2017 (5) TMI 1421 - AT - Income Tax

Penalty u/s. 271B - non enclosure of audit report to the return of income - Held that - As seen from the order of the AO u/s. 153C it is very clear that AO has initiated penalty proceedings for not enclosing the audit report but not for completing the audit before the due date. Board Circular No. 5 of 2007 clearly states that while uploading the return no audit report should be attached to the return and also further states that it should not be furnished separately also before or after due date. Non-enclosure of audit report to the return of income does not attract any penalty u/s. 271B as specified in the Board Circular extracted above. Since AO has initiated the penalty proceedings only for non-enclosure of audit report along with the Return we are of the opinion that the same is not attracting penalty on the facts of the case as assessee has complied with the Board Circular. If the audit report was not enclosed to the return of income filed by assessee subsequently in response to proceedings u/s. 153C AO should have treated the return as defective return. No such action was taken by the AO which indicates that the return is complete in all respects. Since prior approval of the Addl. CIT u/s. 153D was also taken by the AO before completion of assessment we are of the opinion that non enclosure of audit report to the return of income does not attract penalty proceedings u/s. 271B. Accordingly penalty levied is cancelled. - Decided in favour of assessee.

Summary

Issues Involved:
Appeals against penalty u/s. 271B for AYs 2007-08, 2008-09 & 2009-10 due to non-enclosure of audit report.

Analysis:

1. Background and Facts:
The case involves two assessees engaged in real estate business appealing against penalty u/s. 271B for AYs 2007-08, 2008-09 & 2009-10. Search & Seizure operations revealed undisclosed income leading to penalty proceedings. The AO initiated penalties due to non-enclosure of audit reports along with the return of income.

2. AO's Position and CIT(A) Order:
The AO contended that the audit report was not enclosed with the return by the due date, attracting penalty u/s. 271B. The CIT(A) upheld the penalty, emphasizing that the audit report was not furnished before the due date, even though obtained earlier. The CIT(A) dismissed the appeal, citing non-compliance with Sec. 44AB and 271B.

3. Assessee's Arguments and Additional Evidence:
The assessee argued that the audit report was not required to be enclosed with the return, citing Board Circular No. 5 of 2007. The counsel withdrew additional evidence and highlighted the non-mandatory nature of enclosing the audit report with the return.

4. ITAT's Decision and Rationale:
The ITAT analyzed the AO's initiation of penalty solely for non-enclosure of audit reports. Referring to the Board Circular, the ITAT concluded that the penalty was not warranted as the return was complete without the audit report. The ITAT canceled the penalties in all appeals, emphasizing compliance with the Circular and the absence of defects in the returns.

5. Conclusion:
The ITAT allowed all appeals, emphasizing the non-mandatory nature of enclosing audit reports with the return and the absence of defects in the returns filed by the assessees. The penalties under Sec. 271B were canceled based on compliance with the Board Circular and the completeness of the returns.