Word 'may' in s.43 of BM Act is directory, penalty for non-disclosure of foreign assets not mandatory

ITAT MUMBAI (LB) - AT held that the word "may" in s.43 of the BM Act is directory, not to be construed as "shall," so imposition of penalty for non-disclosure of foreign assets is not mandatory. The Assessing Officer has discretion to impose or waive the penalty based on facts and circumstances; the Tribunal found no bona fide mistake in the present non-reporting but did not decide penalty merits. The cases are to be placed before the Division Bench for disposal in accordance with law.

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ISSUES PRESENTED AND CONSIDERED

1. Whether the word "may" in Section 43 of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 is to be construed as "shall", i.e., whether imposition of penalty is mandatory upon non-disclosure in Schedule FA or whether the Assessing Officer has discretion to impose or waive the penalty.

ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Nature of the word "may" in Section 43: mandatory or discretionary?

Legal framework: Section 43 prescribes that where a resident fails to furnish information or furnishes inaccurate particulars in the return relating to any asset located outside India, "the Assessing Officer may direct that such person shall pay, by way of penalty, a sum of ten lakh rupees", subject to a de minimis proviso. Section 46(3) requires that no order imposing penalty shall be made unless the assessee has been given an opportunity of being heard.

Precedent treatment: Authorities including decisions interpreting analogous provisions using "may" in tax and fiscal statutes were considered, notably a Supreme Court authority holding that penalty need not be levied where breach is technical or venial, and High Court/Tribunal decisions construing "may" as vesting discretion in the authority and emphasizing the significance of the hearing requirement.

Interpretation and reasoning: The Court applied established rules of statutory interpretation: words are to be given their plain and ordinary meaning unless such reading leads to absurdity; charging/penal provisions are to be construed strictly; and legislative usage of distinct words is significant. The use of "may" in Section 43 was held to denote discretion. This conclusion is reinforced by the co-existence in the same provision of "may" (decision to impose penalty) and "shall" (quantum), indicating a deliberate legislative distinction. Further, Section 46(3)'s requirement of an opportunity of hearing would be rendered redundant if penalty followed automatically from non-disclosure; thus, purposive and non-redundant construction supports discretion. The Court also rejected treating the provision as creating strict/automatic liability irrespective of bona fides or veniality where the legislature chose permissive language.

Ratio vs. Obiter: Ratio - The plain meaning of "may" in Section 43 is directory/discretionary and does not convert into a mandatory "shall"; the Assessing Officer has discretion to impose or waive the penalty depending on facts and circumstances. Obiter - Observations on related case law distinctions and the comparative treatment of quantum under the section are ancillary but support the main holding.

Conclusion: The word "may" in Section 43 must be given its ordinary meaning - discretionary. Imposition of penalty under Section 43 is not automatic or mandatory; the Assessing Officer may, after affording the opportunity of hearing, exercise discretion to impose or not impose the penalty based on the facts of each case.

Issue 2 - Relevance of opportunity of hearing (Section 46(3)) to interpretation of Section 43

Legal framework: Section 46(3) conditions imposition of penalty on prior opportunity of hearing.

Precedent treatment: Reliance placed on authorities holding that a statutory requirement to afford a hearing indicates legislative intent that the decision whether to impose penalty is not automatic but contingent on consideration of explanations.

Interpretation and reasoning: The Court reasoned that if Section 43 were to operate mandatorily, the hearing provision would be a pointless formality; statutory interpretation disfavors construing enactments to render provisions superfluous. Therefore, the hearing requirement supports the inference of discretion in the decision to impose penalty. The hearing is a substantive safeguard permitting consideration of bona fides, inadvertence, or venial breaches before exercising penal imposition.

Ratio vs. Obiter: Ratio - Section 46(3) is integral to the interpretation of Section 43 and indicates that imposition of penalty is discretionary and must follow an effective opportunity to be heard. Obiter - Discussion of how hearing safeguards align with general principles of administrative fairness.

Conclusion: The requirement of a pre-imposition hearing under Section 46(3) is material and confirms that Section 43 confers discretion on the Assessing Officer; hearing cannot be treated as a mere formality where penalty were automatic.

Issue 3 - Application of established authorities on discretion to penalize for technical or venial breaches

Legal framework: Established principle that where penal/charging provisions permit discretion, authorities may refuse to levy penalty in cases of technical, venial, or bona fide inadvertent breaches.

Precedent treatment: The Court followed and applied precedent holding that minimum or mandatory quantum does not preclude refusal to impose penalty where breach is technical/venial; it distinguished prior decisions of co-ordinate benches where facts showed lack of bona fides or absence of consideration of hearing requirement.

Interpretation and reasoning: The Court treated prior tribunal decisions that upheld penalties as fact-specific: where the assessee failed to substantiate bona fide mistake or where the authority's discretion was exercised judiciously, upholding penalty was appropriate. Those decisions do not constitute authority for the proposition that imposition is automatic. The Court emphasized that where two plausible constructions exist, the one favorable to the assessee should be adopted in fiscal statutes.

Ratio vs. Obiter: Ratio - Authorities permitting refusal to impose penalty for venial breaches are applicable; co-ordinate bench decisions upholding penalties on facts are distinguishable and do not negate the discretionary character of Section 43. Obiter - Remarks on the desirability of construing taxing statutes in favour of the assessee when ambiguity exists.

Conclusion: Prior decisions upholding penalties on their facts do not undermine the holding that Section 43 is discretionary; where a bona fide, inadvertent or venial breach is established, the Assessing Officer may justifiably refrain from imposing penalty.

Issue 4 - Effect of legislative wording and non-redundancy principle

Legal framework: Canon of statutory construction that different words used by legislature should be given distinct meanings and that provisions should not be construed to render portions redundant.

Precedent treatment: The Court relied on the general interpretive principle and applied it to the juxtaposition of "may" and "shall" within Section 43.

Interpretation and reasoning: The deliberate use of "may" for imposition and "shall" for the penalty amount indicates legislative intent to create a discretionary power to impose a fixed penal sum. The Court declined to conflate the two terms so as to attribute mandatory operation to the initial decision to impose penalty.

Ratio vs. Obiter: Ratio - Legislative choice of language in Section 43 demonstrates discretion to levy penalty but fixed quantum if imposed. Obiter - No ruling on challenges to the quantum itself, which was left open for adjudication on merits by the Division Bench.

Conclusion: Legislative wording and non-redundancy principles support construing Section 43 as conferring discretion to impose penalty while prescribing the quantum if penalty is imposed.

Disposition and Scope

The issue was answered in the negative: "may" in Section 43 is not to be construed as "shall"; imposition of penalty is discretionary and depends on facts and circumstances. The Special Bench did not decide the merits of the penalty orders themselves; those remain for adjudication by the Division Bench in accordance with law.

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