High Court Of Madras
Thanjavur Silk Handloom Weavers Co-Operative Production & Sales Society Ltd. vs. Union Of India & Ors.
Sections 44AB, 271B
Asst. Year 1995-96
E. Padmanabhan, J.
Writ Petn. No. 1212 of 1998 & WMP No. 1765 of 1998
18th September, 2001
G. Jeyachandran, for the Petitioner : Mrs. Chitra Venkataraman, for the Respondents
E. Padmanabhan, J. :
The 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, ITO, Ward-I(1), Thanjavur, in file No. GIR No. 613-TI(1)/TNJ and the consequential order passed by the second respondent, CIT, Tiruchirappalli, in C.No. 2026/25/1996-97/TN-V, respectively, dt. 26th Nov., 1996, and 21st Oct., 1997, and quash the same. Heard Mr. G. Jayachandran, learned counsel appearing for the petitioner, and Ms. Chitra Venkataraman, learned standing counsel appearing for the respondents. The petitioner, a co-operative society governed by the provisions of the Tamil Nadu Cooperative 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 Cooperative Societies Act, auditors are appointed by the Director of Co- operative Audit or the Registrar and not by the petitioner-society. Under s. 44AB of the IT 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 IT Act. The petitioner-society, took up the matter with the Director of Co-operative Audit to appoint auditors at an early date so that the audit could be completed and necessary returns could be filed in time. 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 14th June, 1995. The petitioner-society was instructed to get ready with the documents such as P&L a/c, trial balance, drawing account and income and expenditure statement and break-up of the miscellaneous expenditure.
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 14th July, 1995, before the third respondent, who is the assessing authority. By letter dt. 14th July,
1995, the third respondent required the petitioner to state as to whether the accounts have been audited under 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 15th Dec., 1995. On 24th Nov., 1995, the third respondent issued a show-cause notice as to why penalty should not be levied under s. 271B of the IT Act for thecontravention of s. 44AB. With the revised return, the petitioner-society filed the audit report on 11th Dec., 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 dt. 23rd March, 1996, despite valid objections offered, levied a penalty of Rs. 30,947 summarily rejecting the explanation offered by the petitioner. 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.
On behalf of the respondents, the second respondent filed a counter-affidavit. According to the respondents, for the asst. yr. 1995-96 corresponding to the year ending with 31st March, 1995, in terms of s. 44AB, a statutory audit is provided. The provision as it stood till 1st July, 1995, the audit report under s. 44AB of the Act ought to have been obtained by the petitioner before 31st Oct., 1995, and the petitioner had failed to obtain the audit report before the date prescribed and there is an obvious contravention of s. 44AB. In terms of the provision as it stood, the audit report must be filed along with the return of income upto 1st July, 1995, and after 1st July, 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. In terms of s. 139(9) of the Act, if the AO 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-s. (9) of s. 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.
In the present case, the audit report under s. 44AB was admittedly not filed along with the return, which was filed on 14th July, 1995. Hence, the return was considered as defective. The assessing authority, by letter dt. 14th Nov., 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 17th Nov., 1995, sought for extension of time for filing the audit report till 15th Dec., 1995. On 11th Dec., 1995, the petitioner had filed a revised return of income along with the audit report. It is contended that s. 139(9) will have no application to the present case as the audit report under s. 44AB of the Act had admittedly not been obtained before 31st Oct., 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 30th Oct., 1995, and not having furnished the same with the return of income filed on 15th July, 1995, or even by 30th Oct., 1995, the petitioner-society had contravened s. 271B of the Act and, hence, the penalty had been levied. The levy of penalty is well founded and well justified. According to s. 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 under 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. 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 under s. 264 of the Act seeking to cancel the penalty is justified and valid and no exception could be taken.
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 under s. 271B of the Act. When once s. 44AB had been contravened, a levy of penalty under 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 in Hindustan Steel Ltd. vs. State of Orissa (1972) 83 ITR 26 (SC) 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. In this writ petition, the following points arise for consideration : “(A) Whether the belated completion of statutory audit and filing of audit report under s. 44AB of the Act results in automatic levy of penalty under s. 271B of the IT Act ? (B) Whether the assessing authority has the discretion to levy or not to levy penalty under 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 s. 80P of the IT Act. It is also admitted that in terms of the provisions of s. 44AB, instead of the statutory audit as provided under the IT Act, an audit conducted and report submitted under the Tamil Nadu Co-operative Societies Act, will satisfy the requirements of the said s. 44AB. In this case, the only ground for levy of penalty is belated filing of audit report, which is the consequential contravention of s. 44AB of the IT Act.
17. In respect of the filing process, there is no controversy. For the asst. yr. 1995-96, corresponding to the accounting year ending with 31st March, 1995, according to the respondents, the audit report should have been obtained on or before 31st Oct., 1995, in terms of s. 44AB. The IT return was filed on 14th July, 1995. The petitioner-society filed the return in time, but filed the audit report on 11th Dec., 1995. The third respondent initially by letter dt. 14th July, 1995, required the petitioner to clarify whether accounts have been audited under s. 44AB. On 24th Nov., 1995, a show-cause notice was issued stating that the petitioner-society had failed to furnish the audit report before 6th Dec., 1995, and, therefore, the petitioner was called upon to show-cause as to why penalty should not be imposed under s. 271B. An explanation was submitted on 11th Dec., 1995, followed with another explanation on 24th Feb., 1996. By the impugned order dt. 29th March, 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 30th Oct., 1995, while in the show-cause notice, it has been set out that such a statement should have been filed by 6th Dec., 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 IT 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 under s. 271(1)(a) for failure to furnish return.
21. The object of s. 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. Sec. 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 31st December of the assessment year where the assessee is a company and 31st October, in other case of the assessment year.
22. Sec. 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 under s. 44AB, the AO may direct that such person shall pay by way of penalty a sum equal to one-half percentage of the total sales turnover, etc. Secs. 44AB and s. 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 under s. 271B.
Where the assessee had obtained the audit report before the prescribed date provided under s. 44AB, but filed along with the return belatedly, the same may not attract penalty under 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 under s. 44AB, it may attract a levy of penalty as provided under 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 under s. 44AB of the IT Act, the return is defective under s. 139(9) of the IT Act and the failure to furnish audit report before 6th Dec., 1995, attracts penalty under s. 271B of the said Act. The said notice is dt. 24th Nov., 1995. The said notice proceeds on the basis that the audit report should have been filed before 6th Dec., 1995. When there is time even according to the show-cause notice, and there is time to file the audit report till 6th Dec., 1995, what is the occasion or reason for the third respondent to issue a notice on 24th Nov., 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 11th Dec., 1995, and on 24th Feb., 1996. In the meantime, on 11th Dec., 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 cooperative 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 29th March, 1996, the third respondent had passed an order levying a penalty under s. 271B. In the said order dt. 29th March, 1996, the third respondent has set out that 31st Oct., 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 under 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 Addl. CIT, Trichy Range.”
27. Except stating that there is no convincing 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 petitionersociety 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 s. 80 of the Tamil Nadu Cooperative 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 anapplication 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 1st July of any year ending with the 30th June 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 30th June 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. Sec. 271B confers sufficient discretion on the third respondent with respect to the levy of penalty. The exercise of power under 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 ITOs. 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 under s. 139(9), Expln. (e), and s. 44AB and s. 271B can be harmoniously read together and the expression “without reasonable cause” provides a sufficient insulation to the workability of s. 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., s. 44AB along with s. 271B and s. 139(9), Expln. (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 vs. ITO (1994) 50 TTJ (Bang) 1 (Bangalore Tribunal).
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 (supra), where the apex Court held thus : “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 CIT, the apex Court in Smt. Harbans Kaur vs. CWT (1997) 138 CTR (SC) 211 : (1997) 224 ITR 418 (SC) held thus : “If the conditions stipulated in the section are satisfied the CIT has a discretion in the matter. In exercise of that discretion, the CIT can either reduce the amount of the penalty or he may even waive the entire penalty. It is for the CIT to decide on the facts of a particular case whether a waiver in entirety or a reduction alone is warranted. The words âthe CIT may in his discretion . . . reduce or waive the amount of penalty’ in s. 18B of the Act are clear enough to show that the power conferred on the CIT 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 & Ors. AIR 1967 SC 1427. Even if the legislature has not used the words ‘in his discretion’ in s. 18B(1), the CIT 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 CIT to be reposed with the discretionary power to choose between entire waiver or reduction in any proportion.” The said provisions of the WT Act are on par with the IT Act and, therefore, the said pronouncement could very well be applied to the present case even if it arises under the IT Act. 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. 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 ofcommunication of this order. Parties shall bear their respective costs. Consequently, connected WMP is closed.
[Citation : 263 ITR 334]