Analyzing the Penalties Imposed by Section 43 of the Black Money (Undisclosed Foreign Income and Assets) and Taxation Act of 2015

Introduction:

The issue of black money is deeply rooted in India's socio-economic fabric. The commitment to eradicate and repatriate black money has been a recurring theme in the manifestos of numerous political parties. Traditionally, black money refers to unaccounted-for funds, often visualized as cash hidden in secret locations, much like scenes from Bollywood movies. Additionally, black money is commonly associated with 'Swiss bank accounts,' referring to funds stashed in foreign jurisdictions known for their stringent privacy laws regarding account holders.

The topic of black money gained significant traction during the 2014 elections. In response, the newly elected government introduced the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (BMA), aimed at curbing the black money menace. While primarily a tax statute, the BMA also includes provisions for penalties and prosecutions. Rather than a broad definition, the Act provides a technical definition of 'black money.' It seeks to tax undisclosed foreign income and assets, as outlined in Section 3 of the Act:

Charge of tax :

1. A tax shall be charged on every assessee for every assessment year commencing on or after April 1, 2016, subject to the provisions of this Act, in respect of their total undisclosed foreign income and assets from the previous year at a rate of thirty percent: Provided that an undisclosed asset located outside India shall be taxed on its value in the previous year in which the 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 a prescribed manner.
   

Penalty Under Section 43 of the BMA:

The BMA's objective is to bring undisclosed assets and foreign income within the tax framework, imposing tax charges on undisclosed foreign income and assets, along with penalties and prosecution for non-compliance. Section 43 of the BMA addresses penalties for failing to furnish particulars about an asset located outside India or for providing inaccurate particulars. Accurate disclosure of such assets is the BMA's raison d'être. The return mentioned in this section refers to the Return of Income filed by an assessee under Section 139(1), 139(4), or 139(5) of the Income-tax Act, 1961 (ITA), as the BMA does not provide for a separate return of Income.

Section 43 of BMA : Penalty for failure to furnish in return of income, 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 as defined in clause (6) of section 6 of the Income-tax Act, who has filed 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 them as a beneficial owner or otherwise, or in respect of which they were 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 to an asset, being one or more bank accounts, with an aggregate balance not exceeding 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.

Imposition of Penalty Under Section 43 of the BMA :

Before delving into the law imposing penalties for failure to disclose foreign assets in the return of Income or furnishing inaccurate particulars, it is insightful to consider Section 276(1)(c) of the ITA, which levies a penalty for concealing income particulars or furnishing inaccurate particulars. The Supreme Court's judgment in CIT v. Reliance Petroproducts [2010] 322 ITR 158 (SC) is instructive. The Court, considering multiple 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 must be shown that the conditions under section 271(1)(c) exist before imposing a penalty. The return filed is crucial, as it is the document where the assessee furnishes income particulars. Inaccurate particulars lead to liability. In Dilip N. Shroff v. Jt. CIT, the terms 'concealment of income' and 'furnishing inaccurate particulars' were explained. The Court held that penalty under section 271(1)(c) requires mens rea, signifying a deliberate act or omission. However, in Dharamendra Textile Processors, the Court held that mens rea is not necessary for penalty under section 271(1)(c), as it is a civil liability aimed at remedying revenue loss. The Court found no fault with the reasoning in Dilip N. Shroff regarding the terms 'conceal' and 'inaccurate'. Only the inference that mens rea was essential was overruled."

The Court concluded that an unsustainable claim in law does not constitute furnishing inaccurate income particulars. This principle can extend to Section 43 of the BMA, where the existence of mens rea does not influence penalty imposition, although it may matter in prosecution proceedings.

Judicial and Quasi-Judicial Views on 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 ITAT Mumbai held that mere non-disclosure of a foreign asset does not automatically warrant a penalty under the BMA. The penalty applies only when the aggregate value of undisclosed foreign assets exceeds Rs. 5,00,000. The legislature intended to exclude trivial lapses attributed to reasonable cause. Section 43 uses the word "may," indicating that penalties are not mandatory and should be judiciously imposed, considering the overall conduct of the assessee and the materiality of the lapse.

The ITAT Mumbai's stance was reiterated by the Jaipur Bench of the ITAT in Krishna Das Agarwal v. DDIT/ADIT(Inv.) [2023] 150 taxmann.com 290 (Jaipur - Trib.), emphasizing that bona fide actions should be excluded from the stringent provisions of the BMA. The ITAT Mumbai in Ocean Diving Centre Ltd. v. Commissioner of Income-tax (Appeals) [2023] 156 taxmann.com 360 (Mumbai - Trib.) also highlighted that penalties under Section 43 should consider reasonable cause and be exercised judiciously.

The Supreme Court in Hindustan Steel Ltd. v. State of Orissa [1972] 83 ITR 26 emphasized that penalties should not be imposed unless there is deliberate defiance of law, contumacious or dishonest conduct, or conscious disregard of obligations. Even if legally permissible, penalties should not be imposed for technical or venial breaches stemming from bona fide beliefs.

In Thomas Mathew v. Income Tax Officer, Noncompoward 1(5) [2020] 117 taxmann.com 63 (Kerala):

The Court ruled that "the preamble of the Black Money Act is aimed solely at curbing the menace of black money. It was argued that an exclusive order under Section 43 of the Act cannot be imposed without an assessment based on the revised returns. There is no case of non-disclosure of assets or accumulation of black money; hence, the reasoning regarding non-disclosure lacks any foundation or basis. Section 43 of the Black Money Act applies only to assets considered black money or assets without an explanation for their source. Mere non-disclosure in Schedule FA does not automatically render any asset or income as illegally acquired black money."

Our Views :

The imposition of the penalty under Section 43 of the Black Money Act (BMA) is likely to be a common penalty in cases where proceedings under the BMA are initiated. The penalty is a flat sum of 10 lakh rupees, which is substantial, especially since it is not graded. It is entirely possible that the undisclosed income or asset, which was inadvertently not disclosed, could be less than 10 lakh rupees, yet the penalty would still be a flat 10 lakh rupees.

This potential injustice is mitigated by making the levy of the penalty discretionary rather than automatic. The officer seeking to impose the penalty has the discretion not to levy it.

Judgments from various courts and tribunals have attempted to balance the objectives of the act with the potential unfairness of imposing penalties in bona fide cases. These judgments will play a crucial role in ensuring that inadvertent errors and bona fide technical mistakes are not penalized, thereby maintaining a law that is both effective in achieving its stated objectives and humane.