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Non-Disclosure of foreign asset in ITR need to avoid Penalty

Non-Disclosure of foreign asset in ITR need to avoid Penalty

Undisclosed Foreign Asset must accurately report in ITRs to avoid Penalties

The issue of whether a bona fide mistake in the non-disclosure of foreign assets in an Income Tax Return (ITR) would result in a penalty under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (Black Money Act) has been a subject of legal debate. The answer depends on various factors, including the interpretation of the law by tax authorities and the judiciary.

Undisclosed Foreign Asset

  • Definition: Under Section 2(11) of the Black Money Act, an undisclosed foreign asset is one located outside India that has not been reported in the taxpayer’s ITR. If the taxpayer fails to explain the non-disclosure satisfactorily, the asset is considered undisclosed.
  • Disclosure Requirement: Since AY 2012-13, disclosing foreign assets in Schedule FA of the ITR is mandatory.

Current Penalty for Non-Disclosure – Provisions Under Sections 42 & 43

  • Section 42: Imposes a penalty for failure to furnish details of foreign income and assets in the Income Tax Return (ITR). This applies to residents (other than those not ordinarily resident in India) who have foreign assets or income and fail to report them.
  • Section 43: Imposes a penalty for failing to report or inaccurately reporting foreign assets in the ITR. This includes assets held as a beneficial owner or those in which the taxpayer has a financial interest. Section 43 of the Black Money Act: Imposes a penalty of ₹10 lakhs for failing to disclose foreign income or assets. The language of the section suggests that the penalty is at the discretion of the Assessing Officer (AO), as indicated by the word “may.”
  • Penalty Amount: The penalty under both sections is ₹10 lakh, regardless of the asset’s value.

Grey Area: Discretion of the Assessing Officer

  • Discretionary Penalty: The use of “may” in Section 43 implies that the AO has some discretion in imposing penalties. This discretion can consider the taxpayer’s intent, circumstances, and whether the non-disclosure was a bona fide mistake or deliberate evasion.

Conflicting Case Laws

  • ITAT Mumbai in Addl. CIT v. Leena Gandhi Tiwari (2022):
    • Judgment: The tribunal emphasized that bona fide actions should be excluded from stringent provisions like the Black Money Act. The tribunal held that penalties should not be imposed for bona fide mistakes, even if non-disclosure occurred.
    • Rationale: The tribunal argued that strict implementation should not overshadow the genuine intentions of taxpayers.
  • ITAT Mumbai in Ms. Shobha Harish Thawani v. Jt. CIT (2023):
    • Judgment: The tribunal took a contrasting stance, holding that Section 43 does not allow for waiving penalties, even if the asset is disclosed in the taxpayer’s books. The penalties are strictly linked to non-disclosure in Schedule FA.
    • Rationale: The tribunal underscored the stringent nature of the Black Money Act, which aims to ensure complete transparency in reporting foreign assets.
  • The conflicting decisions of the Mumbai ITAT create uncertainty about the consequences of a bona fide mistake in non-disclosure of foreign assets. While the 2022 case suggests that a bona fide mistake may not lead to a penalty, the 2023 case takes a stricter approach, leaving little room for leniency.
  • Practical Implication:

In a bona fide case, such as where a non-resident salaried employee inadvertently fails to disclose foreign assets after becoming a resident, the outcome could vary depending on the AO’s interpretation and the jurisdiction of the case. While some may argue for leniency, the strict provisions of the Black Money Act could still result in penalties.

  • Note: Given the conflicting judgments, taxpayers should exercise caution and seek professional advice when dealing with foreign assets to avoid penalties under the Black Money Act.

Amendment Proposed in Budget 2024

non-reporting or incorrect reporting of foreign assets

  • The Budget 2024 introduces a significant amendment to the penalty provisions under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (Black Money Act). This change provides relief to taxpayers who inadvertently fail to report certain foreign assets.
  • Exemption from Penalty: The Budget 2024 proposes to exempt the penalty under Sections 42 & 43 for non-reporting or incorrect reporting of foreign assets (other than immovable property) where the aggregate value does not exceed INR 20 lakh.
  • Effective Date: This amendment will come into effect from October 1, 2024.

Rationale and Implications

  • Relief for Taxpayers: This amendment is aimed at providing relief to taxpayers, particularly those who may have unintentionally failed to report small movable assets abroad. These could include employee stock ownership plan, social security investments, or other foreign assets acquired by Indian professionals working in multinational companies.
  • Current Exemption: Currently, an exemption exists for one or more foreign bank accounts with an aggregate balance not exceeding ₹5 lakh during the year. The new amendment extends this relief to other types of foreign assets up to ₹20 lakh.

Reporting Requirements as per Amendment Proposed in Budget 2024

  • Mandatory Disclosure: All residents and ordinarily resident taxpayers must disclose foreign assets and income from such assets in their ITRs. Failure to do so currently attracts the penalty specified under Sections 42 and 43.
  • Immovable Property Exclusion: The proposed amendment specifically excludes immovable property, meaning such assets must still be reported, and failure to do so can result in penalties.

Conclusion

The amendment introduced in Budget 2024 reflects a more lenient approach towards minor non-compliance related to foreign assets, recognizing that the previous penalty could be disproportionately harsh for small, movable assets. This change is expected to provide significant relief to individuals who may have inadvertently missed reporting such assets, ensuring that the penalty provisions are fair and proportionate.

Professionals and individuals with foreign assets should stay informed about these changes and ensure accurate reporting in their ITRs to avoid any penalties under the Black Money Act

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