Introduction: The Income Tax Appellate Tribunal (ITAT) Mumbai recently addressed the issue of penalty under Section 271B of the Income Tax Act, 1961. The case, “Varadagovind Parthasarthy Iyer vs. ITO,” pertained to the assessment year 2015-16 and involved an assessee engaged in trading, financing, realty, and commodities businesses. The penalty under scrutiny was Rs. 1,50,000, imposed for not getting the accounts audited, as required under Section 44AB.
1. Background of the Case : The case revolves around the penalty proceedings initiated against the assessee under Section 271B of the Income Tax Act for the assessment year 2015-16. The penalty in question amounts to Rs. 1,50,000.
2. Nature of Assessee’s Business: The assessee in this case is involved in a multifaceted business, including trading, financing, real estate, and commodities. It’s essential to understand the diverse nature of the assessee’s activities, as this plays a role in the penalty imposed.
3. Tax Treatment of Losse: The primary contention in the case was the treatment of short-term capital losses. The assessee had declared a short-term capital loss of Rs. 34,94,555 from trading in futures and options, as well as losses from trading in shares and derivatives. However, the Assessing Officer (AO) categorized these losses as business losses, not short-term capital losses, on the grounds that trading in futures and options did not constitute a sale of assets.
4. Trigger for Penalty (Section 44AB): The AO noted that the total turnover from transactions in futures and options exceeded Rs. 1 crore, surpassing the limit set by Section 44AB of the Income Tax Act. Since the assessee failed to submit the auditors’ report and did not have the accounts audited, it amounted to a contravention of Section 44AB. As a result, the AO initiated penalty proceedings under Section 271B.
5. Assessee’s Response: In response to the show-cause notice, the assessee argued that they had approached their investments as an investor, not a trader. However, the AO remained unconvinced and concluded that the assessee had not provided a plausible reason for not auditing the accounts, leading to the imposition of the penalty.
6. Legal Arguments: Before the ITAT Mumbai, the assessee’s counsel contended that since the assessee had not maintained any books of accounts, the question of auditing such accounts did not arise. They relied on relevant judgments from the Allahabad High Court, including CIT vs. SK. Gupta and Co. (2010) 322 ITR 86, CIT, Bareilly vs. Bisauli Tractors (2007) 165 Taxman (All), and CIT vs. Surajmal Parsuram Todi (1996) 222 ITR 691 (Gauhati), to support their case.
7. ITAT Mumbai’s Decision: The ITAT Mumbai carefully considered the arguments and reviewed the orders passed by the lower authorities. They emphasized that the penalty had been imposed under Section 271B for a violation of Section 44AB, specifically the failure to get accounts audited.
The critical factor in this case was the non-maintenance of books of accounts by the assessee, as required by Section 44AA. In such instances, there is a separate penal provision for levying penalties for non-maintenance of books of accounts under Section 271A. The ITAT referred to the decisions of the Allahabad High Court in CIT vs. Bisauli Tractors and CIT vs. S.K Gupta, where it was established that Section 271B is not applicable when no accounts have been maintained. Instead, recourse can be taken under Section 271A for non-maintenance of books of accounts.
8. Penalty Deletion: Considering these legal precedents and the absence of maintained books of accounts by the assessee, the ITAT Mumbai ruled in favor of the assessee and deleted the penalty imposed under Section 271B.
9. Conclusion: The case of Varadagovind Parthasarthy Iyer vs. ITO before the ITAT Mumbai highlights the significance of proper legal interpretation and adherence to procedural requirements in tax matters. The tribunal’s decision underscores the principle that penalties must align with the specific provisions of the Income Tax Act, particularly in cases where books of accounts have not been maintained. In such situations, the appropriate recourse is under Section 271A, rather than Section 271B.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
The aforesaid appeal has been filed by the assessee against order dated 16/03/2023 passed by NFAC, Delhi in relation to the penalty proceedings u/s.271B for the A.Y.2015-16.
2. The assessee is mainly aggrieved by levy of penalty of Rs.1,50,000/- u/s. 271B. The brief facts are that in this case assessee has filed return of income of Rs.12,50,340/-. He is engaged in the business of trading, financing, reality and commodities etc. Assessee has declared short term capital loss of Rs.34,94,555/- from trading in future and option and loss was arrived from business of trading in shares and derivatives. AO has treated this loss as business loss instead of short term capital loss declared by the ld. AO on the ground that assessee was trading in F & O and it is not sale of asset. The AO noted that the total turnover from transaction in future and option was of Rs. 89,78,78,650/- which is more than the limit prescribed in Section 44AB of the Act. Since, the assessee has failed to submit the report of the auditors and has not got the accounts audited, therefore, there was a contravention of Section 44AB and accordingly, penalty u/s.271B was initiated.
3. In response to the show-cause notice, assessee submitted that he has done all the investment considering himself as an investor and not as a trader. However, the ld. AO held that assessee has not given plausible reason for not auditing the accounts and therefore, he levied penalty at Rs.1,50,000/-u/s.271B. This penalty has been confirmed by the ld. CIT (A) also.
4. Before us ld. Counsel submitted that assessee has not maintained any books of accounts and once assessee has not maintained any books of accounts, then there is no question of the getting the books of accounts audited and therefore, no penalty u/s.271B can be applied. In support, he relied upon the following decisions of the Hon’ble High Court:-
1. CIT vs SK. Gupta and Co. 322 ITR 86 (Allahabad)
2. CIT, Bareilly vs. Bisauli Tractors  165 Taxman (All)
3. CIT vs Surajmal Parsuram Todi  222 ITR 691 (Gauhati)
5. On the other hand, ld. DR submitted that turnover was more than Rs.1 Crore and assessee was required to get the accounts audited.
6. After considering the relevant facts placed on record and also the orders passed by the authorities below, we find that the penalty has been levied u/s. 271B for violation of Section 44AB, i.e., failure to get the accounts audited. It is not in dispute that assessee has not maintained any books of accounts as required u/s.44AA. For violation of non maintenance of books of account u/s 44AA, there is a separate penal provision for levying penalty for non-maintaining of books of accounts prescribed u/s. 271A and therefore if at all penalty should have been levied under this section. The Hon’ble Allahabad High Court in the case of CIT vs. Bisauli Tractors reported in 299 ITR 219 had held that Section 271B of the Act is not attracted in the case where no account has been maintained and instead recourse u/s.271A can be taken. This principle has again been reiterated by the Hon’ble Allahabad High Court in the case of CIT vs. S.K Gupta reported in 322 ITR 86. Similar view has been taken by the Hon’ble Guahati High Court in the case of CIT vs. Surajmal Parsuram Todi supra. Accordingly, we hold that no penalty u/s.271B is leviable when assessee has not maintained the books of accounts. Accordingly, penalty is deleted.
6. In the result, appeal of the assessee is allowed.
Order pronounced on 23rd August, 2023.