2016 (3) TMI 286 - HC - Income Tax

Penalty under Section 271B - Tax Audit - Applicability of provision of Section 44AB on appellant Club - Held that - The assessee was under the bonafide belief that the provisions of Section 44AB of the Act were not applicable to a Club, while supplying beverages, liquor etc., to its members as it was not engaged in any business, but only a mutuality. The authorities and the Tribunal failed to appreciate the vital aspect of the explanation offered by the appellant in a right perspective and as such, in our considered opinion, the order passed by the Tribunal confirming the order of penalty is unsustainable. - Decided in favour of the assessee

Summary

Issues:
1. Applicability of Section 44AB of the Income Tax Act to a mutual concern.
2. Imposition of penalty under Section 271B of the Income Tax Act based on the explanation offered by the assessee.

Issue 1: Applicability of Section 44AB:
The case involved an appellant-Club, registered as a society, supplying liquor and beverages to its members. The appellant failed to obtain an audit report under Section 44AB of the Income Tax Act, leading to penalty proceedings under Section 271B. The appellant argued that being a mutual concern, it was not engaged in business, hence believed Section 44AB did not apply. The assessing officer rejected this explanation, leading to appeals. The Tribunal upheld the penalty, prompting the appellant to approach the High Court. The Court referred to precedents like the Young Men's Indian Association case and the Canara Bank Golden Jubilee Staff Welfare Fund case to establish the principles of mutuality in such scenarios. The Court noted that the appellant's bonafide belief and reasonable cause for not obtaining an audit report were crucial in determining penalty imposition.

Issue 2: Imposition of Penalty under Section 271B:
The Court cited the Assistant Commissioner of Income Tax vs. Dr. K Satish Shetty case and the Income Tax Office vs. Sachinam Trust case to emphasize the importance of a bonafide belief constituting reasonable cause for failure under Section 271B. The Court highlighted that penalty cannot be levied if the assessee acted in a bona fide belief and had no dishonest intention. The appellant's explanation of bonafide belief was found to be a reasonable cause to absolve them from penalty under Section 271B. The Court concluded that the appellant's belief that Section 44AB did not apply due to the nature of the Club's activities was valid, and the authorities failed to appreciate this aspect correctly. Consequently, the Court set aside the penalty orders imposed by the Tribunal and lower authorities, ruling in favor of the appellant.

In summary, the High Court of Karnataka addressed the issues of the applicability of Section 44AB of the Income Tax Act to a mutual concern and the imposition of penalty under Section 271B based on the appellant's explanation. By analyzing precedents and emphasizing the principles of mutuality and bonafide belief as reasonable cause, the Court ruled in favor of the appellant, setting aside the penalty orders imposed by the Tribunal and lower authorities.