GST Exclusion from Turnover for Tax Audit Penalty: Mumbai ITAT Deletes Section 271B Penalty

Manish Pushkar Dayal Singhal Vs ITO (ITAT Mumbai)

Where the assessee did not obtain tax audit under section 44AB because of a bona fide and reasonable belief, based on the ICAI Guidance Note and the existence of two possible views regarding inclusion of GST in turnover, penalty under section 271B is not automatic and can be deleted where there is no deliberate, malafide or contumacious default.

Summary: The Mumbai ITAT condoned a 133-day delay in filing the assessee’s appeal and deleted the penalty of Rs. 1,50,000/- imposed under section 271B for failure to obtain a tax audit report under section 44AB. The assessee, whose total sales were stated at Rs. 9,82,74,992/- and total taxable value under GSTR-1 at Rs. 9,83,03,353/-, contended that GST should not form part of turnover for determining the tax-audit threshold, relying on the ICAI Guidance Note on Tax Audit for AY 2022-23. The Tribunal noted that the Guidance Note states that where GST or another tax is included in the sale price, no adjustment should be made for determining turnover, and referred to judicial views accepting the ICAI meaning of turnover. It held that, where two views may be possible, the assessee’s bona fide belief that tax audit was not applicable could not be completely brushed aside. As nothing established deliberate, knowing or mala fide non-compliance, the explanation constituted reasonable cause. The AO was accordingly directed to delete the penalty under section 271B. The appeal was allowed for statistical purposes.

Core Issue: Penalty Under Section 271B for Failure to Obtain Tax Audit

The principal issue was whether penalty under section 271B was leviable for failure to obtain a tax audit report under section 44AB where the assessee had excluded GST from turnover on the basis of the method of accounting followed by him and the ICAI Guidance Note, and whether such failure was supported by a bona fide and reasonable belief.

Facts of the Case

The assessee, an individual carrying on business through a proprietary concern, D.M. Sales Corporation, was engaged in manufacturing and selling packaging materials. He filed his return declaring total income of ₹3,72,790. During scrutiny assessment, the AO noticed from GSTR-1 that the total invoice value was ₹11,59,43,746 inclusive of GST and, since this exceeded ₹10 crore, concluded that the assessee was liable to obtain tax audit under section 44AB. Penalty proceedings under section 271B were consequently initiated. The assessee contended that his actual sales excluding GST were ₹9,82,74,982 and therefore below the prescribed threshold.

AO’s Finding on Tax Audit Requirement

The AO relied upon section 145A(ii) and held that sales were required to be considered inclusive of tax, duty, cess or fee for determining the liability for tax audit. Since the GSTR-1 reflected total invoice value exceeding ₹10 crore, the AO concluded that the assessee was liable to obtain the audit report and, having failed to do so, levied penalty of ₹1,50,000 under section 271B.

CIT(A)’s Finding

The CIT(A)/NFAC confirmed the penalty. The assessee’s contention was that the taxable sales were below ₹10 crore and that GST was separately accounted for. The assessee also relied upon the ICAI Guidance Note on Tax Audit for AY 2022-23, which stated that where GST or another tax is included in the sale price, no adjustment is required for determining turnover. The CIT(A), however, held that the assessee had failed to establish that his turnover was below the prescribed audit limit and confirmed the penalty.

ITAT Mumbai Finding and Observation

Bona Fide Belief Regarding Applicability of Tax Audit

The Tribunal approached the matter primarily as a penalty case, rather than merely deciding the computation of turnover. It observed that the broad question was whether the assessee’s failure to obtain the audit report was based upon a bona fide belief that he was not liable to tax audit. The Tribunal noted that the ICAI Guidance Note specifically provided that if GST or any other tax was included in the sale price, no adjustment was required while considering the quantum of turnover. The Tribunal also took note of judicial observations recognising the relevance of the ICAI’s interpretation of the commercial term “turnover.” In such circumstances, where two views were possible, the assessee’s contention that he was under a bona fide belief that tax audit was not applicable could not be completely brushed aside.

No Deliberate or Mala Fide Failure to Comply With Section 44AB

The Tribunal further found that nothing had been brought on record to establish that the assessee had deliberately, knowingly or with mala fide intention failed to comply with section 44AB. The failure was neither intentional nor contumacious. The assessee’s explanation of having acted under a bona fide belief was therefore held to constitute reasonable cause. Consequently, the Tribunal directed the AO to delete the penalty under section 271B.

Cases Relied Upon by the Tribunal

The Tribunal considered the principles emerging from Commissioner of Income Tax-VII, New Delhi vs Punjab Stainless Steel Industries, Civil Appeal No. 5592 of 2008, Supreme Court, particularly regarding the meaning of turnover in normal accounting parlance and the relevance of the ICAI Guidance Note. It also considered Snehal Rajendra Pathak v. ITO, ITA No. 3550/MUM/2014, where bona fide belief was held capable of mitigating the rigour of section 271B; Vighnaharta Trust v. DCIT (Exemption) C-2, ITA No. 3324/MUM/2023, where penalty under section 271B was held to be discretionary and not automatic; and Sachin Marotrao Rangari v. ACIT, [2022] 197 ITD 358 (Rajkot), which also recognised the discretionary nature of penalty under section 271B.

Outcome: Section 271B Penalty of ₹1.50 Lakh Deleted

The ITAT allowed the assessee’s appeal for statistical purposes and directed the Assessing Officer to delete the penalty of ₹1,50,000 under section 271B. The important proposition emerging from the order is that even where the assessee may ultimately be found liable to tax audit, penalty under section 271B is not an automatic consequence. Where the assessee demonstrates a bona fide belief, supported by an accepted professional guidance or a reasonably possible interpretation of the law, and there is no deliberate, mala fide or contumacious conduct, such explanation can constitute reasonable cause sufficient for deletion of penalty.

Cases Discussed

• Manish Pushkar Dayal Singhal Vs ITO (ITAT Mumbai)
• N. Balakrishnan v. Krishnamurthy (1998) 7 SCC 123
• Collector, Land Acquisition v. Katiji 167 ITR 471 (SC)
• Commissioner of Income Tax-VII, New Delhi vs Punjab Stainless Steel Industries (Civil Appeal No. 5592 of 2008, dated 05.05.2014)
• Vighnaharta Trust v. DCIT (Exemption) C-2 (ITA No. 3324/MUM/2023 – order dated 01.03.2024)
• Sachin Marotrao Rangari v. ACIT [2022] 197 ITD 358 (Rajkot Trib)
• Smt. Snehal Rajendra Pathak v. ITO 26(1)(1)- (ITA No. 3550/MUM/2014 – order dated 31.03.2017)

FULL TEXT OF THE ORDER OF ITAT MUMBAI

The captioned appeal by the assessee emanates from order passed u/s. 250 of the Income Tax Act, 1961 (in short, ‘the Act’) by the National Faceless Appeal Center, Delhi/ Commissioner of Income Tax (Appeals) [in short, ‘CIT(A)’] for the assessment year (A.Y.) 2022-23 which, in turn, has arisen out of penalty order passed by the Assessing Officer (AO) u/s. 271B of the Act.

2. The grounds of appeal raised by the assessee are as hereunder:

“1. In the facts and circumstances of the case and in law, the National Faceless Appeal Centre/ Ld. Commissioner Income Tax (Appeals) has erred in not appreciating the facts of the case and confirming the penalty imposed upon by the Assessing Officer u/s 271B of the Income-tax Act, 1961.

2. In the facts and circumstances of the case and in law, the National Faceless Appeal Centre/ Ld Commissioner Income Tax (Appeals) has erred in holding that the Appellant was liable to get his accounts audited under Section 44AB of the Income-tax Act, 1961.

3. In the facts and circumstances of the case and in law, the National Faceless Appeal Centre/ Ld. Commissioner Income Tax (Appeals)has erred in not appreciating that GST cannot be included in the definition of ‘turnover’ for the purposes of Section 271B r.w.s. 44AB of the Income-tax Act, 1961.

4. In the facts and circumstances of the case and in law, the National Faceless Appeal Centre/ Ld. Commissioner Income Tax (Appeals)has erred in not appreciating that the Appellant was under a bonafide belief that GST cannot be included in the definition of ‘turnover’ for the purposes of Section 271B r.w.s. 44AB of the Income-tax Act. 1961 as per the guidance note of the ICAI.

5. The appellant craves leaves to add to, to alter or to amend the grounds of appeal.”

3. The appellant has filed the above appeal on 10.02.2026 against the order of the National Faceless Appeal Centre (NFAC) dated 07.07.2025. There was admittedly a delay of 133 days in filing the appeal, for which the assessee has made a prayer for condonation of delay and has also filed an Affidavit. The stated ground for delay is that when, after receiving the impugned order of the NFAC, the assessee followed up with his CA, Mr. Utsav Agarwal, it was brought to his notice that the said appeal had not been filed due to some personal difficulties of the CA, including transition of the CA practice from Mr. Bharat Agarwal (who had passed away in August 2024) to Mr. Utsav Bharat Agarwal. It is stated that it was only after follow-up by the assessee that Mr. Utsav Agarwal filed the appeal. Sworn affidavit of Mr. Utsav Agarwal supports the aforesaid contention, stating that in the process of taking over his father’s practice and managing the affairs of his father’s firm, he was unable to file the appeal on time.

3.1 In support of his prayer for condonation of delay, the appellant has cited decision of the Apex Court in N. Balakrishnan v. Krishnamurthy (1998) 7 SCC 123 where it was, inter alia, held that for condoning delay, length of the delay is not important – acceptability of the explanation is the only criterion. It has also been submitted that the expression ‘sufficient cause’ must receive a liberal construction so as to advance substantial justice. A litigant does not stand to benefit by resorting to delay, and therefore a justice-oriented approach is required to be taken by courts. In every case of delay there can be some lapses on the part of the litigant concerned but that alone is not enough to shut the door against him. Reference has also been made to the decision of Hon’ble Supreme Court in the case of Collector, Land Acquisition v. Katiji 167 ITR 471 (SC), where it was observed that: “When substantial justice and technical considerations are pitted against each other, the cause of substantial justice deserves to be preferred, for the other side cannot claim to have a vested right in injustice being done because of a non-deliberate delay.”

3.2 In view of the above, considering that the delay was neither intentional nor on account of any cavalier attitude on the part of the assessee, the same is hereby condoned.

4. Proceeding to the background of the case, the brief facts are that the appellant is an individual running a proprietary concern called D.M. Sales Corporation and is in the business of manufacturing and selling packaging materials. The appellant filed his return of income u/s. 139(1) of the Income Tax Act, 1961 on 29.07.2022 declaring a total income of Rs. 3,72,790/-. The case was selected for scrutiny through the CASS system and assessment u/s. 143(3) r.w.s. 144B of the Act was completed on 28.02.2024 wherein the Ld. AO did not propose any variation to the total income of the appellant.

However, during the course of assessment proceedings the Ld. AO noticed that as per the appellant’s GSTR-1 for the relevant year, the total invoice value was Rs. 11,59,43,746/- inclusive of GST. Since the amount was above Rs 10 crore, the Ld. AO held that the appellant was liable to get his books of accounts audited u/s. 44AB of the Act. He initiated penalty proceedings u/s. 274 r.w.s 271B of the Act for assessee’s failure to get the accounts of his business audited, and issued show cause notice to the assessee on 20/05/2024 requiring him to explain why the penalty should not be imposed.

The assessee furnished reply to the show cause notice on 04/06/2024. The Ld. AO, however, was not satisfied with the submissions made. Referring to the provisions of section 145A(ii) of the Act, he held that the appellant was required to consider the sales inclusive of any tax, duty, cess or fee in order to ascertain liability for Tax Audit u/s. 44AB of the Act. He, accordingly, levied penalty of Rs. 1,50,000/- u/s 271B of the Act. The assessee thereafter filed an appeal before the National Faceless Appeals Centre 27/09/2024 against the said order. His submission was that the total taxable value in his return of income is only Rs. 9,82,74,982/- which is lower than the limit prescribed u/s. 44AB of the Act. The Ld. CIT(A), however, held that the Appellant had failed to establish how his total sales/ turnover were below the prescribed limit for tax audit under section 44 AB of the Income Tax Act. He confirmed the penalty imposed by the Ld. AO under section 271B vide his order dated 07/07/2025. It is against this order of the Ld. CIT(A) that the assessee is in appeal before this Tribunal.

5. In the submissions made before us, the appellant’s Ld. Authorized Representative (AR), quoting the provisions of section 44AB of the Act, pointed out that in the facts and circumstances of the assessee’s case, he would be liable to get his accounts audited only if his total sales, turnover or gross receipts exceed Rs.10 crore during the relevant year. He referred to the appellant’s Balance Sheet, Profit & Loss account and GSTR 1 (viz. annual return filed under the GST regime). His contention was that the Profit & Loss account and the GSTR 1 clearly show that the appellant follows the exclusive method, and accounts for the GST separately. He also pointed out that while his total sales is Rs. 9,82,74,992/-, the “total taxable value” as per GSTR 1 is Rs. 9,83,03,353/-, and both are less than Rs. 10 Crore.

5.1 The stand taken by the appellant’s Ld. AR is that the terms – “sales”, “turnover” or “gross receipts” – are not expressly defined in the Act, and that these commercial terms should, therefore, be construed in accordance with the method of accounting regularly followed by the assessee. He has relied heavily on the ‘Guidance Note on Tax Audit u/s. 44AB of the Income-tax Act, 1961 – AY 2022-23’ issued by the Institute of Chartered Accountants of India (ICAI), which has interpreted the term “turnover” to mean the aggregate amount for which sales are effected or services are rendered by an enterprise. Para 5.9 of the Guidance Note specifically states that if GST or any other tax is included in the sale price, no adjustment in respect thereof should be made for considering the quantum of turnover. Hence, it is the case of the appellant that the GST collected and paid was not to be included in the definition of total sales, turnover or gross receipts for the purposes of audit u/s. 44AB of the Act.

5.2 The appellant’s Ld. AR also submitted that the language of section 145A(ii) of the Act makes it clear that GST is not to be included for the determination of income under the section. Section 145 A (ii) states that – “For the purpose of determining the income chargeable under the head Profits and gains of business or profession –

(ii) the valuation of purchase and sale of goods or services and of inventory shall be adjusted to include the amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to bring the goods or services to the place of its location and condition as on the date of valuation.” But GST, according to the Ld. AR, cannot be considered as a tax actually paid/incurred by the appellant to bring the goods or services to the place of its location and condition as on the date of valuation. On the contrary, GST is a tax that is merely collected by the assessee on behalf of the government and is paid to the government within prescribed timelines. GST, as pointed out, was not debited to the Profit & Loss account of the appellant but figured as ‘GST Payable’ under Current Liabilities. Such GST cannot, therefore, be considered as part of the turnover since it is not in the nature of ‘income’.

5.3 Yet another point made by the Ld. AR is that section 145A is expressly for the purpose of determining the income chargeable under the head Profits and gains of business or profession and, therefore, it cannot be used for any other purpose, i.e. determining ‘turnover’ under the Act.

5.4 The appellant’s AR further relied on several judicial precedents, and particularly on the following decisions:

• The Hon’ble Supreme Court in the case of Commissioner of Income Tax-VII, New Delhi vs Punjab Stainless Steel Industries – (Civil Appeal No. 5592 of 2008, dated 05.05.2014) – where it was, inter alia, observed that it is clear from the ICAI Guidance Note that in normal accounting parlance, the word ‘turnover’ would mean ‘total sales’, and that they do not see any reason for not accepting the meaning of the term ‘turnover’ given by a body of Accountants, which is having a statutory recognition.
• Smt. Snehal Rajendra Pathak v. ITO 26(1)(1)- (ITA No. 3550/MUM/2014 – order dated 31.03.2017) – In this case, the claim of the assessee before the lower authorities was that she was under a bonafide belief that only the net of sales and purchases is required to be seen for the purposes of section 44AB of the Act. Although the Assessing Officer as well as the CIT(A) were not satisfied with the explanation furnished, the Hon’ble Court held that the bonafide belief of the assessee can be a good ground to mitigate the rigours of section 271B of the Act.
• Vighnaharta Trust v. DCIT (Exemption) C-2 -(ITA No. 3324/MUM/2023 – order dated 01.03.2024) – Observed that the levy of penalty is discretionary and not automatic. Considering the facts and circumstances of that case, the Hon’ble Court held that the assessee was under bonafide belief that there was no obligation for Tax Audit u/s. 44AB of the Act, and the default committed in not getting the audit report was without any malafide intention or any wanton act on the part of the assessee. Accordingly, the Hon’ble Court directed the Ld. AO to delete the penalty.
• Sachin Marotrao Rangari v. ACIT [2022] 197 ITD 358 (Rajkot Trib) – Distinguishing the word ‘may’ occurring in section 271B of the Act from the word ‘shall’, the Hon’ble Tribunal has observed that levy of penalty under the said section is discretionary and not automatic. In the facts of that case, it was seen that the explanations offered by the assessee had been ignored by the Ld. Assessing Officer as well as Ld. CIT(A) on the ground that the Guidance Note issued by the ICAI is not binding on the Income tax authorities. The Hon’ble Tribunal deleted the penalty levied u/s. 271B of the Act.

6. The Ld. Departmental Representative (in short, Ld. DR) placed reliance on the Ld. AO’s order u/s 271B, relevant excerpt from which is reproduced hereunder:- “However, on perusal of the profit and loss account, it was noticed that the assessee had made sales at RS. 9,82,74,982/-net of taxes and other charges. The assessee had shown GST Payable at Rs. 6,15,475/- in Balance Sheet as on 31/03/2021. During the course of assessment proceedings GSTR 1 was verified and noticed that the total invoice value was Rs. 11, 59, 43, 746/- inclusive of GST. In this regard, as per section 145A(ii) of the Act, the assessee was required to consider the sales inclusive of any tax, duty, cess or fee in order to ascertain liability of tax audit u/s 44AB of the I.T.Act,1961.” 6.1 The Ld. DR also referred to Para 7 of the order of the Ld. CIT(A), wherein it is mentioned that even if the amount of GST is excluded from the total turnover of ₹11, 59, 43, 746/-, the turnover of the appellant exceeded the limit prescribed for tax audit. He argued that as per facts brought on record by the Ld. AO, the total turnover of the appellant was Rs. 11 59, 43, 746/- inclusive of GST and Rs. 11, 53, 28, 271/- exclusive of GST. Since both the figures are above the limit prescribed for tax audit, the appellant was required to get his accounts audited as per provisions of section 44 AB of the Act, and the Ld. AO was justified in imposing the penalty of ₹1,50,000 in this case.

7. The Ld. DR then drew our attention to Form GSTR 1, submitted by the appellant himself, showing the Total Invoice Value for the relevant year as Rs. 11,59, 43,446/- which was above the monetary limit exceeding which the appellant was required to get his accounts audited u/s 44AB of the Income-tax Act. Further, he argued that the language of section 145A(ii) of the Act is clear about inclusion of tax, duty, cess or fee for valuation of total turnover, and the appellant cannot escape this mandate by seeking recourse to the ICAI Guidance Notes for interpretation of the meaning of gross receipts/turnover etc. General guidelines, he said, cannot override specific provisions of the Income-tax Act.

8. We have perused the submissions of both the parties. This is a penalty matter, and the broad issue which needs to be addressed in this context is whether or not the appellant’s failure to get his accounts audited was based on a bonafide belief that he was not liable for tax audit during the year under consideration. The ICAI Guidance Note on Tax Audit lays down that if GST or any other tax is included in the sale price, no adjustment in respect thereof should be made for considering the quantum of turnover. We have also seen how Hon’ble Courts have opined that there is no reason to not accept the meaning of the term ‘turnover’ given by the ICAI. In this scenario, where two views may be possibles, it would be difficult to completely brush aside the appellant’s contention that he was under a bonafide belief that that he was not liable to get his accounts audited under section 44 AB of the Act. Nothing has been brought on record to establish that the appellant deliberately, knowingly or with malafide intention failed to comply with the requirements of section 44AB of the Act. The present facts and circumstances, therefore, do not warrant the belief that the appellant’s failure to obtain the impugned tax audit report was intentional or contumacious. Accordingly, the explanation offered by the appellant of having acted under bonafide belief amounts to reasonable cause.

9. In view of the above, we direct the Ld. Assessing Officer to delete the penalty levied u/s 271B of the Income-tax Act in the appellant’s case.

10. In the result, the grounds raised by the assessee stand allowed for statistical purposes.