2025 (9) TMI 1299 - AT - Income Tax

Appeals allowed: s.271B penalty set aside where reasonable cause for late audit report exists under s.273B

Trivandrum District Electricity Board Employees Co-operative Society Versus The Income Tax Officer Ward 2 (1), Trivandrum.

ITAT Cochin allowed the appeals, set aside the Appellate Tribunal's confirmation of penalties under s.271B, and held that appellants established ... Penalty u/s 271B - AO disallowed the claim of deduction u/s.80P to the assessee in view of the provisions of sec. 80A(5) - as alleged assessee failed to get the accounts audited in time as well as submitting the audit report in time - HELD THAT:- As decided in Chavakkad Service Co-op Bank Ltd. [2024 (11) TMI 1272 - KERALA HIGH COURT] appellants/assessees before us cannot be seen as persons who did not establish a reasonable cause for the belated filing of the audit reports before the Assessing Authority. The peremptory phraseology used in Section 273B of the I.T. Act therefore mandated that no penalty under Section 271B be imposed on them. For the same reason, and since reasonable cause was demonstrated by the assessees in the instant cases, the decision of the Division Bench of this Court in Peroorkkada Service Cooperative Bank Ltd. [2020 (1) TMI 624 - KERALA HIGH COURT] would have no application to the case of the appellants before us. We therefore set aside the impugned orders of the Appellate Tribunal, to the extent it confirms the penalty under Section 271B of the I.T. Act on the appellants/assessees, and allow these I.T. Appeals by answering the questions of law raised in favour of the assessees and against the Revenue. ISSUES PRESENTED AND CONSIDERED 1. Whether penalty under section 271B can be levied where the assessee filed the tax audit report belatedly but within the assessment proceedings (i.e., after the due date under section 44AB but before completion of assessment), and whether filing of the tax audit report is directory or mandatory for purposes of section 271B. 2. Whether the disallowance of deduction under section 80P(2) by reason of filing a return after the time prescribed under section 139(1) bears on the correctness of imposing penalty under section 271B for failure to comply with section 44AB. 3. Whether departmental circulars (specifically CBDT Circular No.03/2009) can be relied upon to avoid imposition of penalty under section 271B where no prejudice to the revenue is shown and reasonable cause exists for delay in filing the tax audit report. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Levy of penalty under section 271B for belated filing of tax audit report (relation between sections 44AB and 271B) Legal framework: Section 44AB prescribes audit and filing of the audit report in the prescribed form within the time stipulated; section 271B authorizes levy of penalty for failure to get the accounts audited and furnish the audit report in accordance with section 44AB; section 273B permits waiver of penalty where reasonable cause is shown. Precedent Treatment: The Tribunal identified two lines of authority. One line (Division Bench decision of the jurisdictional High Court in Peroorkkada) treats the requirements of the second proviso to section 44AB and Form 3CD/Form 3CA compliance as mandatory and sustained penalty where audit report/formal further report was not furnished; another (later Division Bench decision of the same High Court in Chavakkad) distinguished Peroorkkada and allowed relief where audited report was submitted before completion of assessment, no prejudice to revenue shown, and reasonable cause existed. Interpretation and reasoning: The Court examined factual matrix and applicable precedents and concluded that when audited reports are furnished before completion of assessment and the Assessing Authority relies on those reports in completing assessment, there is no prejudice to the revenue. In such circumstances the peremptory language of section 44AB does not compel automatic imposition of penalty under section 271B if reasonable cause is shown and no prejudice is caused. The Tribunal gave effect to the later authoritative Division Bench decision of the jurisdictional High Court which emphasized (a) distinction of factual situations, (b) requirement to consider reasonable cause under section 273B, and (c) consideration of whether the Department suffered prejudice. Ratio vs. Obiter: Ratio - penalty under section 271B is not automatic merely because audit report was furnished after the due date; if audit report is filed before completion of assessment, relied upon in assessment, and reasonable cause exists (with no prejudice to revenue), penalty may be deleted. Obiter - observations on strict compliance with Form 3CD/Form 3CA requirements in cases where the second proviso exemption is invoked (as in Peroorkkada) serve as cautionary remarks applicable where mandatory form compliance is not established. Conclusion: The Tribunal deleted the penalty under section 271B, following the later Division Bench authority which allowed relief where audited reports were produced before completion of assessment, no prejudice resulted, and reasonable cause for delay was established. Issue 2 - Interaction between section 80P deduction denial (due to belated return under section 139(1)) and penalty under section 271B Legal framework: Section 139(1) prescribes time for filing return; section 80P deduction is conditional on compliance with return filing timelines; non-compliance can affect entitlement to deductions. Section 271B penalty is governed by section 44AB non-compliance and distinct from deduction entitlements. Precedent Treatment: Revenue relied on authority holding that belated filing which destroys entitlement to deduction under section 80P justified penalty; Tribunal considered contrary High Court authority distinguishing facts where penalty was not automatic if reasonable cause existed. Interpretation and reasoning: The Tribunal treated the denial of deduction under section 80P (for belated return) as a separate consequence distinct from the penalty inquiry under section 271B. The correctness of denying section 80P deduction does not per se validate penalty under section 271B; the penalty question requires its own factual and legal analysis (reasonable cause, prejudice to revenue, timing of audit report submission). The Tribunal therefore did not treat section 80P denial as determinative of penalty validity and followed the later High Court decision directing consideration of reasonable cause and lack of prejudice. Ratio vs. Obiter: Ratio - adverse consequence under one provision (denial of section 80P) does not automatically support penalty under another (section 271B); separate statutory tests must be applied. Obiter - none beyond delineation of separate statutory consequences. Conclusion: The Tribunal did not uphold penalty on the basis of denial of section 80P; it required the penalty analysis to stand on section 271B/273B principles and consequential authorities. Issue 3 - Role of CBDT Circular No.03/2009 and administrative guidance in determining levy of penalty under section 271B Legal framework: Statutory provisions are primary; administrative circulars inform departmental practice. CBDT Circular No.03/2009 addresses circumstances in which audit reports may be produced belatedly and suggests that penalty under section 271B need not be levied where no prejudice is caused. Precedent Treatment: The later Division Bench High Court decision placed weight on the Circular as aligning with the statutory scheme of sections 271B and 273B, while an earlier Div. Bench (Peroorkkada) refused to allow circular to override unambiguous statutory mandate requiring strict compliance with prescribed forms and timelines. Interpretation and reasoning: The Tribunal followed the more recent Div. Bench authority which treated the Circular as relevant to the practical application of penalty provisions - particularly where audited reports were filed before completion of assessment and the Department suffered no prejudice. The Tribunal observed that where statute is unambiguous and mandatory (for example, strict form requirements under the second proviso to section 44AB), a circular cannot supplant statutory obligation; however, in the present factual matrix the Circular supported the conclusion that penalty need not be imposed when no prejudice arises and reasonable cause is shown. Ratio vs. Obiter: Ratio - administrative circulars may be considered in penalty determination to assess prejudice and reasonableness, but cannot override clear statutory mandates on form and timing. Obiter - reliance on circulars is contextual and subordinate to unambiguous statutory requirements. Conclusion: The Tribunal accepted the Circular's relevance insofar as it supports deletion of penalty where audit reports were furnished before completion of assessment and no prejudice was caused, consistent with binding High Court authority; but reaffirmed that where statutory form/timing requirements are unambiguously mandatory, a circular cannot negate statutory obligations. Cross-references and Outcome 1. The Tribunal reconciled conflicting authorities by applying the later Division Bench High Court decision which (i) distinguished earlier decisions that sustained penalty on stricter form-compliance facts, (ii) emphasized the need to consider reasonable cause under section 273B and prejudice to the revenue, and (iii) gave weight to CBDT Circular No.03/2009 in appropriate factual contexts. 2. Applying that framework to the present appeals, the Tribunal found the penalty under section 271B unsustainable and deleted the penalty, while leaving the separate consequence of denial of section 80P untouched as a distinct statutory outcome.