No penalty for non audit if there is a reasonable cause

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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:

  1. 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)
  2. 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.
  3. 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).
  4. 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.

 

  1. 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 Court
    in 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)
  1. Auditors failure to get the audit done:
    Where Assessee has provided the books of accounts to auditor
    well 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)
  1. 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.)
  1. 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)
  1. 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)
  2. 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.
  3. 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).
  4. 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)

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