CA’s are taking the pain of the audit of their clients. How much fees CA’s are getting for audit is another question which professional should ask themselves at the end of this article.
Last minute audit may result error in the audit report. Error could be in the form of non-reporting, or mis-reporting or un-reporting of the transactions. Errors in most of the cases by CA’s are unintentional error as the clients come for audit in the last moment or carry out the audit in the last moment.
Last minute audit or audit in a hurry or number of changes before finalizations, results in mistakes in data feeding, in checking or in verifying the fact.
In an attempt to save the clients, CA needs to ensure that they rescue their hands from being burnt.
Error in audit report could result in penalty u/s 271J results in a penalty of Rs. 10,000/- on auditor. It may be noted that FY 2017-18 (AY 2018-19) is the first year of applicability of section 271J.
The penalty is to be paid by the CA & not the clients!
Will clients pay Rs. 10,000/- penalty if CA informs that,
“Dear Clients, you have come at the last moment and so pay for my mistakes in helping you out at the crucial moments”
Rather, the most important question would be –
Will you clients will still be your clients in the next your, forget after 2 years?
Let us not bother about the penalty for non audit. There is no penalty if there exists a reasonable cause in genuine circumstances. Let the client be client. Let CA not be made liable for penalty of Rs. 10,000/- to help the clients.
Before we tell about “reasonable cause” at the end of article, please have a look at the penal provision,
Section 271J of the Income Tax Act-1961 reads as under:
271J. Penalty for furnishing incorrect information in reports or certificates.—Without prejudice to the provisions of this Act, where the Assessing Officer or the Commissioner (Appeals), in the course of any proceedings under this Act, finds that an accountant or a merchant banker or a registered valuer has furnished incorrect information in any report or certificate furnished under any provision of this Act or the rules made thereunder, the Assessing Officer or the Commissioner (Appeals) may direct that such accountant or merchant banker or registered valuer, as the case may be, shall pay, by way of penalty, a sum of ten thousand rupees for each such report or certificate.
Explanation.—For the purposes of this section,—
(a) | “accountant” means an accountant referred to in the Explanation below sub-section (2) of section 288; | |
(b) | “merchant banker” means Category I merchant banker registered with the Securities and Exchange Board of India established under section 3 of the Securities and Exchange Board of India Act, 1992 (15 of 1992); | |
(c) | “registered valuer” means a person defined in clause (oaa) of section 2 of the Wealth-tax Act, 1957 (27 of 1957).’. |
No penalty for non audit if there is a reasonable cause
Taxpayer having turnover above the specified limit are required to get the books of accounts audited. There is a hefty penalty u/s 271B of the Income Tax Act-1961 if taxpayer fails to comply with it. The minimum penalty that can be levied 1/2% of the total sales, turnover or gross receipts & the maximum penalty cannot exceed Rs 1,50,000.
However, there is an exception u/s 273B. If the tax payers have a “reasonable cause” for not getting accounts audited, no penalty can be imposed.
Important question is what is reasonable cause?
The court have interpreted proposal liberally. Delay in filing of audit reports does not result in any monetary loss to the exchequer. It’s an additional compliance burden on the Assessee.
Most of the judgments are settled in favor of the Assessee. Few of the judgments are as under:
- Accountant left the Job:
The delay in getting the accounts audited for the reason that the accountant has left the service is accepted as “Reasonable Cause” and so no penalty can be imposed in such case- CIT vs Ashoka Dairy [2005 ] 279 ITR 32 (P & H). Similar judgemnet was rendered in in the case of S.H. Sopariwala vs. CIT (2003) 128 Taxmann 23 (Ahd). - Illness of Auditor/ Accountant:
Madras High Court in Lakshmi Card Clothing Manufacturing Co. (P.) Ltd. vs DCIT[2013] 353 ITR 544 (Madras) has held that Where delay in filing audit report was due to illness of assessee’s auditor, penalty under section 271B should not be imposed. - Books seized by Custom Department:
If books of accounts were first seized by custom department & later by Income Tax Department because of which assessee was not able to get it audited, no penalty can be imposed. It was rightly considered as “Reasoanble Cause” in CIT Vs. Trihovandas Tejpal & Sons (2003)126 Taxman 28 (Rahkot).
- Illness of Auditor/ Accountant:
Not getting the books of accounts audited due to illness of accountant or auditor can be construed as reasonable cause so as to grant immunity from penal provision. – CIT vs Ramkrishna Stores253 ITR 175 (Cal). - Delay in Actual Filing:
Audit Report is Obtained by the taxpayer but Delay is Because of Late Filing of Tax Return– CIT vs K.K. Spun Pipe 200 CTR 107. This judgement may not be relevant now as audit report is not required to be filed physically.
- Multiple Proprietary firm:
If proprietor have many proprietorship firm wherein turnover is exceeding in some firms and below the limit in some firms then no penalty can be imposed if audit is not carried out under a bonafide belief that audit limit is “firm wise” and not “Assessee wise” –
– Karnataka High Courtin ACIT vs Dr. K Satish Shetty [ 2009] 310 ITR 366 (Kar).
Similar judgment by Rajasthan High Court in Bajrang Oil Mills vs ITO [2007] 295 ITR 314 (Rajasthan)
- Auditors failure to get the audit done:
Where Assessee has provided the books of accounts to auditorwell in time but but auditor has failed to carry out the audit then no penalty can be imposed for failure to file the audit report in time i.e., due to delay on part of auditors – Allahabad High Court in the case of CIT vs U.P. Rajya Sahkari Evam Bhoomi Vikas Bank Ltd [2013] 353 ITR 152 (Allahabad)
- Auditor appointments to be done by Registrar, Central Government etc:
Where the appointment of auditor is not by Assessee’s but is done by other agencies like Central Government, State Government, Society Registrar then no penalty can be imposed for getting the accounts audited within due date-
Uttrakhand High Court in CIT vs Iqbalpur Cooperative Cane Development Union Ltd [2013] 356 ITR 343 (Uttarakhand) ,
and also Allahabad High Court in CIT vs District Co-Operative Bank [2013] 217 Taxman 145 (Allahabad)(MAG.)
- Books seized by Custom Department:
If there is no difference between the assessed income vis a vis returned income and as a result there is loss to the Government Treasury because of non audit, no penalty should be imposed for a mere technical or venial breach of audit provision was an interest observation in the case of ITO Vs. Bindra Ban Bansi Lal (2001) 78 ITD 228 (Asr).
- Bonafide belief in reckoning turnover:
Where assessee (a licensed vendor for sale of stamps on commission) was under a bona fide belief that he was not liable for audit of accounts under section 44AB as per circular No. 452 and ICAI guidelines, penalty under section 271B was not to be imposed – ITAT , Jaipur in Prem Prakash Gupta vs ITO [2015] 168 SOT 58 (Jaipur – Trib.)
Similar judgement was rendered in D. Usha Rani Vs. ITO (ITAT Hyderabad).
Even similar judgment was rendered in the case of Madanlal Gupta Vs. ITO (2004) 3 sot 144 (Delhi).
- Sudden resignation of Auditor:
Non audit due to Sudden resignation of Auditor is a reasonable cause for non omposition of penalty – ITAT Hyderabad in case of Progressive Constructions (P) Ltd vs ITO20 ITD 182 (Hyd) - Sudden resignation of Auditor:
Even delay in finalization of accounts due to reconciliation of accounts with customers and others has been considered as “Reasonable Cause” by ITAT , Ahmedabad , in Ajitbhai & Covs Ass.CIT [ 1993] 47 TTJ (Ahd) 22. - Delay by Statutory auditor
Where there is a delay in completion of statutory auditby auditors which has resulted in late audit of tax audit u/s 44AB constitute the reasonable cause for non-compliance with provisions of section 44AB – APL India (P) Ltd vs JCIT (OSD) [2014] 62 SOT 91 (Mumbai – Trib.)(URO). - If no Books of Accounts Maintained:
If no book of accounts is maintained, then penalty is leviable u/s 271A. If penalty is imposed u/s 271BA, then no penalty can be imposed u/s 271B- Roshni Devi Vs ITO (ITAT Jaipur)