ITAT Deletes Section 43 Penalty for Non-Disclosure of Foreign Assets in Schedule FA:

The ITAT Mumbai Bench, in the case of ACIT vs. Rohit Krishna, examined whether a penalty of Rs 10 lakh under Section 43 of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, could be imposed for failure to disclose foreign assets in Schedule FA of the income-tax return.

Rohit Krishna is a resident of India who had received employee stock ownership plan (ESOP) shares of Vodafone Group PLC worth Rs 18.99 lakh through an online broking account having user ID: 1528635 arranged by his employer for the Assessment Year 2018-19. As disclosed by Krishna, the account was opened by him to facilitate ESOP allotment.

The value of the shares was treated as a taxable perquisite under the head ‘Income from Salary’, disclosed in Form 16 and Form 12BA, and subjected to tax deducted at source (TDS). Although the foreign assets were not reported in Schedule FA for the relevant assessment years, their value was disclosed in Schedule AL of the income tax returns. The Revenue initiated penalty proceedings on the ground that the mandatory reporting requirements for foreign assets had not been complied with.

The assessee contended that the shares were acquired through disclosed and taxed employment income, their source of investment was identifiable, and there was no intention to conceal foreign assets or evade tax. He contended that Section 43 uses the word “may” while providing for the penalty, indicating that its imposition is discretionary rather than automatic. Reliance was placed on the Supreme Court's decision in Hindustan Steel Ltd. v. State of Orissa, which held that penalties should not ordinarily be imposed for technical or venial breaches or failures arising from a bona fide belief that the person was not legally required to act in a particular manner.

The assessee cited an earlier ITAT Mumbai Bench's decision in his own case for Assessment Year 2016-17, wherein the Tribunal had deleted a similar penalty. That decision followed the reasoning adopted in Ocean Diving Centre Ltd. v. CIT, wherein the Tribunal had held that the penalty was not warranted when foreign assets had been disclosed in the income-tax return, although not in the specific Schedule FA. Other than this, the assessee had relied on several other Tribunal decisions dealing with bona fide omissions, the discretionary nature of Section 43, and the legislative objective of addressing undisclosed foreign income and assets.

For assessment years 2020-21 and 2021-22, the assessee additionally submitted that he had filed updated income-tax returns under Section 139(8A) of the Income-tax Act, 1961, incorporating the relevant foreign asset details in Schedule FA. The Income Tax Appellate Tribunal (ITAT) Mumbai Bench considered these submissions alongside the existing judicial precedents and the orders passed by the Commissioner of Income Tax (Appeals), Mumbai, which had deleted the penalties imposed by the Deputy Director of Income Tax (Investigation).

The tribunal had noted that "provisions of section 43 of the Act as well as the preamble to the said Act to understand the discretionary power vested with the Assessing Officer for imposition of penalty vis-à-vis object sought to be achieved keeping in mind the legislative intent. The purpose of reporting requirement of foreign assets/income in Schedule FA of the Income tax return is for tracking and monitoring the investments held abroad by the residents of India. Preamble to the Act describes its objective to deal with problem of black money, i.e., undisclosed foreign income and assets. The said Act must not be invoked for punishing a technical /venial /bonafide breach of any statutory obligation and therefore bonafide actions of the tax payers must be excluded from the application of provisions of this stringent legislation."