Penalty u/s 271B can not imposed if assesse has bona fide belief that he is not required to get accounts audited u/s 44AB

Summary of Judgment

Assistant Commissioner of Income-tax, Circle-I, Udupi vs. Dr. K. Satish Shett, February 22, 2008 (HC Kar)

Question

“Whether the Tribunal was correct in applying the principle laid down by the Hon’ble Supreme Court in the case of Hindustan Steel Ltd. v. State of Orissa in 83 ITR 26 to the facts of the case for the purpose of levying penalty under section 271B of the Act?”

Facts

The assessee is proprietor of three concerns namely, (1) Sathish Enter-prises – IOC Dealer (2) M/s. Khyathi Motors – Workshop (3) M/s. Khyathi  Enterprises – Insurance Agency. He filed return of income on 31-10-2001 declaring the net taxable income of Rs. 5,33,640. The return filed by him was processed under section 143(1). Subsequently, it was taken up for scrutiny and the assessment was completed on 25-3-2003 determining the income of the assessee at Rs. 5,86,620. In the said computation of income, the total income derived by him from all the three concerns was aggregated. The assessee obtained the audit report as required under section 44AB of the Act only in respect of M/s. Sathish Enterprises (IOC Dealer). In respect of two other businesses, according to assessee, due to his ignorance of law and bona fide mistake, he had not obtained Audit Report with regard to M/s. Khyathi Motors and M/s. Khyathi Enterprises. For these two businesses he had not obtained audit reports on the ground that individually from these two businesses, he had not exceeded the total turnover of Rs. 40 lakhs for the relevant assessment year, as contemplated under section 44AB of the Act.

For not obtaining proper audit report in respect of other two businesses, assessee was issued a notice under section 271B of the Act. The assessee gave his reply. It was not found favourable by the Revenue, even though the same was considered and an order came to be passed under section 271B of the Act levying penalty of Rs. one lakh on him for the aforesaid default. This order was passed by the Assessing Officer. Feeling aggrieved by the same, the assessee preferred to file an appeal before the Commissioner of Income-tax (Appeals), Mysore, who also proceeded to dismiss the appeal. Thereafter, assessee preferred further appeal before the Income-tax Appellate Tribunal challenging those two orders passed by both the authorities below. The Tribunal after considering the matter from all angles, came to the conclusion that no penalty could have been imposed on the assessee as there was no wilful default on his part and the appeal of the assessee was allowed. Hence, this appeal by the revenue.

Held

Taking the cumulative effect of the explanations offered by the assessee and from a reading of the relevant provisions of section 44AB and section 2(13) of the Act, we are of the considered opinion that the assessee was under a bona fide belief that he is required to obtain audit report only in respect of that business, the turnover of which crosses the limit of  Rs. 40 lakhs for each assessment year.

No doubt, it is true that the assessee was being represented by his Chartered Accountant and he should have been little more careful and cautious in applying the legal proposition to the facts of the case. He should have added the aggregate of all the three businesses so as to have full compliance of section 44AB of the Act. But for the mistake or default of the Chartered Accountant, who may have also acted bona fide, being unaware of the correct interpretation of law, the assessee cannot be held responsible, even though the said Chartered Accountant acted as an agent of the assessee. Since the issue involved was complicated, thus the clarification was issued by the Chartered Accountants of India, subsequently.

For all these reasons, we are of the opinion that the question of law, referred to hereinabove, has to be answered in favour of the assessee and against the revenue.

Editor