2025 (6) TMI 900 - AT - Income Tax

Taxpayer Wins Challenge Against Penalty Under Section 271B Due to Procedural Flaws and Time Limitation in Audit Report Filing Dispute

Guru Nanak Agencies Versus The Income Tax Officer, Ward-1 (2) (1), Kanpur

In this tax case, the Tribunal examined the validity of a penalty under section 271B of the Income Tax Act for non-filing of an audit report. The Tribunal ... Levy of penalty u/s 271B - delay in filling penalty notice - non-filing of the audit report u/s 44AB - HELD THAT:- It is noted by the Assessing Officer that the first notice was issued on 21.12.2019 and penalty order was passed on 09.06.2021. Penalty should have been levied by on 31.03.2020 or 30.06.2020. Section 275 of the Act prescribed bar on account of limitation for imposing penaltyThe impugned order suffers from delay and deserves to be quashed. Revenue has also not rebutted the fact that the notice does not disclose any specific charge. Moreover, it is noted that the AO has made minor addition on ad hoc basis only. No defects in accounts have been pointed out. Therefore, considering the fact that the impugned order does not disclose specific charge of default and barred by time. The impugned penalty cannot be sustained. We hereby direct the AO to delete the penalty - Decided in favour of assessee. The core legal issues considered in this appeal pertain to the validity and legality of the penalty imposed under section 271B of the Income Tax Act, 1961, for non-filing of the audit report under section 44AB. Specifically, the Tribunal examined:Whether the penalty under section 271B was rightly levied by the Assessing Officer and upheld by the Commissioner of Income Tax (Appeals)/National Faceless Appeal Centre (NFAC).Whether there was any default on the part of the assessee as contemplated under section 271B to justify the penalty.Whether the assessee was prevented by sufficient and reasonable cause, relying on tax advisors and auditors in bonafide belief, thus exempting it from penalty under section 273B.Whether the penalty order suffers from procedural infirmities, including absence of specific charge in the penalty notice and limitation under section 275 of the Act.Issue-wise Detailed Analysis:1. Validity of Penalty under Section 271B for Non-filing of Audit ReportLegal Framework and Precedents: Section 271B imposes penalty for failure to furnish an audit report as required under section 44AB. The penalty is leviable if the assessee fails to comply with the statutory requirement of audit report submission within prescribed timelines. Section 273B provides exemption from penalty if the assessee proves that the failure was due to sufficient cause.Court's Interpretation and Reasoning: The Tribunal noted that the Assessing Officer initiated penalty proceedings under section 271B due to non-filing of the audit report despite large turnover shown in the return. The penalty of Rs. 1,50,000/- was imposed and sustained by the CIT(A)/NFAC. However, the Tribunal observed that the assessee had filed the return electronically on 29.10.2017, before the due date of 31.10.2017, and the accounts were audited on 28.09.2017. There was no dispute on the fact of non-filing of the audit report within the specified time.Key Evidence and Findings: The Tribunal examined the timeline of filing and audit, the notices issued, and the penalty order. It was found that the penalty notice did not specify any particular charge of default, and the Assessing Officer had made only minor ad hoc additions without pointing out any defect in the accounts.Application of Law to Facts: The Tribunal emphasized that the penalty under section 271B requires a clear default in furnishing the audit report and that the assessee must be given a specific charge in the penalty notice. The absence of such specificity and the minor nature of additions weakened the case for penalty.Treatment of Competing Arguments: The assessee's counsel argued that the penalty order was ex-facie illegal due to lack of specific charge and was barred by limitation. The Revenue representative supported the penalty. The Tribunal took note that the limitation and specificity objections were not raised before the CIT(A), but being legal points, they were considered.Conclusion: The Tribunal found that the penalty order lacked a specific charge of default and was barred by limitation, rendering the penalty unsustainable on these grounds alone.2. Reasonable Cause and Reliance on Tax Advisors and Auditors (Section 273B)Legal Framework and Precedents: Section 273B allows exemption from penalty if the assessee proves that the failure to comply was due to sufficient cause. Reliance on professional advisors in bonafide belief has been recognized as reasonable cause in various judicial precedents.Court's Interpretation and Reasoning: The assessee contended that it was prevented by sufficient cause, being totally dependent on tax advisors and auditors for compliance. The Tribunal noted this submission but observed that the penalty order and the CIT(A) order did not adequately address this aspect.Key Evidence and Findings: The record showed that the assessee had filed the return timely and had undergone audit, indicating no deliberate default. The Tribunal found no evidence of mala fide or willful neglect by the assessee.Application of Law to Facts: Given the bonafide belief and reliance on professionals, the Tribunal considered this a reasonable cause under section 273B, which should have been given due weightage in deciding penalty liability.Treatment of Competing Arguments: The Revenue did not rebut the reasonable cause claim with concrete evidence of willful default. The Tribunal thus favored the assessee's position.Conclusion: The Tribunal implicitly held that the assessee was prevented by sufficient cause and hence penalty under section 271B was not justified.3. Limitation and Procedural Validity of Penalty Order (Section 275)Legal Framework and Precedents: Section 275 prescribes a limitation period for passing penalty orders, generally six months from the end of the quarter in which the penalty proceedings were initiated or related assessment proceedings were completed. This limitation is mandatory and non-compliance renders the penalty order invalid.Court's Interpretation and Reasoning: The Tribunal scrutinized the timeline: assessment completed on 21.12.2019, penalty proceedings initiated on 31.12.2019, and penalty order passed on 09.06.2021. The limitation period for imposing penalty in this case expired on or before 30.06.2020. The penalty order was thus passed beyond the prescribed limitation period.Key Evidence and Findings: The Tribunal relied on the uncontroverted dates and statutory provisions to conclude that the penalty order was time-barred.Application of Law to Facts: The Tribunal applied the limitation provisions strictly and found no justification or extension of limitation applicable. The absence of any appeal or revision proceedings affecting limitation was noted.Treatment of Competing Arguments: The Revenue failed to provide any legal basis to sustain the penalty beyond limitation. The Tribunal gave due weight to the limitation bar despite the Revenue's opposition.Conclusion: The penalty order was held to be barred by limitation under section 275 and therefore invalid.Significant Holdings:The Tribunal held: 'Considering the fact that the impugned order does not disclose specific charge of default and [is] barred by time, the impugned penalty cannot be sustained.'It was further held that the penalty order was 'ex-facie illegal' due to absence of specific charge in the penalty notice and delayed issuance beyond limitation period prescribed under section 275.The Tribunal emphasized the principle that penalty proceedings must be initiated and concluded within the statutory time frame and that the assessee must be clearly informed of the specific charge of default to enable effective defense.Finally, the Tribunal directed the Assessing Officer to delete the penalty imposed under section 271B, allowing the appeal of the assessee.