COMMISSIONER OF INCOME TAX AP.HYD V. M/S JAYABHARATI CONSTRUCTIONS HYD

RC/64/1998

AI Insights

The case revolves around the penalties imposed under Section 271B of the Income Tax Act, 1961, for failure to comply with the audit requirements stipulated under Section 44AB. The assessee, a contractor of civil works, had their accounts audited before the due date but failed to attach the audit report with the income tax return filed for the assessment year 1989-90. The Assistant Commissioner levied a penalty, which was later cancelled by the CIT(A) and ITAT, finding substantial compliance with Section 44AB. The Revenue challenged this decision, leading to the reference of two questions to the High Court regarding the correctness of the ITAT's decision in law.

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 681478 (HC-HYDERABAD)
• Appeal Type: Others
• Pronouncement Date: 26-12-2011
• Assessment Year: misc
• Other Referred Cases: CIT v. Eli Lilly And Company (India) Private Limited
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Applicant
• Court: HIGH COURT
• Keywords: Audit report; Penalty; Reasonable cause; Substantial compliance
• Section: 44AB; 273B; 271B; 139(9); 256(1); 139(6A)

Judgement Text

"THE HON’BLE SRI JUSTICE V.V.S.RAO AND THE HON’BLE SRI JUSTICE B.N.RAO NALLA R.C.NO.64 OF 1998 ORDER: (Per the Hon’ble Sri Justice V.V.S.Rao) The two questions referred to the opinion of this Court by the Income Tax Appellate Tribunal, Hyderabad Bench ‘B’, Hyderabad, under Section 256 (1) of the Income Tax Act, 1961 (“the Act” for brevity) at the instance of the Revenue are the following. (1) Whether on the facts and in the circumstances of the case, the ITAT was correct in law in cancelling the penalty levied u/s.271B on the ground the assessee had substantially complied with the provisions of S.44AB? (2) Whether on the facts and in the circumstances of the case, the ITAT is correct in law in cancelling the penalty u/s.271B even though the assessee had committed the default attracting the provisions of S.271B of the Income Tax Act? The assessee is a contractor of civil works. For the assessment year 1989-90, the assessee firm filed return of income on 30.10.1989 admitting the income in excess of Rs.40,00,000/-. Under Section 44AB of the Act, they were required to get their accounts audited by an accountant as defined in the Explanation before the specified date i.e., 31st October of the assessment year. Allegedly, there was lapse on the part of the assessee. Taking cognizance of the same, the Assistant Commissioner, Hyderabad, initiated penalty proceedings under Section 271B of the Act. A show cause notice dated 08.02.1991 was issued proposing penalty. In reply thereto, the assessee submitted explanation on 16.02.1991 stating that the accounts of the firm were audited prior to filing of the return and the audit report was filed on 29.01.1991 during the course of the assessment proceedings. They stated that by oversight, it was not enclosed to the return of the income. Not impressed, the Assistant Commissioner, by order dated 23.08.1991, levied penalty of Rs.42,478/- under Section 271B of the Act. The assessee appealed to the CIT(A), Hyderabad. They contended that for the assessment year 1989-90, accounts were closed on 31.03.1989; the due date for filing return was 31.10.1989; and that though the accounts were audited by Ravi Shankar & Co., Chartered Accountants on 28.10.1989, report could not be filed along with the return of income on 30.10.1989. Further, they contended that, if the return of income was found to be defective, the assessing officer ought to have given opportunity under Section 139 (9) of the Act to rectify the defects. The contention found favour with the appellate authority, who deleted the penalty, and was confirmed by the appellate Tribunal, who found substantial compliance with Section 44AB. Being aggrieved, the Revenue sought reference to this Court. The Junior Standing Counsel for the Income Tax relies on Section 139(6A) of the Act and submits that filing of the audit report along with the return of income is mandatory; admittedly, the assessee failed to comply with the requirement and therefore, the penalty under Section 271 B was justified. The appellate Tribunal recorded finding of fact that the audit was completed and audit report dated 28.10.1989 was obtained within the specified date and that non-filing of the audit report along with return of income is oversight. This being a finding of fact, deviation therefrom is not permissible. Section 271B enables the assessing officer to penalise @ 0.5% of the total sales turnover or gross receipts as the case may be, if the assessee fails to get his accounts audited in respect of any previous year or furnish the report to such audit as required under Section 44AB within the specified date. The penalty provision is subject to the exception as stipulated under Section 273B of the Act, which is to the effect that if the assessee proves that there was a reasonable cause for failure to get the accounts audited before the specified date, the penalty cannot be levied In CIT v. Eli Lilly And Company (India) Private Limited [1], the Supreme Court considered the scope of Section 271C of the Act (penalty for failure to deduct tax at source) read with Section 273B of the Act held that “Section 271C(1)(a) is not mandatory or compensatory or automatic because under Section 273B, Parliament has enacted that penalty shall not be imposed in cases falling under Section 271C falls in the category of such cases and that..….no penalty shall be imposed on the person or assessee for failure to deduct tax at source if such person or the assessee proves that there was a reasonable cause for the said failure” and…. “the liability to levy a penalty can be fastened only on the person who does not have good and sufficient reason for not deducting tax at source and that only those persons are liable for penalty, who do not have good and sufficient reason for not deducting tax at source”. These principles are also applicable when we consider Section 271B read with Section 273B of the Act. As mentioned by us supra, the appellate Tribunal has recorded a finding of fact that the assessee had a reasonable cause for failure to furnish the audit report along with return of income. That being so, the levy of penalty is not justified. In the result, for the above reasons, both the questions are to be answered in affirmative in favour of the assessee and against the Revenue. Reference case shall stand disposed of accordingly without any order as to costs. _______________ (V.V.S.RAO, J) ____________________ (B.N.RAO NALLA, J) 26th December 2011 RRB [1] (2009) 312 ITR 225 : (2009) 15 SCC 1 "