Mumbai: Income tax authorities are increasingly issuing show-cause notices seeking explanations on foreign investments not disclosed in ‘schedule-FA’ in tax returns. A recent order of the Mumbai bench of the ITAT, which upheld a penalty of Rs 10 lakh under the Black Money Act for each year of default, has created ripples.
“The high penalty was aimed at those who hoard black money abroad in the form of undisclosed foreign assets. However, the lack of effective guidance in filling details in schedule-FA, and almost nil publicity in earlier years about this mandatory requirement, has led to many honest taxpayers making errors. It is a golden principle of jurisprudence, upheld by the SC, that the penalty should be commensurate with the offence committed. The flat penalty of Rs 10 lakh for each year should not be applied for infractions in schedule-FA where there is enough disclosure elsewhere in the tax return and annexed documents. Tax tribunals in some instances have deleted the penalties that were levied by the I-T officers,” Rutvik Sanghvi, a chartered accountant, said.
In this case, the ITAT rejected the taxpayer’s argument that leniency should be shown because her foreign assets were not ‘undisclosed assets’ located outside India. She claimed that the source of funds for her investments was explained to the tax authorities (investments in global dynamic opportunity fund were made out of funds transferred under the LRS), and she had also declared the income arising from such investments in her tax returns. She argued that her failure to disclose these assets in the required schedule for three years was an unintentional mistake, and that she had rectified it in her return for FY18.
Government officials told TOI that information received from the US under its Foreign Account Tax Compliance Act (FATCA) and from other countries under exchange of information process, coupled with the use of advanced technology, enables them to zoom in on cases of non-disclosure. The schedule is to be filled in by all taxpayers who are ‘resident and ordinary resident’ in India for that particular financial year.
Instances of disclosure include details of assets such as ESOPs granted to employees in India by overseas parent companies and securities acquired abroad using funds transferred from India under the liberalised remittance scheme ($250,000 annual limit).
The discretion to levy this penalty of Rs 10 lakh for each year of default in disclosure, under section 43 of the Black Money Act, lies with the I-T officer. In some other cases, tax tribunals have set aside the penalties.However, in this case, the individual taxpayer will have to bear a penalty of Rs 30 lakh for non-disclosure of foreign assets in ‘schedule FA’ in her I-T returns for the three years commencing from FY16.The ITAT held that even if the I-T officer had the discretion to impose a penalty, as the term ‘may’ was used in the provisions, the taxpayer had not proven that the officer had applied this discretion excessively. Regarding her other argument, the tax tribunal ruled that although her assets might not be ‘undisclosed’, the penalty under section 43 is imposed for the failure to report overseas investments, not for making investments with unaccounted money.
Just last month, the ITAT, Mumbai bench, in the case of Ocean Diving had issued an order favourable to the taxpayer. It had held that discretion by the I-T officer is to be exercised judiciously and in a reasonable and justified manner. As the corporate taxpayer had disclosed details of its overseas investments in its audited balance sheet and disclosed it as ‘non-current investments’ in its I-T returns, the penalty of Rs 10 lakh imposed for each of the four years under litigation was quashed by the ITAT.