2023 (5) TMI 1215 - AT - Income Tax

Appeal upheld for university's tax exemption; penalty order quashed for non-profit status.

The Tribunal allowed the appeal filed by the Assessee university regarding exemption under Section 10(23C)(iiiab) of the Income Tax Act. The penalty ... Penalty u/s 271B - AO was not satisfied with the claim of exemption for the purpose of Section 10(23C)(iiiab) r.w.r. 2BBB - AO observed that the assessee university has not audited its account as per Clause (b) of sub-section (1) of section 12A despite the fact that its total income as computed under the Act without giving effect to the provisions of Section 12 exceeds the maximum amount which is not chargeable to Income Tax in F.Y. 2017-18 - whether violation of main part of the Section 44AB confirmed? HELD THAT:- Proviso of Section 44AB is not a default or charging provision rather is a beneficial provision for the any assessee whose accounts are audited under any other law other than the Act and such audited accounts if furnished with return will be considered as compliance of Section 44AB - AO has considered it to be a default Clause and erroneously introduced the default of audit u/s 12A(1)(b) to fall in the Proviso to Section 44AB. While in case there is a failure of audit for the purpose of Section 12A(1)(b) of the Act, then there is no penalty provision except that the Act provides that the concerned assessee shall not be entitled to the benefit of exempt income u/s 11 or 12. If the impugned order of CIT(A) is considered it appears that he introduced his own case as the Ld. AO had not found violation of main part of the Section 44AB for the reasons that the assessee university had gross receipts for the year under consideration above the prescribed limit of Rs. 60,00,000/- for mandatorily getting books of accounts audited as per provisions of Section 44AB of the Act but Ld. AO had taken shelter of Proviso to section 44AB and assumed as assessee University has not got the accounts audited for the purpose of Section 12A(1)(b) of the Act, this is a violation of Section 44AB of the Act. Tax Authorities below have fallen in grave error on facts and law while invoking the penalty provisions. Decided in favour of assessee. ISSUES PRESENTED AND CONSIDERED 1. Whether penalty under section 271B for failure to get accounts audited is sustainable where the assessee is a university established by statute and accepted by Revenue as a local authority, not carrying on 'business' as defined in section 2(13). 2. Whether the proviso to section 44AB (treating audit under another law as compliance with section 44AB) can be invoked as a basis for imposing penalty under section 271B by treating non-compliance with section 12A(1)(b) as equivalent to non-compliance with section 44AB. 3. Whether failure to obtain audit under section 12A(1)(b) (applicable to certain charitable/institutional entities) attracts penal consequences under section 271B or only results in denial of exemption under sections 11/12. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Applicability of section 44AB / section 271B to a statutorily established university / local authority Legal framework: Section 44AB mandates tax audit for persons carrying on business or profession when gross receipts/turnover exceed a specified threshold. Section 271B prescribes penalty for failure to get accounts audited as required under section 44AB. Section 2(13) defines 'business' to include trade, commerce, manufacture or any adventure or concern in the nature thereof. Statutory universities/local authorities created by legislative enactment operate for educational and research purposes. Precedent Treatment: No appellate precedents were relied upon in the impugned orders nor in the judgment under review; the Tribunal examined statutory definitions and institutional character. Interpretation and reasoning: The Tribunal examined the statute establishing the university, its objects, powers and mode of functioning and concluded the institution exists solely for educational purposes and is not established for profit. Revenue itself characterised the assessee as a local authority in assessment/penalty orders. Given that concession, the authorities failed to examine whether the university carried on 'business' within the meaning of section 2(13). The Tribunal held that, in absence of a finding that the university engaged in trade/commerce or an adventure in the nature of business, invoking section 44AB and hence section 271B was unsustainable. Ratio vs. Obiter: Ratio - where an entity is a statutory university/local authority not engaged in business as defined by section 2(13), section 44AB (and by extension penalty under section 271B) cannot be invoked without a specific finding that it carried on business. Conclusions: Penalty under section 271B cannot be sustained solely on threshold gross receipts where the entity is a statutory university/local authority unless the authority first establishes that the entity is carrying on business as defined in section 2(13). Issue 2 - Proper construction and application of the proviso to section 44AB vis-à-vis section 12A(1)(b) Legal framework: The proviso to section 44AB provides that where accounts required to be audited under any other law have been audited and the audit report furnished with the return, such audit shall be treated as compliance with section 44AB. Section 12A(1)(b) requires certain entities to get accounts audited where income (computed without regard to section 12) exceeds the maximum non-taxable amount and prescribes consequences relating to exemption under sections 11/12. Precedent Treatment: No precedents distinguishing or reconciling the proviso to section 44AB with section 12A(1)(b) were invoked in the orders under appeal; the Tribunal undertook textual and purposive analysis. Interpretation and reasoning: The Tribunal emphasised that the proviso to section 44AB is a beneficial, non-charging, deeming provision which treats an audit under another law as satisfying section 44AB; it is not a penal or default clause. The Assessing Officer misapplied the proviso by treating non-compliance with section 12A(1)(b) as falling within the proviso and then characterising that as a breach of section 44AB. The Tribunal held that the proviso cannot be used as a sword to create an independent ground of penalty where the statutory requirements of section 44AB itself (i.e., applicability to persons carrying on business or profession and crossing the threshold) are not shown to be triggered. Ratio vs. Obiter: Ratio - the proviso to section 44AB is beneficial and cannot be treated as a default provision to import non-compliance under section 12A(1)(b) into section 44AB for levying penalty under section 271B. Obiter - remarks on the character of the proviso as beneficial and non-penal are explanatory but support the ratio. Conclusions: The proviso to section 44AB cannot be the basis for imposing penalty under section 271B by merely demonstrating failure under section 12A(1)(b); proper statutory requisites of section 44AB must be established first. Issue 3 - Consequence of non-compliance with section 12A(1)(b): penalty under section 271B or denial of exemption Legal framework: Section 12A(1)(b) prescribes audit requirements for entities seeking exemption under sections 11/12 where income (without regard to section 12) exceeds the non-taxable maximum. Tax law differentiates between procedural/penal provisions and provisions affecting entitlement to exemption. Precedent Treatment: No judicial authority was cited; Tribunal analysed statutory text and scheme. Interpretation and reasoning: The Tribunal noted that in the event of failure to comply with section 12A(1)(b), the statutory consequence is denial of exemption under sections 11/12 rather than automatic penal exposure under section 271B. The Assessing Officer erred in treating failure under section 12A(1)(b) as constituting default under section 44AB and hence attracting penalty. There is no provision in the Act making failure to comply with section 12A(1)(b) punishable by penalty under section 271B; the remedy in law is loss of exemption entitlement. Ratio vs. Obiter: Ratio - non-compliance with section 12A(1)(b) does not, by itself, attract penalty under section 271B; the statutory consequence is denial of exemption under sections 11/12 unless section 44AB independently applies. Conclusions: The penalty was unsustainable insofar as it was predicated on alleged failure under section 12A(1)(b); appropriate consequence for such failure is denial of exemption, not section 271B penalty absent a separate and clear breach of section 44AB. Cross-reference and synthesis These issues are interlinked: the Tribunal's conclusions turn on (a) characterisation of the entity as a statutory university/local authority (which negates the presumption of carrying on business), and (b) correct statutory interpretation that the proviso to section 44AB is a beneficial deeming provision and not a gateway to penal consequences for non-compliance under section 12A(1)(b). Because the Assessing Officer did not establish that the university carried on business and misapplied the proviso to section 44AB to import a failure under section 12A(1)(b) into the ambit of section 44AB, the invocation of section 271B was flawed. Final disposition (ratio of decision) The penalty under section 271B was quashed: the authorities below committed legal and factual errors by failing to determine applicability of section 44AB (business nexus), misreading the proviso to section 44AB as a default provision, and treating non-compliance with section 12A(1)(b) as attracting section 271B penalty instead of resulting only in denial of exemption under sections 11/12. The appeal was allowed and the penalty orders were set aside.