Section 44AB of the IT Act, 1961 imposes a mandatory requirement for certain businesses and professionals to undergo an audit for every accounting year, which must be submitted within the prescribed time-period. Correspondingly, Section 271B provides for the imposition of a penalty in case of non-compliance with the audit requirement. However, Section 273B allows for the possibility of exemption if the assessee can demonstrate a reasonable cause that prevented them from complying with the audit requirement.
Seizure and Delay in Audit
This situation becomes tricky when the relevant documents are seized by the IT department, and they neither return the documents nor provide certified copies to the assessee in a timely manner, thereby preventing compliance with the audit requirement under Section 44AB. In Sameer Mavji Patel v. Dy. Commissioner of Income Tax, 2013 SCC OnLine ITAT 1175: [2013] ITAT 565, the tribunal stated that “there was a delay in getting the copy of the stock statement prepared during the survey from the Department and this delay constituted a reasonable cause for the failure of the assessee in getting the accounts audited in time and furnishing the report of such audit within the period prescribed u/s 44AB. In that view of the matter, we cancel the penalty imposed by the AO and confirmed by the learned CIT(Appeals) u/s 271B and allow this appeal of the assessee.”
Standard of Proof
At this juncture, it becomes evident that the outcome largely depends on proving reasonable cause before the tax authority. But what are the broad contours of the standard of proof required to establish reasonable cause in the context of Section 273B? This question has been addressed in ITO v. Arun Kumar Bhuwalka, 40 ITD 373 (Cal), where the adjudicating authority stated that “proceedings under Section 271B read with Section 273B are not in the nature of a criminal trial and the standard of proof required in such penalty proceedings is lower compared to a criminal case. Evidence which can convince a reasonable man in a rational way is sufficient, and penalty is not exigible.” Therefore, it becomes clear that the threshold for proof has been kept at a bare minimum to protect the interests of the assessee.
Domino Effect of Seizure on Audit of Three Consecutive Assessment Years
Another perplexing scenario arose in Asst. Commissioner of Income Tax v. Kamlesh R. Agarwal, MANU/IB/5041/2005, wherein the ITA had seized the assessee’s accounts on 11-8-1992, but provided copies only after a lapse of four months. The assessment year in question was 1994-95, for which a penalty of ₹64,521 was imposed under Section 271B for the delayed submission of the audit report. The assessee argued that the delay in receiving the copies from the department caused the delay in the audit report for the year 1992-93, which had a domino effect on the subsequent years, 1993-94 and 1994-95, as the audit for the next accounting year could not be prepared without the closing figures from the previous year. The CIT(A) upheld this contention and deleted the penalty. Subsequently, the matter was placed before a three-member bench of the tribunal. The tribunal stated that “the audit of the immediately preceding year was completed on 29th October, 1994. It is difficult to presume that any auditor will proceed with the audit in the absence of authenticated closing figures of the immediately preceding year, and even after the same are provided, he will take his own time to complete the audit. For the year under consideration, the assessee has got its accounts audited on 27th March, 1995, which is within the period of 5 months from the date of audit of the immediately preceding year. The period of 5 months cannot be said to be unreasonable, as the period should be seen from the perspective of a reasonable common man. Thus, it cannot be said that the assessee took an unreasonable amount of time to get it audited for the year under consideration.” The tribunal also assessed the assessee’s contention that the non-completion of the immediately preceding year’s audit is a “reasonable cause” for the non-levy of penalty under Section 271B. The tribunal categorically held that “if no penalty has been levied for the immediately preceding year because there existed a reasonable cause, the same cause will be considered a reasonable cause for the non-levy of penalty for the year under consideration, and thus in either situation, no penalty can be levied for the year under consideration.”
judicial perspective on nature of 271b
Finally, it is also relevant to mention a judgment of the MP High Court, which highlights that the penalty under Section 271B must not be applied mechanically, and taxpayers should be allowed a certain amount of latitude in cases where no nefarious agenda is evident. In Staywell Hotels P. Ltd. v. Commissioner of Income-Tax, (2006) 283 ITR 92, the court declared that “the explanation offered by the assessee in this case ought to have been accepted as a sufficient one. The delay in filing certain forms was not inordinate; it was hardly of two months. Secondly, there was an explanation offered for such delay. The delay thus did not have any deliberate intention on the part of the assessee, nor could their conduct be regarded as contumacious or with a view to evading payment of tax. If at all there is any breach, it was technical or venial in nature. In the facts of this case, no case of penalty under Section 271B was made out.”
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