E. Padmanabhan, J.@mdashThe petitioner, the Handloom Weavers Co-operative Production and Sales Society, prays for the issue of a writ of
certiorari to call for the records pertaining to the proceedings of the third respondent, Income Tax Officer, Ward-I(1), Thanjavur, in file No. GIR
No. 613-TI(1))/TNJ and the consequential order passed by the second respondent, Commissioner of Income Tax, Tiruchirappalli, in C. No.
2026/25/96-97/TN-V, respectively, dated November 26, 1996, and October 21, 1997, and quash the same.
2. Heard Mr. G. Jayachandran, learned counsel appearing for the petitioner, and Ms. Chitra Venkataraman, learned standing counsel appearing
for the respondents.
3. The petitioner, a co-operative society governed by the provisions of the Tamil Nadu Co-operative Societies Act, 1983, and the rules framed
thereunder and is administered through the Commissioner of Handlooms and Textiles, Government of Tamil Nadu, exercising powers of the
Registrar of Societies. The object of the society being to promote the traditional and ancient art of weaving, a cottage industry. All the co-operative
societies in the State are subject to audit as provided under the Tamil Nadu Co-operative Societies Act and separate set of auditors are appointed
for each and every type of society separately. Under the statutory provisions of the Co-operative Societies Act, auditors are appointed by the
Director of Co-operative Audit or the Registrar and not by the petitioner-society.
4. u/s 44AB of the Income Tax Act, every assessee, whose turnover is more than Rs. 40 lakhs, is obliged to audit the accounts and file an audited
report in the prescribed form. The said auditor''s report could be under any other enactment and no separate audit need be carried out under the
Income Tax Act. The petitioner-society, took up the matter with the Director of Cooperative Audit to appoint auditors at an early date so that the
audit could be completed and necessary returns could be filed in time.
5. For the financial year 1994-95 and the previous years and for the year 1995-96, auditors were appointed and circulars were issued only on
June 14, 1995. The petitioner-society was instructed to get ready with the documents such as profit and loss account, trial balance, drawing
account and income and expenditure statement and break-up of the miscellaneous expenditure.
6. The petitioner apprehended that the audit may not be completed within the due date and, hence, it decided to file the return of income so that
the audit report could be filed on any later date as and when it is furnished. The return was filed on July 14, 1995, before the third respondent, who
is the assessing authority on July 14, 1995. By letter dated July 14, 1995, the third respondent required the petitioner to state as to whether the
accounts have been audited u/s 44AB to which the petitioner sent a reply that the auditors have been appointed and audit is nearing completion
and that it would file a revised return of income before December 15, 1995.
7. On November 24, 1995, the third respondent issued a show cause notice as to why penalty should not be levied u/s 271B of the Income Tax
Act for the contravention of Section 44AB. With the revised return, the petitioner-society filed the audit report on December 11, 1995, besides
the petitioner explained the circumstances for the delay. Notwithstanding the filing of the audit report, though it is belated, the third respondent
proceeded further. The third respondent, by the proceedings dated March 23, 1996, despite valid objections offered, levied a penalty of Rs.
30,947 summarily rejecting the explanation offered by the petitioner.
8. Being aggrieved, the petitioner moved the second respondent. The second respondent declined to cancel the penalty imposed by the third
respondent. Hence, the present writ petition challenging the proceedings of respondents Nos. 3 and 2 herein. Counsel for the petitioner raised a
number of contentions, while challenging the impugned proceedings.
9. On behalf of the respondents, the second respondent filed a counter affidavit. According to the respondents, for the assessment year 1995-96
corresponding to the year ending with March 31, 1995, in terms of Section 44AB, a statutory audit is provided. The provision as it stood till July
1, 1995, the audit report u/s 44AB of the Act ought to have been obtained by the petitioner before October 31, 1995, and the petitioner had
failed to obtain the audit report before the date prescribed and there is an obvious contravention of Section 44AB. In terms of the provision as it
stood, the audit report must be filed along with the return of income up to July 1, 1995, and after July 1, 1995, a report must be filed before the
specified date even if the return of income is not filed, in which case a copy of the said report will have to be filed along with the return. There is no
provision to file the audit report after the filing of the return. There is also no provision for granting any extension of time for obtaining the audit
report after the due date.
10. In terms of Section 139(9) of the Act, if the Assessing Officer considers the return filed by the assessee as defective, he may intimate the
defect and give the assessee an opportunity to rectify the defect within 15 days from the date of intimation or such further period as he may allow.
If the defect is not rectified by the petitioner within the time allowed by the officer, the return will be treated as invalid. Further, in terms of the
proviso to Sub-section (9) of Section 139, if the defect pointed out is rectified or the time is allowed before the assessment is made, the delay may
be condoned by the officer and the return treated as a valid return.
11. In the present case, the audit report u/s 44AB was admittedly not filed along with the return, which was filed on July 14, 1995. Hence, the
return was considered as defective. The assessing authority, by letter dated November 14, 1995, enquired of the petitioner as to whether the audit
report had been filed since no copy of the audit report had been filed earlier or along with the return. The petitioner by its letter dated November
17, 1995, sought for extension of time for filing the audit report till December 15, 1995. On December 11, 1995, the petitioner had filed a revised
return of income along with the audit report. It is contended that Section 139(9) will have no application to the present case as the audit report u/s
44AB of the Act had admittedly not been obtained before October 31, 1995, and there is no provision in the Act for extending the time for
obtaining the said report. By failure to obtain the audit report by October 30, 1995, and not having furnished the same with the return of income
filed on July 15, 1995, or even by October 30, 1995, the petitioner-society had contravened Section 271B of the Act and, hence, the penalty had
been levied. The levy of penalty is well founded and well justified.
12. According to Section 271B, if any person fails to get his accounts audited in respect of any previous year or years relevant to the assessment
year or furnish a report of such audit as required u/s 44AB, the assessing authority may direct 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.
13. According to the respondents, the audit report should not only be obtained, but also filed before the specified date, which as per the statutory
requirement the petitioner had failed to comply. The rejection of the petition filed by the petitioner u/s 264 of the Act seeking to cancel the penalty
is justified and valid and no exception could be taken.
14. It is further submitted that the fact that the petitioner is totally exempt from levy of any tax and the delay being only technical, is an irrelevant
consideration for the levy of penalty u/s 271B of the Act. When once Section 44AB had been contravened, a levy of penalty u/s 271B is
automatic and it is not necessary to consider as to whether the contravention was deliberate or wilful or a bona fide one. The decision reported in
Hindustan Steel Ltd. Vs. State of Orissa, relied upon by the petitioner is not relevant and it has no application to the facts of the present case.
Merely because in the earlier years for such belated submission, no penalty had been imposed, or the petitioner is not in the habit of filing audit
report belatedly that would not justify waiver of penalty for the assessment year. It is contended that no interference is called for with respect to the
proceedings of the third respondent as affirmed by the second respondent.
15. In this writ petition, the following points arise for consideration :
(A) Whether the belated completion of statutory audit and filing of audit report u/s 44AB of the Act results in automatic levy of penalty u/s 271B
of the Income Tax Act ?
(B) Whether the assessing authority has the discretion to levy or not to levy penalty u/s 271B ?
(C) Whether there is a failure to exercise jurisdiction by the appellate authority, the second respondent, on the facts of the case ?
(D) Whether the levy of penalty is warranted and justified on the facts of the case when the delay in filing the audit report was beyond the control
of the petitioner ?
16. Before taking up the above points for consideration, it is essential to set out certain crucial and admitted facts. Admittedly, the petitioner-
society is exempt from levy of payment of tax in terms of Section 80P of the Income Tax Act. It is also admitted that in terms of the provisions of
Section 44AB, instead of the statutory audit as provided under the Income Tax Act, an audit conducted and report submitted under the Tamil
Nadu Co-operative Societies Act, will satisfy the requirements of the said Section 44AB. In this case, the only ground for levy of penalty is belated
filing of audit report, which is the consequential contravention of Section 44AB of the Income Tax Act.
17. In respect of the filing process, there is no controversy. For the assessment year 1995-96, corresponding to the accounting year ending with
March 31, 1995, according to the respondents, the audit report should have been obtained on or before October 31, 1995, in terms of Section
44AB. The Income Tax return was filed on July 14, 1995. The petitioner-society filed the return in time, but filed the audit report on December 11,
1995. The third respondent initially by letter dated July 14, 1995, required the petitioner to clarify whether accounts have been audited u/s 44AB.
On November 24, 1995, a show cause notice was issued stating that the petitioner-society had failed to furnish the audit report before December
6, 1995, and, therefore, the petitioner was called upon to show cause as to why penalty should not be imposed u/s 271B. An explanation was
submitted on December 11, 1995, followed with another explanation on February 24, 1996. By the impugned order dated March 29, 1996,
which is long after filing of the audit report, a penalty of Rs. 30,947 was levied.
18. According to the third respondent, who has no consistent stand, the last date for filing of the audit report is October 30, 1995, while in the
show cause notice, it has been set out that such a statement should have been filed by December 6, 1995. However, in either case, there is a delay
in submitting the audit report. Even assuming there is a delay, whether for such delay, a levy of penalty is automatic or a discretion is given to the
assessing authority, is also an incidental contention advanced and it is required to be considered.
19. To answer the said contention, it is essential to refer to the statutory provisions of the Income Tax Act.
20. In this case, there is neither an attempt to evade Income Tax nor is there a failure to furnish the return. It is the settled legal position, that the
element of mens rea is not required to be established or provided for imposition of penalty u/s 271(1)(a) for failure to furnish return.
21. The object of Section 44AB is to prevent tax evasion and plug loopholes enabling tax avoidance. This provision was introduced by the
Finance Act (No. 21 of 1984) as a measure in the drive to unearth black money. Section 44AB requires accounts of every person carrying on
business and whose turnover or gross receipts exceeds Rs. 40 lakhs, to get his accounts audited by an accountant before the specified date and
furnish by date, the report of such audit in the prescribed form duly signed and verified by such accountant. Specified date in relation to the
accounts is December 31 of the assessment year where the assessee is a company and October 31, in other case of the assessment year.
22. 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 furnish 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 percentage of the total sales turnover, etc. Section 44AB and Section 271B have to be read together. A
harmonious consideration of both the provisions requires the assessee to file an audit report within the specified time failing which he will have to
pay penalty, if the assessee fails to assign reasonable cause and satisfy for not doing so. If the return of income was filed within the extended time
along with the tax audit report, then there would be no default, which is punishable u/s 271B. Where the assessee had obtained the audit report
before the prescribed date provided u/s 44AB, but filed along with the return belatedly, the same may not attract penalty u/s 271B. Whether the
assessee failed to file audited accounts with the return within time, such partial failure also does not attract penalty as an interpretation, which is
favourable to the assessee is called for and accepted.
23. If a person fails to get his accounts audited and furnish a report of such audit, as required u/s 44AB, it may attract a levy of penalty as provided
u/s 271B. The contention that belated filing of the audit report is per se leviable with a penalty, in my considered view cannot be sustained and the
further contention that belated filing results in consequential levy automatically also cannot be sustained.
24. In the show cause notice issued, the third respondent has merely set out that the petitioner had not filed the audit report along with the return of
income u/s 44AB of the Income Tax Act, the return is defective u/s 139(9) of the Income Tax Act and the failure to furnish audit report before
December 6, 1995, attracts penalty u/s 271B of the said Act The said notice is dated November 24, 1995. The said notice proceeds on the basis
that the audit report should have been filed before December 6, 1995. When there is time even according to the show cause notice, and there is
time to file the audit report till December 6, 1995, what is the occasion or reason for the third respondent to issue a notice on November 24,
1995, is not known. The very notice itself has been issued without application of mind and it cannot be accepted as a bona fide act.
25. An explanation has been submitted by the petitioner on December 11, 1995, and on February 24, 1996. In the meantime, on December 11,
1995, an audit report had been filed. In the explanation, the petitioner-society had set out the reasons for the delay and has pleaded that it was
beyond its control as the society is governed by the co-operative audit under the Tamil Nadu Co-operative Societies Act. It is also pleaded that
the petitioner-society has no control over the said co-operative auditors and all their persuasion to issue an audit report had failed. The delay in
filing the audit report, if any, is unintentional and not deliberate.
26. Thereafter on March 29, 1996, the third respondent had passed an order levying a penalty u/s 271B. In the said order dated March 29, 1996,
the third respondent has set out that October 31, 1995, is the stipulated time to file the audit report. The third respondent merely referred to both
the explanations submitted by the petitioner and concluded thus :
I feel that there is convincing no reason for failure to furnish the audit report u/s 44AB within the specified date and as such penalty is leviable in
this case . . . The above penalty is levied after getting necessary approval from the Additional Commissioner of Income Tax, Trichy Range.
27. Except stating that there is no convicing reason, the third respondent had not adverted to the reasons nor applied its mind to the reasons
assigned and also further stated that hitherto, the audit report was being filed belatedly also, but no action has been taken. The third respondent
had not taken note of the fact that the petitioner-society is governed by the provisions of the Tamil Nadu Co-operative Societies Act and the Rules
framed therein and it is also controlled by the authorities appointed under the Act. In terms of Section 80 of the Tamil Nadu Co-operative
Societies Act, the Registrar shall cause to be audited by a person authorised by him, by general or special order, the accounts of every registered
society once at least in every co-operative year and the result of the audit shall be communicated to the society concerned. The said Section
provides the manner of audit, the examination of various books of account, securities, valuation of societies, etc, and submitting of a report for
appropriate action to rectify the defects.
28. Chapter VII of the Tamil Nadu Co-operative Societies Rules, 1988, provides for audit, enquiry, etc. Rule 102 provides the procedure for
conducting an audit. Where the audit is not or could not be completed within the period of six months from the close of the co-operative year of
the society concerned, the auditor shall make an application to the Registrar (Audit) requesting extension of time and there is a provision for further
extension of time subject to the reasons assigned. Thus it is seen, the Registrar (Audit) is the authority, who appoints the auditor and under whose
control, the audit is being carried out and the petitioner-society has no discretion to appoint auditors of its own. It is for the Registrar (Audit), who
has to appoint an auditor for the petitioner-society and the petitioner has no choice in this respect.
29. It is the main plea of the petitioner-society that there was delay in the auditors being appointed by the Registrar (Audit) and, consequently,
there was delay in completing the audit as well. According to the rule, six months is the time before which audit has to be completed for every co-
operative society. The expression ""co-operative year"" has been defined as the period commencing from the July 1 of any year ending with the June
30 of the succeeding year. Therefore, the audit as stipulated under the Co-operative Societies Act, has to be undertaken and completed before the
expiry of six months reckoned from June 30 of that year. If the society itself is the authority to appoint an auditor to submit the report, things would
have been different, but the society has no authority to appoint an auditor of its own. Therefore, the delay, if any, as rightly pointed out by the
petitioner is attributable to the Registrar (Audit), a statutory authority, who has to appoint the auditor and the auditor has to audit the accounts of
the society.
30. As detailed in the affidavit filed by the petitioner, there was delay on the part of the Registrar (Audit) and this naturally lead to further delay in
filing the audit report. It is not possible or it could even be stated that it is not a possibility for the society to get the auditor appointed before hand.
As set out in the affidavit, the petitioner had taken up the matter with the Registrar (Audit). Despite that there has been delay. The petitioner had
admittedly filed the return within time, but defectively. The petitioner is totally exempt from the tax. Therefore, there could be no other reason or
cause for the petitioner to delay the submission of the report. It is not a case of suppression or concealment of income or an attempt to delay the
filing of the return. Hence, nothing could be attributed against the society for not filing the audit report within time. The society also did not gain by
the belated filing of the audit report. Taking into consideration the entire facts, it is clear that the society has neither gained anything by delaying nor
there is any purpose behind the society delaying the filing of the audit report. Section 271B confers sufficient discretion on the third respondent with
respect to the levy of penalty. The exercise of power u/s 271B is discretionary and while levying penalty, the third respondent should have taken
into consideration the entire facts, circumstances, the reasons, which were beyond the control of the society and the earlier conduct of the assessee
as well as the Income Tax Officers. Viewed from any angle, there is no special circumstance, which warranted the third respondent to levy the
penalty for the first time as hitherto no such penalty had either been levied nor a notice issued drawing the attention of the society and the power to
levy the penalty should have been exercised in that background. The third respondent had not taken into consideration the above material facts, but
has merely stated that it feels like levying penalty. Such a reasoning cannot be sustained. The appellate authority also had not taken into
consideration the above materials nor had it considered the request in the manner required of it. If there is a reasonable cause for not filing the audit
report, then the third respondent will be well justified in not levying penalty.
31. This court is of the considered view that the provisions as contained u/s 139(9), Explanation (e), and Section 44AB and Section 271B can be
harmoniously read together and the expression ""without reasonable cause"" provides a sufficient insulation to the workability of Section 44AB. It is
a better clue and it does not exclude the use of discretion to drop the penalty proceedings if there is sufficient cause. The conspectus of the whole
situation is that both the provisions, i.e., Section 44AB along with Section 271B and Section 139(9), Explanation (e), can be read together and a
harmonious construction is that the assessee has to file an audit report within the specified date, failing which he will have to pay the penalty if he
fails to show reasonable cause for not doing so. However, if reasonable cause is shown, then it will be well open to the respondent to accept the
reasonable cause and drop the proceedings.
32. In this case, the tax return has been filed within time, but it is a defective return and it is only a partial failure on the part of the society in filing
the audit report and such partial failure may not attract penalty. This is also an interpretation, which is permissible in law as has been held in
Bangalore Steel Distributors v. ITO [1994] TLR 254 Ban.
33. Whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority and such discretion
should be exercised judicially and on a consideration of all relevant circumstances. Learned counsel for the petitioner rightly relied upon the
decision of the apex court in Hindustan Steel Ltd. Vs. State of Orissa, where the apex court held thus (page 29) :
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.
34. In a recent pronouncement with respect to levy of penalty or, waiver thereof by the Commissioner, the apex court in Smt. Harbans Kaur etc.
Vs. Commissioner of Wealth-tax, Jullundur, held thus (page 420) :
If the conditions stipulated in the section are satisfied the Commissioner has a discretion in the matter. In exercise of that discretion, the
Commissioner can either reduce the amount of the penalty or he may even waive the entire penalty. It is for the Commissioner to decide on the
facts of a particular case whether a waiver in entirety or a reduction alone is warranted.
The words the ''Commissioner may in his discretion ... reduce or waive the amount of penalty'' in Section 18B of the Act are clear enough to show
that the power conferred on the Commissioner is to be exercised by him in such manner as he deems just and proper. When a discretion is
conferred on an authority the same must be exercised fairly and not arbitrarily, justly and not fancifully, vide S.G. Jaisinghani Vs. Union of India
(UOI) and Others, .
Even if the Legislature has not used the words ''in his discretion'' in Section 18B(1), the Commissioner could have exercised only a discretionary
power in view of the employment of the word ''may''. Now, when Parliament used both expressions ''may'' and ''in his discretion'' together, the
position is placed beyond the pale of any doubt that the Legislature wanted an officer of the rank of the Commissioner to be reposed with the
discretionary power to choose between entire waiver or reduction in any proportion.
35. The said provisions of the Wealth-tax Act are on par with the Income Tax Act and, therefore, the said pronouncement could very well be
applied to the present case even if it arises under the Income Tax Act.
36. In the light of the said pronouncement of the apex court, on the facts of the case, the discretion exercised by the third respondent and as
affirmed by the second respondent is an arbitrary exercise of power and it is not a just or reasonable exercise of power. Taking into consideration
the object of the provision, the status of the petitioner being a co-operative society, it is being controlled by the authorities under the Tamil Nadu
Co-operative Societies Act and it has to satisfy the requirements stipulated under the said Act, in the absence of any deliberate or wilful omission
on the part of the society, and taking into consideration the past conduct as well as the past treatment of such delay, as if it was taking for granted
on either side, the levy of penalty is not a reasonable exercise of power by the third respondent as affirmed by the second respondent. Had the
second respondent considered the matter in the light of the above, or at least given direction in the future to be complied with, while dropping
penalty, the approach would have been different. It is true there is no escape for the society but to file its audit report within time. But by mere
failure alone, levy of penalty is not warranted nor justified.
37. In the light of the above discussions, the writ petition is allowed. The impugned proceedings of the third respondent as affirmed by the second
respondent are quashed. The penalty, if any, paid, shall be refunded to the petitioner-society, within eight weeks from the date of communication of
this order. Parties shall bear their respective costs. Consequently, connected W. M. P. is closed.
