ITAT Deletes Rs 10 Lakh Penalty Under Black Money Act, Holds Omission of Foreign ESOPs in Schedule FA Was Inadvertent:

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has deleted a Rs 10 lakh penalty imposed on taxpayer Randhir Singh for failing to report foreign employee stock ownership plan (ESOP) investments in Schedule FA of his income tax return for Assessment Year 2017-18. The Tribunal held that the omission was not a case of deliberately hiding foreign assets, as the investment had been disclosed in the previous year’s return and the income arising from it had been offered to tax.

Singh, a salaried employee who had previously worked with Deutsche Bank AG, reported a total income of around Rs 4,80,89,272 for the relevant assessment year. He had received ESOP benefits worth approximately Rs 24,20,929.87 which his employer treated as a taxable salary benefit and deducted tax at source on. Singh also included the ESOP income in his income tax return.

The foreign ESOP investment had been disclosed in Schedule FA in his return for Assessment Year 2016-17. However, after the investment was sold during the following year, the details were inadvertently omitted from Schedule FA in the return for Assessment Year 2017-18. Singh maintained that the sale proceeds and the resulting short-term capital gains had been reported in his return and that the omission was unintentional.

The tax department imposed a penalty of Rs 10 lakh under Section 43 of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, for failing to report the foreign asset in the prescribed schedule. The penalty was subsequently upheld by the Commissioner of Income Tax (Appeals), prompting Singh to approach the ITAT.

Before the Tribunal, Singh argued that the foreign investment had been acquired from his disclosed and taxable income and was not an undisclosed foreign asset. He also pointed out that the asset had been reported in the previous year’s return, the related income had been taxed, and the relevant details were supported by documentary evidence. He contended that the omission was a genuine mistake and that Section 43 gives the Assessing Officer discretion to impose a penalty rather than making it automatic in every case.

The taxpayer relied on several earlier ITAT Mumbai decisions involving similar failures to report foreign investments in Schedule FA. He also cited the Supreme Court’s ruling in Hindustan Steel Ltd. v. State of Orissa, which held that penalties should not ordinarily be imposed for technical or minor violations arising from a genuine belief that there was no legal obligation to act in a particular manner.

The tax department, however, argued that reporting foreign assets in Schedule FA is a mandatory requirement. It maintained that the disclosure serves an important purpose by helping the authorities track foreign investments and investigate possible undisclosed income. According to the department, reporting an asset elsewhere in the return did not remove the obligation to disclose it in the prescribed schedule.

After examining the facts and earlier judicial decisions, the ITAT observed that the ESOP investment had not been completely concealed from the tax authorities. Singh had disclosed it in the preceding year’s return, reported the related salary benefit as taxable income, and provided details and supporting documents during the penalty proceedings.

The Tribunal noted that the purpose of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 is to address undisclosed foreign income and assets. It held that the law should not be used to penalise a genuine, technical or inadvertent reporting error in circumstances where there was no evidence of deliberate concealment or a dishonest intention to hide the foreign investment.

The Bench also considered the wording of Section 43, which states that the Assessing Officer “may” impose a penalty. It concluded that the power to levy a penalty must be exercised judiciously, taking into account the facts of the individual case and the legislative purpose behind the law.

Accordingly, the ITAT Mumbai deleted the Rs 10 lakh penalty and allowed Singh’s appeal.