The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (‘BMA’) is a stringent legislative measure to curb tax evasion resulting from non-disclosure of foreign income and assets, by imposition of severe tax liabilities and penalties.
Among its various penalty provisions, Section 42 of the BMA imposes a penalty of INR 10 lakhs upon a resident for every such year in which such resident held an asset outside India as a beneficial owner or otherwise and failed to file its income tax return (‘ITR’) for such year(s). In addition, Section 43 of the BMA provides that where a resident either fails to disclose or furnishes inaccurate particulars of the aforesaid foreign assets in its ITR for any year, a penalty of INR 10 lakhs shall be imposed for each such year.
While the intent of the aforesaid provisions is to ensure transparency and deter tax evasion, certain issues crop up in its implementation such as the scope of ownership of asset, assumption of jurisdiction, and ambiguity of the valuation mechanism, making this provision a point of contention for taxpayers and income-tax authorities.
Can penalty be imposed without ownership?
As per Section 139 of the Income-tax Act, 1961 (‘IT Act’) read with the Income-tax Rules, 1962, resident individuals are inter alia required to furnish information in relation to the following in Schedule FA while filing their ITRs:
* Details of foreign bank accounts, including those in which such a resident may be an authorised signatory.
* Financial interest in any entity,
* Immovable property located outside India.
* Interests in a foreign trust, whether in the capacity of a settlor, beneficiary or trustee.
Section 42 of the BMA imposes a penalty for non-filing of ITR by a resident holding foreign assets as a ‘beneficial owner or otherwise, or in respect of which he was a beneficiary’ and Section 43 of the BMA seeks to impose penalty for non-disclosure or inaccurate disclosure of such foreign assets by such resident in its ITR. Therefore, there is a direct link between the disclosures required to be made in Schedule FA of the ITR and the penalty sought to be imposed under Sections 42 and 43 of the BMA.
Coming to the term ‘beneficial owner’, it may be noted that the same has not been expressly defined under the BMA. However, Section 2(15) of the BMA stipulates that any expression not defined therein shall bear the meaning assigned to it under the Income-tax Act, 1961 (‘IT Act’). Reference may, therefore, be made to Explanation 4 to Section 139(1) of the IT Act, which defines ‘beneficial owner’ in respect of an asset to mean an individual who has provided, directly or indirectly, consideration for the asset for the immediate or future benefit, direct or indirect, of himself or any other person.
Furthermore, the term ‘beneficiary’ is neither defined in the BMA nor in the IT Act. Therefore, references must be made to Section 3 of the Trusts Act, 1882. Therein, the term ‘beneficiary’ has been defined to mean a person for whose benefit a trust is created. Additionally, in State Bank of India v. Special Secy., Land[1], it has been held that a beneficiary has a right to obtain his beneficial interest against the trustee as owner of the property.
Consequently, taking into account the meanings of the terms ‘beneficial owner’ and ‘beneficiary’, it appears that the intent behind Sections 42 and 43 of the BMA is to penalise non-disclosures or inaccurate disclosures of information pertaining to assets held by a person deriving some direct or indirect benefit from such asset. Therefore, a question that arises is whether penalty under Sections 42 and 43 of the BMA may be imposed in a case where the person who has failed to file his ITR or failed to make the required disclosure in Schedule FA of their ITR is not deriving any benefit from a foreign asset but is still required to report the particulars of the assets/bank account such as an employee exercising signing authority for a foreign bank account of his employer or a trustee in whose name the assets are registered and held for the benefit of the beneficiaries.
In this regard, reference may be made to the decision of the Supreme Court in Hindustan Steel Ltd. v. State of Orissa[2].Therein, it has been held that an order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceeding and thus, penalty may not ordinarily be imposed unless the party so obliged either acted deliberately in defiance of law or was guilty of contumacious or dishonest conduct. Relying upon this, the Mumbai Bench of the Income Tax Appellate Tribunal (‘ITAT’) in Ocean Diving Centre Ltd. v. CIT (Appeals)[3]held that the power of imposition of penalty under Section 43 of the BMA is discretionary and where a breach of the disclosure requirement flows from a bona fide belief that the offender is not liable to act in the manner prescribed by the statute, penalty under the said section may not be imposed.
In this context, further reference may be made to the order of the Mumbai Bench of the ITAT in Sanjay Bhupatrai Shah v. DDIT[4] wherein the ITAT set aside the penalty imposed under Section 43 upon a person for non-disclosure of a bank account in which he was not a beneficiary but was named a joint owner for administrative convenience.
Basis the above, it can be argued that penalty under Sections 42 and 43 of BMA may not be imposed upon non-disclosure or inaccurate disclosure of a foreign asset by a resident individual, say in his capacity of a trustee or a signatory of a foreign bank account, when such individual is not deriving any benefit from such asset but is rather only under a statutory obligation to make disclosures in relation thereto on account of his connection with such an asset. Consequently, mere legal ownership of an asset cannot be the criteria for imposition of penalty under Sections 42 and 43 of the BMA.
The threshold conundrum for imposition of penalty
Prior to its amendment vide the Finance (No. 2) Act 2024, the provisos to Sections 42 and 43 of the BMA stated that no penalty will be levied if the foreign bank account held by an assessee had an aggregate balance of less than INR 5 lakhs. The Finance (No. 2) Act, 2024, with effect from 1 October 2024, has extended the aforesaid exclusion to all assets held by an assessee outside India (except immovable property) whose aggregate value is less than INR 20 lakhs (‘Threshold Amendment’).
While the Threshold Amendment is a welcome relaxation brought about to relax the applicability of an otherwise stringent penalty provision, a question arises as to what will happen to the penalty proceedings initiated before 1 October 2024, wherein the value of the foreign asset is lower than INR 20 lakhs and whether an assessing officer can assume jurisdiction under the amended Sections 42 and 43 for imposition of penalty in relation to assets acquired prior to 1 October 2024 (not being immovable property) having an aggregate value less than INR 20 lakhs.
In this context, it is important to refer to the Supreme Court’s decision in CIT v. Vatika Township (P.) Ltd.[5], whereinwhile addressing the question of retrospectivity in tax legislation, the Court held that a provision which grants benefit to an assessee and does not operate at the detriment of the general public can be accorded retrospective operation.
Accordingly, in light of the Hon’ble Supreme Court’s reasoning, it can be argued that Sections 42 and 43 of the BMA can be accorded retrospective application as the enhancement in the threshold under the said Sections has been brought about as a measure of relief. Consequently, there exists argument that initiation of penalty proceedings under the aforesaid Sections for assets acquired prior to the amendment, having an aggregate value of less than INR 20 lakhs, would be void-ab-initio due to the absence of jurisdiction with an assessing officer to initiate such proceedings and impose penalty.
However, it is also worth noting that the Supreme Court in CIT v. Dhadi Sahu[6] and CIT v. Smt. R. Sharadamma[7] has upheld the jurisdiction of an authority to impose penalty wherein the jurisdiction was assumed validly, even though there was a subsequent ouster of such jurisdiction by virtue of an amendment. It therefore follows that that an assessing officer who has validly initiated penalty proceedings under the un-amended Sections 42 and 43 of the BMA shall be entitled to impose a penalty under the Section, notwithstanding the subsequent increase in the threshold. Thus, the imposition of penalty post Threshold Amendment is a litigious issue.
Date of valuation of asset
As may be seen from the above discussion, penalty under Sections 42 and 43 of the BMA can only be imposed if the value of the foreign asset is more than INR 20 lakhs. Therefore, to determine the applicability of the aforesaid Sections, it is imperative that the foreign asset is valued in INR or the amount present in the undisclosed foreign bank account is converted into INR.
In this regard, Section 43 read with Section 42 of the BMA states that for determining the value equivalent in rupees of the balance in an account maintained in foreign currency, the rate of exchange for calculation of the value in rupees shall be the telegraphic transfer buying rate of such currency according to the State Bank of India as on the date for which the value is to be determined.
What is pertinent to note here is that Section 42 does not provide any clarity as to the date of valuation which is to be considered for the purpose of determining the value equivalent in INR of a foreign asset apart from balance in a foreign bank account. This may give rise to three possible interpretations:
1. The value of the foreign asset is to be determined as on the date on which the asset is acquired by a resident; or
2. The value of the foreign asset is to be determined as on the date of filing of the ITR by the resident; or
3. The value of the foreign asset is to be determined as on the date on which the notice under Section 43 of the BMA is to be issued.
This ambiguity may be a cause for concern for a resident who had acquired an asset much prior to the Threshold Amendment, for instance in the previous year relevant to assessment year (‘AY’) 2016-17, and the notice for imposition of penalty is issued post the said amendment in 2025. In such a case, if the value of the asset was lower than INR 20 lakhs as on the date of acquisition or the date of filing of ITR but its value exceeds the minimum applicable threshold for initiation of penalty in 2025 due to unfavourable foreign exchange fluctuations, a question would arise if the provisions of Sections 42 and 43 of the BMA would be applicable in this case.
If the interpretation listed at (iii) above were to be accepted, the assessing officer could potentially be vested with the authority to impose penalty for non-disclosure under Sections 42 and 43 of the BMA for all the previous AYs in which the asset was held by the assessee, irrespective of the breach of the threshold of INR 20 lakhs having occurred only in one AY.
Thus, determination of the date of valuation under Sections 42 and 43 of the BMA is absolutely essential to analyse the correctness of the initiation of penalty proceedings under the said Section.
At this juncture, it must be noted that Section 42 of the BMA prescribes a valuation mechanism exclusively in relation to foreign bank accounts. Furthermore, while the Threshold Amendment broadened the scope of the exception to the imposition of penalties under Sections 42 and 43 of the BMA to encompass all assets other than immovable property, the legislature did not introduce a corresponding amendment to apply the valuation methodology specifically provided for foreign bank accounts to all such assets falling within the ambit of the amended exception.
Consequently, the absence of a valuation framework under these provisions for assets other than foreign bank accounts underscores a significant legislative gap, which is further compounded by the lack of any reference to the valuation mechanism stipulated under the Black Money Rules, 2015.
Conclusion
The legislative intent behind the incorporation of Sections 42 and 43 of the BMA was to penalise failure of filing of the ITR as well as improper disclosures in the ITR by residents who were holding foreign assets outside India as beneficial holders or otherwise. However, while the provisions and intention behind the said Sections may appear to be clear, as may be seen above, there exist several interpretational issues regarding their application.
Legislative interventions such as the Threshold Amendment, which have ostensibly been brought in to confer a relief upon small defaulters, signified the legislature’s intention to exclude negligible foreign assets / holdings from penal consequences as the low threshold often resulted in many penalties where the asset value itself was less than the penalty amount. Accordingly, authorities under the BMA must keep in mind the said legislative intention while applying the provisions of Sections 42 and 43 and give a purposive interpretation to avoid causing unnecessary hardship to taxpayers.
Further, even if such value exceeds INR 20 lakhs, a clear distinction between legal ownership and beneficial ownership must be kept in mind by the authorities under the BMA to ensure that bona fide cases of inaccurate disclosure or non-disclosure, arising out of technical or interpretational lapses, are excluded.
In essence, the interpretation of Sections 42 and 43 and the Threshold Amendment must remain aligned with the legislative intent of targeting wilful non-disclosure, while safeguarding bona fide taxpayers from disproportionate penal consequences. Such an approach may ensure enforcement that is fair, equitable, and consistent with the principles of natural justice.
[First two authors are Associates, while third and fourth authors are Principal Associate and Associate Partner, respectively, in Direct Tax practice at Lakshmikumaran & Sridharan Attorneys, New Delhi]
[1]1995 Supp (4) SCC 30
[2][1972] 83 ITR 26 (SC)
[3][2023] 156 taxmann.com 360 (Mumbai Trib.)
[4][2025] 173 taxmann.com 316 (Mumbai - Trib.)
[5][2014] 367 ITR 466 (SC)
[6][1993] 199 ITR 610 (SC)
[7] [1996] 8 SCC 388
