Reasonable cause defeats penalty for audit default where statutory cooperative audit and court restraint made compliance impracticable.

Penalty under section 271B for non-compliance with section 44AB was held unwarranted where a cooperative bank's accounts had been audited under the U.P. Cooperative Societies Act by an appointed statutory auditor, and a binding High Court direction barred audit through private chartered accountants. The failure to secure the audit in the manner contemplated by the Income-tax Act was treated as supported by reasonable cause, bringing the case within section 273B and requiring fair, discretionary exercise of penalty powers. On those facts, the matter was decided against the Revenue and in favour of the assessee.

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Issues: Whether penalty under section 271B for failure to comply with section 44AB was exigible when the assessee cooperative society was subject to statutory audit under the U.P. Cooperative Societies Act and was also bound by a High Court order restraining audit through private chartered accountants.

Analysis: The assessee was a cooperative bank whose accounts were audited by the authority appointed under section 64 of the U.P. Cooperative Societies Act, 1963. That auditor was not a chartered accountant within the meaning of section 288 of the Income-tax Act, 1961. However, the case was further governed by a binding High Court direction that no cooperative society in the State of Uttar Pradesh should get its accounts audited through private chartered accountants. In these circumstances, the failure to obtain audit in the manner contemplated by section 44AB was not treated as a case calling for penalty, particularly because section 273B leaves room for non-imposition of penalty where reasonable cause is shown and the authority must exercise discretion fairly and reasonably.

Conclusion: Penalty under section 271B was not warranted on the facts, and the questions of law were answered against the Revenue and in favour of the assessee.

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