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Income Tax Appellate Tribunal, “SMC” BENCH, AHMEDABAD
Before: SMT.ANNAPURNA GUPTA
O R D E R The present appeal has been filed by the assessee against the order passed by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi [in short referred to as “ld. CIT(A)”] under section 250 of the Income Tax Act, 1961 [in short referred to as “the Act”] dated 26.02.2024, confirming the levy of penalty of Rs.1,50,000/- u/s 271B of the Act, for delayed furnishing of Tax Audit Report as required u/s 44AB of the Act, pertaining to Assessment Year (AY) 2016-17.
The grounds raised
by the assessee are descriptive and argumentative in nature. I am, therefore, reproducing only the highlighted portion of the grounds of appeal which are as follows:-
1. On the facts and on the facts and in the circumstances of your appellant’s case and in law, the Honorable CIT-Appeals (NFAC) has erred in confirming the action of the ld. AO of invoking provision of Section 271B, in our case after the six years by violating the provision of the Section 275(1) of the Act.
(SMC) Century Pharmaceuticals Ltd Vs. DCIT AY : 2016-17 2 2. On the facts and in the circumstances of your appellant’s case and in law, the Honorable CIT-Appeals (NFAC), has erred in confirming penalty of Rs.1,50,000/- levied by the ld. AO u/s 271B for alleged failure of non- furnishing of tax audit report u/s 44AB on or before the due date u/s 139(1) of the Act.” 3. Ground No.1 was not pressed before us; hence it is dismissed as not pressed.
Ground No.2 being raised on the merits of the case was argued before us. The fact that the Tax Audit Report filed by the assessee was delayed has been admitted to be true. This fact was never disputed before us. The only contention of the ld. Counsel for the assessee before us was that there was reasonable cause for the delay which was explained in detail to the authorities below, but both the Assessing Officer and the ld. CIT(A) found the cause to be not reasonable enough, giving no credible reasons at all.
The ld. DR, on the other hand, relied on the orders of the Assessing Officer and ld. CIT(A).
Since the entire case of the assessee rests on the fact that there was reasonable cause adduced by the assessee for the delay in filing the Tax Audit Report which was not accepted by the Revenue, it is necessary to go through the reasons for the delay given by the assessee. The same are reproduced by the Assessing Officer at page No.2 to 7 of his order as under:- “During the course of penalty proceeding u/s. 2718 of the Income-tax Act, 1961 a fresh opportunity was given to assessee on 22-12-2022 to file the explanation as to why penalty u/s. 2718 should not be levied. The assessee in its reply filed on 12-01-2023 asked for adjournment and in its reply filed on 06-02-2023 furnished the copy of VC Assistance Agreement, Extract of VC Assistance Agreement, Article of Association, Extract of VC Assistance Agreement, Minutes of the Board Meeting held on 22.08.2016, GVFL letter to Auditor- Naresh & co., Minutes of the Board Meeting, Copy of the approval (SMC) Century Pharmaceuticals Ltd Vs. DCIT AY : 2016-17 3 letter of ROC, Minutes of the Board Meeting held on 25.11.2016 and stated the following: "Facts and Circumstances that caused the Delay: The facts of the entire matter stems from the fact that we had raised a sum of Rs.250 lacs from the Gujarat Biotechnology Venture Fund of M/s. Gujarat Venture Finance Limited (GVFL), a Govt. of Gujarat Undertaking, in January, 2008 by way of Private Placement of Equity Shares and Debentures. Our Company had been undertaking research in biotechnology and the amount was obtained for the purpose of commercialisation of biotech molecules. At the time of obtaining the aforesaid funds, our Company entered into a Venture Capital Assistance Agreement with GVFL as is the norm in case of such funds raised from Venture Capitalists (VC's) on 23.01.2008. The various terms and conditions of the funds raised were mentioned under various Articles of the aforesaid VC Assistance Agreement. Under Article XI of the aforesaid agreement, post investment of funds by GVFL, our Company would need the "prior approval" of GVFL for certain decisions listed therein till such time GVFL remained invested in our Company. Under the aforesaid Article XI, the item 11.1.21 covered "finalisation of accounts, declaration of dividends, change in accounting policies". As a part of the VC Assistance Agreement, the same condition was also incorporated into the Articles of Association of the Company as item 21 under Article 82A. Thus, for finalisation of our accounts, declaration of dividends and change in accounting policies, we would need prior approval of GVFL - else they would be invalidated. Copies of the VC Assistance Agreement and Articles of Association of the Company are enclosed as Annexure A and Annexure C respectively with extracts of the relevant pages separately enclosed as Annexure B and Annexure D respectively. Over a period of time, the Biotech Activity of the Company for which funds were raised from GVFL did not generate any surpluses. However, our regular Active Pharmaceutical Ingredients (API) business was doing very well and generating healthy profitability. During FY 2015-16 since the Company has record high profitability, the Board of Directors decided to pay an Interim Dividend @ 25% totalling to Rs. 75,60,325 at its meeting held on 08.03.2016.
(SMC) Century Pharmaceuticals Ltd Vs. DCIT AY : 2016-17 4 Though GVFL had been sent the agenda in advance which included the proposal to pay Interim Dividend, it did no comment on the same and hence the Board of Directors approved the aforesaid dividend in their Board Meeting held on 08.03.2016 and paid the Dividend to the Shareholders and the Dividend Distribution Tax to Income Tax. Subsequent to the end of the year, the Statutory Audit of our accounts was conducted in July, 2016 and the same were finalised and put up for approval at the Board Meeting to be held on 26th August, 2016. It may be noted that this was well within the stipulated time and if the accounts were approved we would have been in a position to have the Tax Audit Report conducted immediately thereafter and submitted the same well within the original due date. Unfortunately, GVFL raised an objection at the time of Board Meeting on 22.08.2016 that the Interim Dividend paid in March 2016 was without their "prior approval” and hence demanded that the same be reversed as also the accounts be revised to incorporate the reversal of dividend. This Chairman gave a detailed clarification on the matter. However, the GVFL representative insisted that GVFL sought reversal of dividend and also did not approve the accounts without reversal of the Dividend. Since, the Board and GVFL were at loggerheads on this issue, it was unanimously decided to make further representation to the higher authorities of GVFL for allowing the Interim Dividend and approving the accounts. Considering the same, the approval of accounts got postponed till the matter was not resolved. The Minutes of the Board Meeting held on 22.08.2016 in which the detailed discussion on the subject are covered are enclosed as Annexure E On the same day, GVFL also wrote a letter to our Statutory Auditors, M/s. Naresh & Co. intimating their disproval of account due to the issue of Dividend and to sign the account only after revision of the same and approval by GVFL. Copy of the said letter is enclosed as Annexure F. Subsequently, various meetings were held with higher authorities of GVFL to allow the Interim Dividend and approve the accounts. On one hand, GVFL was refusing to allow the interim dividend and on the other end the Shareholders were refusing to refund the dividend already received. However, (SMC) Century Pharmaceuticals Ltd Vs. DCIT AY : 2016-17 5 there was no immediate decision and while the Company expected a positive outcome, it was expected to take more time. Now, as per the Companies Act, 2013, the Company was mandatorily required to approve accounts and hold its Annual General Meeting (AGM) by 30th September, 2016. Since, there was no sign of the deadlock ending before that, the Company held a Board Meeting on 29.09.2016 in which the Chairman explained the situation in detail and requested the Board to grant approval to seek extension of time-limit for approving the accounts and holding the Annual General Meeting so that the Company will not be considered as a defaulter. After due deliberations, the Board granted its permission to apply to the Registrar of Companies, Ahmedabad and seek extension of AGM by 3 months from 30.09.2016 to 31.12.2016. Minutes of the meeting held on 29.09.2016 are enclosed as Annexure G Accordingly, we applied for and were granted extension of 3 months for conducting our AGM. Copy of the approval letter of ROC - Ahmedabad is enclosed as Annexure H However, the discussions and debates continued during the month of October 2016 and spilled over into November, 2016. In the meantime, the extended due date for furnishing Tax Audit Report i.e. 17.10.2016 lapsed. However, in absence of approval of account by GVFL, we were not in a position to obtain the Statutory Audit Report and consequently, we were unable to obtain the Tax Audit Report as well. Finally, due to increasing non-compliances caused by the delay, the matter was taken up very strongly with GVFL, informing them of the mounting consequences due to the delay and the mounting possibilities of penalties. Consequently, GVFL reluctantly agreed to approve the accounts in November, 2016. Thereupon, I decided to hold the Board Meeting for approving the accounts on 25th November, 2016. GVFL accorded its reserved consent to the approval of accounts including the Dividend vide letter dtd. 24.11.2016 indicating that they Ire giving consent only to allow the compliance to be completed and that the same should not be construed as a post facto approval and it also reiterated its stand that the (SMC) Century Pharmaceuticals Ltd Vs. DCIT AY : 2016-17 6 Company had violated the provision of VC Assistance Agreement and Articles and hence it its reserved its rights to take appropriate action subsequently. During the Board Meeting on 25.11.2016, the Chairman gave a detailed explanation of the situation including the stand of GVFL in the matter. The Accounts of the Company were finally approved in the aforesaid meeting on 25.12.2016. The Minutes of the Board Meeting held on 25.11.2016 are enclosed as Annexure 1. Immediately on approval, the accounts were sent to the Statutory Auditors for signing who also signed after noting the above matter in their Audit Report which is already on record. Thereafter, the Tax Auditors also issued their report in Form 3CA/3CD on the same day and the same was immediately furnished on 25.11.2016 itself. Thus, the chain of events will clearly indicate that the delay was on account of dispute with GVFL over the Interim Dividend and their refusal to approve the accounts in time in terms of rights available with them. Once the accounts were approved, there was no further delay on our part and the relevant furnishing was done on the same day. Given the above facts and circumstances, it is humbly prayed that the entire episode causing the delay can certainly be treated as a reasonable cause for the delay. As per the verbatim language of S. 271B, the penal consequences are to be trigged only when the failures envisaged therein are without a reasonable cause. In our case, the above chain of events will clearly indicate that there was legitimate reason for delay which can certainly be treated as a reasonable cause It is therefore prayed that given the reasonable cause for delay as narrated above, the penal proposed penalty u/s 271B in our case may please be dropped.”
As is evident from the above reasons for delay in filing tax audit report as noted by the Assessing Officer and the ld. CIT(A), the cause for the delay was attributed to the delay in finalization of the statutory audit of the assessee-company due to dispute between the Board of Directors with one of the nominee directors of the Government of Gujarat undertaking who refused to allow the payment of interim dividend declared by the Board during the year. Facts and circumstances, as revealed by the assessee, show (SMC) Century Pharmaceuticals Ltd Vs. DCIT AY : 2016-17 7 that the assessee had raised a sum of Rs.250 lakhs from a Venture Fund of the Government of Gujarat by the name of M/s. Gujarat Venture Finance Limited (GVFL) in January 2008. As a result, a nominee of this Government undertaking was appointed to the Board of the assessee-company. This nominee-director was to give his approval for the finalization of accounts, declaration of dividends, change in accounting policies as per the agreement entered into with the Government undertaking. During the impugned year, the assessee decided to pay interim dividend and when the Board approved the payment of the dividend, the nominee of the Government undertaking did comment on the same. Accordingly, the dividend was paid to the shareholders, but subsequently when the statutory audit was being conducted and the final accounts were put for approval before the Board, the nominee director objected the payment of interim dividend. As a result, the final accounts of the assessee were not approved by the Board of Directors. This standoff in the Board continued for a substantial period of time resulting in statutorily stipulated period for holding the Annual General Meeting, for placing the final accounts before the shareholders, being exceeded. The assessee, as per the law, therefore applied to the Registrar of Companies seeking extension of AGM by three months from 30.09.2016 to 31.12.2016 which was approved by the Registrar. Subsequently, the standoff was cleared, dispute was resolved, the nominee director of the Govt. undertaking accorded his approval on the accounts and the final accounts of the assessee- company duly audited were ultimately approved by the shareholders on 25.11.2016 and on the same date the Tax Audit Report was also finalized and filed. This Tax Audit Report, which was supposed to be filed by the assessee by 17.10.2016, was accordingly delayed by approximately one month being filed on 25.11.2016 because of the standoff between the directors of the (SMC) Century Pharmaceuticals Ltd Vs. DCIT AY : 2016-17 8 assessee-company resulting in the audited accounts not being approved for finalization of the assessee-company. I have noted that all evidences to substantiate this explanation for the delay in filing the Tax Audit Report was also filed by the assessee filing the minutes of all the Board meetings held in the intervening period, the approval taken from the RoC for extension of time for AGM, etc.
Having gone through this explanation of the assessee for the delay in filing the Tax Audit Report, I find that the assessee had reasonable cause for the delay. Since its audited accounts itself were delayed for finalization, it is but obvious that the Tax Audit Report could be prepared only thereafter.
I have gone through the order of the Assessing Officer and the ld. CIT(A), and I find that no reason has been given by both of them for finding this explanation of the assessee to be unreasonable. The Assessing Officer in his order states that the assessee was required in the first place to take approval from the nominee-director of the Govt. undertaking while declaring interim dividend which it failed to do so, which ultimately led to all disputes and finally the delay in getting the audit results finalized and approved and the Tax Audit Report being subsequently filed. The Assessing Officer contends that this failure of the assessee-company to adhere to the agreement cannot be said to be a reasonable cause for delay in filing the Tax Audit Report. The ld. CIT(A) agrees with the Assessing Officer.
I do not find any merit in this reasoning of the Revenue Authorities for dismissing the assessee’s explanation as being unreasonable. Whosoever may have been responsible for the dispute and standoff between the Board of Directors of the assessee-company and the nominee-director of the Govt.
(SMC) Century Pharmaceuticals Ltd Vs. DCIT AY : 2016-17 9 undertaking, the fact remains that the audited results of the assessee were delayed for approval, as a consequence of which the Tax Audit Report was also delayed for filing since it was dependent on the audited results.
In view of the same, I hold that there was sufficient cause adduced by the assessee for the delay in filing the Tax Audit Report and, therefore, there is no case for levying any penalty u/s 271B of the Act. The penalty so levied amounting to Rs.1,50,000/- is, therefore, directed to be deleted. The appeal of the assessee is thus partly allowed.
In the result, the appeal filed by the assessee is partly allowed. Order pronounced in the open Court on 30/07/2024 at Ahmedabad.