2009 (3) TMI 186 - HC - Income Tax

Court clarifies gross receipts for audit under Income Tax Act; penalty canceled for reasonable cause. Assessee prevails.

THE INCOME TAX OFFICER Versus SACHINAM TRUST

The Court clarified that gross receipts should be considered for determining audit requirements under Section 44AB of the Income Tax Act, 1961. The ... Tax Audit - Penalty u/s 271B - Audit u/s 44AB - inclusion of deemed turnover for the purpose of calculation of monetary limit of Tax Audit - The Assessing Officer was of the view that in terms of provisions of Section 44AB of the Income Tax Act, 1961 (the Act), the Assessee was under an obligation to get its accounts audited because the total amount of advances during the year under consideration constitute the turnover of the assessee which exceeded the stipulated limit of Rs.40 lacs. As the audit report had not been filed by the assessee, a show cause notice was issued on 05.11.1992. The assessee filed reply on 12.11.1992 contending that provisions of Section 44AB of the Act are not applicable in its case because the Gross Receipts did not exceed the sum of Rs.40 lacs. The said contention was not accepted by the Assessing Officer and penalty of Rs.72,451/- was levied under the provisions of Section 271B of the Act. - held that - In fact, on a reading of provisions of Section 44AB of the Act, it is a moot question as to which of the three phrases can be said to be applicable in a given case, and the same would depend on facts of each case and no straight jacket formula can be evolved in this context. Accordingly, the assessee was entitled to contend that when the terms Turnover and Gross Receipts are separated by the use of word or, the assessee would be entitled to bonafidely believe that Gross Receipts would constitute the basis for ascertaining the limit of Rs.40 lacs so as to attract Section 44AB of the Act. Issues:1. Interpretation of provisions of Section 44AB of the Income Tax Act, 1961 regarding the applicability of turnover or gross receipts for determining audit requirements.2. Imposition of penalty under Section 271B for failure to file audit report.3. Consideration of reasonable cause for failure under Section 273B of the Act.Analysis:1. The primary issue in this case revolved around the interpretation of Section 44AB of the Income Tax Act, 1961, specifically whether turnover or gross receipts should be considered for determining the applicability of audit requirements. The Assessee, a financing entity, argued that gross receipts should be the basis for determining the turnover limit of Rs.40 lakhs. The Commissioner (Appeals) and Tribunal supported this interpretation, citing precedents and legal opinions. The Tribunal upheld the cancellation of penalty under Section 271B based on this interpretation, which was challenged in the present appeal.2. The second issue pertained to the imposition of a penalty of Rs.72,451 under Section 271B for the Assessee's failure to file an audit report as required by Section 44AB. The Assessee contended that they had a reasonable cause for not filing the report, based on a legal opinion and the interpretation of relevant provisions. The Court considered whether the Assessee had a bonafide belief that constituted reasonable cause for the failure, as provided under Section 273B of the Act. The Court emphasized that the Assessee's belief was based on a legal opinion and the ambiguity in interpreting the terms 'turnover' and 'gross receipts' under Section 44AB.3. The final issue addressed the consideration of reasonable cause under Section 273B to determine if the penalty under Section 271B should be imposed. The Court concluded that the Assessee had a reasonable cause for not filing the audit report, as they relied on a legal opinion and a plausible interpretation of the relevant provisions. The Court upheld the decisions of the Commissioner (Appeals) and Tribunal, confirming that the Assessee's belief constituted a reasonable cause for the failure. Consequently, the appeal was dismissed in favor of the Assessee, with no order as to costs.In conclusion, the judgment clarified the interpretation of Section 44AB regarding the basis for determining audit requirements, considered the reasonable cause for the Assessee's failure to file the audit report, and upheld the cancellation of the penalty under Section 271B based on the Assessee's bonafide belief and reliance on legal opinions.