A Special Bench was constituted by the President following conflicting decisions of co-ordinate Benches on the interpretation to be placed on the provisions of Section 43 of the Act, more specifically with regard to the nature of the word “may” as used in Section 43 of the Act [Para 6].
Case Reference: BMA No.33/MUM/2024 and BMA No.34/MUM/2024 [A. Y. 2020-21]
The Special Bench framed the following issue that required its decision:
“Whether the use of word “may” in Section 43 of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 should be construed as “shall”. In other words, whether the imposition of penalty is mandatory once the requirements of Section 43 of the said Act are satisfied or there is a discretion in the Assessing Officer to impose the penalty or otherwise?”
Decision
The issue framed above was decided by the Special Bench in the negative. Para 28 of the Order holding thus, reads as follows:
“28. In the result, we answer the issue as framed in the negative. The word “may” used in Section 43 of the BM Act has to be given its plain meaning as being directory in nature and cannot be construed as “shall”. Thus, the imposition of penalty is not mandatory. There is a discretion in the AO to impose the penalty or otherwise depending upon the facts and circumstances of each case.”
Analysis of the Judgement
Before proceeding further, I will reproduce Section 43 of the Act for the benefit of the reader
“Section – 43
Penalty for failure to furnish in return of income, an information or furnish inaccurate particulars about an asset (including financial interest in any entity) located outside India.
43. 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 of ten lakh rupees:
[1][Provided that this section shall not apply in respect of an asset or assets (other than immovable property), where the aggregate value of such asset or assets does not exceed twenty lakh rupees.]
Explanation. — The value equivalent in rupees shall be determined in the manner provided in the Explanation to section 42.
(Emphasis on the words “may” and “shall” is for the benefit of the reader to indicate the relevance attached in the analysis of the issue in question”)
{[1] Substituted by the Finance (No. 2) Act, 2024, w.e.f. 1-10-2024. Prior to its substitution, proviso read as under:
“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.”}
Facts in Brief resulting in the reference to the Special Bench
1. The Appellants had made an investment in a Cayman Islands’ entity during the financial year relevant to A. Y. 2020-21. However, the investment was not declared by the Appellants in their Returns of Income for the relevant A. Y. in Schedule FA.
2. The A.O. promptly served a SCN on the assessee within the meaning of Section 46 of the Act.
3. The Appellants while not denying the foreign investment in their response to the SCN submitted that the investments were out of tax paid income and done through proper banking channels under the Liberalised Remittance Scheme (“LRS”). The Appellants further contended that the investments were duly disclosed in the subsequent assessment years 2021-22 and 2022-23, much prior to the issue of SCN. The failure to disclose/declare in the A. Y. under SCN was purely an oversight.
4. Rejecting their contentions, the A. O. held that there was a non-disclosure of foreign assets, and the assessees (Appellants) were liable for penalty under Section 43. Accordingly, the A. O. imposed a penalty of Rs.10 lakhs each. The A. O. reasoned that penalty was attracted in the event of a non-disclosure of foreign asset at any point of time during the previous year.
5. The CIT (A) upheld the order of the A. O.
6. The Appellants preferred an appeal before the ITAT wherein the Division Bench found the fact of conflicting decisions of co-ordinate Benches on the matter and thus made this reference to the Special Bench.
7. Necessary to mention that the Special Bench allowed an intervention by an Appellant assessee having a similar issue pending before the Chennai Bench of ITAT.
Submissions of Appellants and Revenue in brief
1. The most relevant submission was from the Counsel of the Intervenor which are summarised as follows:
a. Charging section of a fiscal/taxing statute has to be construed strictly. Liberal construction can only be placed on machinery provisions for computation of tax liablity.
b. The concluding part of Section 43 involves the interplay of the words “may” and “shall”. The interplay between the words indicates the intention of the legislature to allow discretion in the matter of levying of penalty (may) and once such discretion is exercised, the quantum of penalty cannot be altered (shall).
2. The Revenue’s argument was that there was no relevance to the inadvertence or absence of intention in failure to disclose. Holding a view that the Appellants were HNIs, they had at their disposal the best of tax advisers and were not expected to take inadvertence of absence of intention as a ground.
Reasoning of the Special Bench
1. The Special Bench has reiterated the well-established legal principle that charging or penal sections of a taxing statute have to be construed strictly. Words must be given their plain and ordinary meaning, except in the event of such application resulting in absurdity of results.
2. The above legal principles, so applied to the word “may” clearly imply and indicate the discretionary nature of the word. The Special Bench, agreeing with the submissions of the Senior Counsel of the Intervenor observed the significance of the use of words “may” and “shall”; discretion in deciding on imposition of penalty and no discretion in the quantum of penalty, respectively. This, the Special Bench observes, is the intention of legislature.
3. The judgement has also rejected the reliance placed by the Revenue on two decisions of ITAT, Mumbai in Nirmal Bhanwarlal Jain vs. CIT(A)-51[1] and Mrs. Shobha Harish Thawani vs. JCIT[2]. While analysing the two decisions, the Special Bench distinguished on the facts of each of the two decisions. In one of the decisions, the levy of penalty under Section 43 was upheld on the ground that the assessee failed to substantiate his claim of bona fide mistake. There was also a case of furnishing inaccurate particulars. The decision also did not involve the examination of Section 46 of the Act relating to providing opportunity to be heard, the facts of the case sufficiently justified imposition of penalty. The other decision also observed that the AO had levied penalty only after examining facts of the case and there was a judicious exercise of discretion. The emphasis of the Special Bench in rejecting the reliance of the Revenue on these two decisions was that there was a judicious exercise of authority upon verification of facts of the individual cases.
[1] BMA Nos.13 to 15/Mum/2023 dated 31/07/2023 [2] BMA Nos.1 to 3/Mum/2023 dated 09/08/2023Reasoning of the Special Bench
1. Before parting with this analysis, a decision of the ITAT Mumbai Bench ’E’ in Timothy John Brinkman v. Director of Income Tax (Inv.)[1]. The question here was that in the case of a foreign citizen, who became a Tax Resident, and having failed to declare his foreign assets in the Return of Income filed u/s 139(1), whether on having declared the foreign assets subsequently in the returns filed under Section 139(5), penalty u/s 43 was leviable.
2. The Hon’ble Tribunal while allowing the appeal has laid down a significant ratio. The Hon’ble Tribunal has held that in the case of a foreign citizen, in the event of there being a failure to disclose Foreign Assets, it is necessary to establish that the assessee was previously an Indian citizen AND that the foreign investment was made using undisclosed income (black money) from India.
3. The Revenue had, even in this matter, placed reliance upon Nirmal Jain supra, which the ITAT held to be irrelevant to the facts of the case.
[1] [2025] 173 taxmann.com 66 (Mumbai Trib.)
