Ansh Arora
Introduction
A recurring plea taken by assessees when penalized under Section 43 of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act [‘The Black Money Act’] is that their failure to disclose foreign assets, particularly in Schedule FA of their tax returns, was a bona fide mistake.
One notable precedent in this regard is the case of Additional CIT v. Leena Gandhi Tiwari, which set a significant precedent for accepting bona fide mistakes, even though Section 43 of the BMA does not explicitly provide for such a defence.
Understanding Section 43
Section 43 of the Black Money Act provides a penalty of Rs. 10 Lakhs on an assessee for the Non-Disclosure of Foreign Income or Assets in their Income Tax Return. However, the provision states that the Assessing Officer [AO] ‘may’ levy a penalty, indicating that the penalty is not compulsory in nature and thus grants an element of discretion to the assessing officer. The use of the term-‘may’ signifies that the penalty is not to be imposed in all cases of lapses but only when warranted.
What is an undisclosed foreign asset?
Section 2(11) of the Act defines an undisclosed foreign asset as an asset located outside India, for which the assessee has no explanation for or the explanation so provided is unsatisfactory in the Assessing Officer’s Opinion.
The Role of Schedule FA
The Central Board of Direct Taxes (CBDT) mandated the disclosure of foreign assets in Schedule FA (Foreign Assets) as an integral part of the Income Tax Return Forms (ITR) starting from the assessment year 2012-13. This was a crucial step to prevent tax evasion through offshore routes.
Further, Section 43 of the BMA is attracted when there is a failure to furnish any information or furnishing inaccurate information by an assessee filed under Section 139 of the Income Tax Act.
The Conflicting Jurisprudence
1. Additional CIT v. Leena Gandhi Tiwari
The Bona fide plea was first accepted by the ITAT’s Mumbai bench in the case of Additional CIT v. Leena Gandhi Tiwari, where the assessee was a signatory to an undisclosed foreign bank account held in her late mother’s name.
The arguments advanced by the Revenue hinged upon the fact that the assessee being a signatory to an undisclosed foreign bank account was sufficient in itself to attract penalty under Section 43 of the Act. Emphasis was also placed upon the fact that the said account was only disclosed to the authorities after they detected the existence of such an account, and hence such disclosure cannot be said to be bona fide.
However, the ITAT Bench deleted the penalty citing the bona fide conduct of the assessee based on the following grounds:-
i. The assessee had held the account in an entirely fiduciary capacity– The Tribunal accepted the Bona Fide plea of the assessee, primarily because the bank account in question was held in a fiduciary capacity. One of the key ingredients to attract a penalty under Section 43 is that the owner of the account must be the beneficial owner or beneficiary of the said account. In this case, the tribunal recognized that the account was originally opened by the assessee’s late father for his wife, who later asked the assessee to hold it as a trustee due to health issues. The account was dormant for years and the monies were donated to a Noble Peace prize winning charity- Médecins Sans Frontières UK after the mother’s death, even before tax authorities discovered the said account.
The tribunal observed that the assessee’s conduct all along unequivocally established complete detachment with the impugned account, so far as any personal interest was concerned, which it held to be a typical Hallmark of someone holding an asset in a fiduciary capacity and trust.
ii. The financial status of the assessee– The assessee was the chairperson of a prominent pharmaceutical company in India, having her personal tax liability of Rs.159.20 Crores and her aggregate annual tax liability (including that of her husband and the private company of which she is chairperson) being at Rs. 526.30 Crores for the year. The Tribunal also considered that the assessee was a high net worth individual, and the amount in the impugned bank account was insignificant compared to her personal tax liability. The tribunal in its own words held that- “It is not, by any stretch of logic or imagination, a case of siphoning unaccounted wealth in India to the undisclosed bank accounts abroad.”
iii. Substituted Tax return filed by the assessee– The original return filed by the assessee under S.139 of the Income Tax Act stood substituted by a subsequent ITR filed by her under S.153A of the Income Tax Act, after a search and seizure operation was conducted, in which she had duly disclosed the undisclosed foreign bank account. Reliance was placed on the jurisdictional High Court’s decision in PCIT v. JSW Steel Ltd., where it was held that the opportunity to file a return under Section 153A can benefit the assessee, as in this case, and that the original return loses its originality, with the subsequent return filed under Section 153A taking its place. Consequently, the return filed under Section 153A(1) is treated as if filed under Section 139(1), and the relevant provisions apply accordingly. Therefore, non-disclosure of the foreign asset in the original return under Section 139 cannot be held against the assessee, especially since the disclosure was made in the return filed under Section 153A.
The tribunal finally concluded that essentially 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, while relying on the Hon’ble Supreme Court’s decision in Hindustan Steel v. State of Orissa 1970 AIR 253, where it was held a that technical or venial breach of a statutory obligation may be excused if the authorities are vested with discretion and the breach flows from a bona fide belief that the offender is not liable to act in the manner prescribed by the statute.
2. Shobha Harish Thawani v. JCIT
However, the very next year, the same ITAT tribunal in a co-ordinate bench decision denied the bona fide plea of the assessee in Shobha Harish Thawani v. JCIT.
In this case, the assessee had been regularly offering the interest income from his impugned foreign asset to tax and had further provided proper explanations as to the source of the investment.
Despite this interest income from the undisclosed foreign asset being regularly offered to tax, the tribunal ruled that a mere explanation as to the source of the investment and offering interest income to taxation does not absolve the taxpayer from the onus of reporting their foreign assets in Schedule FA. Further, it was emphasized that such reporting enables the authorities to conduct a proper investigation and any non-disclosure, even Bonafide, disentails this purpose.
The Tribunal upheld the penalty, based on the following reasoning:-
i. Penalty under Section 43 may not always pertain to ‘undisclosed foreign assets’ and can even be attracted for the non-disclosure of any foreign asset held by the taxpayer.
ii. There existed no evidence to support the claim of bona fide mistake by the assessee.
iii. Penalty under S.43 is levied for non-reporting of overseas investments and not for making investments from unaccounted money.
Though the tribunal agreed that there may be merit in the submissions that the impugned asset may not be classified as an undisclosed foreign asset, it went ahead with the literal reading of Section 43, which activates upon the non-disclosure of any foreign asset.
Further, there exists a doubt on the correctness of this ruling as the facts on record clearly indicate that the investments were from known sources of funds and were under surveillance of a liberalised remittance scheme of the RBI under the Foreign Exchange Management Act (FEMA) Regulations. It appears that the tribunal might have erred in fully appreciating the facts of the case.
Conclusion
The conflicting decisions raise a fundamental question: Should Section 43 penalize every instance of non-disclosure, even those resulting from a technical or venial breach of the law?
The Tribunal’s reasoning in Shobha Harish Thawani sets the tone for a strict interpretation of Section 43, relying upon the fact that penalty under the provision is to ensure compliance with the disclosure requirements or else Schedule FA in the return would itself become redundant or otiose. This approach aims to deter taxpayers from neglecting their disclosure obligations and ensure proper reporting of foreign assets, thereby preventing tax evasion.
Such a levy of penalty, however, even after the establishment of the legitimate origins of the foreign investment raises concerns about fairness and proportionality. Penalizing bona fide taxpayers who have directly/indirectly, in substance complied with the statutory provisions over mere clerical errors amounts to using the judicial cannons of law, where it is not warranted.
While interpreting Section 43, we must read the statute as a whole. The circumstances that led to the enactment of the Black Money Act included a significant exodus of taxable income being stashed away abroad by Economic offenders like that of Vijay Mallaya. The object of the Legislature behind enacting such a harsh and stringent law was to check economic offenders, tax evaders and for the larger causes of public good. We must consider the fact that the Black Money Act is enacted as a special law whose primary aim is to curb Black Money, and not to penalize innocent and minor breaches of the law, especially when the taxpayer has directly or indirectly complied with the statutory obligations. To put a question to ourselves, can these provisions be invoked in the cases which more of bonafide mistakes, or, at worse, harmless carelessness, cannot be the intent of the Legislature.
