1990 (7) TMI 197 - AT - Income Tax

Summary

Issues Involved:

1. Imposition of penalty under Section 271B of the Income-tax Act, 1961 for failure to get accounts audited as required by Section 44AB.
2. Whether there was a reasonable cause for the assessee's default in getting the accounts audited.
3. Applicability and interpretation of Section 44AB and related provisions for the assessment year 1985-86.
4. Consideration of practical difficulties and bona fide misunderstandings as reasonable causes for non-compliance.
5. Relevance of previous judgments and circulars issued by the Central Board of Direct Taxes (CBDT).

Detailed Analysis:

1. Imposition of Penalty under Section 271B:

The primary issue in this case was the imposition of a penalty under Section 271B of the Income-tax Act, 1961, for the assessee's failure to get its accounts audited as required by Section 44AB. The Income Tax Officer (ITO) had imposed a penalty of Rs. 47,846, which was confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)]. The CIT(A) rejected the assessee's contentions and upheld the penalty, stating that there was no valid reason for not getting the accounts audited.

2. Reasonable Cause for Default:

The assessee argued that there was a bona fide misunderstanding regarding the applicability of Section 44AB because the accounting year ended on 3-4-1984, and the provisions were applied for the first time in the assessment year 1985-86. The assessee also cited practical difficulties, including two deaths in the family of the partners, which made it difficult to finalize the accounts and complete the audit. The CIT(A) rejected these arguments, stating that the firm had sufficient time to comply with the audit requirements and that the plea of bereavement was not a valid excuse.

3. Applicability and Interpretation of Section 44AB:

The Tribunal considered the fact that the Finance Bill, 1984, was introduced on 29-2-1984 and received the President's assent on 11-5-1984, with the relevant rules being published on 31-1-1985. The Tribunal noted that the assessee could not have anticipated the introduction of these new laws and prepared to comply with them immediately. The Tribunal also highlighted that the accounting year of the assessee ended on 3-4-1984, which practically fell within the financial year 1983-84, making compliance with the new provisions challenging.

4. Practical Difficulties and Bona Fide Misunderstandings:

The Tribunal acknowledged the practical difficulties faced by the assessee, including the late publication of rules and the fact that the provisions of Section 44AB were applied for the first time in the assessment year 1985-86. The Tribunal referred to the Gujarat High Court's decision in the case of Rajkot Engg. Association v. Union of India [1986] 162 ITR 28, which highlighted the challenges faced by non-corporate assessees in complying with the new audit requirements. The Tribunal also noted that the Central Board of Direct Taxes (CBDT) had issued Circular No. 205 dated 27-7-1976, which provided relief for similar issues under Section 44AA.

5. Previous Judgments and CBDT Circulars:

The Tribunal referred to the Gujarat High Court's observations in the case of Rajkot Engg. Association, which emphasized the need for the CBDT to issue directions to mitigate the inconvenience and hardship caused to assessees. The Tribunal also cited the Supreme Court's decision in Hindustan Steel Ltd. v. State of Orissa [1972] 83 ITR 26, which stated that penalty should not be imposed merely because it is lawful to do so, especially when the default is venial in nature.

Conclusion:

The Tribunal concluded that the assessee had a reasonable cause for the default in getting the accounts audited, considering the practical difficulties and the fact that the provisions of Section 44AB were applied for the first time in the assessment year 1985-86. The Tribunal set aside the order of the CIT(A) and cancelled the penalty imposed by the ITO. The appeal was allowed in favor of the assessee.