Global Employer Services News

India - Mumbai Tax Tribunal upholds penalty under Black Money Act for non-disclosure of assets outside India

The Mumbai Income Tax Appellate Tribunal on 9 August upheld a penalty under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 for failure to disclose foreign assets. The tribunal rejected the taxpayer’s contentions that investment in the foreign asset was from disclosed sources, and that the income from the foreign asset had been taxed in the relevant tax year.
A person who qualifies as a “resident and ordinarily 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 their income tax return, irrespective of whether or not the person has taxable income in India in that fiscal year.

Reporting of foreign assets in the Indian income tax return was made mandatory effective FY 2011-12; disclosure regarding foreign assets is mandatory for RORs If they hold assets such as foreign depository accounts, immovable property, and foreign securities.

Any misreporting/underreporting of income and assets in Indian tax filings may result in penal consequences and, in appropriate cases, prosecution proceedings may be launched under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (“BMA”) and the Income Tax Act, 1961.

The Indian government introduced the BMA to curb black money, or undisclosed foreign assets and income by imposing taxes and penalties on such income. The BMA entered into effect on 1 April 2016.

If a taxpayer fails to disclose details of foreign assets or furnishes inaccurate information regarding those foreign assets, the taxpayer may incur a penalty of INR 1 million under Section 43 of the BMA, and may be punishable with imprisonment for a term of not less than six months and up to seven years.

The Mumbai Tax Tribunal recently examined the applicability of the penalty provisions in Shobha Harish Thawani v. JCIT, a case of non-reporting of foreign assets in the FA schedule of the income tax return.
Facts of the case
The taxpayer invested in foreign financial assets from her Indian bank account in fiscal year 2014-15 through a liberalised remittance scheme under the Foreign Exchange Management Act (FEMA). The taxpayer invested jointly with her husband in Global Dynamic Opportunity Fund Ltd, with the taxpayer holding a 40% share of the investment and her husband the other 60%.

The taxpayer did not report details of the foreign assets in the FA schedule of the income tax return filed for fiscal years 2015-16 to 2017-18. As a result, the tax authorities issued a show cause notice to the taxpayer requiring her to show cause why a penalty under section 43 of the BMA should not be levied.

The taxpayer submitted a response alleging that her failure to disclose the foreign asset in Schedule FA of the income tax return was an inadvertent error on her part. Further, the taxpayer submitted that the funds were transferred into that foreign account from her Indian bank account, and that in  fiscal year 2018-19 she had already disclosed the details of the foreign assets in the FA schedule; thus, she argued, her intention was not to hide details of the foreign asset. The taxpayer requested that the tax authorities drop the penalty proceedings considering that the error committed was not intentional.

The tax authorities did not accept the taxpayer’s submissions, and proceeded to levy a penalty of INR 1 million for each of the fiscal years under consideration under section 43 of the BMA. The taxpayer then filed an appeal with the first appellate authority, the Commissioner of Income Tax (Appeals) (CIT(A)).

The taxpayer argued in her appeal that the foreign assets were not undisclosed:
  • The impugned assets were not undisclosed assets located outside India because the income arising from the assets was duly offered to tax in her tax returns.
  • The intent of the BMA was to impose taxes and penalties on the non-disclosure of foreign assets held by residents, and the spirit of the law should be respected.
The CIT(A) upheld the penalty, concluding 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 – or beneficially owned -- by the taxpayer.
  • 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 the BMA is not with respect to the 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 had not been aware of the asset/ account, or if someone else was operating the account, but that was not the case here.
  • 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 nondisclosure 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 the BMA is to ensure compliance with disclosure requirements of the return else the column in the return will itself become redundant.
  • The taxpayer defaulted on her obligation to discharge the onus cast on her to truly disclose the ownership of the account while filing her income tax return.
The CIT(A) passed an order in favour of the tax authorities, concluding that the tax authorities were correct in proceeding to levy the penalty under section 43 of the BMA. The taxpayer filed an appeal with the Mumbai Tax Tribunal.
Mumbai tax tribunal ruling
The Mumbai tax tribunal upheld the CIT(A)’s order by confirming the levy of penalty under section 43 of the BMA for nondisclosure of foreign assets in the income tax return filed by the taxpayer. The court made the following observations:
  • Section 43 of the BMA contains provisions for the levy of a penalty for failure to furnish the return of income, information or inaccurate particulars about an asset (including a 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 income tax return fails to furnish or files inaccurate information of investments outside India, then the person is subject to penalty under section 43 of the BMA. The disclosure of foreign investments/assets is to be made in Schedule FA of the income tax return. 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 43 can be levied only with respect to undisclosed assets is untenable. Undisputedly, the taxpayer in the case did not disclose the foreign asset in the tax return.
  • Even if it is assumed that the expression “may” in section 43 of the BMA gives the tax authorities the discretion to levy a penalty, the taxpayer failed to substantiate that the tax authorities had exercised their discretion inappropriately. 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 was brought before the tribunal to show that tax authorities levied the penalty under section 43 of the 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 the books, because the penalty is levied only on the nondisclosure 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 noncompliance may 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 exchange of information agreements and from the U.S. under the Foreign Account Tax Compliance Act. With this information and the effective use of technology, any nondisclosure is easily identifiable.

There has been an increase in the number of show cause notices issued to taxpayers seeking explanations regarding foreign assets disclosed/not disclosed in the FA schedule. This recent ruling issued by the Mumbai tax tribunal affirms the tax authorities' tough stand on such reporting.

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

Taxpayers may also consider revising their income tax returns for prior years, if not time-barred, to mitigate any penalty exposure for past failures to comply with the disclosure requirements.