2024 (12) TMI 198 - AT - Income Tax

Penalty levied u/s 271B - non furnish of audit report as required u/s 44AB - Consideration of reasonable cause - HELD THAT - Reasonable cause as applied to human action is that which would constrain a person of average intelligence and ordinary prudence. It can be described as a probable cause. The cause shown has to be considered and only if it is found to be frivolous, without substance or foundation, the prescribed consequences will follow. Taking into cumulative effect of the explanations offered by the assessee and from a reading of the relevant provisions of Section 271B read with Section 44AB of the Act, we are of the considered opinion that assessee demonstrated that there was a reasonable cause for the said failure as per the provisions contained in section 273B of the Act. From the conduct, behavior and attitude of the assessee, it is clear that as soon as the accountant joined in September, 2018, after a higher remuneration was offered to him, the audit report and the return of income were immediately filed manually. Before us, the accountant submitted an affidavit by way of additional evidence stating that he was responsible for maintaining and finalizing accounts of the firm and during September, 2017, he decided to leave his job due to the dis-satisfaction with the salary being offered and consequently he chooses to resign from his position. Further he stated that at the time of resignation, the accounts of the firm had not been finalized during the year ending 31.3.2017. Further, he confirmed to have rejoined again in September, 2018 after the request of the Managing Partner offering a revised and reasonable salary. Upon rejoining the firm, he completed the finalization of accounts and these accounts were subsequently audited by the CA in compliance with the relevant statutory requirement. The Managing Partner has also filed an affidavit stating that firm was required to get its accounts audited u/s 44AB of the Act and to file the audit report within the extended due date as on 7th November, 2017. The accountant who was responsible for maintaining accounts of the firm abruptly left his employment without finalizing the accounts. This unexpected departure left the firm without a qualified person to manage the accounts and he being unfamiliar with the accounting software and procedure, faced significant difficulties in finding a replacement promptly. There is nothing contrary that has been brought on record by the Ld. DR at the time of the hearing. Further, the assessee has only committed a technical breach without any loss to the exchequer of the Government as there was no addition made by the Ld.AO during the assessment proceeding. CIT(A)/NFAC s non-consideration of the plea raised by the assessee about the existence of reasonable cause vitiate the order. Appeal filed by the assessee is allowed.

Summary

Issues Involved:

1. Whether the order passed by the CIT(A) was illegal due to lack of proper hearing.
2. Legitimacy of the penalty levied under Section 271B of the Income Tax Act, 1961.
3. Consideration of reasonable cause for delay in filing the audit report.
4. Compliance with Section 44AB by filing hard copies of returns and audited financial statements.
5. Applicability of judicial pronouncements regarding discretionary nature of penalty under Section 271B.
6. Regular compliance in subsequent years and genuine circumstances causing delay in the assessment year 2017-18.
7. Adequacy of justification and reasoning provided by CIT(A) for upholding the penalty.

Issue-wise Detailed Analysis:

1. Legality of CIT(A)'s Order:
The assessee contended that the order passed by the CIT(A) was illegal and opposed to the facts due to the lack of a personal hearing, despite a specific request for a virtual hearing. The Tribunal noted that the CIT(A) dismissed the appeal without calling for evidence to support the grounds of appeal, which contributed to the perception of an unfair hearing process.

2. Penalty Under Section 271B:
The CIT(A) confirmed a penalty of Rs. 1,50,000 levied under Section 271B for failure to audit accounts as required by Section 44AB. The Tribunal examined whether the penalty was justified, considering the circumstances leading to the delay in filing the audit report.

3. Reasonable Cause for Delay:
The assessee claimed a reasonable cause for the delay due to the illness of a partner and the departure of an accountant. The Tribunal acknowledged the affidavits submitted as additional evidence, which were not available during earlier proceedings, and found that these affidavits substantiated the reasonable cause for the delay.

4. Compliance with Section 44AB:
The assessee argued that filing hard copies of the return and audited financial statements should be considered compliance with Section 44AB. The Tribunal recognized that the audit report and return of income were filed manually once the accountant rejoined, indicating an attempt to comply despite earlier delays.

5. Judicial Pronouncements:
The assessee cited judicial pronouncements suggesting that the levy of penalty under Section 271B is discretionary. The Tribunal considered these pronouncements and emphasized that penalty should not be imposed if there is a reasonable cause for the failure.

6. Subsequent Compliance and Genuine Circumstances:
The assessee highlighted regular compliance in subsequent years and genuine, unavoidable circumstances causing the delay in the assessment year 2017-18. The Tribunal found these factors relevant and indicative of the assessee's intent to comply with statutory obligations.

7. Justification and Reasoning by CIT(A):
The Tribunal found that the CIT(A) did not adequately justify the penalty, violating principles of natural justice. The Tribunal concluded that the CIT(A) failed to consider the reasonable cause presented by the assessee, which vitiated the order.

Conclusion:

The Tribunal concluded that the assessee demonstrated a reasonable cause for the delay in filing the audit report as per Section 273B. The affidavits and additional evidence supported the claim of reasonable cause, and the Tribunal found that the CIT(A) did not properly consider these factors. Consequently, the Tribunal annulled the order of the CIT(A) and canceled the penalty levied under Section 271B, allowing the appeal filed by the assessee.