Penalty not leviable if there is reasonable cause for failure to get accounts audited

The Income Tax Appellate Tribunal (ITAT) in Chennai has ruled that a penalty for failing to get accounts audited on time, as required by Section 271B of the Income Tax Act, can be waived if there's a reasonable cause. In this case, the assessee's business faced severe financial difficulties and losses, which prevented them from completing the audit by the due date. Despite the delay, the penalty was deleted because the assessee had a valid reason for non-compliance.

The ITAT, Chennai in the Assistant Commissioner of Income Tax, v. Haneefa Sahib Shajahan,[I.T.A. No.931/Chny/2022 dated January 24, 2023] has upheld the decision of the Appellate Authority, deleting the penalty levied for failure to get accounts audited as per Section 271B of the Income Tax Act, 1961 ("the IT Act") and for filing tax audit report belatedly, on the grounds that the assessee was prevented by reasonable cause due to its pathetic condition and heavy losses incurred in its business.

Facts

Haneefa Sahib Shajahan ("the Respondent") had filed its Income Tax Returns on March 24, 2018 for the Assessment Year ("A.Y.") 2017-18 claiming the loss of INR 51,19,878/-. The case was selected for scrutiny and the assessment was completed under Section 143(3) of the IT Act.

However, as the audit report was filed beyond the due date, penalty proceedings were initiated by the Revenue Department ("the Appellant") under Section 271B of the of the IT Act. In the penalty proceedings, the Appellant noted that the Respondent’s gross receipts in the A.Y. 2017-18 were to the tune of INR 27,17,11,367/- which was above the threshold of INR 1 crore, hence, the Respondent was required to get its accounts audited under Section 44AB of the IT Act before the due date. However, the Respondent had not filed the tax audit report under Section 44AB of the IT Act before the due date, and thus, the Appellant levied penalty of INR 1,50,000/- under Section 271B of the IT Act. 

The Respondent preferred an appeal, and contended that, its business had come to a total standstill to the level that its properties were put to auction by the bank, by filing detailed year-wise sales turnover of its jewellery business and heavy loss incurred in its fish net business. Consequently, the Appellate Authority deleted the penalty levied under Section 271B of the IT Act by vide order dated September 16, 2022 ("the Impugned Order").

Being aggrieved, this appeal has been filed.

Issue

Whether the penalty levied under Section 271B of the IT Act is sustainable?

Held

The ITAT, Chennai in I.T.A. No.931/Chny/2022 held as under:

• Noted that, the Appellant had not complied with the defect notice issued for filing of grounds of appeal.
• Further noted that, the Respondent did not appear for the hearing.
• Stated that, the Respondent was prevented by reasonable cause for not getting its books of accounts audited in time as required under the provisions of Section 44AB of the IT Act, but filed the tax audit report before completion of the assessment, therefore, it was not fit for the levy of penalty. 
• Upheld the decision by the Appellant Authority deleting the penalty for failure to get accounts audited as per Section 271B of the IT Act.

Relevant Provisions

Section 271B of the IT Act

"Failure to get accounts audited.

If any person fails to get his accounts audited in respect of any previous year or years   relevant to an assessment year or furnish a report of such audit as required under section 44AB, the Assessing Officer may direct that such person shall pay, by way of penalty, a sum equal to one-half per cent of the total sales, turnover or gross receipts, as the case may be, in business, or of the gross receipts in profession, in such previous year or years or a sum of one hundred fifty thousand rupees, whichever is less."