Penalty for Non-Disclosure of Foreign Assets is Discretionary, Not Mandatory.

ORDER

Justice C.V. Bhadang, President .- This Special Bench is constituted to decide the following issue :-

“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 ?”

2. The appellants in these appeals are husband and wife, against whom orders imposing penalty of Rs.10 lacs each, has been passed by the learned DDIT/ADIT (Inv.)-4(1), FAIU, Mumbai on 01.06.2023 under Section 43 of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (‘BM Act’ for short). This is on account of the fact that the appellant-assessees have failed to disclose in their Return of Income (RoI) for the relevant assessment year 2020-21, the foreign investments with Avestar Global Opportunities SPC (Cayman Islands) in foreign assets schedule (Schedule FA). It is necessary to note that the requirement of such disclosure of foreign assets/investment in Schedule FA was introduced since assessment year 2012-13 by Finance Act, 2012 in order to track the foreign assets and income generated thereon in foreign jurisdictions of the Indian residents. Section 43 of the BM Act prescribes for a penalty of Rs.10 lacs in the event of failure by the assessee to disclose the foreign investment in Schedule FA.

3. The Assessing Officer (‘AO’ for short) in these cases issued a show cause notice dated 21.03.2023 in compliance of Section 46 of BM Act. The assessees filed their reply. It was not disputed that the assessees had invested in Avestar Global Opportunities SPC (Cayman Islands). However, it was contended that the investment was made out of tax paid income through banking channel under the Liberalised Remittance Scheme (LRS) of RBI. It was pointed out that the amount was transferred from the bank account of the assessees and as such, cannot be said to be an ‘undisclosed asset’ within the meaning of Section 4 r.w.s. 2(11) of the BM Act. It was submitted that the investment has been disclosed/declared in the subsequent income tax return for assessment years 2021-22 and 2022-23 much before the show cause notice was received. It was pointed out that for the assessment year in question the disclosure was missed out of oversight.

4. The AO has observed that the penalty under Section 43 of the BM Act is on account of non-disclosure of foreign assets held by a resident, at any point of time during the previous year. The assessees having failed to disclose the foreign assets in their return of income, prior to issuance of summons, were liable for imposition of penalty. In other words, the AO was of the opinion that once there is non-disclosure of the foreign assets in Schedule FA, the assessees cannot escape imposition of penalty. The AO after noticing answer to question no. 18 of the Circular No. 13 of 2015 dated 06.07.2015 issued by CBDT has ultimately found that the assessees are liable for penalty and has accordingly imposed penalty of Rs.10 lacs each.

5. In appeal, the learned CIT(A) has confirmed the same, which has led the assessees approaching this Tribunal in the aforesaid two appeals on the following grounds :-

“1. On the facts & circumstances of the case in law, Ld CIT (A) has erred in confirming the penalty levied by DDIT (Inv) 4(1), FAIU, Mumbai under section 43 of the Black Money Act, 2015.

2. On the facts & circumstances of the case in law, Ld CIT(A) has erred in not

considering the reply filed by appellant and erred in confirming the penalty.

3. On the facts & circumstances of the case in law, DDIT (Inv)-4 (1), FAIU, Mumbai

erred in directing the appellant to pay a penalty under section 43 of the black money Act without appreciating the principle laid down by Honourable Supreme Court in the case of Hindustan steel, 83 ITR 36 (SC) that penalty need not be levied where there is a technical or venial breach of the provisions of the Act.

4. On the facts & circumstances of the case in law, Appellant craves leave to add, alter or amend any of the aforementioned ground or grounds of appeal, which are without prejudice to each other, as and when an occasion may arise at the time of hearing”

6. When the matter came up before the Division Bench on 22.01.2024, the Bench noticed that there are conflicting decisions of co-ordinate Benches on the interpretation to be placed on the provisions of Section 43 of the BM Act, particularly with regard to the nature of the word “may” as used in Section 43 of the BM Act. The Division Bench has noticed two sets of orders in para 5.2(d) (in favour of the assessee holding that it is discretionary to impose penalty) and para 5.3(d) (in favour of Revenue holding that it is mandatory/automatic). In that view of the matter, the Division Bench vide order dated 17.04.2025 had required the matter to be referred to a Special Bench broadly setting out the contours of the dispute as to interpretation of the provisions contained in Section 43 of the BM Act in para 5.9 (A) to (D) of the order dated 17.04.2025.

7. The President, in his discretion, has placed the above referred issue before the Special Bench vide order dated 01.08.2025.

8. In this case, Mr. Pascal Postel (Appellant in BMA Nos. 7 to 12/CHNY/2025 in Chennai Benches) has filed an application for intervention dated 17.09.2025 on the ground that similar issue arises in his appeal pending before the Chennai Bench of the Tribunal.

9. Upon hearing parties, we have allowed the intervention.

10. We have heard Ms. Namrata Chande, learned counsel for the appellants as well as Shri V. Sridharan, Sr. Advocate for the intervenor and Shri Ritesh Misra, learned CIT-DR. The learned CIT-DR has filed written notes of arguments dated 29.01.2025 which are taken on record. We have gone through the same.

11. It is submitted by the learned AR that imposition of penalty under Section 43 of the BM Act is not mandatory merely on account of non-disclosure of foreign assets in Schedule FA. It is pointed out that the assets in the present case also cannot be said to be ‘undisclosed assets’ within the meaning of Section 4 r.w.s 2(11) of the BM Act. It is submitted that use of the word “may” in Section 43 of the BM Act coupled with the requirement of issuance of a show cause notice is indicative of the fact that in an appropriate case where there is a bona fide oversight/mistake/inadvertence or if the breach is of a venial nature, the AO can waive the imposition of penalty.

12. The learned counsel for the intervenor submitted that the charging section of a fiscal/taxing statute has to be construed strictly, although a liberal construction can be placed on the machinery provisions for computation of tax liability. It is submitted that this is more so when penal provisions as contained in Section 43 of the BM Act fall for consideration. It is submitted that no redundancy can be attributed to the legislature while framing the phraseology of any particular section. The learned counsel was at pains to point out that in the concluding part of the same section, the legislature has used the words “may” as well as “shall”, which indicates that so far as the decision for imposition of penalty is concerned, there is a clear discretion vested in the AO depending upon the facts and circumstances of each case. He submitted that the decision to impose penalty and the quantum are two different aspects and for the later, the Act employs the word “shall”. Although it was submitted that the question whether the quantum of Rs. 10 lacs is mandatory, does not fall for consideration, it is submitted that a plain reading of the section itself would indicate that the decision to impose penalty is discretionary in nature and not mandatory or automatic.

13. The learned counsel has placed reliance on the following decisions :-

14. It is submitted that this Tribunal in the following decisions granted relief to the assessees :-

15. The learned CIT-DR has submitted that the BM Act was enacted with the specific legislative intent to ensure full and accurate disclosure of the foreign income and assets. It is submitted that Section 43 of the BM Act mandates imposition of penalty for any failure to disclose such assets in Schedule FA, which is a strict liability. It is submitted that the provision apart from being mandatory has a deterrent effect and mere omission leads to an automatic imposition of penalty and the bona fides or inadvertence of the assessee are not relevant considerations. It is submitted that the question whether non-disclosure was intentional or inadvertent is not relevant. It is submitted that the Supreme Court in Union of India v. Dharamendra Textile Processors, ITR 277 (SC) has held that provision for imposition of penalty is compensatory and not penal in nature. Therefore, it is submitted that the contention on behalf of the AR that it being a penal provision, strict interpretation should be placed on the use of word “may” as being discretionary cannot be accepted. It is submitted that even otherwise the assessees being high networth individuals, had the benefit of tax advisers and cannot be expected to have missed the disclosure of the foreign assets in Schedule FA out of oversight or inadvertence.

16. On behalf of the Revenue, reliance is placed on the decision of Mumbai Benches of the Tribunal in Nirmal Bhanwarlal Jain v. CIT(A) [BMA Nos. 13 to 15 (Mum.) of 2023, dated 31-7-2023] and Ms. Shobha Harish Thawani v. JCIT [BMA Nos. 1 to 3 (Mum.) of 2023, dated 9-8-2023].

17. The BM Act was enacted with an avowed purpose to deal with the menace of stashing away of black money abroad by the resident individuals with the intent to evade taxes. The Act makes elaborate provisions for dealing with the undisclosed foreign income and assets and for imposition of tax on such undisclosed foreign income and assets. In the present reference, we are only concerned with the provisions of Section 43 of the BM Act providing for imposition of penalty on account of failure of the assessees to disclose foreign investment/asset/income in Schedule FA. Section 43 of the BM Act reads as under :-

“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:

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 supplied)

18. The question is whether such non-disclosure would automatically lead to imposition of penalty or whether there is discretion in the AO to waive imposition of penalty in the appropriate circumstances. It is trite that charging/penal provisions of a taxing statute have to be construed strictly. Even otherwise, it is well established principle of interpretation of statutes, that the words must be given their plain and ordinary meaning, unless it leads to absurd results or consequences which could never be intended. Applying this test, the use of the word “may” would clearly indicate that it is discretionary in nature. It is significant to note that the concluding part of Section 43 of the BM Act employs both “may” so far as the imposition of penalty is concerned and “shall” as far as the quantum of Rs. 10 lacs is concerned. We hasten to add that although we are not concerned with the interpretation of later part, about the quantum, the fact remains that the legislature has consciously used the word “may” so far as the decision to impose penalty is concerned.

19. It is necessary to note that Section 46(3) of the BM Act provides that no order imposing penalty shall be made unless the assessee has been given an opportunity of being heard. Such requirement cannot be said to be an empty formality. Thus, the interpretation that imposition of penalty is automatic, on the failure of the assessee to make the disclosure in Schedule FA, would make the provision for opportunity of hearing being granted to the assessee before imposition of penalty, redundant or superfluous. It is the fundamental principle of interpretation that the legislature can never be attributed with such redundancy or superfluousness.

20. In Hindustan Steel Ltd. (supra), arising out of the Odisha Sales Tax Act, 1947 the Supreme Court, inter alia, held in the context of penalty under Section 270 of the Income Tax Act, 1961 that even where the minimum penalty is prescribed, the authority competent to impose the penalty will be justified in refusing to impose the penalty when there is a technical or venial breach of the provisions of the Income Tax Act.

21. In Ankit International (supra), the jurisdictional Bombay High Court held that imposition of penalty under Section 61(2) of the Maharashtra Value Added Tax Act, 2002 (2002 Act, for short) is not mandatory where the dealer liable to get his accounts audited under Section 61(1) failed to furnish a copy of such report within the time as prescribed. It is significant to note that Section 61(2) of the 2002 Act also employs the word “may” in relation to the Commissioner’s power to impose the penalty in the face of a breach to get the accounts audited and failure to furnish a copy of such report within the time prescribed. In the context thereof, the Bombay High Court held as under :-

“9. The imposition of a penalty in sub-section (2) of section 61 is not mandatory. The Commissioner has been conferred with the discretion to determine as to whether a penalty should or should not be imposed, if a dealer who is liable to get his accounts audited under sub-section (1), fails to furnish a copy of the report within the time prescribed. The Legislature has provided that the Commissioner “may” impose a penalty after giving the dealer a reasonable opportunity of being heard. The use of the word “may” is clearly suggestive of the fact that imposition of a penalty is not mandatory. The legislative intent has been emphasized in the requirement of furnishing to the dealer a reasonable opportunity of being heard before a penalty is imposed. The fact that the Legislature contemplated an opportunity of being heard is indicative of the intent of the Legislature that the explanation which the dealer may have, has to be considered before the Commissioner determines as to whether penalty should be imposed. That the imposition of the penalty under sub-section (2) of section 61 is not mandatory has been emphasized in a judgment of a Division Bench of this court in Nitco Paints Ltd. v. State of Maharashtra [2011] 42 v. 71 (Bom) in the following terms (para 3 at page 74 in 42 VST):

22. Thus, in the case of Nitco Paints Ltd. v. State of Maharashtra [2011] 42 VST 71 (Bombay), [which is relied upon in the case of Ankit International (supra)] the requirement of grant of an opportunity of hearing (which is also the requirement in Section 46(3) of the BM Act) is held to be indicative of the imposition of penalty being discretionary. It is not necessary to multiply authorities on the point.

23. We now propose to briefly deal with the two decisions of the Division Bench of the Tribunal in Ms. Shobha Harish Thawani (supra) and Nirmal Bhanwarlal Jain (supra) on which strong reliance is placed on behalf of the Revenue.

24. In Nirmal Bhanwarlal Jain (supra), the assessee had made investment in offshore mutual fund Global Dynamic Opportunities Fund Ltd. (in short ‘GDOF’) based in Mauritius. The investments were made by the assessee in his own name and in the name of his children viz. Ms. Harshita Nirmal Jain (Daughter), Ms. Kalpita Nirmal Jain (minor Daughter) and Mst. Bhavya Nirmal Jain (minor Son). It was undisputed that out of the total investment during the year of Rs.21,70,69,320/-, investment only to the extent of Rs.3,91,04,805/- was reported in Schedule FA. The assessee, inter alia, claimed that the investment was made out of funds on which tax was already paid and there was no unaccounted money involved. Next, it was contended that the non-reporting was out of a bona fide mistake. A perusal of para 6 of the order would indicate that this Tribunal found that the claim about there being bona fide mistake went unsubstantiated. In that view of the matter, the appeal filed by the assessee challenging the imposition of penalty came to be dismissed. In the first instance, we find that the case is distinguishable inasmuch as on facts it was found that the claim of assessee that non-reporting was out of a bona fide mistake was unsubstantiated. In other words, the assessee had failed to establish that there was a bona fide mistake in the non-reporting of the investment in Schedule FA. This finding has been recorded by the Bench after reproducing the break-up of the total investment and the amount which was actually reported. This Tribunal found that even insofar as the investment in his own name of Rs.5,50,44,320/- is concerned, assessee only reported an amount of Rs.3,91,04,805/-. It was in these circumstances found that the assessee had furnished inaccurate particulars of investment in his own name and there was altogether non-reporting of the investment made in the name of the children. That apart, we find that the Division Bench had no occasion to consider the provisions of Section 46 of BM Act requiring an opportunity of hearing being given to the assessee before imposition of penalty and the necessary implication of such a requirement on the question whether the imposition of penalty is automatic or otherwise. The decision therefore cannot be said to be an authority holding that the imposition of penalty is mandatory/automatic, upon failure to disclose foreign assets in Schedule FA.

25. In Shobha Harish Thawani (supra), the Tribunal has relied on the decision of Nirmal Bhanwarlal Jain (supra). In that case, the assessee jointly made certain investments in Global Dynamic Opportunities Fund Ltd. (GDOF) out of funds transferred from India to HSBC Bank at Jersey (USA). The assessee held 40% share in the investment. The investment was made through Liberalised Remittance Scheme under the Foreign Exchange Management Act (FEMA). Even in this case, the assessee claimed that non-reporting was out of a bona fide mistake. The Bench found, on facts, that the claim that the failure to report in Schedule FA was out of a bona fide mistake cannot be accepted. This Tribunal observed that even if it is assumed that in the light of the expression “may” used in Section 43 of the BM Act the AO has the discretion to levy the penalty, the assessee failed to substantiate that the AO has exercised his discretion extravagantly. The following observations in para 11 are to the point :-

“11. 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. In the given case it is an undisputed fact that the impugned foreign asset has not been disclosed in the return of income filed for all the three assessment years 2016-17 to 2018-19 in schedule FA. Even if it is assumed that in the light of expression “may” used in section 43 of BMA, the Assessing Officer has the discretion to levy penalty, the assessee failed to substantiate that the Assessing Officer has exercised his discretion extravagantly. The Assessing Officer after examining the facts of the case, formed his opinion to levy penalty. The Assessing Officer exercised his discretion judiciously. No material is brought before us to show that Assessing Officer levied penalty under section 43 of BMA in an arbitrary and unjustified manner. 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. In the light of these discussions we see no infirmity in the order of CIT(A) confirming levy of penalty under section 43 of the BMA for non disclosure of foreign assets in the return of income filed by the assessee. Accordingly, appeals of the assessee for all assessment years i.e. 2016-17 to 2018-19 are dismissed.”

(Emphasis supplied)

26. It can thus clearly be seen that even the case of Ms. Shobha Harish Thawani (supra) turned on its own facts as the Bench found that the AO had formed an opinion to levy penalty upon examination of the facts of the case and the discretion was exercised judiciously. It is necessary to note that although the Bench has not noticed the provisions of Section 46 of the BM Act and the effect thereof on the interpretation to be placed on Section 43 of the BM Act, the Bench was not oblivious of the fact that there is a discretion with the AO, which in that case was found to have been exercised in a judicious manner.

27. Thus, both these decisions cannot come to the aid of the Revenue. In any event, if two views with regard to interpretation of Section 43 of the BM Act are possible, it is a settled position that it would be justified to adopt that construction which favours the assessee.

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.

29. The appeals shall now be placed before the Division Bench for disposal according to law. We make it clear that we have not examined the merits of the order imposing penalty, which is left to be decided by the Division Bench on its own merits and in accordance with law.