ITR filing: ITAT deletes ₹10 lakh Black Money Act penalty over foreign ESOP disclosure

The Chennai bench of the Income Tax Appellate Tribunal (ITAT) has deleted a ₹10 lakh penalty imposed under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, holding that a genuine failure to disclose foreign employee stock option (ESOP) shares in the Schedule Foreign Assets (FA) of an income tax return cannot automatically attract penal action.

The ruling came in the case of Kishore Kumar Rajagopal vs DDIT (Investigation), where the tribunal observed that the taxpayer had already paid tax on the ESOPs and there was no evidence of any attempt to conceal foreign assets or evade taxes.

Why was the penalty imposed?

The taxpayer had received ESOPs of Vedanta Resources Plc (UK) while working abroad with Vedanta Ltd. The shares were held through a fiduciary arrangement in Jersey.

While filing his income tax return for Assessment Year (AY) 2016-17, he failed to disclose these foreign shares in Schedule FA, which requires resident taxpayers to report specified foreign assets and financial interests.

The Income Tax Department treated this as a violation of Section 43 of the Black Money Act and imposed a penalty of ₹10 lakh. The Commissioner of Income Tax (Appeals) upheld the penalty, following which the taxpayer approached the ITAT.

Before the tribunal, the taxpayer argued that the omission was inadvertent. AY 2016-17 was the first year in which such reporting requirements had been introduced, and the fiduciary structure through which the shares were held added to the confusion.

He also pointed out that the ESOPs had already been taxed as a perquisite through tax deducted at source (TDS), while capital gains arising from their sale were disclosed and taxed in a later assessment year.

What did the ITAT rule?

Allowing the appeal, the tribunal noted that the entire transaction had remained within the tax net. Since the ESOPs had already suffered tax as employment income and the subsequent capital gains had also been offered to tax, there was no loss of revenue to the exchequer.

The tribunal held that the only lapse was the non-disclosure of the foreign shares in Schedule FA. Given that the reporting requirement was new at the time and the shares were held through a fiduciary arrangement, the omission was a bona fide mistake rather than a deliberate attempt to hide foreign assets.

The ITAT also referred to earlier judicial precedents, including the Special Bench decision in Vinil Venugopal, which held that the use of the word “may” in Section 43 makes the levy of penalty discretionary and not mandatory. It further relied on Supreme Court rulings that penalties should not be imposed for technical or inadvertent breaches in the absence of deliberate default.

The order is a significant reminder that while reporting foreign assets in Schedule FA is mandatory, penalties under the Black Money Act cannot be imposed mechanically. The facts of each case, particularly whether there was any intent to conceal income or evade tax, remain crucial in determining whether a penalty is warranted.