As the tax filing deadline nears, many are treading a minefield of rules on foreign assets, the details of which were uploaded to taxpayers' Income Tax (I-T) portal accounts this month.

Over the weekend, several well-heeled taxpayers received SMS alerts from the I-T department, reminding them to disclose overseas bank accounts, properties, and ownership in companies and trusts in 'Schedule FA' of the appropriate income tax return form by July 31.

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Some are waking up to mismatches between their "incomplete disclosures" during 2022-24 and the "actual information" compiled by the I-T department from data shared by various countries. Others, fearing that the taxman would soon discover unreported assets, are seeking professional help to soften the blow.

"By uploading data, the government has signalled it has all FA (foreign asset) information and taxpayers better take shelter under the Fast Track disclosure scheme, expected to become effective soon, for grant of immunity in specified eligible cases. There can be a concern where someone has already filed his return disclosing one FA but is now found to own more. This may be treated as conscious non-disclosure and the defence of reasonable cause, otherwise available, may be lost. Such cases also, in my view, are eligible for immunity on participating in the scheme and are advised to opt for immunity," said senior chartered accountant Pradip Kapasi.

Correcting lapses, errors

The lapses stem from ignorance of the law, sheer negligence or conscious concealment: a wife not disclosing her name in the FA Schedule for joint offshore bank accounts held with her husband, particularly if she hasn't contributed to them; students studying abroad not filing returns even though they should because they have overseas bank accounts; non-disclosure of foreign ESOPs and US retirement accounts (IRA); or residents acting as "protectors" of overseas trusts, whose identities were never reported because there was no provision for doing so, but have now surfaced.

In some cases, the data received may be incorrect - as was the case two years ago when a Singapore bank shared 200 incorrect bank account numbers with the Indian tax office. Sorting out such cases can sometimes be time-consuming.

While a taxpayer must disclose if she is a trustee, settlor or beneficiary of overseas trusts, the ITR is silent about a "protector" (who oversees trustees). A protector's role may be limited under the trust deed, but no one wants to share trust papers with the I-T department.

"Taxpayers who discover they have inadvertently omitted foreign assets, bank accounts or related income should promptly reconcile the AIS with past filings and underlying records. Differences can arise from legacy accounts, joint holdings, beneficial ownership issues, changes in tax residency, or reporting methodologies and interpretations adopted by foreign financial institutions," said Ashish Mehta, partner at law firm Khaitan & Co.

Legacy accounts are old bank accounts that taxpayers have forgotten to close — a situation often seen among returning NRIs.

According to Mehta, where permissible, taxpayers should evaluate filing updated or revised returns to correct reporting deficiencies, as doing so can demonstrate bona fide conduct and may help mitigate or defend against exposure under the applicable laws.

However, transactions disclosed should not be viewed in isolation from compliance with the Foreign Exchange Management Act (FEMA), said chartered accountant Ashish Karundia. “For instance, residents have booked properties in the UAE by paying a token amount upfront and the balance in instalments. Whether completed or under construction, the properties must be disclosed, but the deferred payment arrangement could raise FEMA concerns. Reporting to the Income Tax Department is not a cure for a FEMA breach,” said Karundia.

Interestingly, the Black Money Act (BMA), enacted to track undisclosed foreign assets, does not recognize the concept of an ‘updated return’. This could merely be a drafting oversight, as the concept of updated returns under the Income Tax Act was introduced after the BMA came into force, said Mehta.