Section 43, as discussed in my previous article which analysed a decision of the Special Bench of ITAT, Mumbai on the meaning of the word “may”, vests discretionary power with an Assessing Officer (AO) to levy a fixed penalty. The levy of penalty is discretionary, implying that the AO has to examine the facts within the parameters of conditions laid down in Section 43 before concluding the fitness of levy of penalty. Once that is done, quantum is mandatory.
The discretionary power in a taxing statute is merrily abused by the Assessing Officer, not just in exercise of Section 43, but under various taxing statutes. With absolute disregard to the numerous judgements across the many judicial forums, the Assessing Officers or Tax Authorities, are only concerned with acting as collecting agents to contribute to the coffers of the Central Government. Legitimacy or otherwise is left to the decisions of Courts, which force hapless assessees to spend to fight back against the abuse of discretionary powers.
A recent decision of the Income Tax Appellate Tribunal, Jaipur in Devendra Kumar Mehta v. Deputy Director of Income Tax, Investigation[1], is a classic example of complete abuse of power in the face of facts which cannot be said to meet the essential sine qua non condition of “failure” provided for in section 43.
The Appellant was earlier living in the U. S. Of A. On return to India, he declared himself as a “Resident” and accordingly filed his Returns of Income. In the assessment year under scrutiny, he received an amount under the Social Security Scheme relating to his time in USA.
He was levied with a penalty of Rs.10 lakhs for the assessment year in which such income was received. The trigger for the levy was “failure to declare Social Security Amount in Schedule FA, after having duly declared in the Returns of Income for the relevant year as Exempt Income.” The AO, in interpretation of the term “fails to furnish any information or furnishes inaccurate particulars in such return… relating to any income from a source located outside India…” imported the meaning to a clerical mistake of failure to mention in Schedule FA. The details of exempt income which were duly declared in the body of the Return, where, disclosure materially matters held no meaning for the “trigger happy” AO. The subsequent exercise of discretion was a concluded opinion, since the base of failure was attributed to a lesser significant Schedule, in complete disregard of the actual Returns.
Significant “abetment” to the abuse of power of the AO was the decision of the CIT (A) who upheld the Assessment Order, agreeing with the AO that the assessee had failed to declare the income in the Schedule. At this point, it is pertinent to observe that though designated as Appellate Authority, historically, being part of the machinery under the taxing statute, the Appellate Authority more often than not fails to act judiciously and impartially.
The ITAT, Jaipur Bench allowed the appeal. The Tribunal, in para 11 held as follows:
“11. Even if under section 43 of the Black Money Act, requisite information is required to be furnished in FA schedule of return of income, having regard to the fact that the department has not opposed the claim of the appellant that the said amount was towards his pension, and that he had disclosed in the details of income, the factum of deposit of tax with the concerned department of United States, we find merit in the contention raised by Ld. AR for the appellant that in this situation, no penalty u/s 43 of the Black Money Act, was called for to be imposed.
Consequently, impugned order passed by Learned CIT(A) and the penalty order passed by the Assessing Officer deserve to be set aside.”
CONCLUSION
In my respectful view, the reason on which the appeal was allowed again reflects a failure to interpret the law in the correct perspective. By use of words “even if” in relation to furnishing of information, the Hon’ble Tribunal has in a way agreed that Schedule FA is relevant for the purpose of furnishing of information and declaring income in the appropriate Head of Income in the Returns alone cannot suffice. What saved the assessee, in the view of the ITAT was the fact that “the department had not opposed the claim of the appellant of his having disclosed the income in details of income”. The issue of whether Schedules to the Returns of Income hold equal significance as the main body of Returns, therefore remains res integra. Surely, for a taxing statute, tax should matter more than penalty.
It would be apposite to discuss relevant principles of Administrative Law with respect to the exercise of discretion by an authority vested with such power.
In his book Administrative Law[3], Justice C. K. Thakker, explains the Doctrine of fetters on discretion. Justice Thakker says that an authority exercising discretionary powers is expected to consider the facts of each case, apply its mind and take a decision. If the authority adopts fixed rules of policy in all cases, it effectively imposes fetters on discretion.
Justice Thakker’s book under the Chapter Excess or Abuse of Discretion explains what constitutes abuse of discretion. The author says where an authority acts in bad faith or takes into account irrelevant consideration, he commits an abuse of discretion.
Quoting from a leading Supreme Court decision in Shri Sitaram Sugar Co. Ltd. V. Union of India[4], Justice Thakker strongly brings about the effect of abuse of power. The relevant para is extracted below:
“A repository of power acts ultra vires either when he acts in excess of his peer in the narrow sense or he abuses his power by acting in bad fairly or for an inadmissible purpose or on irrelevant grounds or without regard to relevant consideration or with gross unreasonableness..”
Abuse of discretion by authorities is historical. In counter to such abuse, judicial review has also historically come to the aid of challenges to such abuse. Yet, in certain instances, like in the case of the decision of the ITAT, Jaipur Bench, a decision that leaves more doubts than bringing clarity, a void is left for a further abuse of power, by selective interpretation of the law by the authorities.
[1] [2025] 177 taxmann.com 372 (Jaipur – Trib.) [30-07-2025] [2] Second Edition, 2022, Eastern Book Company [3] (1990) 3 SCC 223 : AIR 1990 SC 1277
