ITAT Chennai Drops Black Money Act Penalty for Genuine Schedule FA Omission

Background and Core Issue

The Chennai Bench of the Income Tax Appellate Tribunal, in the case of Kumar Ramanathan Vs DDIT/ADIT, dealt with a batch of appeals concerning Section 43 of the **Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (BM Act) for Assessment Years 2020-21 to 2023-24.

The central question was whether failure to report a foreign investment in Schedule FA (Foreign Assets) of the income tax return, despite the asset being funded from fully disclosed, tax-paid income and routed through normal banking channels, could by itself trigger a mandatory penalty of ₹10,00,000 per year under Section 43 of the BM Act.

The assessee, a resident individual working with Vodafone, was a beneficiary of ESOPs of Vodafone PLC, UK, and also an investor in foreign listed securities. Based on CRS (Common Reporting Standard) information, the investigation wing noted that while various foreign assets were properly reported, certain units held in Silverdale Fund SPC/Plc were not reflected in Schedule FA for AYs 2020-21 to 2023-24.

The Assessing Officer (AO) invoked Section 43 of the BM Act and levied a penalty of ₹10,00,000 for each of the four assessment years, on the sole ground that this particular foreign asset—whose value exceeded ₹20,00,000—had not been reported in Schedule FA, even though other foreign holdings were disclosed. The CIT(A) sustained the penalty.

On further appeal, the ITAT examined whether this omission, in the facts of the case, amounted to a penalizable default and whether penalty under Section 43 is automatic or discretionary.

Facts Relating to the Foreign Investment

Nature of Employment and Foreign Holdings

  • The assessee is a resident individual employed with Vodafone.
  • Under his employment terms, he was granted Employee Stock Options (ESOPs) of Vodafone PLC, UK.
  • He also invested surplus funds in foreign listed securities and foreign funds.

CRS-based information revealed that the assessee had:

  • Foreign accounts with Saxo Bank and ICICI Bank, and
  • Investments in Silverdale Fund SPC/Plc.

While other foreign assets appeared in Schedule FA of the relevant returns, the particular investment in Silverdale Fund was not reported in Schedule FA for AYs 2020-21 to 2023-24.

Details of the Silverdale Fund Transactions

As explained before the authorities, the assessee had:

  • Invested in Silverdale Fund SPC in two tranches, viz.:

    • 606.50 units acquired in October 2019, amounting to approximately ₹71,31,023; and
    • A further acquisition of units in May 2020, taking the cumulative holding to 798.66 units.

  • These remittances:

    • Were made through ICICI Bank A/c No. 003401516016,
    • Were routed under the Liberalised Remittance Scheme (LRS), and
    • Originated from redemption proceeds of Indian mutual funds such as HDFC Overnight Fund and SBI Overnight Fund.

  • The gains on these mutual fund redemptions:

    • Were duly disclosed in the returns for AYs 2020-21 and 2021-22, and
    • Were assessed to tax accordingly.

Subsequently:

  • The entire 798.66 units in Silverdale Fund were sold in August 2023,
  • This resulted in a capital loss of about ₹26,72,898,
  • The loss was reported in the return of income for AY 2024-25, and
  • The foreign holding in Silverdale Fund was correctly disclosed in Schedule FA in AY 2024-25.

The assessee later became aware that the investment in Silverdale Fund had not been shown in Schedule FA in the returns for AYs 2020-21 to 2023-24, even though:

  • The source of investment was disclosed and taxed,
  • The bank account was disclosed,
  • There was no unreported foreign income, and
  • Ultimately, the foreign asset and its disposal were disclosed in AY 2024-25.

Rectification returns under Section 154 were filed on 28.02.2025 to correct the Schedule FA omission.

Penalty Proceedings Under Section 43 of Black Money Act

AO’s Reasoning

The AO accepted the following:

  • The investment in Silverdale Fund was:

    • Made from tax-paid, disclosed funds;
    • Routed via a disclosed ICICI Bank account;
    • Fully traceable and compliant with FEMA and LRS rules.

  • Income from the underlying Indian mutual funds had been properly offered to tax.

  • The foreign investment and subsequent loss were reflected in later returns.

Despite this, the AO held that: