Voluntary disclosure of income cannot waive penalty for default

The Supreme Court in a recent decision held that a defaulter of income tax cannot be absolved of paying penalty only for making a voluntary disclosure of income after he is caught for concealing his income. Voluntary disclosure does not forgive an assessee from penal proceedings. The law does not provide an assessee to get away with his black money on the ground of voluntary disclosure.

The Supreme Court dismissed the plea taken by a company, MAK Data P. Ltd. challenging penalty proceedings brought by the income tax department against the said company for hiding its income. The department started penal proceedings against the company for concealing its income and for furnishing incorrect particulars of its income.
Arguments on behalf of the company:

The company argued that it had “surrendered” an amount of Rs.40, 74,000/- after a notice was issued to it by the assessing officer for avoiding litigation. The company further argued that penalty proceedings are not maintainable due to the reason that the Assessing Officer did not record his satisfaction that there has been concealment of income or inaccurate particulars of income have been furnished by the assessee. It was also contended that the surrender of income was a conditional surrender before any investigation regarding the matter.

The bench of the Supreme Court was not satisfied and dismissed the plea taken by the company stating that voluntary disclosure of hidden income cannot be a ground to absolve penalty.

What is a “voluntary disclosure’?

When an assessee admits that he has made a false or misleading statement before the income tax department or tends to make a change that will increase his tax or will reduce  his credits, without any force or compulsion on the part of the department – it is referred to it as a ‘ voluntary disclosure’ by the assessee.

Consequences of a voluntary disclosure:

Voluntary disclosure is treated in the same way as a tax return or statement. It means that voluntary disclosures for income tax are considered as amendments.

A voluntary disclosure gives an assessee the opportunity to regularize his tax affairs. If an assessee has not disclosed income that he should have and has claimed deductions he was not entitled to, or has willfully made some statements in connection with his affairs that were false or misleading, he can make a voluntary disclosure to reveal his income. But that would definitely fetch penalties or any interest charges that is applicable to him.

When one makes a voluntary disclosure, it increases the tax he should have paid or lowers his credits. The department can reduce the amount of interest but it cannot release the person from paying the penalty, as held by the Apex Court in the recent decision.