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.

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