In a significant ruling, the Income Tax Appellate Tribunal (ITAT) has clarified that penalties for undeclared offshore assets are not automatic under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015. The ITAT emphasized that the word "may" in the law indicates that imposing a penalty is not mandatory, thus opening a window for taxpayers.
The Tribunal's interpretation hinges on a distinction between "may" and "shall" in the context of penalty provisions. While "shall" would denote a mandatory action, "may" implies discretion. This means that assessing officers have the authority to decide whether or not to impose a penalty based on the specific facts of each case.
This ruling offers potential relief to taxpayers who may have inadvertently failed to report foreign assets. It suggests that unintentional omissions, particularly those involving relatively small amounts, may not automatically trigger penalties. The ITAT's decision aligns with the principle that penalties should not be imposed in cases where there is a reasonable cause for the non-disclosure and no evidence of malafide intent.
The Black Money Act was enacted in 2015 to address the issue of undisclosed foreign income and assets. The Act imposes a tax rate of 30% on undisclosed foreign income and assets, along with a penalty. Section 42 and 43 of the Act deal with penalties for non-disclosure of foreign assets.
A prior amendment to the Black Money Act by the Finance Act (No. 2) 2024, effective from October 1, 2024, raised the threshold for the applicability of penalties. Non-disclosure of foreign assets, excluding immovable property, with an aggregate value up to Rs 20 lakh would not attract penalties under Sections 42 and 43.
The recent ITAT ruling further clarifies the scope of these penalty provisions. It suggests that even when the value of undisclosed assets exceeds Rs 20 lakh, a penalty is not guaranteed. The assessing officer must exercise discretion and consider the circumstances of the case before imposing a penalty.
This interpretation does not imply that non-disclosure of foreign assets is permissible. Taxpayers are still obligated to report all foreign assets in their income tax returns. However, the ITAT's ruling provides a safeguard against the automatic imposition of penalties in cases of genuine oversight or unintentional errors.
The Central Board of Direct Taxes (CBDT) has also issued instructions stating that prosecution proceedings under Section 49 and 50 of the Black Money Act would not be initiated if penalties under Section 42 and 43 are not imposed or "imposable". This instruction reinforces the principle that penalties and prosecution should be reserved for serious cases of tax evasion.
The ITAT's decision underscores the importance of carefully considering the specific facts and circumstances before imposing penalties under the Black Money Act. It also highlights the distinction between unintentional omissions and deliberate attempts to evade taxes. While the Act aims to curb black money and ensure tax compliance, it also recognizes the need for fairness and discretion in its enforcement.
