Significance of Disclosing Foreign Company ESOPs and Foreign Assets

With the globalization of companies and the rise of startup culture, businesses are finding innovative ways to reward their employees. These rewards include gifts, international travel, Employee Stock Ownership Plans (ESOPs), and more.

In the case of ESOPs, companies grant these stock options to employees as a loyalty incentive, typically after they have spent a specified period with the organization. This not only motivates employees but also gives them a sense of ownership in the business. ESOPs are offered by both domestic and foreign companies.

In India, ESOPs are considered a part of an employee’s salary and are subject to taxation as salary income. Companies deduct taxes at the source (TDS) on these benefits and deposit the amount with the government. This deduction is reflected in Form 16, and the tax paid is also visible in Form 26AS after logging into the Income Tax portal.

However, the tax treatment of ESOPs can impose significant compliance obligations, especially when the ESOPs are granted by foreign companies.

Taxation and Disclosure of ESOPs

When ESOPs are allotted by a domestic company, they are reported as part of the individual’s income. For residents of India, if the total income exceeds ₹50 lakh, they are required to disclose their assets and liabilities in their income tax returns.

However, the rules differ for foreign assets. Residents of India holding foreign assets (e.g., immovable property, shares, bank accounts) must disclose these assets in their income tax returns, even if their total income is below ₹50 lakh.

Importance of Disclosing Foreign Assets

The significance of disclosing foreign assets in the income tax return is highlighted by the penalties prescribed under Section 43 of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015. Failure to report foreign assets in the “Schedule FA” of the income tax return can result in a penalty of ₹10 lakh. In practice, justifying an omission to the Assessing Officer (AO) is exceptionally challenging. Most often, the AO imposes the penalty if foreign assets are not disclosed.

A Key Legal Precedent

An important judgment from the Mumbai ITAT (Income Tax Appellate Tribunal) offers relief to taxpayers. In this case, a taxpayer failed to disclose ESOPs granted by a foreign company in the “Schedule FA” of their income tax return. However, the Mumbai ITAT deleted the ₹10 lakh penalty imposed by the AO, citing genuine reasons provided by the taxpayer.

Let’s explore the critical aspects of this judgment.

Facts of the Case

Brief facts of the case are that assessee is a salaried employee and was earlier working with Deutche Bank AG. During the year under consideration, assessee filed his return of income reporting total income at Rs. 4,80,89,272/-. Assessee received a sum of Rs. 24,20,929.87 towards ESOPs of Deutsche Bank A.G. who. had considered the said ESOPs as perquisites and deducted tax at source. Assessee, too had offered salary income (including ESOPs) in his return of income. Assessee showed the investment in ESOPs in the last year under Schedule “FA” in his return of income for A.Y. 2016-17. As the said investment was sold during the year, the same remained to be disclosed in Schedule FA for the year under consideration.

According to the Ld. Assessing Officer, schedule FA was introduced in the return of income from Assessment Year 2012 – 13 by the Finance Act, 2012, making it mandatory for the Indian residents to report about their foreign assets and income generated thereupon in foreign jurisdiction in order to track the same. According to the Ld. Assessing Officer, failure on the part of the assessee to make the said reporting attracted penalty of ₹ 10 lakhs under section 43 of the Act. Ld. Assessing Officer had issued a show cause notice seeking explanation from the assessee to this effect which was replied upon.

Assessee submitted that as the said investment was sold during the year and therefore the same remained to be disclosed in Schedule FA for the year under consideration. According to the assessee, as the investment in ESOPs was out of taxable income of the assessee the same was not undisclosed foreign income or undisclosed foreign asset. He further submitted that as the omission was unintentional and had no tax consequence, the breach may be considered to be a technical or venial breach for which no penalty should have been levied.

Assesse submitted that he had disclosed the foreign asset in Schedule FA in AY 2016-17 and further in the current year, gain arising on its sale is also disclosed as ‘Short Term Capital Gains’ .

Attention was invited to the provisions of section 43 of the Act according to which assessee contended that section does not specify that details of foreign assets must be disclosed in particular schedule, that is Schedule FA as alleged, of the income-tax return form. Assessee was under a bonafide belief that he is not supposed to disclose his foreign assets in any separate schedule such as schedule FA when the same had already been adequately disclosed in schedule AL as part of his assets and liabilities. According to the assessee, levy of penalty under section 43 is not mandatory but is at the discretion of the Assessing Officer since the word used in the said section is that Assessing Officer “may” levy penalty. It was submitted that legislature has given discretionary power to the Ld. Assessing Officer to decide the levy of penalty after considering all relevant factors including the purpose and object, the Act seeks to achieve. The discretion to impose a penalty puts the ld. Assessing Officer under a corresponding obligation to exercise the said discretion by taking into account the facts and circumstances of the case, holistically. Provisions of section 43 of the Act are extracted below:

“If any person, being a resident other than not ordinarily resident in India within the meaning of clause (6) of section 6 of the Income-tax Act, who has furnished the return of income for any previous year under sub-section (1) or sub-section (4) or sub-section (5) of section 139 of the said Act, fails to furnish any information or furnishes inaccurate particulars in such return relating to any asset (including financial interest in any entity) located outside India, held by him as a beneficial owner or otherwise, or in respect of which he was a beneficiary, or relating to any income from a source located outside India, at any time during such previous year, the Assessing Officer may direct that such person shall pay, by way of penalty, a sum often lakh rupees:

Provided that this section shall not apply in respect of an asset, being one or more bank accounts having an aggregate balance which does not exceed a value equivalent to five hundred thousand rupees at any time during the previous year.”

Assessee placed reliance on the decision of the Hon’ble Apex Court in the case of Hindustan Steel Ltd. vs State of Orissa (1972) 83 ITR 26(SC) which held that an order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceeding, and penalty will not ordinarily be imposed unless the party obliged either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation. Penalty will not also be imposed merely because it is lawful to do so. Whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances. Even if a minimum penalty is prescribed, the authority competent to impose the penalty will be justified in refusing to impose penalty, when there is a technical or venial breach of the provisions of the Act or where the breach flows from a bona fide belief that the offender is not liable to act in the manner prescribed by the statute.

Assessee placed strong reliance on the decision of Coordinate Bench of ITAT Mumbai in the case of Rohit Krishna vs. CIT for the Assessment Year 2016-17 in BMA No. 11/M/2024 dated 26.08.2024 which had dealt with the identical issue on identical fact pattern as in the present case before us. This decision in turn placed reliance in the case of Ocean Diving Centre Ltd. v. CIT in BMA No. 22/M/2023 dated 30.08.2023 as well as in the case of Hindustan Steel Ltd. vs. State of Orissa (supra) by the Hon’ble Supreme Court. The observations and finding arrived by the Coordinate Bench in the case of Rohit Krishna (supra) for Assessment Year 2016-17 are extracted below for ease of reference:

“8. We have heard the parties and perused the material available on record and given thoughtful considerations to the rival claims of the parties. Admittedly, the Assessee has not disclosed the foreign assets in particular schedule i.e. FA Schedule, however, it is a fact that the Assessee has duly disclosed the foreign assets i.e. ESOP and its value in “Schedule AL” of the income tax return and the employer of the Assessee has also deducted the TDS on the value of the foreign asset/ESOP and shown the details/value of the same in Form No.16 Part-B as well as in Form No.12BA. Hence, it cannot be said that the Assessee has not disclosed the foreign assets in any manner. The Hon’ble Co-ordinate Bench of the Tribunal in the case of M/s. Ocean Diving Centre Ltd. vs. CIT BMA No.22/M/2023 & ors. decided on 30.08.2023 has also considered almost the similar circumstances, wherein though the Assessee has not disclosed the foreign assets in Schedule FA but in fact disclosed the same in its balance sheet and schedule part-A-BS under “non-current investments” attached with the return of income and therefore the Co-ordinate Bench considering the fact that the Assessee has disclosed the foreign assets may not be in form FA but otherwise in its return of income ultimately held that the penalty is not warranted. For brevity and ready reference, the conclusion drawn by the Hon’ble Co-ordinate Bench of the Tribunal is reproduced herein below”…….

……8.1 Hence, considering the aforesaid facts and circumstances of the case, as it is not the case of the Revenue Department that the foreign asset/ESOP remained undisclosed entirely and there was malafide intention or ulterior motive for hiding the foreign assets from disclosing; and as the Hon’ble Apex Court in the case of Hindustan Steel Ltd. has laid down the dictum that simply on the technical or venial breach of the law the penalty is not automatically leviable; the judgment of the Hon’ble Co-ordinate Bench of the Tribunal in the case referred to above, wherein the Co-ordinate Bench dealt with the identical situation and ultimately deleted the penalty; hence we are inclined to delete the penalty under consideration. Thus, the same is deleted.”

Before us, ld. Counsel for the assessee has placed reliance on long line of judicial precedents by the various coordinate benches, especially that of ITAT Mumbai, on the issue being dealt here in these appeals to assert the contentions of the assessee and bring clarity on the subject matter by pointing out change in stand taken on different occasions by the same author / co-author. The same are listed as under in the chronology of their date of pronouncement.

For each of the above decisions, ld. Counsel for the assessee pointed out their key aspects including facts, judicial precedents relied upon, observations and findings arrived therein. The same are narrated seriatim to gain a meaningful and purposive perspective on the issue involved.

i) ACIT vs. Tejal Ashish Mehta in BMA No. 5/Mum/2022, dated 03.04.2023

a. In this case, assessee had a life insurance policy of a foreign company, whose surrender value was declared u/s. 59 of the Act on which tax and penalty were paid. Declaration was made under one time compliance scheme which was accepted by the Revenue. According to the assessee, receipts on account of surrender were declared in the return of income in Schedule EI. Assessee was under bonafide belief that since policy was surrendered and was no more in existence, there was no requirement to disclose it in Schedule FA. On these set of facts, it was observed that for an asset ceased to exist on account of surrender and its maturity amount was duly reflected in income tax return thus bonafide mistake of not disclosing in Schedule FA is a reasonable cause for deleting the penalty. Reference was made to the decision of coordinate bench of ITAT of Mumbai in the case of ACIT vs. Leena Gandhi Tiwari in 136 taxmann.com 409 (Mum), dated 29.03.2022.Thus, penalty was deleted and appeal by Revenue was dismissed.

ii) Aditi Avinash Athavankar vs. CIT in BMA Nos.16 to 19/Mum/2023, dated 10.07.2023

b. In this case, husband of the assessee made investment in foreign asset with second name of the assessee as a second holder for administrative convenience. Assessee had not contributed any amount towards the said investment. She was under bonafide belief that being a secondary owner, there is no requirement to furnish the details in Schedule FA. At the same time, husband of the assessee had declared the said investment in Schedule FA in his return of income. His case was taken up for scrutiny assessment and was completed accepting the returned income. Reliance was placed on the decision of Coordinate Bench of ITAT, Mumbai in Leena Gandhi Tiwari (supra). On these set of facts, it was observed that section 43 uses the words “the Assessing Officer may direct” which would mean that power of Assessing Officer to impose penalty is discretionary and not mandatory. Non-disclosure in assessee’s return was considered as bonafide mistake since required disclosure was made in the return of income of husband of the assessee. There was no intention to evade tax on this account. Reliance was also placed on the decision of Hon’ble Supreme Court in the case of Hindustan Steel Ltd. (Supra). On the use of word “may” in section 43 for levy of penalty, it was observed that it is necessary to find out from the scheme of the Act, the intention of the legislature for which reference was made to the speech of the then Hon’ble Finance Minister given while introducing the Act. Thus, after considering all these facts and law, it was concluded that Assessing Officer was not justified in exercising the discretionary power just because it would be lawful to do so. According to the decision, the discretionary power would have to be exercised having regard to facts of each case in a fair, objective and judicious manner and the intention of the legislation. It was noted that intention behind the introduction of the Act is mainly to track and bring into the tax net the undisclosed black money stashed abroad. Thus, on Bonafide intentions of the assessee, penalty was deleted and appeal of the assessee was allowed.

Revenue’s Defence

Case of the Revenue is that provisions of the Act are strictly applicable and assessee is mandatorily required to disclose foreign assets in Schedule FA, failure of which would lead to imposition of penalty. According to ld. Sr. DR, disclosure of foreign asset in the return is not merely technical requirement without any purpose. It enables the Department to ensure proper investigation. Hence, its nondisclosure is to be viewed with disfavour.

Tribunal Decision:

We have heard both the parties and perused the material placed on record. We have also given our thoughtful consideration to provisions of the Act and long line of judicial precedents discussed above. Admittedly, assessee did not disclose his foreign asset in particular Schedule, i.e., Schedule FA though the same was duly disclosed in the preceding year. Further, assessee had offered perquisite value of the foreign asset, i.e., ESOPs in his return of income which was subjected to tax by way of TDS. Further, in the course of impugned proceedings, assessee had offered all the details and explanations corroborated with documentary evidences in respect of foreign asset.

We also take note of the provisions of section 43 of the Act as well as the preamble to the said Act to understand the discretionary power vested with the Assessing Officer for imposition of penalty vis-àvis object sought to be achieved keeping in mind the legislative intent. The purpose of reporting requirement of foreign assets/income in Schedule FA of the Income tax return is for and monitoring the investments held abroad by the residents of India. Preamble to the Act describes its objective to deal with problem of black money, i.e., undisclosed foreign income and assets. The said Act must not be invoked for punishing a technical /venial /bonafide breach of any statutory obligation and therefore bonafide actions of the tax payers must be excluded from the application of provisions of this stringent legislation. In this regard, we draw our force from the decision of Hon’ble Supreme Court in the case of Hindustan Steel Ltd. (supra).

Accordingly, considering the facts and circumstances of the case as discussed above, admittedly it is not a case where foreign asset remained undisclosed in entirety and that there is any malafide intention or ulterior motive on the part of the assessee for not disclosing the same. Also, taking into account, detailed discussions on long line of judicial precedents referred by the ld. Counsel, we delete the penalty in the appeal under consideration before us. Accordingly, grounds taken by the assessee in this respect are allowed.

Citation: Randhir Singh vs Deputy Director of Income Tax (Inv)-3(1), FAIU, Mumbai BMA No. 14/MUM/2024 Assessment Year: 2017-18

Order is pronounced in the open court on 27 November, 2024

Conclusion

The importance of disclosing foreign assets, including ESOPs, in the prescribed formats such as “Schedule FA” cannot be overstated, as non-compliance may attract substantial penalties under the Black Money Act. Nevertheless, the recent Mumbai ITAT judgment and similar precedents underline that penalties for non-disclosure should not be imposed for technical or unintentional lapses where there is no malafide intent or undisclosed income. These judgments highlight the importance of fair and discretionary application of the law while emphasizing the taxpayer’s responsibility for transparent reporting.

In conclusion, as globalization continues to blur boundaries, it is crucial for taxpayers to stay informed about their disclosure obligations under Indian tax laws. Accurate reporting not only ensures compliance but also avoids the severe repercussions of non-disclosure, thereby fostering a culture of accountability and financial transparency.