Penalty for Non-Disclosure of Foreign Assets: Whether Technical Non-Compliance Warrants Penal Consequences?

The Hon’ble Bombay High Court in Pr. Commissioner of Income Tax (Central)-3 v. Shrem Alloys Pvt. Ltd., Income Tax Appeal No. 391 of 2024 (Bom HC) has clarified an important question in penalty jurisprudence—whether mere non-reporting of foreign assets in the prescribed format (Schedule FA) constitutes sufficient grounds to levy penalty, even when the foreign asset was already disclosed in prior returns, books of account, and subsequently reported correctly in the Section 153A return before initiation of penalty proceedings.

This judgment assumes significance in the context of search assessments and increasing scrutiny relating to foreign asset reporting post introduction of Schedule FA and Black Money compliance regimes.

1. Legal Background

1.1 Section 153A – Reassessment Following Search:- Section 153A mandates the filing of returns for six assessment years where a search under Section 132 or requisition under Section 132A has occurred. The return filed under this provision is deemed to be a return under Section 139(1).

The Court relied upon the principle laid down in:

PCIT v. JSW Steel Ltd. (2020) 116 taxmann.com 524 (Bom.): “A return filed under Section 153A constitutes a valid and complete return for the purposes of the Act and is deemed to be a return under Section 139(1).”

 1.2 Statutory Requirement for Foreign Asset Disclosure

Effective from AY 2012–13, Schedule FA of the Income Tax Return mandates comprehensive reporting of foreign assets held by a taxpayer. Non-reporting or partial reporting may invite penal consequences under the Act, and in aggravated cases, under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015.

The penalty of ₹10 lakh for non-disclosure of foreign assets is provided under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (“BMA 2015”). Specifically:

(i)                  Under Section 42(1) of the Act: if a resident fails to file the return or fails to provide information in the prescribed manner with respect to foreign assets / foreign income, a penalty of ₹10 lakh may be imposed. 

 (ii)                Under Section 43(1) of the Act: if a person fails to furnish the return or the report of foreign assets (or furnishes inaccurate particulars) then a penalty of ₹10 lakh for each year of default may be imposed

 Section 42 – Penalty for failure to furnish return in relation to foreign income and asset

“42. (1) If a person, being a resident other than a person who is not ordinarily resident in India, in any previous year,

(a) has any asset (including a financial interest in any entity) located outside India; or

(b) is a beneficial owner of any asset located outside India; or

(c) has any income from a source outside India,

and such person fails to furnish a return of income under the Income-tax Act, 1961, for that previous year, then such person shall be liable to a penalty of ten lakh rupees.”

(2) … [Proviso about small value bank-accounts excluded]. 

 Section 43 – Penalty for failure to furnish information or furnish inaccurate particulars about asset located outside India

“43. (1) If a person, being a resident other than a person who is not ordinarily resident in India, in respect of any asset (including a financial interest in any entity) located outside India of which he is beneficial owner or otherwise, or in respect of which he is a beneficiary,

(a) fails to furnish in the return of income furnished under the Income-tax Act any information or document; or

(b) furnishes inaccurate particulars,

then such person shall be liable to a penalty of ten lakh rupees.”

 (2) … [Proviso about small value bank-accounts excluded].

 2. Issue for Determination

Whether penalty can be imposed solely for not reporting the foreign asset in Schedule FA, despite the fact that the asset was already disclosed in earlier returns and books of account and later properly reported in the Section 153A return filed prior to the initiation of penalty proceedings?

Both the CIT(A) and the ITAT had deleted the penalty, prompting Revenue’s appeal before the High Court.

 3. Arguments Considered

Revenue’s Position

(i)                  Schedule FA compliance is mandatory.

(ii)                Even if the foreign asset was disclosed elsewhere, omission in the prescribed format constitutes a statutory failure warranting penalty.

 Assessee’s Position

(i)                  There was never any concealment—the asset was:

(ii)                Recorded in the books of account,

(iii)              Disclosed in the original returns of income,

(iv)              Properly reflected in the Section 153A return before any penalty notice.

(v)                The lapse was inadvertent, technical, and not indicative of mala fide intent.

Reliance was placed on JSW Steel Ltd. (supra) to contend that compliance through the Section 153A return is sufficient.

 

4. Findings and Judicial Reasoning: The Bombay High Court upheld the findings of the lower authorities and recorded the following key observations:

(i) Asset Was Always Disclosed: There was a consistent and transparent pattern of disclosure—therefore, no concealment or suppression existed.

 (ii) Voluntary Rectification Prior to Penalty Notice:- The correction of Schedule FA reporting in the Section 153A return prior to initiation of penalty proceedings indicated bona fide conduct and absence of intent to evade tax.

 (iii) Section 153A Return Constitutes Full Compliance-:- Drawing from JSW Steel Ltd., the Court reiterated that a return under Section 153A is to be treated as a valid return under Section 139(1) for all compliance purposes.

 (iv) Penalty Cannot Be Levied for Technical or Procedural Defects. The Court observed:

“Penalty cannot be imposed merely on account of non-disclosure in the prescribed format when substantive disclosure already existed, and the omission stood corrected before initiation of penalty proceedings.”

5. Decision:- The High Court dismissed the Revenue’s appeal and concluded that:

There was no furnishing of inaccurate particulars or concealment. The omission was technical in nature, subsequently rectified voluntarily.