Tax audit penalty

Tax audit penalty explained

Introduction

Who wants to get penalised? Nobody isn't it? So how can you make sure you don't get penalised?

If you haven't read section 44AB of the Income tax act, make sure you read that first. 

Click me, I am your 44AB guide


If you have read that already, let's move to understand 

WHY and WHEN can you be penalised.

Tax audit penalty

If the provisions of sec 44AB of Income tax act 1961 are not complied with, a penalty would be attracted u/s 271B of the Act.

The taxpayer who is required to get his books audited u/s 44AB of the Income Tax Act 1961, fails to do so within the prescribed time limit, he may be liable to pay a penalty of 0.5% of his turnover/gross receipts subject to a maximum of Rs 150000. But if there is a reasonable cause for the delay, no penalty will be imposed.

Hey, but shouldn't you know about the due dates of filing of tax audit reports?

Every year it is mandatory to file tax audit by 30th September of the relevant Assessment year. However, Central Board of Direct Taxes (CBDT) has the power to extend due dates. In case an assessee is liable for transfer pricing audit, the due date for filing tax audit report would be 30th November of the relevant Assessment year.

Example

Mr Ram has a business turnover of Rs 1.5 crores. He did not opt for the presumptive taxation scheme. He was therefore required to get his accounts audited u/s 44AB. But he failed to get it done by the due date. The penalty to be paid by Mr Ram is 0.5*1.5 that is Rs 75000.

Following reasons can be considered as a reasonable cause

• Delay due to the resignation of the tax auditor.
• Any person in charge of maintaining the accounts has expired.
• Unforeseen circumstances for eg strikes, lockouts etc.
• Natural catastrophe.

Some frequently asked questions

If I have opted for presumptive tax scheme, do I have to pay penalty on non-filing of return on the due date?

Since you are an individual with a taxable income of more than Rs 5 lakhs and your business turnover is less than 2 crores and you have opted for presumptive tax scheme, you have to pay a penalty/late fees of Rs 5000 or Rs 10000 depending on when you are filing your belated return. Assuming the last date of filing of income tax returns for an individual was 31st August, Rs 5000 would be levied if you file your income tax return by 31st December. If you file after December, Rs 10000 would be levied. But if your taxable income is less than Rs 5 lakhs, you will have to pay a penalty of Rs 1000 only. Since you are an individual and not liable to tax audit, you will be penalized u/s 234F and not 271B. Such penalty on individual taxpayers was applicable from FY 2017-18.

My turnover is more than 3 crores. But the Assessing officer wants to levy a penalty on the basis of 0.5 percentage basis due to which penalty exceeds Rs 150000. Is he correct?

The Income tax act has granted the Assessing officer the right to levy a penalty if the income tax audit reports are not filed within due dates. However, as per the act, he cannot levy penalty more than Rs 150000. Hence the Assessing officer is not correct.

My accountant had resigned suddenly and failed to cooperate with the new accountant. Due to this, there was a delay in the submission of tax audit reports. Will I still be penalized?

It depends on whether your circumstances amount to a reasonable cause or not. In an income tax case of CIT vs Ashoka Dairy, where the partner was miserably sick and the accountant too had resigned, the penalty on Ashoka Dairy was removed. Thus, if the Assessing officer contends that your reasons are genuine, you will not be penalized. Had the accountant died or the person who maintains your business accounts had expired, you would not be penalised. But otherwise, the genuineness of your circumstances decide whether you would be liable or not.

If you want to know more about such income tax cases, click here

The Chartered Accountant who was auditing my business accounts had suddenly expired due to which a delay occurred in the filing of tax audit reports. Will I be penalized?

Since the tax auditor who was supposed to audit your financial statements had demised, no penalty would be levied. Whenever there is a reasonable cause of the delay, no penalty would be imposed.

If I have not maintained any books of accounts and I am liable to tax audit, do I have to pay both the penalties- One under section 271A and the other under section 271B?

In Roshini Devi vs CIT, It was held that if you are liable for penalty u/s 271A, you are not liable for penalty u/s 271B. The reason given behind such judgement was that if an assessee had no books of accounts, the tax audit of the assessee is impossible to be carried out. Section 271A had been introduced for the same reason. It would be charging a penalty on something that was already held impossible to be carried out and for which you had been charged the same u/s 271A.

A few words from the rulings of the case and reasons provided: 

 
"Once the penalty has been levied for non-maintenance of books of accounts, there cannot be penalty levied again for non-audit of books of accounts which were not kept at first place. It is clearly a case of impossibility of performance where it is expected that the assessee should get her books of accounts audited when it is a known and admitted fact that there are no regular books of accounts which have been maintained at first place"

From this ruling, it is evident that you won't be liable for the
penalty levied u/s 271B.

I had started a business of diagnostic centre and this year my business turnover is Rs 60 lakhs. But the Assessing officer levied a penalty u/s 271B of Rs Rs 30000 stating that I had a profession and not a business. Is the Assessing officer correct?

The solution of your question lies in the income tax case of Dr Shantanu Dutta v/s CIT

The assessee Shantanu Dutta is a doctor by profession. He derived income from 2 clinics. During the course of his income tax assessment in the year 2016, it was noticed by the AO that the income exceeded Rs 50 lakhs which is the basic threshold limit for getting the account's tax audited by a CA. But the assessee was of the opinion that his diagnostic centre was in the nature of business as he had purchased some equipment and machinery and also hired doctors and technicians who were not related to his medical profession. Also, he had obtained trade licenses from concerned authorities which supported the belief of the assessing officer.

Thus the Tribunal contended that the belief of the assessee that he was carrying out business was a bonafide belief. Hence the AO was not right in this regard to levy penalty for not filing a tax audit report.

So as long as you are able to prove that you had no reason to believe that you are carrying out a profession i.e. in other words, your belief is bonafide and is exclusive of any ill intentions to escape the eyes of tax audit provisions, your AO cannot levy penalty u/s 271B.

Conclusion

After reading this, you can save yourself from landing into the troubles of paying penalty by complying with the relevant provisions of the section 44AB. 

Thanks for reading Tax audit penalty section 271B

Section 44AB of Income Tax Act