in Income tax returns is a mandatory requirement for ROR and non-compliance would lead to serious repercussions in the form of high financial penalties and initiation of prosecution proceedings.

The tax authorities regularly receive information from other countries under the exchange of information and from the USA under the Foreign Account Tax Compliance Act. With this information and effective use of technology, any non-disclosure is easily identifiable. There is an increase in the spate of show cause notices issued to the taxpayers seeking explanation on foreign assets disclosed / not disclosed in the FA schedule in ITR. This recent ruling issued by the Mumbai tax tribunal has affirmed tax authorities' tough stand on such reporting.

Therefore, all resident taxpayers must make a full inventory of all the assets held outside India and ensure an appropriate disclosure in the FA schedule while filing tax returns in India.

Taxpayers may also consider revising the ITR for prior years, if not time-barred, to mitigate the penalty exposure for the past.   

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¹ Shobha Harish Thawani vs JCIT, BMA 01-03/Mum/2023 (Mumbai Tax Tribunal)