Aditya Ajgaonkar, Advocate

Introduction

The concept of black money is not new to India. The promise to eradicate and bring back black money has been a part of the manifesto of almost all political parties. Traditionally, the term black money has been often used to describe unaccounted money. When one thinks of black money, one often imagines cash being stashed away in various hides holes as depicted in Bollywood movies. Black money has also been linked ubiquitously with ‘Swiss bank accounts’, often used to monies stashed in foreign jurisdictions that have strict privacy laws with regard to account holders.

The issue of black money was a hot topic of discussion in the 2014 elections. Consequently, when the government was formed after the national elections, the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (‘BMA’) was brought in purportedly to combat the menace of black money. This Act is primarily a taxation statute thought it also provides for penalties and prosecutions. The concept of ‘black money’ is given a technical definition rather than an expansive one. The provision relating to charge of tax is telling – the BMA primarily seeks to tax undisclosed foreign income and assets. Section 3 of the Act reads as follows:

3. Charge of tax. (1) There shall be charged on every assessee for every assessment year commencing on or after the 1st day of April, 2016, subject to the provisions of this Act, a tax in respect of his total undisclosed foreign income and asset of the previous year at the rate of thirty per cent of such undisclosed income and asset:

Provided that an undisclosed asset located outside India shall be charged to tax on its value in the previous year in which such asset comes to the notice of the Assessing Officer.

(2) For the purposes of this section “value of an undisclosed asset” means the fair market value of an asset (including financial interest in any entity) determined in such manner as may be prescribed.

What is the Penalty under Section 43 of the BMA?

Given that the BMA seeks to bring undisclosed assets and foreign income into the tax net, the act not only provides for the charge of tax on undisclosed foreign income and assets but also for penalties and prosecution in case of non compliance with the Sections of the Act. To this end, Section 43 of the BMA acts as a watershed for penalising the failure to furnish particulars about an asset that is located out of India. Similarly, it also seeks to penalise the furnishing of inaccurate particulars about an assets located outside in India. The accurate disclosure of such assets located out of India is the raison d’etre of the BMA. The return referred to in the Section is the Return of Income filed by an Assessee under Section 139(1), 139(4) or 139(5) the Income-tax Act, 1961 (ITA) as the BMA does not provide for a separate return of Income.

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.—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:

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.

Explanation.—The value equivalent in rupees shall be determined in the manner provided in the Explanation to section 42.

The Imposition of the Penalty under Section 43 of the BMA

Before getting into the law that imposes penalty for failure to disclose foreign assets in the return of Income or the furnishing inaccurate particulars thereof, a look back at Section 276(1) (c) of the ITA is recommended. Section 276(1)(c) levied a penalty for any person who may have concealed the particulars of his income or furnished inaccurate particulars of such income. In this backdrop, a re-consideration of the Judgement of the Supreme Court in the case of CIT v. Reliance Petroproducts [2010] 322 ITR 158 (SC) may be instructional. The Supreme Court in the case of Reliance Petroproducts while considering a catena of decisions including Dilip N. Shroff v. JCIT [2007] 291 ITR 519 (SC) and UOI v. Dharmendra Textile Processors [2008] 13 SCC 369 held that:

“It is obvious that it must be shown that the conditions under section 271(1)(c) must exist before the penalty is imposed. There can be no dispute that everything would depend upon the Return filed because that is the only document, where the assessee can furnish the particulars of his income. When such particulars are found to be inaccurate, the liability would arise. In Dilip N. Shroff v. Jt. CIT [2007] 6 SCC 329, this Court explained the terms “concealment of income” and “furnishing inaccurate particulars”. The Court went on to hold therein that in order to attract the penalty under section 271(1)(c), mens rea was necessary, as according to the Court, the word “inaccurate” signified a deliberate act or omission on behalf of the assessee. It went on to hold that Clause (iii) of section 271(1) provided for a discretionary jurisdiction upon the Assessing Authority, inasmuch as the amount of penalty could not be less than the amount of tax sought to be evaded by reason of such concealment of particulars of income, but it may not exceed three times thereof. It was pointed out that the term “inaccurate particulars” was not defined anywhere in the Act and, therefore, it was held that furnishing of an assessment of the value of the property may not by itself be furnishing inaccurate particulars. It was further held that the assessee must be found to have failed to prove that his explanation is not only not bona fide but all the facts relating to the same and material to the computation of his income were not disclosed by him. It was then held that the explanation must be preceded by a finding as to how and in what manner, the assessee had furnished the particulars of his income. The Court ultimately went on to hold that the element of mens rea was essential. It was only on the point of mens rea that the judgment in Dilip N. Shroff’s case (supra) was upset. In Dharamendra Textile Processors’ case (supra), after quoting from section 271 extensively and also considering section 271(1)(c), the Court came to the conclusion that since section 271(1)(c) indicated the element of strict liability on the assessee for the concealment or for giving inaccurate particulars while filing Return, there was no necessity of mens rea. The Court went on to hold that the objective behind </em >enactment of section 271(1)(c) read with Explanations indicated with the said section was for providing remedy for loss of revenue and such a penalty was a civil liability and, therefore, wilful concealment is not an essential ingredient for attracting civil liability as was the case in the matter of prosecution under section 276C of the Act. The basic reason why decision in Dilip N. Shroff’s case (supra) was overruled by this Court in Dharamendra Textile Processors’ case (supra), was that according to this Court the effect and difference between section 271(1)(c) and section 276C of the Act was lost sight of in case of Dilip N. Shroff (supra). However, it must be pointed out that in Dharamendra Textile Processors’ case (supra), no fault was found with the reasoning in the decision in Dilip N. Shroff’s case (supra), where the Court explained the meaning of the terms “conceal” and “inaccurate”. It was only the ultimate inference in Dilip N. Shroff’s case (supra) to the effect that mens rea was an essential ingredient for the penalty under section 271(1)(c) that the decision in Dilip N. Shroff’s case (supra) was overruled.”

The Supreme Court went on to hold that when it comes to inaccurate particulars of Income – “A mere making of the claim, which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars regarding the income of the assessee. Such claim made in the Return cannot amount to the inaccurate particulars.” One may venture as far as to say that is possible to extend this proposition to the ‘inaccurate particulars’ that are sought to be penalized by Section 43 of the BMA. That being said, the existence of ‘mens rea’ would not play any role in determining if the penalty is leviable or not. Mens Rea would have a role if any proceedings for prosecution are taken out by the Authorities.

What do the Judicial Judgements / Quasi-Judicial Orders say about the levy of penalty under Section 43 of the BMA? 

In Additional Commissioner of Income-tax v. Leena Gandhi Tiwari [2022] 136 taxmann.com 409 (Mumbai – Trib.) the Mumbai Bench of the ITAT held that “It is only elementary that a mere non-disclosure of a foreign asset in the income tax return, by itself, is not a valid reason for a penalty under the BMA. While disclosure of all foreign assets is mandatorily required to be made in an income tax return, the penalty under section 43 of BMA comes into play only when the aggregate value of these assets exceeds Rs. 5,00,000. Clearly, therefore, even statutorily, it is not a simple cause and effect relationship between non-disclosure of an undisclosed foreign asset in the income tax return, and penalty under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015. The unambiguous intent of the legislature thus is to exclude trivial cases of lases which can be attributed to a reasonable cause. It is also to be noted that Section 43 provides that the Assessing Officer “may” impose the penalty, and the use of the expression “may” signifies that the penalty is not to be imposed in all cases of lapses and that there is no cause and effect relationship simpliciter between the lapse and the penalty. As to what should be the considerations for the exercise of this inherent discretion by the Assessing Officer, we find some guidance from Hon’ble Supreme Court’s judgment in the case of Hindustan Steel (supra), which, inter alia, observes that “. penalty will not ordinarily be imposed unless the party obliged, either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation. The penalty will not also be imposed merely because it is lawful to do so. Whether a penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances. Even if a minimum penalty is prescribed, the authority competent to impose the penalty will be justified in refusing to impose a penalty, when there is a technical or venial breach of the provisions of the Act or where the breach flows from a bona fide belief that the offender is not liable to act in the manner prescribed by the statute”. Essentially, therefore, the overall conduct of the assessee, and materiality of the lapse as also its being in the nature of a technical or venial breach of law, is the most critical factor so far as taking a call on the question of whether or not a penalty should be imposed for the assessee’s failure to discharge a statutory obligation. The imposition of penalty under section 43 is surely at the discretion of the Assessing Officer, but the manner in which this discretion is to be exercised has to meet the well-settled tests of judicious conduct by even quasi- judicial authorities. Such well-intended stringent legislation as the BMA, enacted for the larger causes of public good and to check tax evaders, cannot be so interpreted as to cause undue hardship to the citizenry for such harmless technical or venial breaches of the law. Francis Bacon, in his classic essay ‘Of Judicature’ (The Works of Francis Bacon, Volume 1 (1984), has said that “Judges must beware of hard constructions, and strained inferences, for there is no worse torture than the torture of laws: especially in case of laws penal, they ought to have care that that which was meant for terror be not turned into rigour”. Viewed in the light of these discussions, in our considered view, it was not a fit case for invoking the penal provisions under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, even if it was lawful for the Assessing Officer to do so.

The need to implement BMA in a strict manner, as learned Commissioner (DR) pleads for, can hardly be overemphasised. What it essentially means is that whenever any unaccounted income or undisclosed asset abroad is found, stern action, in accordance with the law, must be taken. Just as much as we must ensure that a guilty person does not go unpunished, we must also ensure that such tough laws, as the BMA is, do not inconvenience genuine people not falling in the category which is sought to be checked by the BMA. In the 2015 Union Budget speech, the then Hon’ble Finance Minister had said that “Tracking down and bringing back the wealth which legitimately belongs to the country is our abiding commitment to the country. Recognising the limitations under the existing legislation, we have taken a considered decision to enact a comprehensive new law on black money to specifically deal with such money stashed away abroad” That is the background in which the BMA was introduced, and that is the backdrop in which harsh penalties and prosecutions are contemplated under the BMA. To put a question to ourselves, can these provisions be invoked in the cases which more of bona fide mistakes, or, at worse, harmless carelessness. The answer is emphatically in the negative.

The path of idol worshipping the law, even at the cost of sacrificing the unambiguous intent of the law, cannot take us to the goal of protecting the majesty of law in letter and in spirit- something that every judicial officer must strive for. The well-intended harsh laws meant for checking the economic offenders, stashing their ill-gotten monies abroad, must not be invoked for punishing a venial breach of the law by a bona fide businessperson. Undoubtedly, the Assessing Officer has discretion in the matter, and that is what, as we have noted earlier as well, the use of the expression ‘may’ in Section 43 suggests. When the exercise of a statutory power is not warranted or justified on a well-considered appreciation of the facts of the case on which a reasonable conclusion would be that the lapse is bona fide and devoid of any ulterior motives, a public authority must not exercise that power just because it would be lawful for the said authority to exercise the same. That’s why human discretion is involved in the exercise of such powers, and this discretion is to be exercised having regard to the facts of each case in a fair, objective and judicious manner and without losing sight of the bigger picture about the related state of affairs and the scheme of relevant legislation. Unless there are sufficient prima facie reasons to at least doubt bona fides well demonstrated by the assessee, an assessee cannot be visited with penal consequences. The bona fides actions of the taxpayers must, therefore, be excluded from the application of provisions of such stringent legislation as the BMA. In this light, and keeping in mind the object of the BMA, we do not subscribe to the learned Departmental Representative’s perception that in the name of strict implementation of the BMA, a penalty for non-disclosure of the bank account in question will be justified under the stringent provisions of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015. This </em >is, of course, without any prejudice to whatever consequence may follow under the provisions of the Income-tax Act, 1961, the legislation under which the lapse of non-disclosure, even if that be so, occurred.”</em > Therefore, the Mumbai ITAT also took a lenient view in genuine cases with respect to the imposition of penalty under Section 43 of the BMA by stating that the bonafide actions of the taxpayers must be excluded from the application of stringent legislation as the BMA. The Order contemplates that in case of the existence of reasonable cause and in trivial cases, penalty under Section 43 of the BMA may not be necessarily levied. It also holds that the levy of the penalty is not automatic and there is a discretion vested the Assessing Officer in the levy of the Penalty. This order of the Mumbai ITAT has been quoted at length and followed by the the Jaipur Bench of the ITAT in Krishna Das Agarwal v. DDIT/ADIT(Inv.) [2023] 150 taxmann.com 290 (Jaipur – Trib.).

The Mumbai ITAT in the case of Ocean Diving Centre Ltd. v. Commissioner of Income-tax (Appeals) [2023] 156 taxmann.com 360 (Mumbai – Trib.) also followed a similar tone and tenor when it held “By reading bare provisions of section 43 of the Act, it clearly reflects that a person shall pay by way of penalty of sum of Rs. 10,00,000/- who fails to furnish any such information or furnishes inaccurate particulars qua any asset/located outside India/ sourced from outside India in the return of income filed under sub-section (1) or (5) of section 139 of the Act. Further, the AO may direct that such person shall pay by way of penalty of Rs. 10,00,000/-. No doubt the AO is empowered to impose the penalty as discretion is vested with him by using word ‘May’ in the provisions. The discretion is always at wisdom of an authority, however, discretion is required to be exercised judicially and under the Judicial canons of law and in reasonable and justified manner to impart the Justice, by considering all the relevant circumstances and in case the Assessee is able to discharge its burden for reasonable cause, then the discretion against the Assessee has to be used cautiously and consciously.

The Hon’ble Apex Court in Hindustan Steel Ltd. </em >v. State of Orissa [1972] 83 ITR 26 also reminded that an order imposing penalty for failure to carry out a statutory obligation is the result of a quasi- criminal proceeding, and penalty will not ordinarily be imposed unless the party obliged either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation. Penalty will not also be imposed merely because it is lawful to do so. Whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances. Even if a minimum penalty is prescribed, the authority competent to impose the penalty will be justified in refusing to impose penalty, when there is a technical or venial breach of the provisions of the Act or where the breach flows from a bona fide belief that the offender is not liable to act in the manner prescribed by the statute.

In the instant case, the Assessee admittedly duly recorded and disclosed the investment in foreign entity in its audited balance-sheet and also furnished such information under “Non Current Investments” in Schedule para-A-BS in its return of income, hence we are in concurrence with the claim of the Assessee that the Assessee has directly or indirectly complied with the statutory provisions and therefore, the case of the Assessee does not fall under the rigorous provisions of section 43 of the B.M. Act. No doubt the Schedule “FA” and BMI Act, have been introduced and enacted for checking the economic offenders, tax evaders and for analyses of information qua foreign investment/income by using artificial intelligence and Schedule “FA” applicable specifically to the Assessee(s) whose accounts are not required to be audited or if audited but books of account not filed along with the return of income. However, in each and every case, the penalty as prescribed in section 43 of the Act, cannot be imposed.”

However, a co-ordinate Mumbai bench of the ITAT in the case of Ms. Shobha Harish Thawani v. Joint Commissioner of Income-tax [2023] 154 taxmann.com 564 (Mumbai – Trib.) favoured a stricter interpretation of Section 43 stating that “From the plain reading of the above it is clear that a person who is resident and ordinarily resident while filing the return of income under section 139(1), or 139(4) or 139(5) fails to furnish or files inaccurate particulars of investment outside India, then the person is liable for penalty under section  43. The disclosure of foreign investments/assets is to be made in return of income-Schedule FA. Thus, it is apparent from the language of section 43 that the disclosure requirement is not only for the undisclosed asset but any asset held by the assessee as a beneficial owner or otherwise. Given this the argument that the penalty under section can be levied only with respect to undisclosed asset is not tenable. Undisputedly, the assessee in the instant case has not disclosed the foreign asset in the return of income – Schedule FA, therefore, we are inclined to agree with the findings of the CIT(A) in this regard.

The alternate plea of the assessee is that the non- disclosure of the foreign asset in schedule FA of the return is an inadvertent bona fide error and therefore does not warrant levy of penalty. In this regard it is noticed that, though the assessee claims that the non-reporting is a bona fide mistake, there is nothing on record in support of the said claim. It is also contended that the levy of penalty under section 43 is not mandatory but is at the discretion of the Assessing Officer since the word used in the section is that the Assessing Officer “may” levy penalty.

The contention that the assets are not undisclosed assets may be factually true, but penalty under section 43 is levied for non-reporting of overseas investments and not for making investments from unaccounted money. The provisions of section 43 does not provide any room not to levy penalty even if the foreign asset is disclosed in books since the penalty is levied only towards non-disclosure of foreign assets in schedule FA.

Though Leena Gandhi Tiwari was cited by the appellant in Ms. Shobha Harish Thawani, the latter order has not explicitly dealt with the observations in the former. It did consider the plea of an inadvertent bonafide error but did not accept it citing the lack of anything on record to support that claim and that there was nothing on record to show that the Assessing Officer acted in an arbitrary and unjustified manner. Therefore, the door of any inadvertent bonafide error as a reason to escape the penalty under Section 43 of the BMA is not shut. There is however possibility of some friction between the orders of Ms. Shobha Harish Thawani and Ocean Diving Centre Ltd.

Curiously enough, Ms. Shobha Harish Thawani and Ocean Diving Centre Ltd. are both orders of the Mumbai ITAT passed in August 2023. The former is dated 9th August 2023 while the latter is 30th August 2023. The order of Ocean Diving Centre Ltd. does not refer to the order of Ms. Shobha Harish Thawani at all.

The High Court of Karnataka in the case of K. Mohammed Haris v. Income-tax Department [2023] 147 taxmann.com 370 (Karnataka), while examining a case where the Assessee had disclosed his foreign assets and foreign Income by filing a revised return under Section 139(5) of the ITA, after search proceedings were carried on at his premises, but not before, it held that no penalty can be levied under Section 50 of the Act which defines that the offence for failure to furnish in return of income, any information about an asset (including financial interest in any entity) located outside India. This section also reveals that 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, 1961 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 that Act, wilfully fails to furnish in such return any information relating to an asset (including financial interest in any entity) located outside India, held by him, as a beneficial owner or otherwise or in which he was a beneficiary, at any time during such previous year, or disclose any income from the source outside India, he shall be punishable with rigorous imprisonment for a term which shall not be less than six months but which may extend to seven years and with fine.

The Court held that “if the assessee failed to disclose the foreign assets under sub-section (1) or sub-section (4) or sub-section (5) of section 139 of the I.T. Act, fails to furnish any information relating to any asset at any time during such previous year, the Assessing Officer may direct that such person shall pay, by way of penalty as per section 43 of the Black Money Act. Apart from that, it is not a case of the I.T. Department that there were any income yield by the petitioner from those assets. Therefore, I hold that the complaint itself is not sustainable once the assessee has already filed the revised ITR by disclosing the foreign assets and the question of saying that he has willfully failed to disclose the assets cannot be acceptable”.

Thomas Mathew v. Income Tax Officer, Non- compoward 1(5) [2020] 117 taxmann.com 63 (Kerala)

The Court held that “the preamble of the Black Money Act aims at only to curb the menace of black money. It was next contended that the exclusive order under section 43 of the Act ibid cannot be imposed without there being an assessment on the revised returns. It is no case of any non-disclosure of assets or accumulation of any black money, therefore, the alleged reasning regarding non -disclosure is without any foundation or basis. Section 43 of the Black Money Act can only apply to the assets which are in the nature of black money or assets for which there is no explanation as to the source. Mere non-disclosure of the same in Schedule FA would not make any asset or income illegally acquired as black money”.

Conclusions

The imposition of the penalty under Section 43 of the BMA is without a doubt going to be a common penalty that will sought to be imposed in cases where proceedings under the BMA are initiated. The penalty is a flat penalty of Rupees 10 Lakh which is a hefty sum especially as the imposition of the penalty is not graded. It is completely possible that the undisclosed income or undisclosed asset sought to be brought to tax which is inadvertently not disclosed may be less than Rupees Ten Lakh, but the levy of penalty would still be a flat Rupees Ten Lakh. This possible injustice is tempered by making the levy of the penalty discretionary and not automatic. The Officer seeking to levy the penalty always has the discretion to not levy the same.

The Judgements of the various Courts and Tribunals have sought to maintain a balance between the objectives of the act and the unfairness that may result due to the levy of penalty in bonafide cases. These Judgements shall go a long way in insuring that inadvertent errors and bonafide technical mistakes are not penalised and that a strict law while remaining effective in achieving its avowed objectives, also remains humane.