2019 (6) TMI 1095 - AT - Income Tax

Appeal allowed, penalty canceled under Income Tax Act; reasonable cause for non-compliance recognized.

The Tribunal allowed the appeal, canceling the penalty under Section 271B of the Income Tax Act. The assessee's belief that the receipt was an advance and ... Penalty under section 271B for failure to get accounts audited - Reasonable cause defence to penalty - Classification of receipts as business income or capital gains - Section 44AB audit applicabilityPenalty under section 271B for failure to get accounts audited - Reasonable cause defence to penalty - Classification of receipts as business income or capital gains - Section 44AB audit applicability - Whether penalty under section 271B is sustainable where the assessee, in relation to a single receipt treated by the AO as business income, bona fide believed the receipt was not taxable in the year or was taxable only as capital gains and therefore did not get accounts audited. - HELD THAT: - The Tribunal found that the receipt in question arose from a single transaction described as advance/consideration under tripartite agreements and that there were no other business transactions, no series of dealings, and no expenditure claimed which would indicate carrying on of business. The AO had not produced material to show the assessee conducted a trading business in the relevant year. The assessee, a mechanical engineer, filed a return declaring nil income and furnished a detailed note explaining his bona fide view that the receipt was not taxable in the year or, if taxable, would be long term capital gains. The Tribunal accepted that this genuine belief amounted to a reasonable cause for not getting the accounts audited under the audit threshold regime. Applying these facts to the statutory scheme, the Tribunal held that the circumstances justified relief from penalty under section 271B and that the penalty levied by the AO (and confirmed by the CIT(A)) was unsustainable. [Paras 7]Penalty under section 271B cancelled as the assessee had reasonable cause for not getting accounts audited; appeal allowed.Final Conclusion: The Tribunal set aside the CIT(A)'s confirmation of the penalty and cancelled the penalty imposed under section 271B for A.Y. 2008-09, holding that the assessee's bona fide belief that the receipt was not taxable in the year (or was capital gains) constituted reasonable cause for not obtaining an audit. Issues Involved:1. Levy of penalty under Section 271B of the Income Tax Act, 1961.2. Classification of income as business income versus capital gains.3. Requirement for audit under Section 44AB of the Income Tax Act, 1961.4. Reasonable cause for non-compliance with audit requirements.Issue-wise Detailed Analysis:1. Levy of Penalty under Section 271B of the Income Tax Act, 1961:The primary issue in this case was the levy of penalty under Section 271B for the assessee's failure to get accounts audited as required under Section 44AB of the Income Tax Act, 1961. The assessee filed a return declaring Nil income, but the Assessing Officer (AO) completed the assessment with a total income of Rs. 3,40,22,207/- under the head 'business income'. Consequently, the AO initiated penalty proceedings under Section 271B and levied a penalty of Rs. 1,00,000/- for non-maintenance of books of accounts and failure to get the accounts audited.2. Classification of Income as Business Income versus Capital Gains:The assessee contended that the income derived from the sale of disputed property should be classified as long-term capital gains. The assessee argued that the rights transferred did not have any cost of acquisition and referenced several judicial precedents to support the claim that the transaction did not constitute taxable capital gains. However, the AO assessed the receipt of Rs. 3,40,00,000/- as business income, stating that the transaction was in the nature of trade. This classification was upheld by the Tribunal, which confirmed that the activity was an adventure in the nature of trade.3. Requirement for Audit under Section 44AB of the Income Tax Act, 1961:Since the AO treated the receipt as business income and the gross receipts exceeded the specified limit of Rs. 40,00,000/-, the AO held that the assessee was required to get the accounts audited under Section 44AB. The failure to comply with this requirement led to the initiation of penalty proceedings under Section 271B.4. Reasonable Cause for Non-compliance with Audit Requirements:The assessee argued that the receipt of Rs. 3.4 Crores was an advance and was offered for capital gains, hence there was reasonable cause for not getting the accounts audited. The assessee believed that the amount was not taxable in the year of receipt as the transaction was not finalized and should be taxed as long-term capital gains when completed. The Tribunal found that the assessee's belief was a reasonable cause for non-compliance with the audit requirement. The Tribunal noted that the transaction was a single instance and the assessee, a mechanical engineer, was not engaged in any business activities. Therefore, the Tribunal held that the penalty under Section 271B was unsustainable and set aside the order of the Commissioner of Income Tax (Appeals), canceling the penalty levied by the AO.Conclusion:The Tribunal allowed the appeal of the assessee, concluding that there was a reasonable cause for not getting the accounts audited, and thus, the penalty levied under Section 271B was canceled. The order was pronounced in the open court on 21st June 2019.