2025 (11) TMI 332 - AT - Income Tax

Penalty under s.271B for not filing tax audit under s.44AB held invalid as transactions were mutuality, not business.

ITAT, Chennai (AT) held that penalty under s. 271B for failure to furnish tax audit report u/s. 44AB was not tenable because the assessee's transactions ... Penalty levied u/s. 271B - failure to furnish the Tax audit report u/s. 44AB - assessee has carried out the transactions on the concept of principles of mutuality - assessee is Unit set up under government of Tamil Nadu home department to cater so the requirement of police personnel of household items such as groceries - HELD THAT:- We observe that all transactions undertaken by the assessee were exclusively with its members, and the same were reported under the GST regime. The AO, after a detailed scrutiny, accepted the returned income on the basis of mutuality, thereby acknowledging that the assessee was not carrying on any ‘business’ or ‘profession’ as contemplated under the Act. It is well settled that the provisions of Section 44AB of the Act apply only to income under the head “Profits and gains of business or profession.” In the present case, since the assessee’s activities do not fall within the ambit of “business or profession,” the provisions of Section 44AB of the Act are inapplicable. Therefore, the levy of penalty u/s. 271B of the Act for failure to file the tax audit report u/s. 44AB of the Act is not tenable under the present circumstances of the case. In support of this view, reliance is placed on the judgment of case of Young Men's Indian Association [1970 (2) TMI 87 - SUPREME COURT] wherein it was held that in the case of a club supplying refreshments to its members, if the club is acting merely as an agent of its members, no element of sale exists in the transaction, and thus, it does not amount to a business activity. We also draw support held in the case of M/s. Koramangala Club [2016 (3) TMI 286 - KARNATAKA HIGH COURT] that it is clear the assessee was under the Bonafide belief that the provision of section 44AB of the Act were not applicable to a club, while supplying beverage, liquor etc. to its members as it was not engaged in any business, but only a mutuality. We are of the considered opinion that the CIT(A) has erred in upholding the penalty levied under Section 271B. Appeal of the assessee is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the provisions of Section 44AB (audit of accounts of certain persons carrying on business or profession) apply where an entity transacts exclusively with its members under the principle of mutuality. 2. Whether penalty under Section 271B for failure to furnish the tax audit report under Section 44AB is sustainable where (a) the Assessing Officer accepted the return on the basis of mutuality in assessment and (b) the transactions were reported under GST but claimed as non-business for income-tax purposes. 3. Whether bona fide belief that Section 44AB is not applicable (based on mutuality) can constitute reasonable cause under Section 273B to escape or mitigate penalty under Section 271B (considered only insofar as relevant to alternative reasoning). ISSUE-WISE DETAILED ANALYSIS Issue 1: Applicability of Section 44AB where activities are alleged to be governed by principle of mutuality Legal framework: Section 44AB mandates audit and furnishing of audit report where a person 'carrying on business' has sales/turnover exceeding prescribed threshold; Section 2(13) defines 'business'. The audit obligation applies to income chargeable under the head 'Profits and gains of business or profession'. Precedent treatment: The Court relied on authoritative precedents which establish that where an association or club acts merely as agent for its members (mutuality), transactions inter se may not amount to sale or business for income-tax purposes; precedents also recognise that mutual concerns may nonetheless be treated as carrying on business depending on facts. Interpretation and reasoning: The Tribunal examined the factual matrix - (i) all transactions were exclusively with members; (ii) the entity was established to serve members without profit motive; and (iii) the Assessing Officer, during assessment under Section 143(3), accepted the return on the basis of mutuality and declared nil income. Given that Section 44AB applies only to persons 'carrying on business or profession', and that the AO accepted absence of business for income-tax purposes, Section 44AB is inapplicable in the present circumstances. The Tribunal emphasised the settled proposition that the statutory audit requirement is tied to the existence of business/profession under the Income-tax Act, not turnover alone or GST characterisation. Ratio vs. Obiter: Ratio - where an assessing authority has accepted that the entity's transactions fall within mutuality and are not business/profession, Section 44AB cannot be invoked to mandate an audit. Obiter - discussion on GST deeming provisions and their inapplicability to income-tax provisions is explanatory and not necessary to the core decision. Conclusion: Section 44AB did not apply to the assessee on facts; the transactions, being governed by mutuality and accepted as such in assessment, did not amount to 'business or profession' attracting audit obligation under Section 44AB. Issue 2: Sustainment of penalty under Section 271B for non-furnishing of tax audit report where Section 44AB held inapplicable Legal framework: Section 271B levies penalty for failure to furnish audit report as required under Section 44AB; liability under Section 271B is contingent on the underlying statutory duty under Section 44AB. Precedent treatment: Tribunal relied on decisions holding that where the audit obligation is not attracted because there is no business/profession (mutuality), consequential penalties for non-compliance with that audit obligation cannot be sustained. Authorities also indicate that bona fide belief regarding non-applicability may constitute reasonable cause in some cases for penalty cancellation, but that principle is ancillary where the primary legal obligation is absent. Interpretation and reasoning: Since the Tribunal found Section 44AB inapplicable (see Issue 1) - a jurisdictional prerequisite for any penalty under Section 271B - the levy of penalty became untenable. The Tribunal noted the inconsistency of simultaneously accepting mutuality in assessment and imposing penalty for failure to comply with an audit obligation premised on business-status. The fact that turnover was reported under GST and that a GST audit/report existed did not convert the income-tax position into business for Section 44AB purposes; the income-tax statute and its definitions govern the applicability of Section 44AB and Section 271B. Ratio vs. Obiter: Ratio - penalty under Section 271B cannot be sustained where the statutory audit requirement under Section 44AB is not attracted because the assessee is not carrying on business/profession. Obiter - comments on interplay between GST deeming provisions and income-tax provisions are not essential to the conclusion. Conclusion: Penalty under Section 271B was unsustainable on the facts; the Tribunal set aside the penalty and directed deletion by the Assessing Officer. Issue 3: Bona fide belief and Section 273B (reasonable cause) - alternative consideration Legal framework: Section 273B provides that no penalty shall be imposable if the person proves reasonable cause for the failure which led to penalty. Precedent treatment: Some authorities accept bona fide belief in non-applicability of audit provisions (e.g., mutuality cases) as reasonable cause to cancel penalty where Section 44AB might arguably apply. Interpretation and reasoning: Although the Tribunal did not need to base its decision on Section 273B because it concluded Section 44AB was inapplicable, it noted that where mutuality is genuinely relied upon, bona fide belief may amount to reasonable cause. The Tribunal treated the alternative contention (reasonable cause under Section 273B) as supportive but not necessary to the operative relief, since the primary ground of non-applicability already disposed of the levy. Ratio vs. Obiter: Obiter - observations on Section 273B and bona fide belief are ancillary; the decision does not rest on cancellation under Section 273B but on inapplicability of the audit provision. Conclusion: Even if considered alternatively, the assessee's bona fide reliance on mutuality could constitute reasonable cause; however the decisive conclusion is that Section 44AB did not apply, rendering Section 271B inapplicable. Cross-references and operative conclusion All issues are interlinked: the central legal threshold is whether the entity carried on 'business or profession' for income-tax purposes. Acceptance of mutuality in assessment (see Issue 1) negates the statutory predicate for both the audit obligation (Section 44AB) and any penalty for non-compliance (Section 271B) (see Issue 2). Alternative reliance on Section 273B (reasonable cause) is noted (see Issue 3) but unnecessary to the outcome. The Tribunal therefore allowed the appeal and set aside the penalty.