2005 (9) TMI 220 - AT - Income Tax

Summary

Issues Involved:
1. Cancellation of penalty under section 271B.
2. Method of accounting and its relevance to auditing.
3. Receipt of payments and reconciliation with bank accounts.
4. Reasonable cause for delay in filing the audit report.

Issue-wise Detailed Analysis:

1. Cancellation of penalty under section 271B:
The Revenue appealed against the order of the CIT(A) which canceled a penalty of Rs. 1 lakh imposed under section 271B by the Assessing Officer. The assessee, a carriage contractor, filed the return and statutory audit report late, attributing the delay to difficulties in dealing with army authorities in remote areas and disrupted communications due to bad weather and political conditions. The CIT(A) accepted the assessee's explanation and canceled the penalty, citing "reasonable cause" under section 273B of the Income-tax Act, 1961.

2. Method of accounting and its relevance to auditing:
The Assessing Officer argued that the assessee's mercantile method of accounting meant that all necessary information for auditing was already available, as evidenced by TDS certificates dated April and May 1998. However, the CIT(A) found that the delay in receiving TDS certificates and other relevant information from remote locations constituted a reasonable cause for the delay in filing the audit report.

3. Receipt of payments and reconciliation with bank accounts:
The Assessing Officer contended that the assessee received payments by cheque during the accounting period and should have been able to reconcile these with bank accounts within three months. The CIT(A) countered this by noting that the physical and political conditions in the areas where the assessee operated made it difficult to obtain necessary documents and certificates in a timely manner.

4. Reasonable cause for delay in filing the audit report:
The CIT(A) considered the geographical and political challenges faced by the assessee, including disrupted communication and delayed receipt of TDS certificates. The CIT(A) also noted that the assessee did not benefit from the delay, as it resulted in a refund situation where the assessee lost interest on the refund due to the delayed filing. The CIT(A) concluded that these factors constituted a reasonable cause under section 273B, justifying the cancellation of the penalty.

Conclusion:
The appeal by the Revenue was dismissed, and the order of the CIT(A) canceling the penalty under section 271B was upheld. The CIT(A)'s decision was based on the reasonable cause for the delay, considering the unique challenges faced by the assessee in obtaining necessary documents from remote and politically unstable areas. The Tribunal agreed with the CIT(A) that the delay was beyond the assessee's control and did not warrant a penalty.