Employee Fails To Disclose ESOP Holdings In ITR, Fined Rs 10 Lakh

The Income Tax Appellate Tribunal (ITAT) Chennai has deleted the penalty of Rs 10 lakh levied on an employee for not disclosing foreign stock options (ESOPs) in his income tax return. This case involves an employee, Kumar, who received stock options during his service overseas while working with Vedanta.

The employee received ESOP from its foreign parent company, Vedanta Resources PLC, and the same is held under a trust arrangement with Sanne Fiduciary Services.

During filing for income tax returns (ITR) for assessment year 2016-17 on February 22, 2018, the taxpayer failed to declare the holding of shares in Schedule Foreign Assets (FA), which invited penalty proceedings against him for non-disclosure of foreign assets under Section 43 of the Black Money Act, 2015.

Case Taken To ITAT

The tax department issued a penalty order of Rs 10 lakh in respect of the above-mentioned case. It was subsequently confirmed by the Commissioner of Income Tax (Appeals).

Kumar challenged the decision before ITAT Chennai. His authorised representative argued that the omission was not intentional but arose due to confusion in the first year of implementation of the foreign asset disclosure requirement.

It was also submitted that the ESOPs were already taxed as part of salary, with tax deducted at source on the perquisite value. Moreover, capital gains on the sale of these shares were reported and taxed in a subsequent assessment year, ensuring that the whole transaction remained within the tax framework.

The tribunal's stated that there was no dispute regarding the nature of the ESOPs. They were awarded as employment compensation, taxed as perquisites, and subsequently taxed again when sold.

Therefore, the issue is limited only to failure to disclose those shares in Schedule FA in the return of income.

In its ruling, ITAT Chennai referred to earlier judicial decisions, including the case of Vinil Venugopal, where it was held that the use of the word “may” in Section 43 indicates that the imposition of penalty is discretionary and not mandatory.

It also cited rulings of the Supreme Court in cases such as Hindustan Steel, and Reliance Petroproducts. According to these rulings, penalties must not be levied on technical grounds and without proof of wilful default.

Section 43 of the Black Money Act is quasi-criminal in nature. As such, penalties under that section are liable to be imposed only in the event of wilful default. It requires strict evidence of wilful or deliberate default.

Judgment By ITAT

On considering all the material aspects of the case along with legal principles, the bench found that the appellant’s act was of technical in nature. There was nothing more than mere non-compliance with the rules and regulations relating to the declaration of foreign assets.

The appellant was not guilty of an intentional breach of any law. The ESOPs held abroad were fully taxed under income head 'salary'. Again, capital gains tax arising from the sale was also accounted in subsequent years.

As per the reference cases taken into consideration in this case, penalty provision in the Black Money Act does not require technical approach and provides discretionary powers to impose the penalties under Section 43. Therefore, it held that imposition of penalty under the section is discretionary and not mandatory in nature.

Considering all these facts and legal precedents, the ITAT waived off the penalty of Rs 10 lakh levied from the taxpayer.