ITAT deletes Rs 10 lakh penalty under Section 43 Black Money Act for foreign insurance policies

ITAT Mumbai allowed assessee's appeal against penalty under section 43 of Black Money Act for non-disclosure of foreign assets. The tribunal held that for the Isle of Man insurance policy, assessee was not the beneficial owner as it was purchased by brother-in-law with assessee's wife as beneficiary. For the UAE insurance policy, it had lapsed in 2014 before penalty provisions came into effect from AY 2016-17. The tribunal deleted the penalty of Rs. 10,00,000 and addition of Rs. 1,08,01,726, ruling that necessary conditions for treating assets as undisclosed foreign assets were not fulfilled.

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The core legal questions considered in this judgment revolve around the applicability and interpretation of the penalty provisions under section 43 of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (BMA). Specifically:

• Whether the Assessee was obligated to disclose foreign assets, namely life insurance policies held in the name of the Assessee but allegedly paid for by relatives, in Schedule FA of the Income Tax Return (ITR) for the relevant assessment years.
• Whether non-disclosure of such foreign assets in Schedule FA attracts penalty under section 43 of the BMA, even if the Assessee claims no beneficial interest or ownership in the assets.
• Whether the penalty can be levied for multiple assessment years for the same alleged default.
• Whether a lapsed foreign insurance policy, with last premium paid prior to the enactment of BMA penalty provisions, qualifies as an asset requiring disclosure and penalty for non-disclosure.
• The interpretation of the terms "beneficial owner" and "beneficiary" under the BMA and their relevance to disclosure obligations.

Issue-wise Detailed Analysis

1. Obligation to Disclose Foreign Assets in Schedule FA and Applicability of Penalty under Section 43 of BMA

The legal framework mandates that any person resident in India, other than not ordinarily resident, must disclose in Schedule FA of their ITR any foreign asset held by them as owner or beneficial owner. This requirement was introduced from Assessment Year (AY) 2012-13 onwards. Section 43 of the BMA prescribes a penalty of Rs. 10 lakhs for failure to disclose such foreign assets.

Precedents and CBDT Circular No. 13 of 2015 (FAQs) clarify that even if the foreign assets are fully explained and acquired from tax-paid income, non-reporting in Schedule FA attracts penalty, except for foreign bank accounts with aggregate balances not exceeding Rs. 5 lakhs.

The AO found that the Assessee had foreign life insurance policies in his name with Zurich International Life Ltd. (UAE) and RL 360 Life Insurance Company (Isle of Man), which were not disclosed in Schedule FA for AY 2016-17 onwards. The Assessee admitted the policies stood in his name but claimed no beneficial interest or investment in the RL 360 policy, and that the Zurich policy had lapsed before the penalty provisions came into effect.

The AO rejected the Assessee's explanations, emphasizing that ownership in the name of the Assessee triggers the disclosure obligation regardless of who paid the premiums or who benefits. The AO relied on the circular's clarification that reporting is mandatory irrespective of the source of funds or beneficial interest.

The Commissioner upheld this view, holding that the Assessee was the primary and legal owner of the foreign assets and thus liable to disclose them. The penalty under section 43 was sustained for each AY where non-disclosure occurred.

The Assessee's contention that he was not a beneficial owner or beneficiary was analyzed against the definitions in BMA Explanation 4 and 5, which define beneficial owner as one who provides consideration directly or indirectly for the asset for immediate or future benefit, and beneficiary as one who derives benefit from the asset. The Assessee argued that since premiums were paid by his relative and he did not derive benefit, these explanations do not apply.

However, the authorities emphasized that the statutory obligation to disclose foreign assets is not limited to beneficial ownership but extends to any asset held in the person's name. The penalty is imposed for non-furnishing of particulars and is independent of ownership or beneficial interest.

2. Treatment of Life Insurance Policy from RL 360 Life Insurance Company (Isle of Man)

The Assessee claimed that the RL 360 policy was purchased by his brother-in-law in the Assessee's name to protect his sister (Assessee's wife), with all premiums paid by the brother-in-law. The Assessee submitted an affidavit from the brother-in-law confirming these facts and asserted he was neither beneficiary nor investor.

The Tribunal acknowledged that under section 43, penalty applies if the person is a beneficial owner or beneficiary or otherwise holds the asset. Given the Assessee's submission supported by affidavit that he neither provided consideration nor was beneficiary, the Tribunal found that the Assessee cannot be held liable as beneficial owner or beneficiary for this policy.

Consequently, the Tribunal deleted the penalty imposed on the RL 360 policy, subject to verification by the AO of the facts concerning purchase and premium payments.

3. Treatment of Life Insurance Policy from Zurich International Life Limited (UAE)

The Assessee submitted that the Zurich policy was purchased in 2010 using foreign currency carried during foreign visits, with the last premium paid in 2014, and that the policy had lapsed before the penalty provisions of BMA came into effect in AY 2016-17.

The Tribunal relied on a precedent where the Tribunal held that discontinued or lapsed policies, with no premiums paid after a certain date and no asset in existence during the relevant year, do not qualify as foreign assets under section 2(11) of BMA and thus are not liable for penalty under section 43.

Since the Zurich policy had lapsed prior to the enforcement of penalty provisions, the Tribunal held that the penalty on this policy was unsustainable and deleted the penalty imposed on this asset.

4. Levy of Penalty for Multiple Assessment Years

The Assessee argued that even if penalty was leviable, it should be restricted to one assessment year as the same offence was alleged repeatedly. The authorities rejected this submission, holding that each assessment year is a separate entity with independent reporting requirements for foreign assets in existence during the relevant calendar year.

Since the Assessee failed to demonstrate that the assets were not in existence in those years, penalty was correctly levied for each assessment year where non-disclosure occurred.

5. Interpretation of "Beneficial Owner" and "Beneficiary" under BMA

The Assessee relied on Explanation 4 and 5 of section 139(1) of BMA which define "beneficial owner" as one who provides consideration for the asset for immediate or future benefit, and "beneficiary" as one who derives benefit from the asset during the previous year.

The Tribunal noted that these definitions are relevant to determine the nature of ownership or benefit but the penal provision under section 43 is triggered by non-disclosure of foreign assets held by the person, whether as beneficial owner or otherwise. The penalty is not contingent upon proving beneficial ownership but on the obligation to disclose foreign assets accurately.

Therefore, the mere fact that the asset is in the Assessee's name imposes a disclosure obligation, regardless of beneficial interest or source of funds.

Treatment of Competing Arguments

The Assessee's primary defense was non-beneficial ownership and lack of investment or benefit in the foreign assets, supported by documentary evidence and affidavits. The authorities emphasized the strict statutory disclosure requirements and the importance of the asset being in the Assessee's name.

The Tribunal balanced these arguments by deleting penalty on the RL 360 policy due to credible evidence negating beneficial ownership and on the Zurich policy due to its lapsed status prior to penalty provisions, while upholding penalty for other years and assets where non-disclosure was established.

Significant Holdings

"The sources of investment done in foreign assets is not relevant for the purpose of reporting requirements and the only requirement is the ownership/beneficial ownership of a foreign asset. In this case, the said investment in RL360 Life Insurance Company is undisputedly in the name of the appellant and the appellant is the primary or the legal owner of the same. Regardless of the sources of investment, the appellant being the primary/legal owner has the responsibility to disclose the same in Schedule FA of the return of income."

"The penalty under section 43 of the Act is not with respect to ownership of such assets but with respect to non-furnishing of particulars in respect of the foreign asset."

"Since the disclosure was not made in Schedule FA of the ITRs for AY 2016-17 to AY 2023-24, the AO has correctly levied the penalty of Rs. 10,00,000/-u/s 43 of BMA separately for each of the assessment years."

"The Assessee cannot be held as beneficial owner or beneficiary of the policy, as the Assessee's wife was inducted as a beneficiary and therefore the liability on the Assessee for imposing the penalty, cannot be fastened."

"Since the insurance policy from Zurich International Life Limited has lapsed for non-payment of premium before the enactment and enforcement of BMA penalty provisions, the penalty on this particular insurance is unsustainable."

Final Determinations

• The penalty under section 43 of the BMA was correctly levied for non-disclosure of foreign assets held in the Assessee's name for multiple assessment years, except where credible evidence negated beneficial ownership or the asset had ceased to exist.
• The penalty imposed on the RL 360 Life Insurance Company policy was deleted as the Assessee was neither beneficial owner nor beneficiary, supported by affidavit and documentary evidence.
• The penalty imposed on the Zurich International Life Limited policy was deleted as the policy had lapsed prior to the enforcement of the penalty provisions.
• Each assessment year is a separate entity for penalty purposes, and penalty can be levied for each year where non-disclosure occurred.
• The statutory obligation to disclose foreign assets in Schedule FA is independent of the source of funds or beneficial interest and applies to assets held in the Assessee's name.

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