No penalty for non-getting account audited under bona fide belief based on ICAI Guidance Note on tax audit

Sachin Marotrao Rangari Vs ACIT (ITAT Rajkot)

The assessee vide its reply letter dated 08.12.2018 brought to the attention of the A.O., CBDT Circular No. 6/2016 which clarified the tax payers to choose whether the gains or losses from sale of listed shares/securities either should be treated as Business Income or Capital Gains. Further the assessee is of the bonafide belief that the net result in the trading of shares, cash and commodity shall be considered as “turnover” as per the Guidance Note issued by the Institute of Chartered Accountants of India (ICAI). Thus the total turnover from Derivatives, Equity Shares and Mutual Fund is Rs. 48,43,374/- which does not exceed Rs. 1 crore specified u/s. 44AB of the Act for the present Assessment Year 2016-17. Therefore the assessee is not liable to get his books audited and furnish audited report u/s. 44AB of the Act and consequently penalty cannot be levied u/s. 271B of the Act. The imposition of penalty under section 271B of the Act is not mandatory, rather it is discretionary, because if the assessee proves that there was a “reasonable cause” for the said failure, then the Assessing Officer ought to have considered the same and then proceed with levying penalty.

A perusal of the above provision shows that the Parliament has used the words “may” and not “shall”, thereby making their intention clear in as much as that levy of penalty is discretionary and not automatic. The said conclusion is further justified by Section 273B of the Act namely “penalty not to be imposed in certain cases”. A careful reading of Section 273B encompasses that certain penalties “shall” be imposed in cases where “reasonable cause” is successfully pleaded. It is seen that penalty imposable u/s 271 B is also included therein. By the said provisions, the Parliament has unambiguously made it clear that no penalty “shall be” imposed, if the assessee “proves that there was a reasonable cause for the said failure”. As noticed, if the statutory provision shows that the word “shall” has been used in Section 271B, then the imposition of penalty would have been mandatory. Section 271B as extracted above further throws light on the legislative intent as it specifically provides that no penalty “shall’ be imposed if the assessee proves “that there was reasonable cause for the said failure”.

Hon’ble Supreme Court in the case of Punjab Stainless Steel Industries (cited supra) recognize the Guidance Note issued by ICAI. The Jurisdictional High Court in the case of Sachinam Trust (cited supra) also held that the appropriate expression to be considered for deciding the applicability of the provisions of section 44AB would be the term ‘gross receipts’, the assessee, carrying on the business of financing, bona fidely believed that gross receipts of interest, and not gross amount of advances, would constitute the basis for ascertaining the limit of Rs. 40 lakhs so as to attract section 44AB, the assessee could be said to have a reasonable cause for not getting its accounts audited under section 44AB, and as such no penalty could be imposed on the assessee.

It is seen that the explanations offered by the assessee have been ignored by the 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 whereas the Hon’ble Supreme Court and Co-ordinate Bench of the Tribunal recognizes the same and applicable in the case of the assessee.

For the above reasons, we have no hesitation in deleting the penalty levied u/s. 271B of the Act.

FULL TEXT OF THE ORDER OF ITAT ROJKOT

This appeal is filed by the Assessee challenging the order dated 2 1 .06.202 1 passed by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, (in short referred to as “NFAC”), as against the confirming of levy of penalty u/s. 271B of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) relating to the Assessment Year (A.Y) 20 16-17.

2. The brief facts of the case is that the assessee is an individual and a salaried person and also entered into shares and derivative transactions. For the assessment year 2015-16, the assessee filed his original Return of Income on 30.07.2016 declaring total income of Rs. 15,35,100 / -. During scrutiny assessment proceedings, it was noticed that the total turnover/gross receipts of the assessee was Rs. 82,26,82,172/-. Thus the assessee was liable to get his accounts audited and furnish Audit Report u/s. 44AB of the Act, as the assessee has failed to get his books audited, the assessee shall be deemed to be in default and penalty u/s. 271B is initiated.

2.1 The assessee vide show cause notice dated 04.12.2018 issued as to why u/s. 271B penalty not be levied. In response the assessee vide its reply dated 08.12.2018, invited the kind attention of the Assessing Officer to the CBDT Circular No. 6/2016 dated 29.02.2016 which clarified the tax payers to decide whether the gains or losses from sale of listed shares/securities should be treated as business income or as capital gain for tax purposes. The tax payers had given an option to decide to treat the income arising from such transfer as business income or capital gains and the A.O. was not put it to dispute. Further the assessee was of the bonafide belief that in case of shares, cash and commodity trading only the net result considering the profit or loss shall be considered as turnover, as the assessee believed the same are also for securities. As the assessee computed the net loss arising from the sale of shares and commodities was a loss of Rs. 7,23,872/-. The provisions of Section 44AB which prescribes the turnover in business or profession exceeds 100 lakhs when the assessee should get his books audited under 44AB. The assessee further relied upon the Delhi Benches Tribunal decision in the case of Chander Prakash Batra in ITA No. 4305/Delhi/2011 dated 14.11.2014 and pleaded that no penalty u/s. 271B leviable in the assessee’s case.

2.2 The above explanation was not accepted by the Assessing Officer and held that ignorance of law is not an excuse for non­compliance of the statutory provisions of law. The case law relied upon by the assessee Chander Prakash Batra is not applicable to the assessee’s case and thereby levied penalty of Rs. 1,50,000/- u/s. 271B of the Act.

3. Aggrieved against the same, the assessee filed an appeal before the ld. CIT(A). During the appellate proceedings, the assessee submitted that he has carried transactions in shares, mutual funds and derivatives (Futures and options) with two brokers namely Axis Direct and R.K. Global Shares & Securities Ltd. The assessee also submitted “Guidance Note on Tax Audit u/s. 44AB of the Income Tax Act, 1961” issued by the Institute of Chartered Accountants of India (ICAI) as follows:

“5.14 The turnover or gross receipts in respect of transactions in shares, securities and derivatives may be determined in the following manner.

(a) Speculative transaction: A speculative transaction means a transaction in which a contract for the purchase or sale of any commodity, including socks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scraps. Thus, in a speculative transaction, the contract for sale or purchase which is entered into is not completed by giving or receiving delivery so as fo result in the sale as per value of contract note. The contract r.sseff/ed otherwise and squared up by paying out the difference which may be positive or As such, in such transaction the difference amount is ‘turnover’. In the case of an assessee undertaking speculative transactions there can be both positive and negative differences arising by settlement of various such contracts during the year. Each transaction resulting into whether a positive or negative difference is an independent transaction. Further, amount paid on account of negative difference paid is not related to the amount received on account of positive difference. In such transactions though the contract notes are issued for full value of the purchased or sold asset the entries in the books of account are made only for the differences. Accordingly, the aggregate of both positive and negative differences is to be considered as the turnover of such transactions for determining the liability to audit vide section 44AB.

(b) Derivatives, futures and options; such transactions are completed without the delivery of shares or securities. These are also squared up by payment of differences. The contract notes are issued for the full value of the assets purchased or sold but entries in the books of account are made only for the differences. The transactions may be squared up any time on or before the striking date. The buyer of the option pays the premier. The turnover in such types of transactions is to be determined as follows.

(i) The total of favorable and unfavorable differences shall be taken as turnover.

(ii) Premium received on sale of options is also to be included in

(iii) In respect of any reverse trades entered, the difference thereon, should also form part of the turnover.

(c) Delivery based transactions: Where the transaction for the purchase or sale of any commodity including stocks and shares is delivery based whether intended or by default, the total value of the sates is to be considered as turnover.”

1.4 In view of the above guidelines, turnover for determining the liability to tax audit u/s. 44AB of the Income Tax Act, 1961 in respect of each class of assets in which the appellant has carried out transactions, is to be considered as tabulated hereunder:

3.1 As per the Guidance Note the total turnover from derivatives Equity Shares, Mutual Fund is Rs. 48,43,374/- which does not exceed Rs. 1 crore as specified in Section 44AB of the Act. Therefore the assessee is not liable to get his books audited and furnish the report u/s. 44AB of the Act. Therefore no question of levying penalty u/s. 271B of the Act. The ld. CIT(A) held that the turnover in cases of Speculative transaction involving derivatives is not defined in Section 44AB of the Act. Thus one need not apply normal meaning of “turnover”. Accordingly the turnover/gross receipts of the assessee from the transaction of Rs. 82,26,82,172/- as computed by the A.O. has to be construed as “turnover” for the purpose of Section 44AB of the Act. The Guidelines given by the ICAI cannot be directly imported here since the same is not binding for the Income Tax proceedings. Further CBDT has also not issued any notification/circular to the effect that for the purpose of Section 44AB, the “turnover” as computed as the Guidance Note of the ICAI is required to be considered. Therefore the assessee was liable to get his accounts audited u/s. 44AB of the Act. Having not done A.O. is correct in levy of penalty u/s. 271B of the Act and thus dismissed the appeal filed by the assessee.

4. Aggrieved against the same, the assessee is in appeal before us with the following grounds:

1. That the learned CIT(Appeals) has grievously erred in contending that the turnover in cases of speculative transactions involving derivatives is not defined in section 44AB and therefore normal meaning of “turnover” as is generally understood is to be applied.

2. That the learned CIT(Appeals) has grievously erred in contending that the total turnover /gross receipts of the appellant from the transaction (Rs 82,26,82,172.32/-) as computed by the AO has to be considered as turnover for the purpose of section 44AB of the Act.

3. That the learned CIT(Appeals) has grievously erred in not considering the guidance note as issued by the Institute of Chartered Accountants of India (ICAI).

4. That the Learned CIT(Appeals) has grievously erred in upholding the action of the learned AO in levying penalty u/s.271B of the Income Tax Act, 1961.

5. Kindly stay the demand during pendency of the appeal.

5. Ld. Counsel Mr. Fenil Mehta reiterated the arguments made before the lower authorities and strongly relied upon by the guidelines issued by the Institute of Chartered Accountants of India (ICAI) and relied upon judgment of Hon’ble Supreme Court in the case of CIT vs. Punjab Stainless Steel Industries reported in [2014] 46 taxmann.com 68 wherein it was held that the ICAI has published same material under the head ‘Guidance Note’ on Tax Audit under Section44AB of the IT Act. “Interpreting the meaning of turnover by ICAI which is having a statutory recognition”. The said material has been published so as to guide the members of the ICAI. In our opinion, when a recognized body of Accountants, after due deliberation and consideration publishes certain material for its Members, one can rely upon the same.

5.1 The Ld. Counsel further relied upon by the Jurisdictional High Court in the case of ITO vs. Sachinam Trust [2009] 320 ITR 445 wherein the Hon’ble jurisdictional High Court deleted the penalty levied u/s. 271B of the Act is as follows:

Section 271B of the Income-tax Act, 1961 – For failure to get accounts audited – Where in view of Tax Audit Manual published by Bombay Chartered Accountants’ Society, which contained legal opinion of eminent counsel that in case of a person carrying on banking business, appropriate expression to be considered for deciding applicability of provisions of section 44AB would be term ‘gross receipts’, assessee, carrying on business of financing, bona fidely believed that gross receipts of interest and not gross amount of advance, would constitute basis for ascertaining limit of Rs. 40 lakhs so as to attract section 44AB, penalty on assessee was not leviable [Assessment year 1992-93] [In favour of assessee]

5.2 The Ld. Counsel further relied upon the Co-ordinate Bench of this Tribunal decision in the case of ACIT Vs. Hasmukh M. Shah reported in [2003] 85 ITD 99 wherein it was held as follows:

“In the instant case, the transactions of sale and purchase of shares done by the assessee as a stockbroker for and on behalf of his constituents were far in excess of the ceiling limit of Rs. 40 lakhs. If such transactions were to be considered as sales and turnover of the assessee, the case would be hit by the mischief of section 44 AB.

The word ‘turnover’ as appearing in section 44AB is not appropriate to the transaction which is done by an agent in the way of bringing together a buyer and a seller for brokerage or commission. The commission is the charge for his labour of bringing together the two  parties to the transactions of sale and purchase of shares and the transaction cannot amount to his ‘sale, turnover or receipts’. As a sharebroker, an assessee does not have any interest whatsoever in the goods agreed to be purchased or sold on behalf of his constituents.

There is no dispute that the sharebroker does not sell the goods of his principal as his own and only charges commission for bringing the two parties together for the purpose of sale and purchase. A sharebroker has no authority whatsoever to treat the goods as his awn. His only interest in the goods is to receive his brokerage on the transaction from the principals. The sharebroker would, therefore, not obviously come within the ambit of section 44AB.

Regarding the Circular No. 452, dated 17-3-1986, it may be pointed out that by applying the principles laid down in the said circular, it is clear that a stockbroker, like a kachcha arathia in foodgrains is merely entitled to brokerage and does not have any domain over the goods and is not interested in the profits and losses made by his constituent. Similarly, like a kachcha arathia, a stockbroker acts only as an agent of his constituent and never acts as a principal. So -whatever be the modalities of the transactions for the purchase and sale of shares made by the sharebroker for and on behalf of his constituents, the position is undisputed that he does not have any interest whatsoever in the transactions except brokerage for the services rendered by him in bringing the purchaser and seller together. Thus, the CBDT’s circular cited by the Assessing Officer rather supported the case of the assessee that the transactions in the accounts of the constituents were not to be considered for the purposes of turnover under section 44AB.

Regarding the interpretation of the word ‘turnover’ as made by the  Institute of Chartered Accountants in the context of section 44AB,  the publication, ‘Guidance Note on Tax Audit’ under section 44AB published by the Institute of Chartered Accountants of India is  relevant. Applying the said principles, it will be clear that the shares purchased/sold by the sharebroker for and on behalf of his constituent do not belong to the broker and therefore, the  transactions cannot be considered as his transactions for the  purposes of section 44AB.

5.3 Thus the assessee was of the bonafide belief that his turnover of Rs. 48,43,374/- which has not exceeded Rs. 1 crore as specified in the provisions of Section 44AB of the Act. Penalty cannot be levied for not getting audited the books of account u/s. 271B of the Act. Therefore pleaded to cancel the penalty of Rs. 1,50,000/- levied u/s. 271B of the Act and allow the appeal of the assessee.

6. Per contra the ld. D.R. Mr. B.D. Gupta appearing for the revenue supported the order passed by the Lower Authorities and pleaded to confirm the same and thereby dismissed the assessee’s appeal.

7. We have heard both sides arguments and perused the materials available on record including the Paper Book and Case Laws filed by the assessee. The assessee vide its reply letter dated 08.12.2018 brought to the attention of the A.O., CBDT Circular No. 6/2016 which clarified the tax payers to choose whether the gains or losses from sale of listed shares/securities either should be treated as Business Income or Capital Gains. Further the assessee is of the bonafide belief that the net result in the trading of shares, cash and commodity shall be considered as “turnover” as per the Guidance Note issued by the Institute of Chartered Accountants of India (ICAI). Thus the total turnover from Derivatives, Equity Shares and Mutual Fund is Rs. 48,43,374/- which does not exceed Rs. 1 crore specified u/s. 44AB of the Act for the present Assessment Year 2016-17. Therefore the assessee is not liable to get his books audited and furnish audited report u/s. 44AB of the Act and consequently penalty cannot be levied u/s. 271B of the Act. The imposition of penalty under section 271B of the Act is not mandatory, rather it is discretionary, because if the assessee proves that there was a “reasonable cause” for the said failure, then the Assessing Officer ought to have considered the same and then proceed with levying penalty. For better understanding, Section 271 B is extracted as follows:

271B. If any person fails to get his accounts audited in respect of any previous year or years relevant to an assessment year or [furnish a report of such audit as required under section 44AB], [Assessing] Officer may direct that such person shall pay, by way of penalty, a sum equal to one-half per cent of the total sales, turnover or gross receipts, as the case may be, in business, or of the gross receipts in profession, in such previous year or years or a sum of [one hundred fifty thousand rupees], whichever is less.]

7.1 A perusal of the above provision shows that the Parliament has used the words “may” and not “shall”, thereby making their intention clear in as much as that levy of penalty is discretionary and not automatic. The said conclusion is further justified by Section 273B of the Act namely “penalty not to be imposed in certain cases”. A careful reading of Section 273B encompasses that certain penalties “shall” be imposed in cases where “reasonable cause” is successfully pleaded. It is seen that penalty imposable u/s 271 B is also included therein. By the said provisions, the Parliament has unambiguously made it clear that no penalty “shall be” imposed, if the assessee “proves that there was a reasonable cause for the said failure”. As noticed, if the statutory provision shows that the word “shall” has been used in Section 271B, then the imposition of penalty would have been mandatory. Section 271B as extracted above further throws light on the legislative intent as it specifically provides that no penalty “shall’ be imposed if the assessee proves “that there was reasonable cause for the said failure”.

7.2 Further the Hon’ble Supreme Court in the case of Punjab Stainless Steel Industries (cited supra) recognize the Guidance Note issued by ICAI. The Jurisdictional High Court in the case of Sachinam Trust (cited supra) also held that the appropriate expression to be considered for deciding the applicability of the provisions of section 44AB would be the term ‘gross receipts’, the assessee, carrying on the business of financing, bona fidely believed that gross receipts of interest, and not gross amount of advances, would constitute the basis for ascertaining the limit of Rs. 40 lakhs so as to attract section 44AB, the assessee could be said to have a reasonable cause for not getting its accounts audited under section 44AB, and as such no penalty could be imposed on the assessee.

7.3 In the facts of the present case, it is seen that the explanations offered by the assessee have been ignored by the 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 whereas the Hon’ble Supreme Court and Co-ordinate Bench of the Tribunal recognizes the same and applicable in the case of the assessee.

7.4 For the above reasons, we have no hesitation in deleting the penalty levied u/s. 271B of the Act.

8. In the result, the grounds raised by the Assessee is allowed and the appeal filed by the assessee is hereby allowed.

Order pronounced in the open court on 28-09-2022