The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has held that an inadvertent omission in a tax audit report, caused by a software error and supported by a Chartered Accountant’s affidavit, cannot attract penalty under Section 271B of the Income Tax Act where the assessee establishes a “reasonable cause” under Section 273B. 

The bench of Anubhav Sharma (Judicial Member) and Sanjay Awasthi (Accountant Member) has ruled that a bona fide procedural lapse should not be equated with a failure to comply with the statutory tax audit requirements and consequently set aside the penalty imposed by the Income Tax Department. 

The dispute arose from the assessment proceedings for Assessment Year (AY) 2017-18. During the assessment, the Assessing Officer noticed that Column 40 of Form 3CD, which forms part of the tax audit report, had been left blank. The omitted column contained material particulars relating to the assessee’s gross turnover, net profit, stock-in-trade and other financial information.

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Treating the incomplete audit report as non-compliance with the mandatory tax audit provisions contained in Section 44AB of the Income Tax Act, the department imposed a penalty under Section 271B. The National Faceless Appeal Centre (NFAC) upheld the penalty, prompting the assessee to approach the ITAT. 

Before examining the merits, the Tribunal considered a delay of 173 days in filing the appeal.

The assessee explained that he had changed his tax consultant due to financial disputes. Because of this transition, neither the assessee nor the newly appointed consultant was aware that the appellate order had already been passed. The omission came to light only after the new consultant reviewed the records available on the Income Tax Portal, following which the appeal was filed without further delay.

Finding the explanation genuine and supported by an affidavit, the Tribunal condoned the delay and admitted the appeal for adjudication. 

On merits, the assessee argued that the omission in Form 3CD was purely accidental.

Counsel submitted that the Chartered Accountant who prepared the tax audit report had filed an affidavit acknowledging that the relevant particulars had inadvertently remained unfilled. It was also explained that the omission occurred because of a software error and there was no intention to suppress any material information or evade taxes.

The assessee further contended that even if there was a technical lapse, the case was squarely covered by the protection available under Section 273B, which shields taxpayers from penalties where a reasonable cause exists. 

The department defended the penalty, arguing that an incomplete audit report cannot be treated as a valid tax audit report.

According to the Department, leaving a crucial column in Form 3CD blank amounted to non-compliance with Section 44AB, thereby justifying the levy of penalty under Section 271B. The Revenue therefore urged the Tribunal to uphold the orders passed by the lower authorities. 

After considering the rival submissions, the Tribunal observed that the expression “reasonable cause” under Section 273B contemplates circumstances where there is no negligence, lack of bona fides or deliberate inaction on the part of the taxpayer.

The Bench noted that the Chartered Accountant had accepted responsibility for the omission and explained that the incomplete disclosure resulted from a software-related error rather than any intentional act. Considering the overall facts and circumstances, the Tribunal concluded that the omission was a bona fide mistake.

The Tribunal also referred to several judicial precedents explaining the scope of “reasonable cause,” including CIT v. Mysore Fertilizer Co., CIT v. Chembara Peak Estates Ltd., CIT v. Jaipur Electro Pvt. Ltd., and CIT v. Bhikaji Ramchandra, while concluding that the assessee’s case satisfied the statutory protection under Section 273B. 

Holding that the assessee had established a sufficient and reasonable explanation for the omission, the Tribunal ruled that the penalty imposed for the incomplete tax audit report could not be sustained in law.

The Delhi Bench allowed the appeal and deleted the penalty, reiterating that a bona fide procedural omission, particularly one attributable to a software error and supported by credible evidence, should not automatically result in penal consequences when the taxpayer demonstrates reasonable cause. 

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