Biaora Constructions (P) Ltd. vs >Commissioner of Income Tax, Indore

A.K. Patnaik, CJ.

This is an appeal u/s 260A of Income Tax Act, 1961 (in short the Act).

The appellant carries on the business construction of roads and bridges. For the assessment year 1995-96, the assessing officer found that the appellant filed its return of income on 19-2-1996 and the Profit and Loss account of the appellant disclosed that its contract receipts exceeded Rs.40 lakhs, during the previous year, relevant to the assessment year 1995-96, but the appellant had failed to furnish by 30-11-1995, a report of audit of the accounts, as required u/s 44AB of the Act and accordingly the assessing officer served show-cause notices dated 30-91996 and 28-2-1997, on the appellant to show-cause as to why penalty u/s 271B would not be imposed. In its reply dated 10-3-1997 the appellant contended that it had got its accounts audited by 29-11-1995 and, the same were sent by registered post on 30-11-1995 and as an evidence attached a copy of receipt issued from Rajgarh Town Post Office and therefore, the appellant had complied with the provisions of section 44AB of the Act and was not liable for penalty u/s 271B of the Act. The Assessing officer rejected the said contention of the appellant and held that assessee has not been able to produce any cogent evidence as proof of furnishing of the audit report by the specified period and accordingly levied the penalty of Rs. 1,00,000 (Rs. One lakh only) u/s 271B of the Act, on the appellant. Aggrieved, the appellant filed Appeal No.IT-36/97-98/397, before the Commissioner (Appeals)-I, Indore, but by order dated 6-10-1997, the Commissioner of Income Tax dismissed the appeal of the appellant. Being aggrieved, the appellant filed Appeal No. ITA 1102/IND/1997 before the Income Tax Appellate Tribunal, Indore, but the Tribunal also dismissed the appeal of the appellant, vide order dated 30-12-2003. Aggrieved by the said order dated 30-12-2003 of the Tribunal, the appellant has filed this appeal before this court.

On 21-6-2004, while admitting the appeal, the court formulated the following substantial questions of law :

"1. Whether the Tribunal was justified in confirming the penalty levied u/s 271B of the Act ?

Whether the Taxing Authority were justified in the facts of this case in properly interpreting the requirement of section 271B when they upheld the penalty of Rs. 1,00,000 (Rs. one lakh) on the assessee for delayed filing of Audit Account, as required u/s 44AB?"

Mr. Chaphekar, learned counsel for the appellant submitted that in this case, the assessment year in question is the assessment year 1995-96 and, therefore, the law that was applicable was the law, which was prevalent on 1-4-1995. He submitted that the provisions of section 44AB as they stood on 1-4-1999 did not provide that the assessee has to furnish by the specified date the audited report to the department and all that it provided was that by the specified date the assessee was to obtain the report of the audit of his accounts. He submitted that in this case the report of the audit of the accounts had been obtained by the appellant by 30-11-1995, which was then the specified date. He submitted that the change in section 44AB casting the obligation on the assessee to furnish the report of the audit by the specified date was brought in by the Finance Act, 1995 with effect from 1-7-1995 and the said change of the law would not be applicable to the assessment year 1995-96. In support of the aforesaid contention, Mr. Chaphekar cited the decision of Supreme Court in Commissioner of Income Tax, Bombay Vs. Scindia Steam Navigation Co. Ltd., . He also relied on the decision of Andhra Pradesh High Court in Andhra Cements Co., Ltd., Vijayawada Vs. Commissioner of Income Tax, Visakhapatnam, and the decision of Madras High Court in Commissioner of Income Tax Vs. S. Palaniswamy, .

Mr. Chaphekar further submitted that in any case section 271B of the Act provides that, "If any person fails to get his accounts audited in respect of any previous year or years relevant to an assessment year or furnishes a report of such audit as required u/s 44AB, the assessing officer may direct that such person shall pay, by way of penalty a sum equal to one-half per cent of the total sales, turnover or gross receipts, as the case may be, in business, or of the gross receipts in profession, in such previous year or years or a sum of one hundred thousand rupees, whichever is less." He submitted that the word may shows that a discretion is conferred on the assessing officer to impose the penalty or not to impose the penalty and in case he imposes the penalty then discretion has been further vested on the assessing officer to determine the quantum of penalty. He submitted that this discretion has to be exercised by the assessing officer judicially, considering the facts and circumstances of each case.

He submitted that in this case the appellant had in fact had its accounts audited and has also obtained report of the audit of its accounts from the auditor, but the said report was required to be signed by the Directors of the Company as provided u/s 215 of the Companies Act, 1956. He further submitted that in case the court holds that the amendment to section 44AB that in case the turnover of the assessee exceeds Rs. 40 lakhs, he has to furnish such report of audit to the department before the specified date will apply to the assessment year 1995-96, the assessee could raise a bona fide plea that it was not aware of such change in law made with effect from 1-7-1995. He submitted that this is the first assessment year in which change had been brought about and the assessing officer should have considered this aspect of the matter before deciding whether or not to impose the penalty u/s 271B of the Act in the facts and circumstances of the case. He submitted that impugned order of the Tribunal shows that all the contentions raised on behalf of the appellant have been brushed aside and imposition of penalty at the highest rate of Rs. 1 lakh (One hundred thousand rupees) has been upheld by the Tribunal.

Mr. Chaphekar cited the decision of Supreme Court in Hindustan Steel Ltd. Vs. State of Orissa, for the proposition that,

".. . An order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceeding, and penalty will not ordinarily be imposed unless the party obliged, either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation...".

He also relied on the observations of the Supreme Court in the said case that,

"...Even if minimum penalty is prescribed, the competent authority who is 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, where the breach flows from a bona fide belief that the offender is not liable to act in the manner prescribed by the statute.. .". (p. 29)

In reply Mr. R.L. Jain, learned counsel for the respondent, referred to the Circular No. 117 dated 14-8-1991 of the Board of Directors, in which the scope and effect of the amendments in section 271B by the Finance Act, 1995, with effect from 1-7-1995 have been explained. He pointed out that in para 29.5 of the said Circular, it is stated that the amendments take effect from 1-7-1995. He submitted that contention of Mr. Chaphekar that amendment to section 44AB of the Act casting an obligation on an assessee having turnover of more than Rs. 40 lakhs to furnish a report of audit to the department by the specified date, would not apply to the assessment year of 1995-96, therefore, is not correct. He submitted that the appellant was required to furnish a report of audit of his business with turnover exceeding Rs. 40 lakhs by 30-11-1995 and hence the assessing officer has rightly exercised his discretion and imposed a penalty of Rs. 1 lakh, u/s 271B of the Act, after having found the explanation of the assessee in the show cause reply for not furnishing the audit report by 30-11-1995, not at all believable.

The findings of the Tribunal in the impugned order upholding the levied penalty of Rs. 1 lakh, on appellant u/s 271B of the Act are in Paragraph 6 of the impugned order, which is quoted hereunder :

"After considering the arguments advanced by the parties, averments of auditor Shri Dinesh Kasat, in affidavit, orders of the lower authorities and the decisions relied upon by the learned authorised representative, we are of the view that the explanation that the audit report after preparing of it on 29-11-1995 at Indore by the Auditor was sent through the representative of the assessee to Biaora for the signature of both the directors residing there and after their signatures on it the same was posted on 30-11-1995 through registered post from the post office of Rajgarh i.e., around 20 Kms. away from Biaora, does not appears to be convincing one on several aspect. Firstly, there was no need of signatures of directors on the audit report specially when the auditor being professional and conversant with the provisions of the law was very much aware that 30-11-1995 was the last date of furnishing of the audit report to the department and he should have furnished the audit report to the department at Indore to comply the provisions of law instead of sending it for signatures of the Directors residing at Biaora with instruction to post it from there. And secondly if at all the auditor was of the view that signatures of the directors also should have been there on the audit report, he should have instructed the representative of the assessee that after obtaining signatures of both the directors on the audit report of Biaora he must have returned to Indore for furnishing the report on the due date 30-11-1995 to the department. The explanation of the assessee and affirmation of the same by its auditor in his affidavit thus does not match with common behaviour of a prudent man. The statute does not permit to condone the delay even if the delay is not satisfactorily explained by the assessee. The delay is condoned only in those cases where some bona fide reason is there to establish that due to those reason, it was beyond power and control of the assessee to furnish the audit report in time. The law does not allow a delay to be condoned caused by lapse on the part of the assessee itself. In the present case there is no such situation beyond the power and control of the assessee and auditor under which a prudent assessee or auditor who is well conversant with the provisions of the law, could not have furnished the audit report in time. It is also not convincing as to why return has been filed only on 19-2-1996 when audit report was ready with the assessee on 29-11-1995 especially when there was no-tax liability and return was ready for filing on 24-10-1995 as evident from Page No. 2 of the paper book. It is not material that delay is of one day or inordinate in furnishing the audit report but material is to see as to whether the delay has been properly explained or not to show that some bona fide reason was there with the assessee for not furnishing the audit report in time. Unfortunately, in the present case the behaviours of auditor and assessee do not reflect bona fide reason that they had made all the aspected efforts to furnish the audit report In time. The judgments relied upon by the learned authorised representative are thus not relevant as the assessee has failed to furnish a bona fide reason which constitutes a reasonable cause for the delay. We thus, find no reason to interfere with the first appellate order upholding the penalty against the assessee. The same is affirmed.

In result appeal is dismissed."

From a reading of the aforesaid findings of the Tribunal, it appears that the Tribunal has not found the explanation of the appellant that the audit report after being prepared on 29-11-1995 at Indore by the auditor had been sent to Biaora for signatures of both the Directors residing there, to be so convincing because there was no need of signatures of the directors on the audit report, when the auditor being professional and conversant with the provisions of the law was very much aware that 30-11-1995 was the last date for furnishing the audit report. The Tribunal has taken a view that instead of sending the audit report to Biaora for signatures of the Directors, he should have furnished that report to the department at Indore, to comply with the provisions of law. The Tribunal in our view was oblivious of the provisions of section 215 of the Companies Act, 1956, which provides that, "Every balance sheet and every profit and loss account of a company shall be signed on behalf of the Board of Directors, by not less than two directors of the company." If the appellant has taken a stand that the audit report which included the balance sheet and the profit and loss account of the Company had to be sent to the two Directors at Biaora for signature, the Tribunal was required to apply its mind to the aforesaid explanation given by the appellant consistently with the requirement of section 215 of the Companies Act and, thereafter record its finding whether the explanation was bona fide or not.

Moreover, it will appear from the findings of the Tribunal quoted above that the whole approach of the Tribunal was as if penalty has to be imposed for non-compliance of the provisions of section 44AB of the Act, unless the assessee shows that some good reason as to why such penalty should not be imposed. In Hindustan Steel Ltd. (supra) the Company Hindustan Steel Ltd., had failed to register itself as dealer under the Orissa Sales Tax Act, 1947 and for such failure to register itself as a dealer, the Sales Tax Officer imposed a penalty. The Supreme Court held:

"...But the liability to pay penalty does not arise merely upon proof of default in registering as a dealer. An order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceeding, and penalty will not ordinarily be imposed unless the party obliged, either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest or acted in conscious disregard of its obligation. Penalty will not also be imposed merely because it is lawful to do so. Whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances. Even, if a minimum 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.. ." (p. 29)

Since the aforesaid decision of the Supreme Court had been cited before the Tribunal by the appellant, the Tribunal should have applied its mind to the aforesaid law as well as the facts and circumstances of the case and should have recorded a finding whether the appellant had acted deliberately in defiance of the provisions of section 44AB of the Act and was guilty of conduct contumacious or dishonest, warranting imposition of penalty by the assessing officer u/s 271B.

For the aforesaid reasons, we set aside, the impugned order dated 31-12-2003 of the Tribunal. We find that the appellant had not raised the contention before the Tribunal that the amendment to section 44AB requiring the assessee with a business turnover of more than 40 lakhs to furnish a report of audit of its accounts by the specified date came into force on 1-7-1995 and was not applicable to the assessment year 1995-96 and, therefore we have not considered this contention in this appeal. Since, the matter is now remanded back to the Tribunal, it will be open for the appellant to raise this contention before the Tribunal and if the same is raised, the Tribunal shall decide the same, in accordance with law. The appeal is allowed.

Considering the facts and circumstances of the case, the parties shall bear their own costs.