2024 (12) TMI 198 - AT - Income Tax

Penalty under Section 271B waived due to reasonable cause when accountant resigned abruptly leaving audit incomplete

The ITAT Bangalore allowed the assessee's appeal against penalty under Section 271B for non-furnishing of audit report under Section 44AB. The tribunal ... Audit requirement under section 44AB - Penalty under section 271B - Reasonable cause under section 273B - Discretionary nature of penalty - Admission of additional evidence in appellate proceedings - Principles of natural justiceAdmission of additional evidence in appellate proceedings - Principles of natural justice - Admissibility of affidavits filed before the Tribunal which were not placed before the lower authorities - HELD THAT: - The Tribunal found that the affidavits filed by the partner and the accountant did not constitute new facts but were evidentiary support of submissions already made before the lower authorities regarding reasons for delay. The first appellate authority had dismissed the appeal solely on the ground of non-submission of evidence without specifically calling for or considering such evidence. In the interest of justice the Tribunal admitted the additional affidavits for adjudication, noting they were not available earlier and that the assessee had articulated the same factual contentions before the authorities below. [Paras 4]Additional evidences (affidavits) admitted for adjudication.Penalty under section 271B - Reasonable cause under section 273B - Audit requirement under section 44AB - Discretionary nature of penalty - Whether penalty under section 271B should be sustained despite the assessee's explanation of delay in filing audit report - HELD THAT: - The Tribunal analysed Sections 44AB, 271B and the overriding non obstante provision in section 273B. It emphasised that levy of penalty under section 271B is not automatic and that the initial burden lies on the assessee to prove reasonable cause. Having examined the admitted affidavits and conduct of the assessee, the Tribunal held that the sudden resignation of the accountant and illness of the managing partner constituted a reasonable cause within the meaning of section 273B. The Tribunal noted that once the accountant rejoined, the accounts were finalised and the audit report and return were filed, there was no addition in assessment and no loss to the revenue. The CIT(A)'s failure to consider the plea of reasonable cause therefore vitiated the order below. [Paras 9, 10]Penalty levied under section 271B cancelled.Final Conclusion: The Tribunal admitted the additional affidavits and, on merits, held that the assessee established reasonable cause under section 273B for delay in filing the audit report required by section 44AB; consequently the penalty under section 271B was annulled and the appeal allowed for AY 2017-18. Issues Involved:1. Whether the order passed by the CIT(A) was illegal due to lack of proper hearing.2. Legitimacy of the penalty levied under Section 271B of the Income Tax Act, 1961.3. Consideration of reasonable cause for delay in filing the audit report.4. Compliance with Section 44AB by filing hard copies of returns and audited financial statements.5. Applicability of judicial pronouncements regarding discretionary nature of penalty under Section 271B.6. Regular compliance in subsequent years and genuine circumstances causing delay in the assessment year 2017-18.7. Adequacy of justification and reasoning provided by CIT(A) for upholding the penalty.Issue-wise Detailed Analysis:1. Legality of CIT(A)'s Order:The assessee contended that the order passed by the CIT(A) was illegal and opposed to the facts due to the lack of a personal hearing, despite a specific request for a virtual hearing. The Tribunal noted that the CIT(A) dismissed the appeal without calling for evidence to support the grounds of appeal, which contributed to the perception of an unfair hearing process.2. Penalty Under Section 271B:The CIT(A) confirmed a penalty of Rs. 1,50,000 levied under Section 271B for failure to audit accounts as required by Section 44AB. The Tribunal examined whether the penalty was justified, considering the circumstances leading to the delay in filing the audit report.3. Reasonable Cause for Delay:The assessee claimed a reasonable cause for the delay due to the illness of a partner and the departure of an accountant. The Tribunal acknowledged the affidavits submitted as additional evidence, which were not available during earlier proceedings, and found that these affidavits substantiated the reasonable cause for the delay.4. Compliance with Section 44AB:The assessee argued that filing hard copies of the return and audited financial statements should be considered compliance with Section 44AB. The Tribunal recognized that the audit report and return of income were filed manually once the accountant rejoined, indicating an attempt to comply despite earlier delays.5. Judicial Pronouncements:The assessee cited judicial pronouncements suggesting that the levy of penalty under Section 271B is discretionary. The Tribunal considered these pronouncements and emphasized that penalty should not be imposed if there is a reasonable cause for the failure.6. Subsequent Compliance and Genuine Circumstances:The assessee highlighted regular compliance in subsequent years and genuine, unavoidable circumstances causing the delay in the assessment year 2017-18. The Tribunal found these factors relevant and indicative of the assessee's intent to comply with statutory obligations.7. Justification and Reasoning by CIT(A):The Tribunal found that the CIT(A) did not adequately justify the penalty, violating principles of natural justice. The Tribunal concluded that the CIT(A) failed to consider the reasonable cause presented by the assessee, which vitiated the order.Conclusion:The Tribunal concluded that the assessee demonstrated a reasonable cause for the delay in filing the audit report as per Section 273B. The affidavits and additional evidence supported the claim of reasonable cause, and the Tribunal found that the CIT(A) did not properly consider these factors. Consequently, the Tribunal annulled the order of the CIT(A) and canceled the penalty levied under Section 271B, allowing the appeal filed by the assessee.