[Opinion] Non-Disclosure of Foreign Assets | No Automatic Penalty

Meenakshi Subramaniam – [2025] 180 taxmann.com 365 (Article)

Once, Laurel and Hardy were walking along the river bank. Suddenly, Hardy fell into the river.

He shouted: “I may drown, unless someone shall rescue me !” Laurel immediately thought to himself: ” The word ‘may’ means, that Hardy wants to drown, while word ‘shall’ in this context, means he doesn’t want anyone to stop his drowning act, by rescuing him.” Laurel nodded his head, for brilliant legal thinking and walked on.

“May is not “shall.” That is, penalty for non-disclosure of foreign assets in Schedule FA is not mandatory. Thus, ruled a recent enlightening judgment [Vinil Venugopal v. DDIT (Inv.) [2025] 179 taxmann.com 618 (Mum. – Trib.), pronounced by Mumbai Tribunal.

The appellants 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’). This is on account of the fact that the appellant-assessees have failed to disclose in their Return of Income (ROI) for the relaant assessment year 2020-21, the foreign investments with Avestar Global Opportunities SPC (Cayman Islands) in foreign assets schedule (Schedule FA).

The question in the case was””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 ?”

The Assessing Officer (‘AO’) 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.

The AO was of 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.

In appeal, the learned CIT(A) confirmed the same, which has led the assessee approaching Tribunal.

The assessee said penalty was levied by DDIT(Inv) without appreciating the principle laid down by Honourable Supreme Court in the case of Hindustan Steel Ltd. v. State of Orissa [1972] 83 ITR 26 (SC) that penalty need not be levied where there is a technical or venial breach of the provisions of the Act.

The Division Bench noticed that there are conflicting decisions of coordinate Benches on the interpretation of Section 43 of the BM Act, with regard to the nature of the word “may” as used. One order in para 5.2(d) says it is discretionary to impose penalty and another in para 5.3(d) goes in favour Of Revenue holding that it is mandatory/automatic. Hence, the Division Bench required the matter be referred to 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) .

The President, in his discretion placed referred issue before the Special Bench.

It is submitted by learned AR that imposition of penalty under Section 43 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/inadvertenence or if the breach is of a venial nature. Being venial, , the AO can waive the imposition of penalty.

The intervenors counsel submitted that 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.
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. The provision apart from being mandatory has a deterrent effect and mere omission leads to an automatic imposition of penalty and bonafides or inadvertence are not relevant considerations.

It is submitted that Supreme Court in Union of India v. Dharamendra Textile Processors [2008] 174 Taxman 571/306 ITR 277 has held provison for imposition of penalty is to be compensatory and not penal in nature. Therefore, it is submitted that the contention on behalf of AR that it being a penal provision strict interpretation should be placed on 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.

Judgment

The BM Act was enacted with a vowed purpose to deal with the menace of stashing away of black money abroad by the resident individuals with the intent to evade taxes.

It is trite that charging/penal provisons 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 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.

In Hindustan Steel Ltd. (supra) arising out of Odisha Sales Tax Act, 1947 the Supreme Court, inter alia, held in the context of penalty under Section 270 of 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.

In Ankit International ACST v. Ankit International [2011] 46 VST 1 (Bom), the jurisdictional Bombay High Court held imposition of penalty under Section 61(2) of the Maharashtra Value Added Tax Act, 2002 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 penalty in the face of a breach to get 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 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 penalty under sub-section(2)of section 61 is not mandatory has been emphasised in a judgment of a Division Bench of this court in Nitco Paints Ltd. v. State of Maharashtra [2011] 42 VST 71 (Bom) in the following terms:

“Section 61(2) clearly specifies that upon the failure of the dealer to get his accounts audited and to furnish a copy of the report within the time as prescribed, the Commissioner may after furnishing reasonable opportunity of being heard impose penalty at rates. The law provides that penalty may be imposed and contemplates that a reasonable opportunity should be furnished to the dealer. Obviously there would be no occasion to furnish a reasonable opportunity of being heard if liability to levy penalty was automatic. Since the legislation has used the expression ‘may’, the imposition of penalty is discretionary. Undoubtedly, such discretion has to be exercised in accordance with law and judiciously…”

Thus, in the case of Nitco Paints Ltd. (supra) [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.

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.

In Ms. Shobha Harish Thawani v. Jt. CIT [2023] 154 taxmann.com 564 (Mum. – Trib.), the Tribunal has relied on the decision of Nirmal Bhanwarlal Jain (supra). This Tribunal observed that even if it is assumed in light of 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 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.

It can thus clearly be seen that even the case of Ms Shobha Harish Thawani (supra) turned on its own facts.

Thus, both these decisions cannot come to the aid of Revenue.

In any event, if two views with regard to interpretation of Section 43 are possible, it is a settled position that it would be justified to adopt that construction which favours the assessee.

In the result, the Tribunal said:

“We answer the issue as framed in the negative. The word “may” used in Section 43 of the BM Act has to be given it s plain meaning to 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.

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