Relevance And Abuse
Guest Author
In one of my previous articles, I had discussed and analysed Section 43 of Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015. The analysis was based on a decision of the Special Bench of the Income Tax Appellate Tribunal, Mumbai (“ITAT) on the meaning of the word “may”, which vests discretionary power with an Assessing Officer (AO) to levy a fixed penalty.
The levy of penalty is discretionary, implying that the AO has to examine the facts within the parameters of conditions laid down in Section 43 before concluding the fitness of levy of penalty. Once that is done, quantum is mandatory.
Discretionary power in a taxing statute is, as a norm, merrily abused by the Assessing Officers, not just in exercise of Section 43, but under various taxing statutes. With absolute disregard to the numerous judgements across the many judicial forums, the Assessing Officers or Tax Authorities, are only concerned with acting as collecting agents to contribute to the coffers of the Central Government. Legitimacy or otherwise is left to the decisions of Courts, which force hapless assessees to spend to fight back against the abuse of discretionary powers.
In another decision of the Income Tax Appellate Tribunal, Jaipur in Devendra Kumar Mehta v. Deputy Director of Income Tax, Investigation[1], the judgement highlighted a classic example of complete abuse of power in the face of facts which cannot be said to meet the essential sine qua non condition of “failure” provided for in section 43.
The Appellant was earlier living in the U. S. Of A. On return to India, he declared himself as a “Resident” and accordingly filed his Returns of Income. In the assessment year under scrutiny, he received an amount under the Social Security Scheme relating to his time in USA.
He was levied with a penalty of Rs.10 lakhs for the assessment year in which such income was received. The trigger for the levy was “failure to declare Social Security Amount in Schedule FA, after having duly declared in the Returns of Income for the relevant year as Exempt Income.” The AO, in interpretation of the term “fails to furnish any information or furnishes inaccurate particulars in such return… relating to any income from a source located outside India…” imported the meaning to a clerical mistake of failure to mention in Schedule FA. The details of exempt income which were duly declared in the body of the Return, where disclosure materially matters held no meaning for the “trigger happy” AO. The subsequent exercise of discretion was a concluded opinion, since the base of failure was attributed to a less significant Schedule, in complete disregard of the actual Returns.
Significant “abetment” to the abuse of power of the AO was the decision of the CIT (A) who upheld the Assessment Order, agreeing with the AO that the assessee had failed to declare the income in the Schedule. It is worthwhile to observe that though designated as an Appellate Authority, historically, being part of the machinery under the taxing statute, the Appellate Authority more often than not fails to act judiciously and impartially.
While allowing the appeal, the ITAT, Jaipur Bench in para 11 held as follows:
“11. Even if under section 43 of the Black Money Act, requisite information is required to be furnished in FA schedule of return of income, having regard to the fact that the department has not opposed the claim of the appellant that the said amount was towards his pension, and that he had disclosed in the details of income, the factum of deposit of tax with the concerned department of United States, we find merit in the contention raised by Ld. AR for the appellant that in this situation, no penalty u/s 43 of the Black Money Act, was called for to be imposed.
Consequently, impugned order passed by Learned CIT(A) and the penalty order passed by the Assessing Officer deserve to be set aside.”
CONCLUSION
In my respectful view, the reason for which the appeal was allowed again reflects a failure to interpret the law in the correct perspective. By use of words “even if” in relation to furnishing of information, the Hon’ble Tribunal has in a way agreed that Schedule FA is relevant for the purpose of furnishing of information and declaring income in the appropriate Head of Income in the Returns alone cannot suffice. What saved the assessee, in the view of the ITAT was the fact that “the department had not opposed the claim of the appellant of his having disclosed the income in details of income”. The issue of whether Schedules to the Returns of Income hold equal significance as the main body of Returns, therefore remains res integra. Surely, for a taxing statute, tax should matter more than penalty.
It would be apposite to discuss relevant principles of Administrative Law with respect to the exercise of discretion by an authority vested with such power.
In his book Administrative Law[2], Justice C. K. Thakker, explains the Doctrine of fetters on discretion. Justice Thakker says that an authority exercising discretionary powers is expected to consider the facts of each case, apply its mind and take a decision. If the authority adopts fixed rules of policy in all cases, it effectively imposes fetters on discretion.
Justice Thakker’s book under the Chapter Excess or Abuse of Discretion explains what constitutes abuse of discretion. The author says where an authority acts in bad faith or takes into account irrelevant consideration, he commits an abuse of discretion.
Quoting from a leading Supreme Court decision in Shri Sitaram Sugar Co. Ltd. V. Union of India[3], Justice Thakker strongly brings about the effect of abuse of power. The relevant para is extracted below:
“A repository of power acts ultra vires either when he acts in excess of his peer in the narrow sense or he abuses his power by acting in bad fairly or for an inadmissible purpose or on irrelevant grounds or without regard to relevant consideration or with gross unreasonableness..”
This author’s own experience with the adaptation of administrative law into a specific provision enabling exercise of discretion under the Income Tax Act, 1961 requires a mention. In Dawat E Islami v. CIT (Exemptions) & Anr.[4] the Bombay High Court held that the Commissioner of Income Tax (Exemption) ought to have followed the exercise of delegated authority in terms of the law delegating such authority. The law, read with the relevant circular, mandated that the benefits of an enabling provision ought to percolate to the Assessee so as to save it from the rigors of law. The Authority was necessarily bound to follow the law both in letter and spirit and not cause its exercise of discretion to be colored by non-existent conditions. For more details, read the article on https://legallectual.com[5].
Abuse of discretion by authorities is historical. In counter to such abuse, judicial review has also historically come to the aid of challenges to such abuse. Yet, in certain instances, like in the case of the ITAT, Jaipur Bench, a decision that leaves more doubts than bringing clarity, a void is left for further abuse of power, by selective interpretation of the law by the authorities.
More often than not, an assessee suffers at the hands of various tax authorities, be they under the Income Tax Act or the Goods and Services Tax Act or any other law determining revenue or taxes payable by a person. Such revenue generating laws provide for various exercise of powers by the authorities administering the law. Many of the discretionary powers vested with authorities become the source and cause of harassment. In a country and under a regime which brazenly touts itself as providing ease for business, the reality is harsh and far from truth. Hope in times to come, assessees, dealers and those who are subjected to paying taxes take more initiative to demand benefits rather than subject to the draconian abuse of powers.
About the Author
The author is an Advocate practicing as a Counsel primarily on the Original Side of the Bombay High Court and also appears frequently before various other High Courts in India, Tax Tribunals (Income Tax / GST) and National Company Law Tribunals. He has a modest appearance before the Supreme Court of India as well. The primary areas of litigation are Taxation, Constitutional Law, land litigation (acquisitions etc.) and modest exposure to civil trials. The author also advises a diverse range of clients in tax planning, mergers and acquisitions, international taxation and matters relating to public and charitable trusts. Having trained under a well known designated Senior Advocate specializing in Constitutional law, Muslim law and litigation, the author also advises on inheritance under Muslim law, creation and administration of wakfs and their legal and tax intricacies as well as other issues under the Muslim Personal Law. The author has various reported judgements in his own name as well as important judgements in Constitutional Law at the Supreme Court along with his senior.
[1] [2025] 177 taxmann.com 372 (Jaipur – Trib.) [30-07-2025]
[2] Second Edition, 2022, Eastern Book Company
[3] (1990) 3 SCC 223 : AIR 1990 SC 1277
[4] 2026 SCC OnLine Bom 3819
[5] Exercise of delegated authority under Section 119(2)(b) of the Income Tax Act, 1961 – Principles of Administrative law read into the Income Tax Act – LegalLectual
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