The Income Tax Appellate Tribunal (ITAT), Mumbai Bench, has ruled that a taxpayer whose annual turnover was below ₹10 crore and whose cash receipts and cash payments did not exceed the prescribed 5% threshold was not required to obtain a tax audit under Section 44AB of the Income Tax Act, 1961.

The Bench of Challa Nagendra Prasad (Judicial Member) and Rakesh Kumar Lodha (Accountant Member) consequently deleted a penalty of ₹1.50 lakh imposed under Section 271B for the alleged failure to get the books of account audited.

The bench observed that Section 44AB does not require a Chartered Accountant-certified computation of cash receipts and cash payments to establish compliance with the 5% limit. The figures could have been verified by the tax authorities from the taxpayer’s regular books of account.

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The appellant/assessee filed his income tax return for Assessment Year 2022-23 on December 31, 2022. He declared a total turnover of ₹9,91,59,453 and a total income of ₹11,10,120.

The case was subsequently selected for scrutiny under the Computer Assisted Scrutiny Selection system. The assessment was completed on February 19, 2024, accepting the returned income of ₹11,10,120.

While accepting the returned income, the Assessing Officer observed that the assessee had not furnished sufficient documentary evidence to establish that Section 44AB was inapplicable. Penalty proceedings under Section 271B were therefore initiated for the alleged failure to obtain and furnish a tax audit report.

During the penalty proceedings, the assessee maintained that he was not legally required to get his accounts audited. He submitted that his turnover of approximately ₹9.91 crore was below the enhanced threshold of ₹10 crore applicable where cash receipts and cash payments remained within 5% of the respective aggregate amounts.

To substantiate the claim, the assessee furnished a monthly cash summary, cash book and other supporting records. According to the summary, total cash debits amounted to ₹34,13,329, while cash receipts stood at ₹35,47,013. Both figures were stated to be below 5% of the relevant aggregate receipts and payments.

The assessee argued that the provisos to Section 44AB(a) specifically excluded him from the compulsory tax audit requirement because both statutory conditions were satisfied.

The Assessing Officer rejected the assessee’s explanation on the ground that no concrete evidence had been produced to prove that the cash transactions were within the prescribed 5% limit.

The officer proceeded on the basis that the assessee’s turnover exceeded ₹2 crore and, therefore, concluded that a tax audit was mandatory. A penalty of ₹1.50 lakh was imposed under Section 271B, being the lower of 0.5% of the turnover or the statutory ceiling of ₹1.50 lakh.

Aggrieved by the penalty order, the assessee filed an appeal before the Commissioner of Income Tax (Appeals).

The assessee reiterated that his turnover did not cross ₹10 crore and that the monthly cash summary demonstrated that the cash component of receipts and payments remained below 5%. The Commissioner (Appeals), however, confirmed the penalty.

Apart from finding that the assessee had not sufficiently substantiated the cash transaction figures, the appellate authority observed that the assessee had failed to furnish a Chartered Accountant-certified working of the percentage of cash receipts and cash payments.

The assessee submitted that the cash book, bank statements and copies of GST returns had been made available during the assessment proceedings. These records, according to the assessee, established both that the turnover was below ₹10 crore and that the cash transactions were within the 5% limit.

The Revenue defended the orders passed by the Assessing Officer and the Commissioner (Appeals).

After examining the record, the Tribunal found that neither the Assessing Officer nor the Commissioner (Appeals) had rejected the monthly cash summary as false or fictitious.

At the same time, the authorities had not attempted to verify the disclosed cash transactions from the cash book placed before them. The cash book had been furnished specifically to demonstrate that the cash transactions remained within the prescribed limit.

The Tribunal observed that the statement of cash receipts and payments available on record demonstrated that both were below 5% of the aggregate gross receipts and aggregate gross payments, respectively.

The ITAT held that Section 44AB does not mandate the production of a Chartered Accountant-certified working to establish that cash receipts and payments remained below 5%.

The regular books of account could have been examined to verify the figures claimed by the assessee, the Tribunal said.

It noted that the provisos to Section 44AB(a) extend the tax audit threshold to ₹10 crore where the aggregate cash receipts do not exceed 5% of the total receipts and the aggregate cash payments do not exceed 5% of the total payments during the previous year.

In the present case, it was undisputed that the turnover did not exceed ₹10 crore. The material placed on record also established that the cash receipts and cash payments remained below the specified 5% threshold.

The Tribunal therefore concluded that the assessee satisfied the conditions for exclusion from the compulsory audit requirement under Section 44AB.

The Tribunal held that there could be no violation of Section 44AB. Consequently, the penalty imposed for the alleged violation could not be sustained.

The ITAT deleted the ₹1.50 lakh penalty imposed under Section 271B and allowed the assessee’s appeal.

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