2019 (6) TMI 1095 - AT - Income Tax

Penalty u/s 271B - non-maintenance of books of accounts, for assessee s failure to get the accounts audited as required u/s 44AB - Assessee had received the sale proceeds from the sale of disputed property and paid the advance tax - assessee filed the return of income declaring Nil income and claimed the refund of the entire amount of advance taxes paid along with detailed note on long term capital gains - AO treated the receipt as business income and the receipts exceeded the specified limit of ₹ 40,00,000/-, the AO initiated penalty proceedings u/s 271B - HELD THAT - From the penalty order of the AO, it is observed that the assessee made only single transaction which is stated to be advance for purchase of land and property and there were no series of transactions. The assessee was under the impression that the advance received by the assessee was not taxable in the impugned assessment year since the transaction was not finalized. Even if it is to be taxed, the same is to be taxed under the head capital gains , but not under the head business income . That was the reason that the assessee did not get his accounts audited as required u/s 44AB of the Act. There is no dispute that the transaction was single transaction. No other expenditure was also claimed by the assessee. The AO did not bring any other material to support that the assessee has carried on the business in the earlier year or subsequent year in the assessment order. There is no issue of complexity involved in the receipts of the assessee. The assessee is a mechanical engineer, as observed from the assessment order and he is not engaged in the business, there are no other business transaction carried on by the assessee as brought out by the AO in the assessment order. Therefore, we hold that the assessee did not get the accounts audited since he was under the bonafide impression that sale transaction of litigated land as capital gains but not business and the same appears to be reasonable cause as required u/s 271B. Accordingly, we hold that there is reasonable cause for not getting the accounts audited - Decided in favour of assessee.

Summary

Issues Involved:
1. Levy of penalty under Section 271B of the Income Tax Act, 1961.
2. Classification of income as business income versus capital gains.
3. Requirement for audit under Section 44AB of the Income Tax Act, 1961.
4. Reasonable cause for non-compliance with audit requirements.

Issue-wise Detailed Analysis:

1. Levy of Penalty under Section 271B of the Income Tax Act, 1961:
The primary issue in this case was the levy of penalty under Section 271B for the assessee's failure to get accounts audited as required under Section 44AB of the Income Tax Act, 1961. The assessee filed a return declaring Nil income, but the Assessing Officer (AO) completed the assessment with a total income of ?3,40,22,207/- under the head 'business income'. Consequently, the AO initiated penalty proceedings under Section 271B and levied a penalty of ?1,00,000/- for non-maintenance of books of accounts and failure to get the accounts audited.

2. Classification of Income as Business Income versus Capital Gains:
The assessee contended that the income derived from the sale of disputed property should be classified as long-term capital gains. The assessee argued that the rights transferred did not have any cost of acquisition and referenced several judicial precedents to support the claim that the transaction did not constitute taxable capital gains. However, the AO assessed the receipt of ?3,40,00,000/- as business income, stating that the transaction was in the nature of trade. This classification was upheld by the Tribunal, which confirmed that the activity was an adventure in the nature of trade.

3. Requirement for Audit under Section 44AB of the Income Tax Act, 1961:
Since the AO treated the receipt as business income and the gross receipts exceeded the specified limit of ?40,00,000/-, the AO held that the assessee was required to get the accounts audited under Section 44AB. The failure to comply with this requirement led to the initiation of penalty proceedings under Section 271B.

4. Reasonable Cause for Non-compliance with Audit Requirements:
The assessee argued that the receipt of ?3.4 Crores was an advance and was offered for capital gains, hence there was reasonable cause for not getting the accounts audited. The assessee believed that the amount was not taxable in the year of receipt as the transaction was not finalized and should be taxed as long-term capital gains when completed. The Tribunal found that the assessee's belief was a reasonable cause for non-compliance with the audit requirement. The Tribunal noted that the transaction was a single instance and the assessee, a mechanical engineer, was not engaged in any business activities. Therefore, the Tribunal held that the penalty under Section 271B was unsustainable and set aside the order of the Commissioner of Income Tax (Appeals), canceling the penalty levied by the AO.

Conclusion:
The Tribunal allowed the appeal of the assessee, concluding that there was a reasonable cause for not getting the accounts audited, and thus, the penalty levied under Section 271B was canceled. The order was pronounced in the open court on 21st June 2019.