TMI Blog1989 (2) TMI 171X X X X Extracts X X X X X X X X Extracts X X X X ..... e been audited by 31-7-1985 but the accounts were audited only on 27-3-1986, i.e., 8 months after the expiry of the date fixed by the statute and the return was submitted only on 31-3-1986. According to the order, when these facts were pointed out to the assessee by letter dated 14-8-1987 requiring the assessee to show cause why action should not be initiated under sec. 271B for failure to get the accounts audited in time, the assessee replied by letter dated 26-8-1987 that the audit could not be done within the prescribed time for the following reasons, to quote from the order imposing penalty : "(1) One of the partners Sri K. Srinivasan was seriously ill during 1985 and he was actually admitted in hospital for a surgery on 21-9-1985 ; (2) Being the first year of audit, they were not prepared for it because of inexperienced and irregular accountant ; (3) They have already asked for time in Form No. 6 for late filing of return." The Income-tax Officer did not consider the reply to be satisfactory. Therefore, he gave an opportunity for being personally heard. The representatives of the assessee were heard on 9-9-1987. The Income-tax Officer observed that the audit was to hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the first year when the provisions came into effect and extension of time had been sought for filing the return by submitting an application in Form No. 6. The CIT(A), however, observed that he saw no merit in the contentions and merely because the provisions of section 271(1)(a) had not been invoked, he was of the view that it did not follow that the assessee's case went outside the purview of sec. 271B. The specified date for the purpose of completing the audit for the assessment year 1985-86, he stated, was the 30th September, 1985 since there was an extension up to such date granted by the CBDT. In the assessee's case the audit report was dated 27th March, 1986 and the same had been filed along with the return on 31-3-1986. The CIT(A) also came to the conclusion that there was failure to obtain the accounts audited and obtain the report of such audit within the specified date, i.e., 30-9-1985. The CIT(A), therefore, upheld the penalty as imposed. 6. Before us, the learned counsel submitted that under the provisions of sec. 271B, penalty could be imposed only when there was failure without reasonable cause on the part of a person to get the accounts audited as required under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ec. 44AB and the Court had even observed that in order to mitigate the inconvenience and hardship to assessees, particularly in relation to the assessment year 1985-86, the Board of Direct Taxes may consider issuing a direction on the lines contained in Circular No. 205, dated July 27, 1976. 7. Since sufficient cause had been established, the learned counsel submitted the penalty required to be cancelled. 8. The learned Departmental Representative submitted that the previous year of the assessee having ended on 31-3-1985, the audit should have been completed by July 1985. Extension of time had been allowed by the Board by a general circular up to 30th September, 1985 and there was ample time, therefore, for the assessee to have the tax audit completed by that date. The mere fact that Shri Srinivasan fell ill in September, 1985 would not show that there was sufficient cause for not having completed the audit by that date. The learned Departmental Representative went on to emphasise that the question of granting any extension in relation to the specified date for completion of audit did not arise and merely because the assessee had sought for extension of time for filing the retu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able to agree with the learned Advocate-General for the petitioners that this will by itself ipso facto expose the defaulting assessees to the consequences of penalty and/or of their return being treated as defective. The reason is that section 271B justifies imposition of penalty where an assessee fails to get his accounts audited and obtain the report by the specified date without reasonable cause. It will be for the Department to prima facie show that there was want of reasonable cause on the part of the assessee for committing the default as held by the Full Bench of this Court in I.M. Patel Co.'s case [1977] 107 ITR 214 (FB). We do not think that the return can also be treated as incomplete merely because the assessee has committed default in annexing the auditors' report with the return. The Income-tax Officer has to give him time to remove the defect and if within the stipulated time of a fortnight or the extended time, the assessee is able to comply with the requirement. we do not think that his return can be treated as defective or incomplete. We are sure that the income-tax authorities will bear in mind this peculiar situation as it prevails particularly in relation to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t case, the audit was completed on 27-3-1986 and the return itself was filed on 31-3-1986. Therefore, the observations of their Lordships referred to are apposite for rendering a decision in the present case. 10. Another contention put forth before the Gujarat High Court was that the provisions of sec. 271B do not leave any discretion to the Income-tax Officer in the matter of levy of penalty or does not link the quantum of penalty, with the period of default. An argument was also advanced that an appeal was not competent in respect of the quantum of penalty by the very nature of the provision contained in sec. 271B and, therefore, the provisions have become arbitrary and unreasonable and required to be struck down. Dealing with this contention, the observations of the Court are as under : "On the face of it, the contention appears to be very attractive. We have, therefore, to closely scrutinise it in order to find out whether the same is well-founded. It is no doubt true that the penalty which has been prescribed in section 271B is a flat penalty in the sense that a defaulting assessee is liable to pay penalty of one-half per cent of the total sales, turnover or gross receipts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... um penalty is prescribed, the authority competent to impose the penalty will be justified in refusing to impose penalty, when there is a technical or venial breach of the provisions of the Act or where the breach flows from a bona fide belief that the offender is not liable to act in the manner prescribed by the statute." (Emphasis supplied). It should be noted that section 12(5) of the Orissa Sales Tax Act provided penalty for failure to apply for registration without sufficient cause and the Commissioner was empowered to levy by way of penalty a sum not exceeding one and a half times that amount. In Addl. CIT v. I.M. Patel Co. [1977] 107 ITR 214 (FB), the Full Bench of this court in the context of the failure to furnish return without reasonable cause ruled that under section 271(1)(a) of the Act, failure "without reasonable cause" to furnish the return is an ingredient of the offence, and section 271(1)(a) would be attracted where the assessee has acted deliberately in defiance of the law or was guilty of conduct, contumacious or dishonest, or acted in conscious disregard of his obligation. The expression "reasonable cause" must receive a liberal interpretation so as to ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erpreted in a liberal manner, the expression would require consideration of all attendant circumstances including the period of default, the conduct or the intention of the assessee, etc. 11. We would now proceed to consider the facts particularly with reference to the aforesaid guidelines. The assessee had filed before us photostat copy of the application for extension of time dt. 30-9-1985 which was received in the Income-tax Office, City Circle III on the same date. It was mentioned therein that the trial balance difference was being traced and particulars were being gathered for tax audit purpose and a reference was made to the letter dated 30-9-1985 and extension of time was sought till 31-12-1985. Accompanying this application was a letter of the same date. The photo copy of the application bore the seal of receipt in the Income-tax Office, City Circle III, on 30-9-1985. Since the application itself was not readily traceable on the record. We requested the learned Departmental Representative to verify whether the application had been received in the office and with reference to the registers of the office which were produced for our inspection, it is seen that the receipt o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iginally given to the Chartered Accountant. A letter was filed from M/s. Chengayya Co., Chartered Accountants, dated 23-1-1989 signed by partner Shri N. Prasad wherein it is stated that the assessee, a firm of coconut merchants, had submitted their books of account on 3rd June, 1985 to them and since it was found that the accounts had to be audited and initial checking showed a difference in trial balance, particulars necessary for compulsory tax audit were called for. The firm wanted time on the ground that the accountant was not available and as the auditors themselves were busy the books were returned to the firm to trace the trial balance difference and furnish the particulars required. In September, 1985, it was stated that the firm reported that the partner in charge Shri K. Srinivasan was ill and had to undergo surgery and consequently to work could not be done. 13. The learned Departmental Representative submitted that there was no evidence that the books had been given to the Chartered Accountant on the 3rd June, 1985. We required evidence in this regard to be produced. The Chartered Accountant produced a note book maintained by the firm of Chartered Accountants showin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er, 1985, it was less than Rs. 2 lakhs and from January to March, 1986 it was less than Rs. 1 lakh per month. So also sales from September to December, 1985 were less than Rs. 2 lakhs per month and in January and February, 1986 it was less than Rs. 1 lakh per month and in March, 1986 barely Rs. 1 lakh. This would show that the illness of the managing partner had clearly affected the day-to-day business of the firm and, therefore, the normal functioning of the assessee's business was clearly affected. The Income-tax Officer has emphasised on the aspect that Shri Srinivasan took ill only after July, 1985 by which date the audit should have been completed. We have already found as a fact that the accounts had been given to the Chartered Accountant for audit on the 3rd of June, 1985 and so when Shri Srinivasan was well he has taken due care to see that accounts were given for audit. Certain differences etc. were found by the auditors in the trial balance and by the time the books were returned, Shri Srinivasan fell ill and it took time to reconcile the same. Yet matters appear to have been done with due expedition considering the nature of the ailment of the managing partner as evidenc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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