2025 (5) TMI 1647 - AT - Income Tax

Penalty u/s 271B - delay in furnishing the audit report u/s 44AB beyond the due date specified u/s 139(1) - HELD THAT - As in the case of Chavakkad Service Co-op. Bank Ltd. 2024 (11) TMI 1272 - KERALA HIGH COURT held where assessee co-operative societies did not file audit report as mandated u/s 44AB within time limit specified thereunder however audit reports were made available before Assessing Authority at time of finalization of assessments since delay in obtaining audit reports from statutory auditors under Kerala Co-operative Societies Act and Rules could be seen as a reasonable cause for delayed submission of audit reports no penalty u/s 271B was to be imposed on assessee. Appeal filed by the assessee is allowed.

Summary

Issues Presented and Considered

The core legal questions considered in this appeal are:

• Whether penalty under section 271B of the Income Tax Act, 1961 can be imposed on the appellant for delay in furnishing the audit report under section 44AB beyond the due date specified under section 139(1) of the Act.
• If delay in submission of the prescribed audit report is justifiable on grounds of reasonable cause, particularly when the audit report is submitted before the completion of assessment proceedings.
• Whether the explanation offered by the appellant for delay, specifically the illness of the accountant, is sufficient to constitute reasonable cause to exempt from penalty.

Issue-Wise Detailed Analysis

1. Imposition of penalty under section 271B for delay in furnishing audit report under section 44AB

The relevant legal framework involves section 44AB of the Income Tax Act, which mandates certain taxpayers, including partnership firms engaged in retail business, to get their accounts audited and furnish the audit report by the due date specified under section 139(1). Failure to comply attracts penalty under section 271B.

Precedents cited include the judgment of the Hon'ble Madras High Court in CIT v. A.N. Arunachalam [1994], which held that penalty cannot be levied if the audit report is furnished before the completion of assessment. Additionally, the recent ruling of the Jurisdictional High Court in Chavakkad Service Co-op. Bank Ltd. [2024] 169 taxmann.com 45 (Kerala) was considered authoritative, wherein the court observed that delay in submission of audit reports caused by statutory auditors' constraints under the Kerala Co-operative Societies Act and Rules constituted reasonable cause, and thus penalty under section 271B was not warranted.

The AO's reasoning was that the appellant failed to file the audit report by the due date and that the explanation of the accountant's accident was not acceptable because the audit was conducted by a different Chartered Accountant. The AO imposed a penalty of Rs. 1,50,000/- accordingly.

The CIT(A) confirmed the AO's penalty order, rejecting the appellant's explanation.

The appellant contended that since the audit report was submitted before the completion of assessment proceedings, penalty should not be imposed, relying on the Madras High Court precedent.

The Tribunal considered the facts and noted the similarity with the Kerala High Court ruling in Chavakkad Service Co-op. Bank Ltd., where delay due to reasonable cause related to auditors' constraints was held to exempt penalty. The Tribunal found the facts of the present case analogous, where delay was caused by the illness of the accountant, a reasonable cause.

The Tribunal thus applied the principle that if the audit report is furnished before completion of assessment and the delay is due to reasonable cause, penalty under section 271B should not be imposed.

2. Sufficiency of the explanation for delay based on illness of the accountant

The appellant submitted medical evidence-a discharge summary from a hospital-documenting the serious motorcycle accident and spinal cord injury of the accountant, who was advised bed rest for six months. This was presented as the reason for delay in obtaining the audit report.

The AO rejected this explanation on the ground that the audit was conducted by a different Chartered Accountant, not the injured accountant.

The Tribunal, however, did not find this objection sufficient to negate the reasonable cause. The illness of the accountant was a significant factor affecting the audit process. The Tribunal implicitly recognized that operational difficulties caused by such an event could reasonably delay the audit report submission.

The Tribunal's acceptance of the appellant's explanation aligns with the principle that genuine and unavoidable causes affecting compliance timelines should be considered reasonable cause, thus exempting penalty.

Significant Holdings

The Tribunal held:

"Where assessee co-operative societies did not file audit report as mandated under section 44AB within time limit specified thereunder, however, audit reports were made available before Assessing Authority at time of finalization of assessments, since delay in obtaining audit reports from statutory auditors under Kerala Co-operative Societies Act and Rules could be seen as a reasonable cause for delayed submission of audit reports, no penalty under section 271B was to be imposed on assessee."

Applying this principle to the facts of the case, the Tribunal concluded:

"The facts of the case on hand are identical as discussed above. Thus, respectfully following the same, we delete the penalty imposed by the Revenue."

Core principles established include:

• Penalty under section 271B for delay in furnishing audit report under section 44AB is not automatic and must consider whether the delay was due to reasonable cause.
• Submission of the audit report before the completion of assessment proceedings mitigates the penalty liability.
• Medical or operational difficulties affecting the auditor or the audit process can constitute reasonable cause for delay.

Final determination was that the penalty imposed under section 271B was not justified and was accordingly deleted, allowing the appeal.