Pains Of Harsh Penalties For Bonafide Mistakes
“It is the power of punishment alone, when exercised impartially in proportion to the guilt, and irrespective of whether the person punished is the King’s son or an enemy, that protects this world and the next.” – Kautilya
In a recent decision, the division bench of the Mumbai ITAT, in the case of Shobha Harish Thawani,1 confirmed the levy of penalty under Section 43 of The Black Money (Undisclosed Foreign Income And Assets) And Imposition Of Tax Act, 2015 (BMA) for non-disclosure of foreign assets in ‘Schedule FA’ of the Income-tax Return (ITR). In this particular case, the assessee had made a joint investment (with her husband) in an overseas Fund, having a 40 per cent share, but failed to disclose the said foreign asset in Schedule FA of ITR filed for A.Ys. 2016–17 and 2018–19. The assessee explained the source of the investments and offered the income thereon to tax in the ITRs. The Assessing Officer (AO) did not accept the assessee’s plea of bonafide error in disclosing such investment and levied a penalty of R10 lakh for each of the A.Ys. under Section 43 of the BMA for furnishing inaccurate particulars of investments outside India.
1 [TS-554-ITAT-2023(Mum)] dated 9th August, 2023
The ITAT noted that Section 43 does not provide any room not to levy a penalty, even if the foreign asset is disclosed in the books, since the penalty is levied only towards non-disclosure of foreign assets in ITR. Strangely, her husband, who was the joint owner of the said investments, also failed to disclose the said investments in his ITR, but AO levied no penalty in his case. The language of Section 43 of the BMA is “…the Assessing Officer may direct that such person shall pay, by way of penalty, a sum of ten lakh rupees”(emphasis supplied). Regarding the discretion to levy the penalty, ITAT held, “The Assessing Officer exercised his discretion judiciously.” Thus, it did not give any relief to the assessee.
However, Mumbai ITAT, in the case of Leena Gandhi Tiwari,2 held 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.”
2 Addl. CIT vs. Leena Gandhi Tiwari (2022) 216 TTJ 905 / 96 ITR (T) 384(Mum) (Trib)
As far as the discretion of the AO is concerned, the ITAT held that “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 Ltd vs. The State of Orissa3, 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.”
3 [(1972) 83 ITR 26 (SC)]
In both these cases, the respective assessee claimed it was a genuine or a bonafide mistake. There was no mens rea. In the former case, this plea was rejected, and in the latter case, it was accepted.
The main objective of the BMA, as mentioned in the Statement of Objects and Reasons, appears to be “tracking down and bringing back undisclosed foreign assets and income which legitimately belongs to the nation.” Therefore, stringent regulations and harsh penalties are prescribed. These provisions are to deal with serious monetary crimes and not for bonafide mistakes or careless omissions, more so when there is no culpable state of mind. The intention behind the omissions must be considered, especially when the income from such investments is offered for taxation. Provisions of Section 43 of the BMA should be invoked judiciously, as one should not be penalised with a harsh penalty when one has made investments through a normal banking channel complying with FEMA formalities (e.g., remittance under Liberalised Remittance Scheme / ODI, etc.) or the income from such investments / assets are offered for tax in India. Levying of penalty in such circumstances, merely for non-disclosure of foreign investments / assets, and that too in a particular part of the return only, may be legally correct but morally wrong.
The severity of this penal provision can be understood by the fact that even if the assessee has made a one-time investment in foreign asset amounting to Rs 1,00,000 but failed to disclose the same in his ITR, a penalty of Rs 10 lakhs can be levied for each year of non-disclosure. For example, if a person fails to disclose such investment for three years, then Rs. 30 lakhs can be levied as a penalty for a technical default repeated three times. The only exception from such a penalty is in respect of an asset, being one or more bank accounts having an aggregate balance which does not exceed a value equivalent to Rs. 5,00,000 at any time during the previous year.”
The AOs should, therefore, use their discretion more judiciously and desist from routinely levying penalties. Unfortunately, some AOs seem to take a different view. In Leena Gandhi Tiwari’s case (supra), the AO relied on the decision of the Supreme Court (SC) in the case of UOI vs. Dharmendra Textiles Processors4, relating to section 11AC of the Central Excise Act, 1944, dealing with a mandatory penalty in case of any wilful misstatement or suppression of facts or contravention of any of the provisions thereunder.
4 (2008) 306 ITR 277 (SC)
The situation is no better under the Income-tax Act, 1961. Post SC decision in the case of Dharmendra Textiles, the AOs were invoking penalty provisions under the Income tax in a routine manner. This erroneous interpretation was set right by the SC in UOI vs. Rajasthan Spinning & Weaving Mills5, wherein it was held that: “At this stage, we need to examine the recent decision of this Court in Dharmendra Textile Processor’s case (supra). In almost every case relating to penalty, the decision is referred to on behalf of the Revenue as if it laid down that in every case of non-payment or short payment of duty, the penalty clause would automatically get attracted, and the authority had no discretion in the matter. One of us (AftabAlam, J.) was a party to the decision in Dharmendra Textile Processor’s case (supra), and we see no reason to understand or read that decision in that manner.”
5 (2009) 180 Taxmann 609 (SC)
To conclude, any penalty should be proportionate to the seriousness or magnitude of the violations / lapses. The purpose of a penalty should be to discourage intentional wrongdoing while addressing unintentional errors through a more lenient approach, such as a reprimand or nominal fine. Provisions concerning harsh penalties under BMA, the Income-tax Act, 1961, and various other Statutes need to be suitably amended to give relief in respect of bonafide mistakes or venial / technical lapses or additions arising due to ambiguous provisions. Often, there are delays in compliance (e.g., KYC verification) because of a server failure on the government website, network issues, mistakes in forms, etc. Whereas taxpayers are at the receiving end for mistakes on their part, the revenue officials get away without any penal actions if their decisions are overruled or found to be blatantly incorrect or are in contrast to the jurisdictional Court / ITAT rulings. Professional bodies like BCAS can assist in identifying harsh penalty provisions under various laws and suggest checks and balances to stop their misuse and encourage compliance.
Let us hope and trust that till the time the laws are amended, the Courts and AOs will take a lenient view of such pardonable lapses, which will help to bridge the trust deficit between the taxpayers and the Income-tax department.
