ITAT Chennai Deletes ₹1.5 Lakh Penalty On Stargate Enterprises, Holds Bona Fide Belief As Reasonable Cause

The Chennai Bench of the Income Tax Appellate Tribunal (ITAT) on 26 June held that a penalty under Section 271B for failure to furnish a tax audit report cannot be sustained where the taxpayer acted under a bona fide belief that the audit requirement did not apply.

Vice President George George K and Accountant Member Gagan Goyal allowed the appeal filed by Stargate Enterprises Pvt. Ltd. and deleted the penalty of Rs.1.5 lakh imposed under Section 271B for failure to furnish a tax audit report under Section 44AB. The Bench held:

“the bona fide belief entertained by the assessee, founded upon the consistent acceptance by the Department of the interest income under the head 'Income from Other Sources' in the earlier and subsequent years, constitutes a reasonable cause within the meaning of section 273B of the Act.”

During scrutiny for Assessment Year 2018–19, the Assessing Officer treated interest earned on bank deposits as business income instead of income from other sources. On that basis, the officer held that Stargate Enterprises Pvt. Ltd. was required to obtain a tax audit report under Section 44AB and subsequently imposed a penalty under Section 271B for failure to do so.

The taxpayer contended that it had consistently disclosed the interest income under the head “Income from Other Sources” in preceding and subsequent assessment years, and the Department had accepted this treatment. It argued that this consistent acceptance created a bona fide belief that the tax audit provisions did not apply.

The Tribunal held that this bona fide belief constituted a “reasonable cause” under Section 273B of the Income Tax Act, which protects taxpayers from penalty where a satisfactory explanation exists for the default.

Accordingly, the ITAT directed deletion of the penalty imposed under Section 271B.