JASBIR SINGH vs. COMMISSIONER OF INCOME TAX

This appeal has been preferred by the assessee under Section 260A of the Income Tax Act, 1961 (in short “the Act”) against the order dated 20.1.2003 passed by the Income Tax Appellate Tribunal, Chandigarh Bench, Chandigarh (hereinafter referred to as “the Tribunal”) in ITA No. 1091/CHANDI/98 for the assessment year 1991- 92, proposing following substantial question of law:- “That whether under the facts and circumstances of the case and on the true interpretation of the provision of the Act the Hon'ble Tribunal was justified in upholding the levy of penalty u/s 271B for delayed filing of the audit report in response to the -2- proceedings u/s 148 and before the completion of the assessment?”

Facts necessary for adjudication as narrated in the appeal may be noticed. The assessee filed his return on 3.9.1991 declaring an amount of Rs.40,720/-. The search was conducted on 7.9.1993 under Section 132 of the Act on the premises of M/s Sarup Singh and Company and group cases and notice under Section 148 of the Act was issued on 31.10.1995 for not disclosing the income from supply of milk to M/s Milk Foods Ltd., Bahadurgarh. In pursuance thereto, the assessee filed return on 26.12.1995. The assessment was completed under Section 143(3) on 27.3.1997 determining the income at Rs.2,21,985/-. In the absence of the tax audit report, the income from supply of milk was estimated by applying a gross profit rate of 0.5% on the total sales of Rs.3,45,27,248/- (Rs.3.45 crores) as the gross profit rate of 0.53% was disclosed in the firm for the assessment year in question. Since the turnover exceeded Rs.40 lacs, the assessee was required to get its accounts audited and was directed to obtain its report before 31.10.1991. the said report was not filed with the return. The assessee filed the audit report dated 8.6.1991 of H.R. Mittal and Co. during the course of reassessment proceedings. Accordingly, the Assessing Officer initiated penalty proceedings under Section 271B of the Act and imposed a penalty of Rs.1 lac on account of failure of the assessee in obtaining the report and furnishing the same with the return. Against the penalty, the assessee filed an appeal. The Commissioner of Income Tax (Appeals) [in short “the CIT(A)”] vide order dated 31.7.1998 allowed the appeal and deleted the penalty -3- imposed by the Assessing Officer. Being aggrieved, the revenue went in appeal before the Tribunal, who vide order dated 20.1.2003 set aside the order of the CIT (A) and restored that of the Assessing Officer which give cause to the assessee to approach this Court by way of instant appeal.

We have heard learned counsel for the parties and perused the record.

Learned counsel for the appellant submitted that the accounts of the assessee were audited on 8.6.1991, i.e. before the filing of the return, but the audit report was misplaced and, therefore, the same could not be filed along with the return. According to the learned counsel, penalty under Section 271B, as it stood at the relevant time, could be imposed for not filing the audit report along with the return which was filed under Section 139(1) or in response to notice issued under Section 142(1) but Section 271B was not attracted where the assessee had failed to file the audit report along with the return filed in response to notice under Section 148 of the Act. The penalty proceedings under Section 271B were initiated on 27.3.1997 while framing assessment on the basis of returned filed in compliance to notice under Section 148 of the Act. Reliance was placed on the decision of this Court in Income Tax Officer v. Kaysons India [2000] 246 ITR 489. 5. Learned counsel for the revenue submitted that failure of the assessee to file the audit report along with the return had made him liable to penalty under Section 271B of the Act. He supported the order passed by the Tribunal.

We have given our thoughtful consideration to the respective submissions of learned counsel for the parties.

Section 271B of the Act at the relevant time, i.e. prior to 1995, reads as under:- “271-B if any person fails to get his accounts audited in respect of any previous year or years relevant to an assessment year or obtain a report of such audit as required under section 44AB or furnish the said report along with the return of his income filed under sub-section (1) of section 139 or along with the return of income furnished in response to a notice under clause (i) of sub-section (1) of section 142, the Assessing Officer may direct that such person shall pay, by way of penalty a sum equal to one half percent of the total sales, turnover or gross receipts, as the case may be, in business, or of the gross receipts in profession, in such previous year or years or a sum of one hundred thousand rupees, whichever is less.”

A Division Bench of this Court in Kaysons India's case (supra) while interpreting Sections 44AB and 271B, as they stood prior to 1.7.1995, had observed as under:- “A plain reading of the aforesaid provisions shows that it provides for penalty in case of following events: (i) Failure to get the accounts audited in terms of section 44AB. This would cover cases where either -5- the accounts are not got audited at all or are got audited but after the specified date; (ii) Failure to obtain report of audit as required under section 44AB. This would cover cases where the accounts are duly got audited but the audit report on the prescribed form is not obtained before the specified date; (iii) Failure to furnish the audit report along with the return of income filed under sub-section (1) of section 139. This would cover cases where a return has been filed under sub-section (1) of section 139 and the audit report is not attached therewith. (iv) Failure to furnish the audit report along with the return of income furnished in response to a notice under clause (i) of sub-section (1) of section 142. This would cover cases where a notice under clause (i) of sub-section (1) of section 142 is issued to an assessee requiring him to file a return and in response to the same a return is filed without attaching the audit report.”

In that case, the assessee had not filed the audit report along with the return filed under Section 139(4) of the Act. The Division Bench while adjudicating the issue in favour of the assessee had held:- “It is, therefore, evident that the default or failure to file the return along with the audit report on or before the specified date is not hit by the provisions of -6- section 271B. It is not the case of the Revenue that the assessee has failed to get the accounts audited or has failed to obtain the report of such audit in terms of section 44AB before the specified date. It is also evident that no return had been filed either under sub-section (1) of section 139 or in response to any notice under clause (i) of sub-section (1) of section 142 and as such there could possibly be no default of not furnishing the audit report along with such a non-existent return. The return under sub- section (1) of section 139 in this case could be filed up to November 30, 1990. However, the assessee had filed the return on December 31, 1990 which was a return filed under sub-section (4) of section 139 and this return was duly accompanied by the audit report obtained by the assessee in accordance with the provisions of section 44AB. Thus, according to us, the default for which penalty had been levied was not covered by the provisions of section 271B and the Commissioner of Income-tax (Appeals) and the Tribunal were justified in holding that no penalty was leviable.”

It is not in dispute that the original return declaring an income of Rs.40,720/- was filed on 3.9.1991 which was processed under Section 143(1)(a) on 4.2.1992 and the Assessing Officer had not initiated any penalty proceedings under Section 271B of the Act for the -7- failure on the part of the assessee to file the audit report along with this return. The penalty proceedings under Section 271B of the Act were initiated in the course of assessment proceedings while finalizing assessment in response to notice issued under Section 148 of the Act as would be evident from perusal of assessment order dated 27.3.1997. Further, the audit report dated 8.6.1991 was filed by the assessee during reassessment proceedings. Once that is so, then applying the aforesaid guiding principles as laid down in Kaysons India's case (supra), it can safely be concluded that the Tribunal was in error in reversing the order of the CIT(A) while upholding penalty under Section 271B in the present case.

Accordingly, the substantial question of law is answered against the revenue and in favour of the assessee. Consequently, the appeal is allowed and the order of the Tribunal dated 20.1.2003 is set aside. (AJAY KUMAR MITTAL) JUDGE September 28, 2010 (ADARSH KUMAR GOEL) gbs JUDGE