Kerala High Court: A division bench of A.K. Jayasankaran Nambiar* and K.V. Jayakumar, JJ. was hearing a group of I.T. appeals preferred by Co-operative Societies raising common questions of law. The appeals challenged the orders of the Assessing Authority, later upheld by the First Appellate Authority and thereafter by the Appellate Tribunal, imposing penalties on the assessees Societies under Section 271-B of the Income Tax Act, 1961 (‘I.T. Act’) for the alleged breach of the procedural provisions under Section 44-AB of the I.T. Act, owing to the failure of the assessees in filing the audit report within the specified time limit. Finding that the assessees had demonstrated reasonable cause for the delay in filing the audit report, the Court allowed the appeals and set aside the impugned orders.
Background
The appellants/assessees were Co-operative Societies who had filed returns of income for the purposes of assessment under the I.T. Act. However, breaching the provisions of Section 44-AB of the I.T. Act (which deals inter alia with the manner in which reports of audit have to be submitted before the Assessing Authority), they did not file the mandated audit report within the specified time limit. However, the audit reports were made available before and were relied on by the Assessing Authority at the time of finalisation of the assessments. While passing the assessment orders, the Assessment Authority initiated penalty proposals under Section 271-B of the IT Act for alleged breach of the procedure under Section 44-AB. Consequently, penalties of Rs. 1.5 lakhs were imposed on the assessees, which was the least of the two amounts mentioned in Section 271-B of the I.T. Act. These orders were upheld by the First Appellate Authority and thereafter by the Appellate Tribunal.
Section 273-B of the I.T. Act mandates that a penalty cannot be imposed whenever a reasonable cause is shown by the assessees. In the present case, the assesses had reasoned that the delay was occasioned solely on account of the corresponding delay in receiving the audit reports from the statutory auditors appointed under the Kerala Co-operative Societies Act and Rules. This explanation was rejected by the Assessing Authority which held that once it was established that there was a delay in submitting the audit reports prescribed in Section 44AB, the penalty under Section 271-B of the I.T. Act was automatic. The First Appellate Authority noted that although the provisions of 273B would apply whenever a reasonable cause was shown, such a cause had not been shown in the present cases. This view was accepted by the Appellate Tribunal. Aggrieved, the assessee filed the present appeals.
Issues
-
The legality of the penalty that was imposed on the assessees Societies under Section 271-B of the I.T. Act for the alleged breach of the procedural provisions under Section 44-AB of the I.T. Act.
-
Whether the delay in obtaining the audit reports from the statutory auditors under the Kerala Co-operative Societies Act and Rules can be seen as a reasonable cause for the delayed submission of the audit reports.
Analysis and Decision
The Court noted the distinction between the mandatory and discretionary language used in Sections 44-AB and 271-B of the Income Tax Act, 1961, which govern the requirement of getting accounts audited and the penalty for non-compliance. While Section 44-AB mandates that the accounts must be audited as indicated by the use of the word “shall”, Section 271-B provides discretion to the Assessing Authority on whether to impose a penalty for failure to comply with the audit requirement, using the word “may.” However, once the decision is made to impose a penalty, the quantum is specified by law, with no discretion available to the authority. The penalty is determined by whichever is lower between one-half percent of the total sales, turnover, or gross receipts, or ₹150,000. Furthermore, Section 273B offers a potential relief mechanism, allowing the Assessing Authority to absolve an assessee from the penalty if reasonable cause for non-compliance is shown. Therefore, while the decision to impose a penalty is discretionary, the quantum is fixed, and there is a possibility of relief under certain conditions.
The Court observed that the phraseology of Section 273B of the I.T. Act was such that if an assessee proves there was a “reasonable cause” behind the breach under Section 271B, no penalty can be imposed on him.
After a perusal of the statutory framework of the Kerala Co-operative Societies Act and Rules, the Court said that the assessees had virtually no control over the audit completion by the statutory authorities, and the delay was in no way attributable to the assessees.
The Court also noted that as the audit reports were made available before the Assessing Authority at the time of completion of the assessment, there was really no prejudice caused in the matter of finalisation of the assessment.
The Court also dismissed the Appellate Tribunal’s reliance on Peroorkkada Service Co-operative Bank Limited v. Income Tax Officer 2020 SCC OnLine Ker 5531, holding that the factual situation in the cited case was different and distinguishable from the facts in the present appeal.
Rejecting the ruling of the First Appellate Authority and Appellate Tribunal, the Court concluded that the assessees had demonstarted reasonable cause for the delay on the following four counts:
(1) Notwithstanding the peremptory phraseology used in Section 44AB with regards to the prescribed time limit, the assessees had furnished the audit reports before the completion of assessment and there was therefore no prejudice caused to the Department while completing the assessment.
(2) There is no material on record to suggest that it was on account of any fault with the assessees Societies that a delay was occasioned in the preparation of the final audit report. Under the statutory provisions under the Kerala Co-operative Societies Act and Rules, the assessees had no option but to await the audit report.
(3) There is no material on record that would suggest that any of the assessees had been subjected to penal proceedings under the Kerala Co-operative Societies Act and Rules for failure to maintain proper accounts/ to get audits from statutory auditors. Hence, the Appellate Tribunal was not justified in assuming that some part of the delay in submitting the audit reports can be attributed to the assessee Societies.
(4) On a perusal of the CBDT Circular No.3/2009 dated 21-05-2009, which is of binding nature, it is noted that a penalty need not be imposed on assessees if no prejudice is caused to the Department on account of any belated furnishing of an audit report.
Conclusion
The Court reached the net conclusion that the assessees had demonstrated a reasonable cause for the belated filing of the audit reports before the Assessing Auhority. Therefore, the Court set aside the impugned orders of the Appellate Tribunal to the extent it confirmed the penalty under Section 271-B of the I.T. Act on the assessees. The Court thus allowed the I.T. Appeals.
[Chavakkad Service Co-operative Bank v. Income Tax Officer, 2024 SCC OnLine Ker 6873, decided on 22-11-2024]
*Order Authored by: Justice A.K. Jayasankaran Nambiar
Advocates who appeared in this case :
For the Petitioner: C. Sasidharan, Arjun Raghavan
For the Respondents: P.G. Jayashankar and Keerthivas Giri
