DAKSHINA KANNADA NIRMITHI KENDRA ,MANGALORE vs. INCOME TAX OFFICER, WARD-1(1), MANGALORE

Assessee aggrieved with the same preferred appeal before the ld. CIT(A). The ld. CIT(A) confirmed the penalty stating that when the assessment order passed by the AO and confirmed by the CIT(A) for the same AY on merits against the assessee, based on the same order, penalty u/s. 271(1)(c) is confirmed. Such appellate order was passed on 10.1.2025 confirming the penalty order.

Assessee aggrieved with the same is in appeal before us. It is the ground of the assessee that merely because addition is confirmed by the ld. CIT(A) in quantum proceedings, penalty cannot be levied automatically. The AO has to give his satisfaction about the concealment of income and further the reason given by the ld. CIT(A) confirming the penalty that when the quantum additions are confirmed, penalty is also to be confirmed, is incorrect. He submits that the appellate order confirming the penalty is not sustainable.

The ld. DR vehemently supported the order of the ld. lower authorities.

Penalty for AY 2010-11 is levied of Rs.74,30, for AY 2010-11 of Rs.2,22,731, for AY 2011-12 of Rs.2,22,731, for AY 2012-13 of Rs.26,39,026, for AY 2013-14 of Rs.16,42,580 and for AY 2016-17 of Rs.1,21,28,712.

Once again we note that all the penalty orders as well as appellate orders confirming the penalty are identical.

We have carefully considered the rival contentions and perused the orders of the ld. lower authorities. The facts show that in the present case the activity of the assessee is of carrying on various civil work issued by the Karnataka Govt. The assessee is registered u/s. 12A and therefore it claimed exemption u/s. 11 & 12 of the Act. As it is found by the ld. lower authorities that assessee is carrying on business, they denied the benefit of section 11 & 12 to the assessee and assessed the income of assessee as business income. Therefore the total income of the assessee was assessed at such business income and accordingly the AO initiated penalty proceedings for concealment of income u/s. 271(1)(c) of the Act. During the course of penalty proceedings, the reply of the assessee was not considered and as the addition has been confirmed in the case of quantum proceedings, on that basis itself, penalty was levied. During the penalty proceedings the ld. AO did not mention how the assessee has concealed the income. No such finding was given by the ld. AO.

In the appellate proceedings also, the ld. CIT(A) has held as under:-

From the above, it is amply clear that the ld. lower authorities have wrongly held that when the addition is confirmed, penalty is also automatic and required to be confirmed. We find that there is a specific distinction between the assessment proceedings and penalty proceedings. There is no provision in the Income-tax Act which provides that if the quantum addition is confirmed in the hands of the assessee, the penalty u/s 271(1) ( c) is leviable automatically. If the conduct of the ld. Lower authorities is found to be correct, then we do not find any reason that there should be a separate penalty proceedings required in the Act, other than the assessment proceedings. Penalty is discretionary, which would always be the discretion of the adjudicating authority to satisfy himself that whether the assessee has committed a particular default or not.

Honourable Supreme court in Dilip N Shroff V CIT 161 Taxman 281 and T Ashok Pai V CIT 161 taxman 340 has approved that a finding in assessment proceedings cannot be automatically adopted for penalty proceedings. Further since burden of proof varies in assessment proceedings and penalty proceedings, therefore, the authorities must look at penalty proceedings from a different angle. No doubt the findings in assessment proceedings is a good evidence but may not be sufficient to fasten the assessee with penalty.

In the present case, we do not find any such finding with reasons that assessee has concealed the particulars of income is recorded in penalty

Further the ld. CIT(A) who has to apply his own mind that whether the assessee has concealed particulars of income or not and then to decide the appeal of the assessee. The ld. CIT(A) in this case has given the only reason that the order of confirmation of penalty is merely consequential as quantum appeal of the assessee on merits is already dismissed. This appellate order cannot also be sustained.

Thus the orders of the ld. lower authorities are reversed and penalty levied u/s. 271(1)(c) of the Act for all these years are directed to be deleted and all the 5 appeals of the assessee are allowed.

Similarly identical appeals for AYs 2012-13, 2013-14 & 2016-17 are also filed by the assessee on identical facts and circumstances.

We first note down the facts and circumstances for AY 2011-12, consider the arguments of both the parties and thereafter give our decision, which will also be applied to the other 3 appeals.

The facts of the case for AY 2011-12 show that assessee has filed return of income on 17.1.2011 which was processed u/s. 143(1) and then taken up for scrutiny u/s. 143(2) resulting into assessment order passed on 16.12.2013 wherein total income of assessee is assessed at Rs.12,07,284 treating the income of the assessee as business income. This was because the assessee was mainly engaged in undertaking civil contract work of various schemes of the Karnataka Govt. This assessment order was confirmed by the ld. CIT(A) and the ITAT vide appellate order dated 16.6.2022. As the assessee was held to be carrying on business activity and turnover of the assessee from business was determined as per assessment order at Rs.7.5 crores, the ld. AO issued show cause notice on 16.12.2013. The assessee submitted its reply. The ld. AO stated that the reply of the assessee is not ‘considerable’, and the penalty is imposed at Rs.1,50,000 u/s. 271B of the Act by order dated 16.3.2023. The ld. AO while levying penalty held that assessee’s quantum addition has been confirmed by the ITAT, penalty u/s. 271B is levied.

The assessee aggrieved with the penalty order preferred appeal before the ld. CIT(A) stating that assessee was a trust and income was offered claiming exemption u/s. 11 & 12 of the Act, audit is not required to be carried out u/s. 44AB of the Act and therefore same was not obtained. As it is a reasonable cause, the penalty u/s. 271B is not leviable. The ld. CIT(A) held that the present appeal is consequential as the quantum order has been confirmed by the ld. CIT(A) and therefore there is no merit in the appeal of the assessee. Accordingly penalty u/s. 271B of the Act was confirmed.

The ld. AR vehemently submitted that merely because assessment order in quantum proceedings is confirmed, it does not automatically result into penalty proceedings u/s. 271B. He submits that there was a dispute about whether the assessee is carrying on business activity or charitable activity. The assessee has offered its income claiming benefit u/s. 11 & 12 of the Act, whereas the AO and the appellate authorities have treated the assessee as carrying on business and therefore assessee should have got the accounts audited under the provisions of section 44AB of the Act. As assessee failed to obtain tax audit report, penalty u/s. 271B was levied by the O and confirmed by the ld. CIT(A). He further referred to the provisions of section 273 and submitted that reasonable cause shown by the assessee was not at all considered. Accordingly, the penalty orders and consequential appellate orders are not sustainable.

The ld. DR vehemently supported the orders of the ld. lower authorities. It was submitted that the assessee is carrying on business and therefore claim u/s 11 & 12 is already rejected. As the turnover of the assessee exceeded the specified limit, the assessee has failed to get its accounts audited u/s. 44AB of the Act and consequential penalty u/s. 271B is levied.

We have carefully considered the rival contentions and perused the orders of the ld. lower authorities. We find that assessee is a co-

We find that a person carrying on business is required to get his accounts audited if it exceeds the specified turnover by a specified date under the provisions of section 44AB of the Act. If the assessee fails to comply with the provisions of section 44AB without reasonable cause (u/s. 273B of the Act), he could be subjected to a penalty to the maximum amount of Rs,1,50,000 for an assessment year.

In the present case, the assessee has explained the reasonable cause stating that assessee is registered society u/s. 12A of the Act, claimed exemption u/s. 11 & 12 which was denied by the ld. AO and confirmed upto ITAT, itself is reasonable cause for not getting the accounts audited in terms of provisions of section 44AB of the Act. On careful reading of the order of the AO and the CIT(A), it is apparent that both the authorities have rejected the explanation of the assessee first and thereafter levied penalty u/s. 271B of the Act as a consequential penal provision when the quantum additions are confirmed. We do not subscribe to this view. Had it been so, the penalty would have proceeded to be levied in the assessment order itself. Both the proceedings are separate and independent of each other. Further the assessee has also shown the reasonable cause that it is registered u/s. 12A of the Act and benefit of section 11 & 12 were denied to it and the income of the trust is assessed as business income. Therefore, looking to the facts and circumstances of the case, we find that the orders of the ld. lower authorities are not sustainable and even otherwise there is reasonable cause for not getting the accounts audited u/s. 44AB of the act and therefore penalty u/s. 271B of the Act of Rs.1,50,000 deserves to be deleted. The ld. AO is directed to delete the same.

The appeals of the assessee for AYs 2012-13, 2013-14 & 2016-17 are also on identical facts and circumstances, we also quash the penalty orders passed u/s. 271B of the Act levying penalty of Rs.1,50,000 for all these years.

Thus, all these 4 appeals of the assessee are allowed.

In the result, all these 9 appeals filed by the assessee are allowed.