IGNORANCE OF LAW COULD NOT BE PLEADED AFTER ISSUE OF FIRST NOTICE.

[Mr. M. GOVINDARAJAN]

                        Ignorance of law is not an excuse.  Every one could not be expected to be update in law in all aspects.   Therefore the aid of the professionals are required who update their knowledge in their field.  Since amendments are taken place frequently in tax laws and also the issue of notifications, circulars etc., the assessee is to comply with the up dated provisions.  Failure to comply with the legal provisions would attract penalty etc.,  In one case the assessee is in the bona fide belief that the alleged provisions are not applicable to the assessee.   The Department issued a notice which has not been taken care of by the assessee.   Again the Department issued a notice after that the assessee complied with the statutory provisions.  In the proceedings the assessee pleaded ignorance of law.   The plea of the assessee was rejected in ‘Patan Nagrik Sahakari Bank Limited V. DIT (CIB)’ – (2011) 338 ITR 167 (Guj).   The facts of this case run as follows:

                        The assessee is engaged in banking business as a co-operative bank.   The assessee was required to file Annual Information Report (‘AIR’ for short) for the financial year 2006-07 on or before 31.08.2007. Director of Income Tax (CIB) issued a notice to the assessee on 17.12.2008 under Section 271FA of the Income Tax Act, 1961 (‘Act’ for short) stating the assessee, without any cause, failed to furnish AIR as required under Section 285BA (1) within the prescribed time limit and asking the petitioner to show cause as to why an order imposing penalty under Section 271FA of the Act should not be made. 

The Department sent a notice on 11.09.2009 for the financial year 2007-08 and that it was only after the issue of the second notice the assessee realized the seriousness of the matter and immediately took steps for filing the AIR.

                        The Department imposed a penalty of Rs.40,700 on 09.09.2010 @ Rs.100/- per day for the delay of 407 days in filing the AIR.  The assessee, being aggrieved by this order filed the present petition before the High Court.  The assessee put forth the following arguments:

• The petitioner was a small co-operative bank situated in a mofussil area and did not have the assistance of Chartered Accountants for tax matters;
• It had inadequate and untrained staff not conversant with legal provisions as well as use of the computers etc;
•  Since the co-operative banks were exempt from income tax under the provisions of Sec. 80P(2)(a)(i) up to the assessment year 2006 – 07, the petitioner was not aware of other provisions like Section 285BA of the Act with regard to filing of AIR;
• The petitioner was under the impression that co-operative banks were not subject to the provisions of the Act at all and under the said belief, the petitioner could not comply with the transactions for the year were substantial and the same had to be traced out from the records of the bank which had taken time;
• No penalty can be imposed on a person for the failure if he proves that there was a reasonable cause for the said failure;

• The petitioner has been able to prove that there was reasonable cause for the failure to file AIR and therefore there is no justification in imposing penalty;
• As per the circular No. 1 of 2009 it is apparent that the Income Tax Department had no manner of use of all the AIRs filed up to the financial year 2006 – 07.  On this fact also no penalty can be imposed;
• The breach in question is technical and venial and not at all intended or deliberate.   There was reasonable cause on the part of the petitioner in not having filed the AIR in time and as such no penalty ought to have been imposed on the petitioner bank;

The Department vehemently opposed the petition on the following grounds:

• Initially for the year under consideration, the petitioner had not filed the AIR;
• After noticing the default the department issued notice; despite which the petitioner did not comply with the statutory requirement;
• It was only after the second notice the petitioner has filed the AIR;
• The petitioner, thus, has consciously disregarded its statutory obligation and as such the penalty imposed was justified;
• The provisions of Section 285BA of the Act have been brought on the statute book in order to provide a mechanism whereby the flow of information regarding the material financial transactions entered by a taxpayer with other persons is automatic so that the same can be utilized for widening and deepening of the tax base;  since the petitioner admittedly did not provide timely information, the remedial action could not be taken; in this context that the petitioner’s assertion that there was no loss in the revenue, pales into insignificance;
• The petitioner had slept over the first notice for a considerable period of time and as such, the aspect of bona fide belief disappears.

The High Court analyzed the provisions of Section 285BA.  The said section imposes an obligation upon any person, being an assessee, who is responsible for registering or maintaining books of account or other documents containing a record of any specified financial transaction, under any law for the time being in force, to furnish an AIR, in respect of such specified financial transaction which is registered or recorded by him during any financial year beginning on or  after 01.04.2004  and information relating to which is relevant and required for the purposes of the Act to the prescribed income tax authority.  Such AIR is required to be furnished within the prescribed time after the end of the financial year.   Section 285BA (5) lays down that where a person who is required to furnish AIR under sub section (1) has not furnished the same within the prescribed time, the prescribed income tax authority may serve upon such person a notice requiring him to furnish such return within a period not exceeding 60 days from the date of service of such notice and he shall furnish the AIR within the time specified in the notice.

                        In the present case it is an undisputed position that the petitioner was required to file AIR in relation to the financial year 2006 – 07 on or before 31.08.2007 and failed to comply with the said statutory required.  The default continued next financial year also.   The Department issued a notice on 17.12.2008 for non compliance.   The petitioner did not comply with the same.  The Department once again issued a notice on 11.09.2009 for the financial year 2007 – 09 and it was only thereafter that the petitioner became serious and filed the returns for the financial year 2006 – 07 along with the financial year 2007- 08 on 12.10.2009.  Thus the AIR had been filed beyond the prescribed period of limitation.   In the above circumstances the penalty proceedings came to be initiated against the petitioner which culminated into the impugned order.

                        The High Court held that-

• Upon issue of the first notice dated 17.12.2008, the petition can no longer plead that it was not  unaware of the statutory provisions or its obligations under the same;
• Even thereafter the petitioner did not comply with the requirement of Section 285BA by filing the Air;
• It was only when a second notice was issued on 11.09.2009 that the petitioner came out of inertia and filed the AIR;
• Even if it is assumed that the petitioner was not aware of its statutory obligation under Section 285BA of the Act, but once the Department had issued notice under Section 285BA(5) it is thereafter not open for the petitioner to take the defence that it was not aware of its statutory obligations;
• It is apparent that the petitioner in conscious disregard to its statutory obligation, still did not file the AIR and it was only after the second notice was issued, that the petitioner filed the same within a period of one month thereafter;
• Thus, for the period after service of the notice under Section 285BA(5) of the Act, it cannot be said that the petitioner had any reasonable cause for not filing the AIR within a period of 60 days of service of the notice;
• As regards the contention that in any case the Revenue had no use for the AIR, when there is a statutory obligation on the assessee to furnish AIR, it is bound by it.   How and in what manner in the income tax authorities make use of the said information is not the look out of the petitioner;
• The petitioner is bound to comply with the statutory requirements as prescribed, failing which it has to face the consequences of such failure;
• It is not disputed by the Department that the petitioner was exempt from payment of income tax up to the assessment year 2006-07.  In the circumstances it would be quite natural that the petitioner may not have been aware of the provisions of Sec. 285BA of the Act initially;
• It is not disputed that in so far as the financial year 2006-07 is concerned, no notice under Section 285BA of the Act had been issued by the  prescribed income tax authority; thus the attention of the petitioner was not drawn to the provisions of Section 285BA of the Act at the relevant time;
• Thus the petitioner is entitled to partial relief by way of deletion of penalty till the date of service of notice dated 17.12.2008 under Section 285BA(5) of the Act;
• However for the remaining period, no reasonable cause as envisaged under Section 273B of the Act can be said to be in existence for non compliance with the statutory provisions.