Project completion method and bona fide belief saved the assessee from penalty for failure to obtain tax audit

Penalty under section 271B was held not sustainable where the assessee followed the project completion method and treated customer receipts as advances, not turnover, for section 44AB purposes. The tribunal accepted that such receipts were not recognised as sales until the project was completed, and that the assessee had a bona fide belief that tax audit was not required on that basis. As the default was not shown to be deliberate or contumacious, reasonable cause under section 273B was established and the penalty was deleted.

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Issues: Whether penalty under section 271B of the Income-tax Act, 1961 was leviable for failure to get accounts audited under section 44AB where the assessee, following the project completion method, treated amounts received from customers as advances and not as turnover.

Analysis: The receipts during the year were in the nature of trade advances and, on the project completion method, were not recognised as turnover until the project was completed and the advances crystallised into sales. The assessee entertained a bona fide belief that audit under section 44AB was not required on the basis of such receipts. In these circumstances, the default was not shown to be deliberate or contumacious, and the case fell within the principle that penalty is not to be imposed where reasonable cause exists under section 273B. The reasoning adopted in the cited tribunal decisions supported the view that advances of this nature do not automatically constitute turnover for the purpose of penalty.

Conclusion: Penalty under section 271B was not sustainable and was directed to be deleted.

Final Conclusion: The assessee succeeded in challenging the penalty, and the impugned penalty order did not survive.

Ratio Decidendi: Where receipts are accounted for as advances under the project completion method and there is reasonable cause and bona fide belief that such receipts are not turnover, penalty for failure to get accounts audited under section 44AB is not leviable under section 271B.

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