WEST COAST FINE FOODS (INDIA) PRIVATE LIMITED ,ANDHERI, MUMBAI vs. DEPUTY COMMISSIONER OF INCOME TAX 13(3)(2), AAYKAR BHAWAN, MUMBAI

The assessee filed the reply stating that due to implementation of ERP system there was a delay in completing the audit under section 44AB of the Act and that the audit report has already been filed while filing the return of income. The AO did not accept the submissions of the assessee and proceeded to levy a penalty of Rs. 1,50,000/-. Aggrieved the assessee filed further appeal before the CIT(A). Before West Coast Fine Foods (India) Pvt. Ltd. the CIT(A), the assessee submitted that due to ERP implementation it was difficult to compile the information required for filing Tax Audit Report (TAR) and that the same was submitted before the completion of assessment proceeding. Therefore, the assessee prayed that penalty under section 271B may not be levied. The CIT(A) confirmed the penalty for the reason that the assessee has not responded to the various notices issued and does not file any documentary evidence in support of the ground taken. The relevant findings of the CIT(A) are extracted below: “5.8 The penalty proceedings in the instant case emanates from the order u/s 143(3) dated 23.12.2020 wherein the total income of the appellant was determined at Rs. 11,06,05,110/-. AO observed that the assessee failed to furnish tax audit report for the AY 2017-18 before the specified date and consequently, initiated penalty proceedings u/s 271B of the Act. Detailed justification for imposition of the penalty of Rs. 1,50,000/- are contained in paras 3 to 8 of the order u/s 271B dated 11.01.2022. The appellant has not filed any justification or furnished any documentary evidence in support of the grounds taken or the statement of facts challenging imposition of penalty u/s 271B, despite repeated opportunities granted to the appellant in this regard. As rightly observed by the AO, the appellant has clearly failed to furnish any justification for failure on its part to get the accounts audited u/s 44AB of the Act, by the specified date for the A.Y. 2017-18, despite the appellant having gross receipts of Rs. 212,51,06,142/-. Consequently, the imposition of the penalty of Rs. 1,50,000/- under section 271B is in order, and I find no infirmity in the same.”

The ld. AR submitted that the AO in the notice issued has stated that the penalty proceedings are initiated for failure to get the account audited or failure to furnish the Audit Report under section 44AB of the Act and therefore the assessee is not informed of the nature of failure for which penalty proceedings are initiated. The ld. AR further argued that the AO has levied the penalty for the reason that the assessee has not furnished the Audit report but the CIT(A) while confirming the penalty has held that the AO has levied penalty for the reason that the assessee failed to furnish any justification for failure on its part to get the accounts audited under section 44AB of the Act. Therefore, the ld. AR submitted that there is no clarity on revenue's part as to whether the penalty is levied for failure to get West Coast Fine Foods (India) Pvt. Ltd. accounts audited or failure to furnish the audit report on the part of the assessee warranting levy of penalty under section 271B of the Act. On merits the ld. AR submitted that the delay in getting the accounts audited and furnishing of the audit report is due to the fact that the assessee was implementing ERP System and therefore the required for completing the audit could not be compiled within the specified timeline. The ld. AR submitted that the delay is thus due to a reasonable cause which the lower authorities failed to consider while levying penalty under section 271B of the Act.

The ld. DR on the other hand submitted that though the assessee is claiming that the delay is due to ERP implementation no evidence to support the said claim is furnished before the lower authorities. The ld. DR further submitted that the assessee did not represent the case properly before the CIT(A) who has passed an ex-parte order and therefore there is a non-compliance on the part of the assessee. The ld. DR accordingly argued that the assessee has failed to substantiate the claim that there was a reasonable cause for delay in getting the accounts audited and furnishing of the audit report and therefore the lower authorities have correctly levied the penalty under section 271B of the Act.

We heard the parties and perused the material on record. The assessee for the year under consideration filed the return of income belatedly on 16.02.2018. The AO initiated penalty proceedings under section 271B of the Act by issuing show- cause notice which is reproduced below:

The contention of the ld. AR is that the specific non-compliance on the part of the assessee whether the assessee failed to get the account audited or failed to furnish the audit report is not coming out clearly from the above show-cause notice. From the observations of the AO in the order of penalty we notice that the AO has levied the penalty since reason quoted by the assessee for the delay being implementation of ERP system is not acceptable. During the course of hearing the ld. AR drew our attention to a letter dated 12.10.2018 which was submitted before the AO during the course of assessment proceedings in response to a notice under section 143(2) of the Act. On perusal of the said letter we notice that the assessee has filed the copy of the return of income along with audit report in Form-3CB before the AO. We further notice that the AO while completing the assessment under section 143(3) has taken into consideration the details furnished including the Audit Report. While considering the issue of penalty under section 271B of the Act, it is relevant to look at the provisions of section 273B of the Act which contains provisions to state that the penalty cannot be imposed under certain circumstances. The provisions of Section 273B read as under – West Coast Fine Foods (India) Pvt. Ltd. Penalty not to be imposed in certain cases. 273B. Notwithstanding anything contained in the provisions of clause (b) of sub- section (1) of section 271, section 271A, section 271AA, section 271B, section 271BA, section 271BB, section 271C, section 271CA, section 271D, section 271E, section 271F, section 271FA, section 271FAB, section 271FB, section 271G, section 271GA, section 271GB, section 271H, section 271-I, section 271J, clause (c) or clause (d) of sub-section (1) or sub-section (2) of section 272A, sub-section (1) of section 272AA or section 272B or sub-section (1) or sub-section (1A) of section 272BB or sub-section (1) of section 272BBB or clause (b) of sub- section (1) or clause (b) or clause (c) of sub-section (2) of section 273, no penalty shall be imposable on the person or the assessee, as the case may be, for any failure referred to in the said provisions if he proves that there was reasonable cause for the said failure.

From the plain reading of the above section it is clear that the penalty under section 271B cannot be levied if the assessee is able to prove that there was a reasonable clause for failure to get the accounts audited or for failure file the audit report as per the provisions of section 44AB of the Act. In the context of the penalty provisions including the provisions of Section 271B, the word "reasonable cause" would mean a cause which prevents a reasonable man of ordinary prudence acting under normal circumstances, without negligence or inaction or lack of bona fide. In assessee's case there is no dispute that the provisions of section 44AB are applicable to the assessee and accordingly the assessee ought to have complied with the said provisions within the time limit as specified therein. However the assessee has complied with the provisions of section 44AB belatedly due to ERP implementation and that the report has been filed with the return of income furnished during the course of assessment before the AO. In this regard it is relevant to consider the following observations of the Hon'ble Madras High Court while considering a similar issue in the case of Thanjavur Silk Handloom Weavers Co-operative Production & Sales Society Ltd. vs Union of India [2003] 263 ITR 334 (Madras) – West Coast Fine Foods (India) Pvt. Ltd. "21. The object of section 44AB is to prevent tax evasion and plug loopholes enabling tax avoidance. This provision was introduced by the Finance Act (No. 21 of 1984) as a measure in the drive to unearth black money. Section 44AB requires accounts of every person carrying on business and whose turnover or gross receipts exceeds Rs. 40 lakhs, to get his accounts audited by an accountant before the specified date and furnish by date, the report of such audit in the prescribed form duly signed and verified by such accountant. Specified date in relation to the accounts is December 31 of the assessment year where the assessee is a company and October 31, in other case of the assessment year.

Section 271B of the Act provides that if any person fails to get his accounts audited in respect of any previous year or years relevant to an assessment year, or furnish a report of such audit as required under section 44AB, the Assessing Officer may direct that such person shall pay by way of penalty a sum equal to one-half percentage of the total sales turnover, etc. Section 44AB and section 271B have to be read together. A harmonious consideration of both the provisions requires the assessee to file an audit report within the specified time failing which he will have to pay penalty, if the assessee fails to assign reasonable cause and satisfy for not doing so. If the return of income was filed within the extended time along with the tax audit report, then there would be no default, which is punishable under section 271B. Where the assessee had obtained the audit report before the prescribed date provided, under section 44AB, but filed along with the return belatedly, the same may not attract penalty under section 271B. Whether the assessee failed to file audited accounts with the return within time, such partial failure also does not attract penalty as an interpretation, which is favourable to the assessee is called for and accepted.

If a person fails to get his accounts audited and furnish a report of such audit, as required under section 44AB, it may attract a levy of penalty as provided under section 271B. The contention that belated filing of the audit report is per se leviable with a penalty, in my considered view cannot be sustained and the further contention that belated filing results in consequential levy automatically also cannot be sustained".

From the above observations it is clear that the levy of penalty under section 271B is not automatic and that if the assessee is able to establish the reasonable cause for the failure or the delay then the levy of penalty may not be warranted. In the light of the said legal position when we look at the facts in the present case, the assessee's reason for delay in getting the books audited and the consequent delay in furnishing the report is that the assessee was implementing a new ERP system due West Coast Fine Foods (India) Pvt. Ltd. to which the details required for audit purposes could not be collated. This fact is also substantiated by the fact that the assessee has filed the return of income itself belated for the same reason. Therefore there is merit in the submission of the ld AR that there is a reasonable cause for the delay in getting the books audited and the consequent delay in furnishing the report. Further the assessee has furnished the audit report along with the return of income during the course of assessment proceedings and that the AO has taken into consideration the same while completing the assessment under section 143(3) of the Act. We also notice from the perusal of the CIT(A)'s order that the CIT(A) has confirmed the penalty based on the misunderstood fact the assessee failed to get the accounts audited whereas the AO has levied the penalty for non-furnishing of the audit report. Therefore the argument of the ld AR that the revenue is not clear about the nature of violation by the assessee while levying the penalty has merits. In view of these discussions and considering the facts unique to assessee's case we hold that in assessee's case penalty under section 271B is not warranted and the AO is directed to delete the same.

In result appeal of the assessee is allowed.