MAHARASHTRA STATE PHARMACY COUNCIL,MUMBAI vs. CIT (A)-NATIONAL FACELESS, DELHI

IN THE INCOME TAX APPELLATE TRIBUNAL (VIRTUAL COURT) “D” BENCH, MUMBAI BEFORE SHRI S. RIFAUR RAHMAN, HON'BLE ACCOUNTANT MEMBER AND SHRI AMARJIT SINGH, HON'BLE JUDICIAL MEMBER ITA NOs. 1141, 1142, 1143, 1144 & 1145/MUM/2021 (A.Ys: 2011-12, 2012-13, 2013-14, 2014-15 & 2014-15) Maharashtra State Pharmacy Council v. CIT (Appeals) 404, R-Square Opp ESIS Hospital National Faceless Appeal Centre LBS Marg, Mulund (W) Delhi Mumbai - 400080 PAN: AAALM1121C (Appellant) (Respondent) Assessee by : Shri Vimal Punmiya Department by Shri T. Shankar

Date of Hearing : 08.02.2022 Date of Pronouncement : 31.03.2022

O R D E R PER BENCH 1. These appeals are filed by the assessee against different orders of the Learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [hereinafter in short “Ld.CIT(A)”] dated 26.03.2021 for the A.Y.2011-12 to A.Y. 2014-15.

2 ITA NOs. 1141 to 1145/MUM/2021 Maharashtra State Pharmacy Council consolidated order. We are taking Appeal in ITA.No. 1141/MUM/2021 for Assessment Year 2011-12 as a lead case.

3 ITA NOs. 1141 to 1145/MUM/2021 Maharashtra State Pharmacy Council 7. The assessment u/s 143(3) rws 147 was completed on 26.11.2018 determining total income as follows:- AY Total Income Determined 2011-12 12809270 2012-13 16790900 2013-14 16965910 2014-15 24962650 2015-16 14592800 8. The assessee had shown gross receipts(fees) in Income and expenditure account as follows:- AY Gross Receipts 2011-12 12249409 2012-13 29554309 2013-14 36398036 2014-15 41868407 2015-16 41290202 9. Therefore, notice for levying penalty u/s 271B of the Act was issued to assessee dated 26.11.2018 to show cause as to why an order imposing penalty u/s 271B be not made and assessee in response filed reply dated 15.10.2018 to drop the penalty, but Ld. AO vide order dated 29.05.2019 levied penalty u/s 271B of Rs. 1,50,000/-. 10. Aggrieved with the order of Ld. AO assessee preferred an appeal before CIT(A) and CIT(A) has confirmed the same. 11. Aggrieved with CIT(A) order dated 26.03.2021 the assessee has preferred an appeal before your honours raising following ground:- On the facts and circumstances of the case the Ld. CIT(A) erred in confirming the penalty order u/s 271B passed by the Ld. AO levying penalty of Rs. 1,50,000/- u/s 271B • WHY THE PENALTY LEVIED BY THE AO The Ld. AO levied penalty on following ground: (a) Every person whose turnover/gross receipts exceeds the limit specified therein the books of accounts is required to be audited. (b) The legislature does not make a distinction between the assessee whose income is exempt or whose income is not exempt. (c) The assessee has not discharged it onus of compiling to the provisions of section 44AB of the Act. (d) The assessee has committed a default within the meaning of sec 271B of the Act by his failure to get the books of accounts audited and submit the same in time.

4 ITA NOs. 1141 to 1145/MUM/2021 Maharashtra State Pharmacy Council • WHY THE PENALTY LEVIED BY THE AO AND CONFIRMED BY CIT(A) i) The appellant itself being a body of prudent and elected people from registered pharmacists, which is entrusted with the task of regulating the profession of pharmacy in the state of Maharashtra, cannot take the plea of being ignorant of tax law. ii) If there was any doubt as regards to its eligibility for filing of tax and getting its account audited, it could itself have taken the help of tax professional as it had done after the issuance of notice u/s 148. iii) The appellant did not bother at all to deposit the self assessment tax, file income tax return and get its account audited and all of a sudden after issuance of notice u/s 148, it became aware and deposited the self assessment tax suo motu. iv) Plea of the appellant that it had suo-motu deposited the self assessment tax on 31.03.2018 appears to be an after thought v) As far as the case laws relied on by the appellant is concerned, the same are not found to be applicable in the instant case as the circumstances and facts are quite different from the one quoted by the appellant. SUBMISSION: • Maharashtra State Pharmacy Council is a statutory body constituted by the Government of Maharashtra under the provision of the Pharmacy Act of 1948 consisting of six members elected by Registered Pharmacists amongst themselves, five members nominated by Government of Maharashtra, one member elected by Maharashtra Medical Council and three Ex-Officio members. • The main objective of Maharashtra State Pharmacy Council is to regulate the profession of pharmacy in the state of Maharashtra. The prime function of Maharashtra State Pharmacy Council is to grant registration to the eligible pharmacists possessing requisite qualification as per provision of section 32(2) of the Pharmacy Act and enforce the necessary provisions of Pharmacy Act 1948. As per provisions of Pharmacy Act, 1948, no person other than Registered Pharmacist can dispense, supply drugs on the prescription of Registered Medical Practitioner, hence the services of Registered Pharmacist is an Integral part of healthcare system catering to the public at large. • Being a statutory body, the council operates on no profit and no loss basis and the fees collected and interest earned by the council is utilized to meet the expenses of the council and the surplus if any, is invested in fixed deposit. The prevailing opinion was that the income earned by the council is exempt from income tax and we are not required to file return of income. Hence appellant had not filed any return of income so far and failed to get it's financials audited u/s 44AB within due date.

5 ITA NOs. 1141 to 1145/MUM/2021 Maharashtra State Pharmacy Council • It was brought to appellant's notice that Income Tax Authorities may take a view that council is required to apply for exemption u/s 10(46) and till such exemption is granted u/s 10(46) it's income would be taxable under Income Tax Act, 1961. Considering the contrary view, as a matter of abundant precaution the council decided to make the payment of estimated tax liability under protest for the AY 2011-12 to AY 2017-18 and accordingly the self-assessment tax was voluntarily deposited on 31st March, 2018 for AY 2011-12, after considering TDS credit and ITR was filed u/s 148 of the Income Tax Act, 1961, after getting the accounts audited u/s 44AB albeit beyond the due date for filing Income Tax Return u/s 139. • It is respectfully submitted that once it was realized that the view prevailing in the council may be incorrect, appellant has taken all steps to appoint chartered accountant firm for conducting tax audit u/s 44AB and file the Income Tax returns. • The learned Assessing Officer has levied penalty ignoring the above submission by the appellant that the delay was due to a reasonable cause which is the appellant's genuine belief that being statutory body it is not required to file income tax return or get it's accounts audited u/s 44AB. • The Ld. AO has grossly erred in ignoring the appellant's submission that delay in getting the financials audited u/s 44AB was due to bonafide belief that there was no statutory obligation to file Income Tax Return or to get the accounts audited u/s 44AB. This bonafide belief was due to the following reasons o Since it is statutory body constituted by Government of Maharashtra under the Pharmacy Act of 1948 o It is non-profit-making organisation and the surplus generated from operations cannot be distributed but has to be accumulated for application towards it's objects. o Its books were already being audited by the audit department of Government of Maharashtra and no recommendation was received to either file Income Tax Return or get tax audit conducted u/s 44AB • As per their knowledge none of the pharmacy councils constituted in the other states under Pharmacy Act of 1948 were filing Income Tax Returns The Maharashtra State Pharmacy Council had in past replied consistently in response to Income Tax notices that in their opinion being a government body it is not required to file Income Tax Return and their claim had not been refuted by the income tax department. (Copies of the letters are enclosed) It is respectfully submitted that the delay in getting the financials audited u/s 44AB was due to genuine belief that being a statutory body constituted by the Government of Maharashtra under the provision of the Pharmacy Act of 1948, there was no statutory obligation to file Income Tax Return or

6 ITA NOs. 1141 to 1145/MUM/2021 Maharashtra State Pharmacy Council get the accounts audited u/s 44AB, which may be considered a reasonable cause for delay in filing tax audit report. Further there was no malafide and deliberate attempt on appellant's part to circumvent the law by knowingly circumvent law by concealing income. • It is respectfully submitted that on being made aware that exemption had to claimed u/s 10(46) by making application to CBDT, the estimated tax liability for five years had been deposited voluntarily before receipt of notice u/s 148. • Further it is respectfully submitted income tax return has been filed u/s 148 along with tax audit report u/s 44AB, on the basis of which the assessment was completed without making any addition to the income as per income tax return. There has been no revenue loss due to the delay in filing tax audit report. Section 271 reads as under:- 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 per cent 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 hundredfifty thousand rupees, whichever is less. The section speaks about failure on part of the appellant to get his accounts audited, but in assessee's case the assessee has not intentionally or deliberately failed to get his accounts audited, it was due to reasonable cause which the assessee has proved by way of letters written to department dated 10.01.99 and 10.09.2000 for knowing the tax liability if any but the department has not replied to it so there was no malafide intention of the assessee to not file return or get the books of account audited. Section 273B reads 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 27 IAA, 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, i[section 271Jd clause (c) or clause (c/) of sub-section (1) or sub- section (2) of section 272A, sub-section (1) of section 272AA or section 272B or subsection (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.

7 ITA NOs. 1141 to 1145/MUM/2021 Maharashtra State Pharmacy Council • Further it is respectfully submitted that the Penal Provisions in any piece of legislation are required to be construed very strictly for framing the charge of penalty. There is no deliberate attempt to disregard any statutory obligation on appellant's part to defraud the revenue in the facts of our case. As per the cardinal principals of interpretation of the statue, the penal provisions in any piece of legislation are required to be construed very strictly and therefore unless and until there are sufficient evidence and material to show the malafide and deliberate attempt by assessee to circumvent the law by knowingly concealing income, penal provisions u/s 271B cannot be invoked. Reliance can be placed on :- Manoj S. Gugale Vs. ITO ITA No. 417/Pune/2016 held that "The issue is with respect to levy of penalty under section 271B of the Act. It is an undisputed fact that assessee is engaged in the business of Advertising Agency and during the year under consideration the commission earned from the Advertising Agency was not in excess of the limits prescribed under section 44AB for the purpose of getting the books audited. Before us, it is assessee's submission that the entire receipts will not form part of turnover and therefore he had not got the books audited and for which reliance was placed on CBDT Circular and also on the decision of Bombay High Court in the case of Heros PublicityServices (supra). The aforesaid submission of the assessee prima facie appears to be bona fide belief on his part and Revenue has not brought any material on record to support that the belief of the assessee was not bona fide. Assessing officer has levied penalty under section 271B of the Act for not getting the books audited under section 44AB of the Act. A reading of section 271B makes it clear that the imposition of penalty is not mandatory as the word used is "may" meaning thereby that a discretion is conferred on the assessing officer to impose or not to impose the penalty. Further the provision with respect to imposition of penalty is not mandatory in view of the provision contained in section 273B of the Act which inter alia provides that notwithstanding the provisions of section 271B, 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 failure. In the present case, the assessee was having a bona fide belief that he was not required to get his books audited under 44AB in view of the decision in Bombay High Court in the case of Heros Publicity Services (supra) and the CBDT Circular (supra). In such a situation, we are of the view that there was a reasonable cause on the part of the assessee for not getting the books audited. Further it is a settled law that when there is a technical or venial breach of the provisions of law, the ends of justice requires that discretion should not be exercised in favour of punishing a minor default and for the aforesaid proposition we get support from the decision of Hon'ble Apex Court in the

8 ITA NOs. 1141 to 1145/MUM/2021 Maharashtra State Pharmacy Council case ofHindustan Steel Ltd. v. State of Orissa (1972) 83 ITR 26 (SC) wherein the Hon'ble Apex Court has held as under :- "Even if a minimum penalty is prescribed, the authority competent to impose the penalty will be justified in refusing to impose penalty when there is a technical or venial breach of the provisions of the Act or were the breach flows from a bona fide belief that the offender is not liable to act in the manner prescribed by the statute." Considering the totality of the facts and relying on the aforesaid decision of Hon'ble Apex Court, we are of the view that in the present case the levy of penalty under section 271B of the Act was not justified and therefore direct its deletion. Thus, the grounds of assessee are allowed." North Eastern Constructions vs. ITO [2020] 117 taxmann.com 321 (Guwahati - Trib.) "Section 273B, read with section 271B, of the Income-tax Act, 1961 - Penalty - Not to be imposed in certain cases (Delay in submitting Tax Audit Report) - Assessment year 2015-16 - There was delay in filing Tax Audit Report (TAR) - Assessee explained that accountant of assessee had suddenly left office/service in earlier year without properly handing over books maintained by assessee and, thus, for earlier year, audit report could not be completed on time and this caused consequential delay in audit for current year also - Whether explanation given by assessee could not be held to be unreasonable and, thus, no penalty could be levied - Held, yes [Para 11] [In favour of assessee Merely because the assessee could not get its books of accounts audited within the time as per the provisions of section 44AB as there was reasonable cause for such failure, penalty cannot be levied under section 271B on the following factual back ground: (i) The return was filed on 5. 10.2018 and books of account was audited on 05.10.2018 against issue of notice u/s 148 of the Income Tax Act, 1961. (ii) The assessee was prevented by sufficient cause that being a statutory body constituted by the Government of Maharashtra under the provision of the Pharmacy Act of 1948, there was no statutory obligation to file Income Tax Return or get the accounts audited u/s 44AB. (iii) The assessee has paid the tax (Copy of challan attached) (iv) When the return has been accepted than the Audit report also has to be accepted. As the assessee was prevented by sufficient cause, levy of penalty requires to be deleted.

9 ITA NOs. 1141 to 1145/MUM/2021 Maharashtra State Pharmacy Council WHERE IN PENALTY NOTICE, ASSESSING OFFICER HAD SPELT OUT FAULT BUT WHICH WAS INCORRECT, NOTICE WAS TO BE TREATED VAGUE AND PENALTY WAS TO BE QUASHED we would like to draw the attention of your Honor to the fact that the Ld. AO has stated in the penalty notice the reason for levying penalty as under:- "have without reasonable cause failed to comply with a notice under section 142(1) of the income Tax Act, 1961" And levied penalty on failure to get accounts audited under section 271B. Thus, the notice issued under section 271 r.w.s. 274 of the Income Tax Act is vague and incorrect as it does not mention the actual fault on which penalty is being levied. It is mentioning levy of penalty on non compliance of notice u/s 142(1)(Paper Book pg no 26 of paper book) Thus the order passed u/s 271B becomes void ab initio and needs to be quashed. As the AO failed to state in the notice the reason for initiating the penalty, the entire penalty proceedings shows non-application of mind on the part of Ld. AO and penalty order passed by the Ld. AO is required to be quashed. Reliance placed on :- North Eastern Constructions vs. ITO [2020] 117 taxmann.com 321 (Guwahati - Trib.) "Where in penalty notice, Assessing Officer had not spelt out what was fault for which assessee was being proceeded against for levy of penalty, notice was vague; hence, penalty order was also bad 5. Assailing the decision of the id. CIT(A), Shri Sanjay Modi, ld.AR of the assessee drew our attention to page-1 of the paper book (P/B) and submitted that the show cause notice issued by the AO (ITO, W-1(2), Dibrugarh before levying of penalty dated 15-05- 2018 is vague and therefore, bad in law. According to him, the penalty notice does not specify the fault/charge against the assessee, for which the proposed penalty is intended to be levied, so according to him since the fault for which the penalty is proposed to be levied is not clear, and it is vague, therefore, according to him, the show cause notice dt. 15-5-2018 was bad in law and consequently levy of penalty itself is bad and need to be cancelled. 11. Thus, we note that the AO has given a show cause notice, which is per-se vague. Thus, we note that the AO by issuing penalty notice u/s. 271B has not spelt out what was the fault for which the assessee is being proceeded against for levy of penalty. Since the AO has not struck down the irrelevant portion/fault which is not applicable in the facts and circumstances of the case, the notice reproduced (supra) is vague and therefore, bad in law as held by the Coordinate Bench of the Tribunal in the case of Parkinson

10 ITA NOs. 1141 to 1145/MUM/2021 Maharashtra State Pharmacy Council Electrical Corprn (supra). We are of the opinion that notice proposing penalty should clearly spell out the fault/charge for which the assessee is put on notice, so that he can defend the charge properly. The issue of bad/ vague penalty notice was adjudicated by the Hon'ble Karnataka High Court [though in a different context i.e notice issued u/s. 274 read with section 271(1)( c) of the Act] in the case of CIT v. SSA's Emerald Meadows [2016] 73 taxmann.com 241 (Kar.) wherein the Hon'ble High Court following its own decision in the case of CIT v. Manjunatha Cotton and Ginning factory [2013] 35 taxmann.com 250/218Taxman 4231359 ITR 565 has held that if the penalty notice is vague, then the penalty order is also bad in the eyes of law. This decision of Karnataka High Court was challenged by the Revenue before the Hon ble Apex Court, and the Honble Supreme Court has dismissed the SLP. Therefore, applying the ratio-decidenali in SSA 's Emerald Meadows & Parkinson (supra), we are of the view that the notice issued by AO before levying penalty u/s. 271B of the Act is bad in law." Parkinson Electrical Corprn v. ITO [1996] 84 Taxman 82 (Delhi) (Mag.), wherein the Tribunal held as under:- Head Note "Even otherwise also the penalty could not be sustained as the notice Issued under section 271B was vague. The Assessing Officer, by issuing the penalty notice under section 271B, had not brought home to the assessee his fault, precisely. In other words, he had not precisely informed the assessee under which situation of section 271 B the assessee came. Even in the penalty order, the Assessing Officer had not stated under which situation the assessee had been caught. He had simply stated that the assessee had no objection for the proposed penal action. Before a penalty is imposed, the assessee must be apprised of the precise charge brought against him. In the absence of a precise charge, the levy of the impugned penalty was not justified." 10 The submission of the assessee is summarized as under (i) Penalty u/s 271B of the Act was initiated for not getting its books of account audited u/s 44AB. (ii) The assessee was prevented by sufficient reasonable cause that as it was a statutory body constituted by the Government of Maharashtra and its books were audited by Government there was no statutory obligation to file Income Tax Return or get the accounts audited u/s 44AB. (iii) The notice of penalty is vague as the fault on which penalty has been levied is precisely absent.

11 ITA NOs. 1141 to 1145/MUM/2021 Maharashtra State Pharmacy Council (iv) The return filed by the assessee against the notice issued u/s 148 was accepted and assessee has voluntarily deposited the self assessment tax on 31st March, 2018. (v) With this background it has requested to drop the penalty proceedings. In support of the same it has relied upon certain judicial pronouncement as mentioned above.”

12 ITA NOs. 1141 to 1145/MUM/2021 Maharashtra State Pharmacy Council A.Y. 2011-12 to 2015-16 in response to notice u/s. 148 of the Act after getting its books duly audited. Further it was submitted that assessee was advised to apply for exemption u/s. 10(46) of the Act and since assessee has not applied and till such exemption is granted u/s.10(46) assessee has voluntarily deposited self assessment tax after adjusting TDS credit and filed the return of income under protest. We observed that assessee with the belief that income earned by the council is exempt from Income-tax and has not filed any return of income from inception. Only upon receipt of notice u/s. 148 of the Act it came to understand that its income is not exempt and it is required to file return of income as well as its books should be audited u/s. 44AB of the Act. It is fact on record assessee based on the belief that its income is exempt from tax it has not taken any steps to file return as well as get its books audited u/s. 44AB of the Act.

13 ITA NOs. 1141 to 1145/MUM/2021 Maharashtra State Pharmacy Council ITAT Pune Bench has decided the issue in which assessee has failed to get its books audited u/s. 44AB of the Act with the bonafide belief that their entire receipt is not taxable, for the sake of clarity it is reproduced below: - “5. We have heard the rival submissions and perused the material on record. The issue is with respect to levy of penalty u/s 271B of the Act. It is an undisputed fact that assessee is engaged in the business of Advertising Agency and during the year under consideration the commission earned from the Advertising Agency was not in excess of the limits prescribed u/s 44AB for the purpose of getting the books audited. Before us, it is assessee’s submission that the entire receipts will not form part of turnover and therefore he had not got the books audited and for which reliance was placed on CBDT Circular and also on the decision of Bombay High Court in the case of Hero Publicity Services (supra). The aforesaid submission of the assessee prima facie appears to be bonafide belief on his part and Revenue has not brought any material on record to support that the belief of the assessee was not bonafide. AO has levied penalty u/s 271B of the Act for not getting the books audited u/s 44AB of the Act. A reading of Section 271B makes it clear that the imposition of penalty is not mandatory as the word used is “may” meaning thereby that a discretion is conferred on the A.O to impose or not to impose the penalty. Further the provision with respect to imposition of penalty is not mandatory in view of the provision contained in Section 273B of the Act which interalia provides that notwithstanding the provisions of Section 271B, 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 failure. In the present case, the assessee was having a bona fide belief that he was not required to get his books audited under 44AB in view of the decision in Bombay High Court in the case of Hero Publicity Services (supra) and the CBDT Circular (supra). In such a situation, we are of the view that there was a reasonable cause on the part of the assessee for not getting the books audited. Further it is a settled law that when there is a technical or venial breach of the provisions of law, the ends of justice requires that discretion should not be exercised in favour of punishing a minor default and for the aforesaid proposition we get support from the decision of Hon’ble Apex Court in the case of Hindustan Steel Ltd. vs. State of Orissa (1972) 83 ITR 26 (SC) wherein the Hon’ble Apex Court has held as under:- "Even if a minimum penalty is prescribed, the authority competent to impose the penalty will be justified in refusing to impose penalty when there is a technical or venial breach of the provisions of the Act or were the breach flows from a bona fide belief that the offender is not liable to act in the manner prescribed by the statute." 6. Considering the totality of the facts and relying on the aforesaid decision of Hon’ble Apex Court, we are of the view that in the present case

14 ITA NOs. 1141 to 1145/MUM/2021 Maharashtra State Pharmacy Council the levy of penalty u/s. 271B of the Act was not justified and therefore direct its deletion. Thus the grounds of assessee are allowed.”

Order pronounced in the open court on 31.03.2022.

Sd/- Sd/- (AMARJIT SINGH) (S. RIFAUR RAHMAN) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai / Dated 31/03/2022 Giridhar, Sr.PS Copy of the Order forwarded to: 1. The Appellant 2. The Respondent. 3. The CIT(A), Mumbai. 4. CIT 5. DR, ITAT, Mumbai 6. Guard file. //True Copy// BY ORDER (Asstt. Registrar) ITAT, Mum