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Facts
The assessee, engaged in trading Mill Scale, filed the return for AY 2010-11. The AO reopened the assessment due to a significant discrepancy in turnover and initiated penalty proceedings under section 271B for failure to get accounts audited. The assessee argued that the demise of his business partner, Mr. Hardik Mehta, who managed compliances, along with his own disability and family circumstances, constituted a reasonable cause for the failure.
Held
The Tribunal held that the assessee's contentions regarding the demise of his partner, his own disability, and lack of knowledge of tax laws, leading to difficulties in complying with audit requirements, constituted a reasonable cause under Section 273B. Therefore, the penalty imposed under Section 271B was not sustainable.
Key Issues
Whether the assessee had a reasonable cause for failure to get accounts audited under Section 44AB, thereby avoiding penalty under Section 271B, considering the circumstances of his partner's demise and his personal limitations.
Sections Cited
148, 44AB, 271B, 273B, 274
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Income Tax Appellate Tribunal, “F” BENCH, MUMBAI
Before: SHRI NARENDER KUMAR CHOUDHRY, JM &
: Shri Jignesh Shah (A’s in person) Appellant /Assessee by : Shri Krishna Kumar, Sr. DR Revenue / Respondent by Date of Hearing : 11.04.2025 Date of Pronouncement : 21.04.2025 O R D E R
Per Padmavathy S, AM:
This appeal by the assessee is against the order of the Commissioner of Income Tax (Appeals) / National Faceless Appeal Centre (NFAC), Delhi [for short 'the CIT(A)] dated 07.08.2024 for the AY 2010-11. The assessee raised the following grounds of appeal:-
Jignesh Suresh Shah “The following Grounds of Appeal are without prejudice to one another:-
1. On the facts and circumstances of the case and in law, the Ld. Commissioner of Income Tax (Appeals) (National Faceless Appeal Centre) erred in confirming the action of NFAC in imposing Penalty of INR 1,50,000/- u/s 271B of the act, without considering the appellants submission.
2. On the facts and circumstances of the case and in law, the Ld. Commissioner of Income Tax (Appeals) (National Faceless Appeal Centre) erred in ignoring the case laws quoted by the appellant which are of Higher Fora and applicable to the appellants case.
3. On the facts and circumstances of the case and in law, the Ld. Commissioner of Income Tax (Appeals) (National Faceless Appeal Centre) erred in understanding Section 271B r.w.s. 273B of the Act in its true spirit.
4. The appellant craves leave to add, amend, alter, modify and or withdraw any of the above Grounds of Appeal, which are prejudice to each other. The Appellant prays this Hon'ble Tribunal to delete the addition of INR 1,50,000/- being Penalty imposed u/s 271B for non-audit of books of Accounts by the NFAC and confirmed. by the Ld. Commissioner of Income Tax (Appeals)”
2. The assessee is an individual and engaged in the business of trading in Mill Scale which is a by-product of rolling mills. The assessee filed the return of income for AY 2010-11 on 06.01.2011 declaring a total income of Rs. 97,300/-. The case was selected for scrutiny and statutory notices were duly served on the assessee. The Assessing Officer (AO) during the course of hearing called on the assessee to furnish various details including the audit report for the last three years. The AO noticed that the assessee is a proprietor of various concerns and the turnover of the various concerns are much more than what is declared by the assessee in the return of income. Accordingly the AO reopened the assessment by issuing a notice under section 148 of the Income Tax Act, 1961 (the Act). The assessee filed the return of income in response to notice under section 148 of the Act on 19.07.2017 and in the said return of income the total sales turnover / gross Jignesh Suresh Shah receipts has been revised by the assessee to Rs. 3,14,43,447/- as against Rs. 5,72,498/- shown in the original return of income. However, the income returned was declared at Rs. 1,72,618/- in the revised return as against Rs. 97,310/- declared in the original return of income. The AO called on the assessee to furnish various details from time to time and after perusing the details furnished the AO completed the assessment by making an addition of Rs. 3,07,56,388/- towards bogus purchases. The AO also initiated penalty proceeding under section 271B for failure to get account audited.
3. The AO subsequently issued a penalty notice under section 271B of the Act and issued show-cause notice dated 22.12.2017. In response, the assessee submitted that “With reference to your notice, regarding penalty proceedings u/s 271 B of the income tax act, 1961, I submit as under, I again submit what I submitted during assessment proceedings that I was looking after sales part & my partner/colleague Mr. Hardik Mehta was dealing with the mediators & agents who used to procure the mill sale through his sources. It was Hardik Mehta only who also used to look after compliance or tax payment if any. I also submit that Mr. Hardik Mehta was the one who established the business & helped me to eam my livelihood, even his untimely demise caused me immense difficulties to eam my livelihood & meeting my family's expenses. I am handicapped & not so educated or well versed with any laws or taxes else instead to be dependent on Mr. Hardik Mehta for my livelihood, I myself would have started some business or joined some job for the bread & butter for my family. I further submit that as a law abiding citizen I paid taxes as per average margin i.e. 1.70% as soon as I received the notice. Even though I am handicapped, I am the only eaming member in my family. My family consists of my dependent father Suresh Shah whose age is 75 years, Wife who is house wife and is handicapped, 2 sons aged around 9 years old. Due to regular Jignesh Suresh Shah medical expenses I don't have any savings also to meet my basic needs or to give good education to my sons. I further submit that according to section 2718, no penalty shall be imposable on the person or the assessee, as the case may be for failure to get his books of accounts audited u/s 44AB, if he proves that there was reasonable cause for the said failure. A plain reading of section 271B makes it clear that section 2718 maintains imposition of penalty on the failure but such imposition of penalty is dependent on the proof that there was no reasonable cause for the failure. I therefore submit that due to above mentioned/stated reasons I failed to gets books of accounts audited as per section 44AB of the act. There was reasonable cause for the said failure as explained above. Therefore I request you to not to initiate any penalty u/s 2718 of the income tax act, 1961 for reasons stated above. Kindly acknowledge & oblige.”
4. The AO issued another notice dated 23.05.2018 requiring the assessee to file reply by 31.05.2018. Since the assessee did not file any further details, the AO levied a penalty of Rs. 1,50,000/- under section 274 r.w.s. 271B of the Act for failure to get the account audited.
5. Aggrieved the assessee filed further appeal before the CIT(A). Before the CIT(A), the assessee made similar submission praying that the penalty be deleted. The CIT(A) confirmed the penalty and the assessee is in appeal before the Tribunal against the order of the CIT(A)
6. The assessee during the course of hearing prayed that the submissions made in writing on 30.01.2025 be considered for the purpose of adjudication. The assessee in the return submission dated 30.01.2025 has submitted that there is a reasonable cause for not getting the accounts audited. The relevant part of assessee's submissions are extracted as under – “4. For the sake of brevity, the genuine reason for not getting the books of account audited is explained below in detail for your lordships reference; "I again submit what I submitted during penalty proceedings and NFAC hearing that my partner/colleague Mr. Hardik Mehta was dealing with the parties, mediators and agents and used to look after our business. It was Hardik Mehta only who also used to look after compliance all the compliances and/or tax payments, if any.
I also submit that Mr. Hardik Mehta was the one who established the business and helped me to earn my livelihood; however, he expired in an accident while travelling in local train years back and his untimely demise caused me immense difficulties to earn my livelihood and meeting my family's expenses. I am handicapped and not so educated or well versed with any laws or taxes else instead to be dependent on Mr. Hardik Mehta for my livelihood, I myself would have started some business or joined some job for the bread & butter for my family.
I further submit that as a law abiding citizen I paid taxes as per average margin as soon as I received the notice. Even though I am handicapped, I am the only earning member in my family. My family consists of my dependent wife who is house wife and is handicapped and 2 sons aged around 15 years old respectively. Due to regular medical expenses I don't have any savings also to meet my basic needs or to give good education to my sons. Also, this Covid-19 pandemic has further worsened my condition with no money to purchase medicines for the family, forget about the food.
I further submit that according to section 271B of the act, no penalty shall be imposable on the person or the assessee, as the case may be for failure to get his books of accounts audited u/s 44AB, if he proves that there was reasonable cause for the said failure as per section 2738. A plain reading of section 2718 makes it clear that section 2718 maintains imposition of penalty on the failure but such imposition of penalty is dependent on the proof that there was no reasonable cause for the failure.
I therefore submit that due to above mentioned/stated reasons, I failed to gets books of accounts audited as per section 44AB of the act. There was reasonable cause and circumstances beyond my control for the said failure as explained above."
If require, the applicant can submit the handicap proof of the applicant and his wife and death certificate of Mr. Hardik Mehta to evidence that submission of the applicant is genuine and it should be considered as reasonable cause considering principle of natural justice. Therefore, the applicant request your lordship to consider his submission and quash the penalty order passed u/s 271B of the income tax act, 1961 as there was reasonable cause and circumstances beyond applicant's control for the said failure as explained above considering section 2738 of the act.”
We heard the ld DR and perused the material on record. The AO reopened the assessment for the reason that the turnover of the assessee as declared in the return of income is very less considering that the assessee is the proprietor of many concerns the turnover of which is substantial. The assessee while filing the return of income has revised the turnover to Rs. 3,14,43,447/- as against Rs. 5,72,498/- shown in the original return of income and that the assessee has not got the accounts audited. Accordingly the AO has initiated the penalty proceedings under section 271B of the Act, which is levied for failure to get the accounts audited. 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 – 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 Jignesh Suresh Shah 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 under 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 the light of the above legal position we will now look at the assessee's case. The contention of the assessee is that the his partner / friend Mr.Hardik Mehta was the one who was handling the business affairs including the regulatory compliance etc., and the sudden untimely demise of Mr.Hardik Mehta in an accident caused immense difficulties which led to non- compliance of the audit requirements. It was also submitted that the assessee is not much educated and not well versed with the tax laws. From the perusal of the written submissions we notice that the assessee is a person with disability and the other family members are not in a position to support him in his business affairs. Therefore there is merit in the submission that the assessee was fully dependant on Mr.Hardik Mehta for earning his livelihood and meeting medical expenses through businesses. During the course of hearing, the assessee submitted that post the demise of Mr.Hardik Mehta, the assessee could not manage the business affairs and has closed down the businesses. In the facts and circumstances unique to assessee's case we are inclined to agree with the contention that the failure to get the accounts audited was not deliberate on the part of the assessee and that there is a reasonable cause for not complying with the provisions of section 44AB of the Act. Therefore we are of the view that the CIT(A)'s action of confirming the Jignesh Suresh Shah penalty without appreciating the facts peculiar to assessee's case is not tenable. Accordingly we direct the AO to delete the penalty levied under section 271B of the Act.
In result, the appeal of assessee is allowed.