No Penalty Can Be Imposed U/S.271B of Income Tax Act If 'Reasonable Cause' Exists for Failure: Kerala HC Sets Aside Penalty Imposed Upon Co-Op Societies For Delay In Submitting Audit Reports
The Kerala High Court set aside the direction of imposing a penalty on the assessees- Co-operative Societies after noting that there was a reasonable cause for the delay in submitting audit reports as mandated under Section 44AB of the Income Tax Act.
The High Court further clarified that the phraseology used in Section 273B of the I.T. Act is such that no penalty can be imposed on an assessee under Section 271B for breach of the provisions if he proves that there was “reasonable cause” for the said failure.
The Division Bench comprising Justice A.K.Jayasankaran Nambiar and Justice K.V. Jayakumar asserted, “We also find that, at any rate, the audit reports were made available before the Assessing Authority at the time of completion of the assessment, and hence, there was really no prejudice caused to the Department in the matter of finalisation of assessment.”
Advocate P.C. Sasidharan represented the appellant-assessee while Standing Counsel P.G. Jayashankar represented the Respondent.
The Court was considering a batch of Income Tax Appeals preferred by the Co-operative Societies.
The appellants-assessees are Co-operative Societies that had filed returns of income for assessment under the Income Tax Act [I.T. Act]. In breach of the provisions of Section 44AB, however, they did not file the audit report as mandated under the said provision within the time limit specified therein. However, the audit reports were made available before the Assessing Authority at the time of finalisation of the assessments. The Assessing Authority completed the assessments by relying on the said audit reports. However, while passing the assessment orders, the Authority initiated penalty proposals under Section 271B of the I.T. Act for alleged breach of the procedure contemplated under Section 44AB of the Act.
The appellants/assessees were also imposed with penalties of Rs.1.5 lakhs, which was the lesser of the two amounts mentioned in Section 271B of the I.T. Act. The orders of the Assessing Authority imposing penalty were upheld by the First Appellate Authority and thereafter by the Appellate Tribunal in appeals preferred by the assessee. Aggriever thereby, they approached the High Court.
The sole issue that arose for consideration was the legality of the penalty imposed on the assessees Societies under Section 271B of the I.T. Act for the alleged breach of the procedural provisions under Section 44AB.
Section 44AB prescribes a procedure of audit of accounts by certain categories of assessees and deals with how reports of such audit have to be submitted before the Assessing Authority under the I.T. Act. Referring to section 271B, the Bench explained that while the Assessing Authority has a discretion in the matter of whether or not a penalty is to be imposed, there is no such discretion available to the Assessing Authority in deciding the quantum of penalty once he/she finds that penalty has to be imposed.
The quantum of penalty that has to be imposed is specified as being the lower among the two figures of (a) a sum equal to one-half percent of the total sales, turnover or gross receipts in business or of the gross receipts in the profession in such previous years or years and (b) 150 thousand rupees. “It merits notice that the phraseology used in Section 273B of the I.T. Act is such that no penalty can be imposed on an assessee under Section 271B for breach of the provisions, if he proves that there was “reasonable cause” for the said failure”, the Bench further added.
One of the issues in this case was whether the assessee Societies had demonstrated a reasonable cause for the delay in submitting audit reports as mandated under Section 44AB of the I.T. Act before the Assessing Authority. “If the assessees could demonstrate that there were valid reasons for the delay occasioned in submitting the audit reports before the Assessing Authority, and that they were on account of reasons beyond the control of the assessees, then the threshold of reasonable cause would be crossed by the assessees”, it said.
The reason cited by the Assessing Authority was that being Co-operative Societies regulated by the provisions of the Kerala Co-operative Societies Act and Rules, their accounts had to be mandatorily audited in terms of the said statutory provisions and the delay in submitting the audit reports before the Income Tax Authorities was occasioned because there had been a corresponding delay in receiving the audit reports from the statutory auditors appointed under the Kerala Co-operative Societies Act and Rules. The views of the First Appellate Authority were accepted by the Appellate Tribunal which took the view that the assessees had not demonstrated reasonable cause for the delay occasioned, and hence, the penalty imposed on the appellants/assessees did not require any interference.
Considering the statutory framework provided under the Kerala Co-operative Societies Act, the Bench observed that the assessee Co-operative Societies had virtually no control over the completion of the audit by the statutory auditors. There was nothing on record that would suggest that the delay occasioned by the statutory auditors in finalising the audit reports was in any way attributable to the conduct of the assessees in these appeals.
As per the High Court, notwithstanding the peremptory phraseology used in Section 44AB of the I.T. Act with regard to the furnishing of audit reports within the prescribed time limit, the assessees in these appeals had furnished the audit reports before the completion of assessment and the assessment was completed by the Assessing Authority by placing reliance on the said audit reports. There was therefore no prejudice caused to the Department while completing the assessment against the appellants/assessees. Secondly, there was no material on record to suggest that it was on account of any fault with the assessees Societies that a delay was occasioned in the preparation of the final audit report. Thirdly, there is no material on record that would suggest that any of the assessee Societies had been subjected to penal proceedings.
Reliance was also placed upon a CBDT Circular No.3/2009 dated May 21, 2009 which suggests that a penalty need not be imposed on assessees if no prejudice is caused to the Department on account of any belated furnishing of an audit report.
“The peremptory phraseology used in Section 273B of the I.T. Act therefore mandated that no penalty under Section 271B be imposed on them”, the Bench held.
Thus, allowing the appeals, the Bench set aside the impugned orders of the Appellate Tribunal to the extent it confirmed the penalty under Section 271B of the I.T. Act on the appellants/assessees.
Cause Title: The Chavakkad Service Co-operative Bank v. The Income Tax Officer (Case No: I.T.A.NO.9 OF 2023)
Appearance:
Appellant: Advocates P.C.Sasidharan, Arjun Raghavan
Respondent: Advocate P.G.Jayashankar, Standing Counsel Keerthivas Giri
