The Chennai Bench of the Income Tax Appellate Tribunal (ITAT) has deleted a penalty of ₹1.5 lakh imposed under Section 271B of the Income Tax Act, holding that a sports and recreation club had a bona fide belief that it was not required to obtain a tax audit under Section 44AB because its activities were governed by the principle of mutuality.
The bench of George George K (Vice President) and Padmavathy S (Accountant Member) ruled that the bona fide belief constituted a reasonable cause under Section 273B, making the penalty unsustainable.
The appellant/assessee, a sports and recreation club registered under the Tamil Nadu Societies Registration Rules, filed its income tax return for the Assessment Year 2023-24 declaring a total income of ₹59,910. During scrutiny assessment, the Assessing Officer noticed that the club had disclosed more than ₹3.61 crore as “Income from Other Sources,” representing amounts received from members towards the supply of liquor, while claiming corresponding expenditure on liquor purchases.
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The Assessing Officer questioned the club’s treatment of these receipts and issued a show cause notice proposing to classify them as business income rather than income from other sources. According to the department, the supply of liquor to members constituted a business activity.
The club, however, maintained that the supply of liquor was merely an incidental recreational facility extended exclusively to its members and was not carried on with any profit motive. It argued that the receipts formed part of its mutual activities and therefore could not be regarded as business income.
Rejecting the club’s explanation, the Assessing Officer treated the activity as a business and concluded that the club’s turnover exceeded the threshold prescribed under Section 44AB for mandatory tax audit.
Since no tax audit report had been obtained, the Assessing Officer initiated penalty proceedings under Section 271B and ultimately imposed a penalty of ₹1,50,000 for failure to comply with the audit requirement.
The Commissioner of Income Tax (Appeals) upheld the penalty.
The appellate authority held that although the club claimed to be a non-profit organization governed by the principle of mutuality, it had failed to establish any reasonable cause under Section 273B for not complying with the tax audit provisions. Consequently, the penalty was confirmed.
Before the Tribunal, the club reiterated that it was not carrying on any business activity and that its operations were based entirely on the principle of mutuality.
It argued that supply of liquor to members was only an incidental recreational facility. There was no commercial venture or profit motive. Since it honestly believed Section 44AB did not apply, there existed a reasonable cause under Section 273B for not obtaining a tax audit. Reliance was placed on the Karnataka High Court’s decision in Koramangala Club v. ITO, where similar facts had led to deletion of penalty under Section 271B.
The department on the other hand, defended the orders passed by the Assessing Officer and the first appellate authority.
The Tribunal observed that the very foundation of the penalty rested upon the Assessing Officer’s conclusion that receipts arising from the supply of liquor to members constituted business receipts, thereby attracting the tax audit provisions under Section 44AB.
However, the Tribunal noted that the assessee had consistently maintained that it functioned on the principle of mutuality and that the supply of liquor and beverages was merely incidental to its recreational activities for members.
The Bench emphasized that the assessee had entertained a bona fide belief that Section 44AB was not applicable to its activities, and therefore the failure to obtain a tax audit report could not automatically attract penalty.
The Tribunal found the controversy to be squarely covered by the Karnataka High Court’s ruling in Koramangala Club v. ITO (2016) 387 ITR 630.
In that decision, the High Court had held that where a members’ club supplies beverages and liquor only to its members under the principle of mutuality, it can reasonably believe that Section 44AB does not apply. Such bona fide belief amounts to a reasonable cause under Section 273B and protects the assessee from penalty under Section 271B.
Finding the facts of the present case to be substantially similar, the Tribunal applied the same principle.
Allowing the appeal, the Chennai ITAT held that the club’s bona fide belief regarding the inapplicability of Section 44AB constituted a reasonable cause within the meaning of Section 273B.
Accordingly, it ruled that the penalty imposed under Section 271B could not survive and directed the Assessing Officer to delete the penalty of ₹1.5 lakh.
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