WHETHER THE AUDITEE BE IMPOSED WITH PENALTY IN EVERY SITUATION FOR NON-AUDIT OF ACCOUNTS??

WHETHER THE AUDITEE BE IMPOSED WITH PENALTY IN EVERY SITUATION FOR NON-AUDIT OF ACCOUNTS?

1.    As we all are aware, consequence of non-fulfillment of any responsibilities bestowed upon generally lead to penalty, and sometime prosecution. Similarly, non-fulfillment of the responsibility of getting the books of accounts audited could end up with payment of penalty under Income-tax Act, 1961 (‘the Act’).

2.  But the question is, whether the Auditee be imposed with penalty in every situation?

2.1. So, let’s touch upon the issues involved upon levy of penalty under section (u/s) 271B of the Act.

2.2. Starting with the provision of section 271B which is reproduced as under,

‘271B. 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 section 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 fifty thousand rupees, whichever is less’

It’s apparently very clear that penalty imposed could be of

·        0.5% of total sales, turnover or gross receipts OR

·         Rs.1.5 Lac, whichever is less.

2.3. However, the question, whether the Auditee be imposed with penalty in every situation?  According to my view, the answer is NO.

2.4. The initial phrase, ‘If any person fails to GET his accounts audited….’, is of much importance to understand the depth of this section. The penalty is imposable in a situation where the person whose accounts are to be audited has failed on his part in getting his accounts audited.

2.5. Let’s take up an illustration, if person has shared his accounts with the Chartered Accountant for auditing. But CA could not complete the same owing to any reason better known to him. Then, in this situation, was there any failure on part of that person to get his accounts audited?

2.6. In situations where assessee share’s his accounts or invite the CA to conduct audit of accounts and have also extended enough support to the CA to complete the audit reasonably, then there is no failure on part of that person and he should not be penalized.

2.7. The assessing officer while deciding upon levy of penalty should understand the reasoning of non-completion of audit or non-furnishing of audit report and then decide upon levy of penalty. The provision of section 271B gives discretionary power to the assessing officer to impose penalty for not getting the accounts audited or non-furnishing the audit report.

3.    Whether, any genuine cause of failure would also lead to imposition of penalty?

3.1. As per provisions of section 273B of the Act no penalty under section certain category of sections shall be imposable if the person proves the reasonable cause for such failure. In those certain category of section, the penal provisions for failure to get accounts audited is also covered. Accordingly, if assessee or that person could substantiate the reasonable cause then there should be no imposition of penalty.

4.     Whether, any opportunity of proving the reasonable cause for the failure would be given?

4.1.  The penal provisions are governed by the principle of Natural justice, the lapse of which may lead to annulment of the penalty levied. Accordingly, as per section 274 of the Act, no penalty shall be imposed unless the assessee is been given the opportunity of being heard. That is to say, the officer is required to issue a show notice u/s 274 of the Act seeking reasons why penalty u/s 271B should not be imposed in the case.

 Further, if the amount of penalty exceeds Rs.10,000/- the assessing officer is required to get the prior approval of Joint Commissioner.

5.    Therefore, the answer to the question raised, is, in every situation the person liable to get his accounts audited would not be imposed with penalty u/s 271B of the Income-tax Act.

CA. Bhuvanesh Kankani

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