Income Tax Return: Failure to declare foreign shares, investments, or assets can lead to a penalty of ₹10 lakh

Failing to disclose foreign shares and other overseas assets in your income tax return (ITR) can have significant financial consequences. Individuals may face potential legal liabilities under the Black Money Act, 2015, for non-compliance, reported Economic Times.

According to the report, a Mumbai Income Tax Appellate Tribunal (ITAT) imposed a penalty of ₹10 lakh for each year in which foreign shares and other assets were not disclosed in the “Schedule FA” of the individual’s ITR.

It is obligatory for an individual to complete “Schedule FA” in their ITRs if they have made direct investments in foreign assets (such as foreign shares, foreign company mutual funds, etc.) or have possessed employee stock options (ESOPs) from foreign companies.

Under Section 43 of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, resident individuals are obligated to disclose details of their foreign assets situated outside of India in their income tax return (ITR). Failure to comply with this requirement may result in the Assessing Officer imposing a flat penalty of ₹10 lakh on the individual.

It’s crucial to recognize that Section 43 necessitates the inclusion of foreign assets in ‘Schedule FA’ within the respective ITR form. Merely reporting income from foreign assets in the ITR form without disclosing the assets in Schedule FA will not suffice to meet the disclosure obligation. In the event that an individual acquires virtual digital assets (VDAs) from international exchanges and stores them in foreign wallets, they are required to file both Schedule VDA and Schedule FA.

Nonetheless, if an individual invests in an Indian-origin scheme that has a foreign investment mandate, such as Indian mutual funds investing in the US, Taiwan, and so on, there is no obligation to file Schedule FA. However, if an Indian individual acquires foreign assets, such as the Blackrock i-Shares exchange-traded fund (ETF) on the New York Stock Exchange (NYSE), then the filing of Schedule FA is necessary.

Discretionary authority of the Income Tax Department

The Income Tax Department possesses discretionary authority to determine the legal framework under which a taxpayer should face prosecution for not disclosing foreign assets in their ITRs. The income tax assessing officer holds the authority to initiate legal proceedings against the individual for non-disclosure of foreign assets, either under the Income Tax Act or the Black Money Act. Once the specific Act is selected for prosecution, the penalties stipulated within that Act will be applied exclusively.

In cases where an individual can demonstrate to the tax department that the omission was unintentional and not intended to evade taxes, the imposition of penalties may be waived. However, if the tax department, upon conducting a thorough investigation, discovers that the individual is not only responsible for failing to disclose foreign assets in Schedule FA but is also guilty of tax evasion, illicit movement of black money offshore, or other infractions, severe consequences may ensue, including both substantial penalties and the possibility of imprisonment. It's worth noting that such stringent actions are typically reserved for extreme cases and are not invoked solely for failures in disclosure.

Nevertheless, the penalty specified in Section 43 of the Black Money Act does not come into effect when the foreign asset in question consists of one or more bank accounts with a combined balance of up to ₹5 lakh. In other words, if an individual possesses foreign bank account(s), and the total balance across all these foreign bank accounts does not surpass ₹5 lakh, no penalty pursuant to section 43 of the Black Money Act will be enforced, even if such bank account(s) were not declared in Schedule FA.

It's crucial to emphasize that this immunity applies exclusively to foreign bank account(s). No exemption is granted if the foreign asset consists of shares held in a foreign company or any other foreign assets.

Additionally, the penalty will be imposed on a per-defaulting-year basis, meaning that it applies to each year in which foreign assets were not reported in the ITR. In cases where there are multiple defaulting years, the assessing officer has the authority to levy the penalty for each year of default, as demonstrated in the aforementioned case by Mumbai ITAT.

In comparison to the Black Money Act, the Income-tax Act is more forgiving when it comes to the omission of foreign asset disclosure. Failure to disclose foreign assets in an individual's income tax return (ITR) will result in the ITR being labelled as a “Defective ITR”.

Upon being classified as a defective ITR, an individual is obligated to submit a revised ITR, which will then undergo processing by the income tax department. In cases where there is additional tax owed, penal interest may be applicable.

What details are required to be included in Schedule FA?

Schedule FA in the ITR necessitates that a taxpayer must divulge all foreign assets, which may encompass financial interests in any entity, held either as a beneficial owner or through other means. This includes beneficial interests in trusts and acting as a signatory on a bank account, even on behalf of a company, at any point during the respective previous year.

In Schedule FA, individuals are required to provide the following declarations:

(a) Any assets located outside India, such as shares, debentures, life insurance policies, annuity contracts, immovable property, or any other type of capital asset.

(b) Financial or beneficial stakes in overseas entities, which may include being a partner in an overseas LLP or firm, or serving as a beneficiary of a foreign private trust, among others.

(c) Authorization or signing authority for any account situated outside India, whether it's a trading account, depository account, bank account, or custodian account.

(d) Earnings originating from any source outside India, encompassing dividends, interest, or capital gains.

Failure to disclose the aforementioned details in the ITR can lead to the imposition of a penalty of ₹10 lakh under Section 43 of the Income Tax Act. At times, individuals may question the necessity of disclosing information in Schedule FA when they have already reported all their income, including overseas earnings.

NRIs returning to India sometimes overlook these disclosures, as they perceive that these assets and incomes were obtained during their non-resident status. Consequently, they believe that these assets should not fall under the purview of the Indian Income Tax Act. It's important to note that disclosing these details in Schedule FA does not grant Indian tax authorities the authority to impose taxes unless they are subject to taxation under Indian laws.