Case Law Details

Case Name : P.D. Usha Rani Vs. The Income Tax Officer (ITAT Hyderabad)
Appeal Number : ITA No. 250/Hyd/17
Date of Judgement/Order : 15/11/2017
Related Assessment Year : 2011- 12
Courts : All ITAT (4534) ITAT Hyderabad (262)

P.D. Usha Rani Vs. ITO (ITAT Hyderabad)

Penalty u/s. 271B is attracted for failure to get accounts audited u/s. 44AB. Even though the law prescribes the levy of penalty, in case of default, the same is not automatic as provisions of Section 273B gives relief, when there is a reasonable cause. The AO has to examine the same as per the provisions. In these cases, the turnover has increased marginally over the lower limit of Rs. 40 Lakhs prescribed u/s. 44AB for the first time during the year. Even though assessees are on the record of department in earlier years, there is no need to get the books audited earlier. Moreover, the provisions of Section 44AD have been amended so as to provide relief to the small business men upto turnover of Rs. 60 Lakhs. In assessee’s case(s), the turnover is less than Rs. 60 Lakhs. Therefore, there can be a bonafide belief that books need not be subjected to audit.

Moreover, as rightly considered by the Hon’ble High Court in the above referred case of Bajrang oil mills(supra), the AO has an option to treat the returns as defective, should have given an option to assessees for furnishing the audit report before considering initiation of penalty proceedings. AO has not considered the return as defective. Moreover, the books of account are rejected and in two cases incomes are assessed u/s. 44AD for which turnover of Rs. 60 Lakhs is the limit. In other case also, books are rejected and addition on closing stock valuation was made, which was subject matter of appeal separately. On the facts, respectfully following the principles laid down by the Hon’ble Court in the case of Bajrang Oil Mills Vs. ITO (supra), I am of the opinion that there is reasonable cause u/s. 273B and accordingly penalty u/s. 27 1B is not warranted.

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Full Text of the ITAT Order is as follows:-

All the three appeals pertain to levy of penalty u/s. 271B of the Income Tax Act [Act] for non-submission of audit report along with return of income u/s. 44AB of the Act. The assessees are family members and are in the business of manufacture of cloth at Nagari. The facts are similar and the orders of the AO/Ld.CIT(A) are also similar, except the amounts involved. Hence, all the three appeals are taken up together.

2. There was a delay of two days in filing the appeals. The cause given was that assessees are attending to old aged mother/ mother-in-law who was not well and the delay of two days occurred due to delay in signing the appeal papers and payment of Considering the explanation, the two days delay is condoned and appeals are admitted.

3. The turnovers, income considered at 8% and penalty u/s. 271B of the Act levied are as under:

Rs. Rs. Rs.
1. P.D. Usha Rani 55,81,382 4,29,313 26,830
2. P.G.M. Dharmalingam 55,8 1,382 4,13,800 27,910
3. P.G. Neelamegham 58,59,100 29,295

4. In the case of smt. P.D. Usharani & sri Dharmalingam, AO took the turnover at the same amount but arrived at different incomes and levied penalty at different amounts as can be seen from the table. However, Ld.CIT(A) confirmed penalty of Rs. 35,390/- and Rs. 32,370/- in the impugned orders i.e., more than the penalty levied. This indicates that the penalty proceedings are considered and finalized mechanically.

4.1. In the case of P.G. Neelamegham, AO instead of estimating income at 8% u/s. 44AD made addition of closing stock at Rs. 22,66,830/- (almost 45% of the turnover) but levied penalty u/s. 44AB stating assessees should have offered 8% on turnover u/s. 44AD. Ld.CIT(A) conferred the penalty at the same amount i.e., Rs. 29,295/-.

5. It was the explanation that assessee’s turnover was less than Rs. 60 Lakhs and so they are under bonafide impression that the income may be estimated and books need not be audited. This being 1st year of changed provisions, it was explained that assessees were under bonafide impression that maintenance of books of account u/s. 44AA is sufficient, as they are covered by the provisions of Section 44AD of the Act.The AO did not agree and levied penalty.

6. Ld.CIT(A) confirmed the penalty stating as under:

“4. It is a case where penalty u/s 271B is levied for violating the provisions of Sec. 44AB read with Sec. 44AD, since the appellant has not admitted 8% income from eligible business u/s 44AD. The appellant made a plea that since it is a first year of amendment to Sec. 44AD, the appellant’s failure may be condoned. Further it is contended that AO has estimated the income @ 8% and hence penalty may not be leviable.

The contentions of the appellant are carefully considered. The appellant’s stand that he was ignorant of the provisions cannot be accepted as valid ground. The requirements of law need to be construed as they are unless discretion is provided under the law. The failure of the appellant to disclose 8% of profit and failure of the appellant to get the books of account audited are factually established. Hence, the levy of penalty u/s 271B by AO cannot be contested only on the ground that he was ignorant of law. As admitted the appellant is filing his return regularly and maintaining his accounts as required. Hence there is no valid excuse for not getting the accounts audited. The fact that A. O. estimated the profits @ 8% in no way reduces the culpability of the appellant.

Accordingly, the penalty of Rs. 35,090/- u/s. 271B is sustained”.

Similar orders were passed in other cases also.

7. It was the submission of Ld. Counsel that the returns are not treated as defective but, the books of account are rejected by AO and AO estimated income invoking the provisions of Section 44AD. Further, it was submitted that the limits u/s. 44AD were increased, so the assessees, even though maintained books of account as prescribed, did not submit them for audit under the bonafide belief that the audit is not required. Ld. Counsel relied on the decision of the Hon’ble Rajastan High Court in the case of Bajrang Oil Mills Vs. ITO [295 ITR 314] (Raj) in support of the contentions.

8. Ld.DR explained the facts, the provisions of law and relied on the orders of the authorities.

9. I have considered the rival contentions and perused the orders. Penalty u/s. 27 1B is attracted for failure to get accounts audited u/s. 44AB. Even though the law prescribes the levy of penalty, in case of default, the same is not automatic as provisions of Section 273B gives relief, when there is a reasonable cause. The AO has to examine the same as per the provisions. In these cases, the turnover has increased marginally over the lower limit of Rs. 40 Lakhs prescribed u/s. 44AB for the first time during the year. Even though assessees are on the record of department in earlier years, there is no need to get the books audited earlier. Moreover, the provisions of Section 44AD have been amended so as to provide relief to the small business men upto turnover of Rs. 60 Lakhs. In assessee’s case(s), the turnover is less than Rs. 60 Lakhs. Therefore, there can be a bonafide belief that books need not be subjected to audit. Moreover, as rightly considered by the Hon’ble High Court in the above referred case of Bajrang oil mills(supra), the AO has an option to treat the returns as defective, should have given an option to assessees for furnishing the audit report before considering initiation of penalty proceedings. AO has not considered the return as defective. Moreover, the books of account are rejected and in two cases incomes are assessed u/s. 44AD for which turnover of Rs. 60 Lakhs is the limit. In other case also, books are rejected and addition on closing stock valuation was made, which was subject matter of appeal separately. On the facts, respectfully following the principles laid down by the Hon’ble Court in the case of Bajrang Oil Mills Vs. ITO (supra), I am of the opinion that there is reasonable cause u/s. 273B and accordingly penalty u/s. 27 1B is not warranted.

10. In the result, all the appeals are allowed, cancelling the penalties so levied.

Order pronounced in the open court on 15th November, 2017

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