List of 13 Reasonable Causes for Non-Imposition of Penalty

The heading of Section 273B of the Income Tax Act sets out the scope of the provision of law. This provision clearly establishes the rule that the penalties imposed under section-271(1)b), section-271A, section-271B, section-271BB, section-271C, section-271D, section-271E, clause (c) or clause (d) of sub-section (1) or sub-section (2) of section-272A, sub-section (1) of section-272AA] or 42[sub-section (1) of section-272BB orclause (b) of sub-section (1) or clause (b) or clause (c) of sub-section (2) of section-273 canot be imposed if there is a “REASONABLE CAUSE” for the fault.

List of Reasonable Cause Accepted by Courts

I have compiled the following twelve kinds of causes which have been held reasonable by Tribunals and Courts. The list of “reasonable causes” was prepared some years back, and I am sure readers can add many more.If you know any new, add it in the comments.

A. Reasonable Causes for Delay in Obtaining or Filing Audit Report -(Section 271B)

1. Repayment in cash: In . [ . ], ..,( ) -A Bona fide belief coupled with the genuineness of the transactions would constitute a reasonable cause. Furthermore, the transaction which was bona fide and not aimed to avoid any tax liability would constitute a reasonable cause within the meaning of Section 273B of the Act for not invoking Section 271E of the Act.
2. Audit Report Obtained, but Filing Delayed Due to Return Filing DelayIn CIT v. K.K. Spun Pipe (200 CTR 107), the court accepted that even though the audit report was obtained, the delay in filing it was due to the late filing of the return, which constituted a reasonable cause.
3. Staff Shortage and Incompetence:In CIT v. Ashoka Dairy (\[2005] 279 ITR 32, P\&H), the delay in filing was condoned on account of accountants leaving the service and partners not being competent to finalise the accounts.
4. Illness of Auditor: The Madras High Court in Lakshmi Card Clothing Manufacturing Co. (P.) Ltd. v. DCIT (\[2013] 353 ITR 544) held that when the delay was due to the illness of the auditor, penalty under Section 271B was not justified. A similar view was adopted by the Calcutta High Court in CIT v. Ramkrishna Stores (253 ITR 175).
5. Bona Fide Belief in Applicability of Section 44AB : In ACIT v. Dr. K. Satish Shetty (\[2009] 310 ITR 366, Kar) and Bajrang Oil Mills v. ITO (\[2007] 295 ITR 314, Raj), courts accepted that where some proprietorship concerns had turnover below the threshold and audit was done only for those above the limit under a bona fide belief, no penalty should apply.
6. Interpretation Based on Professional Literature: In ITO v. Sachinam Trust (\[2010] 320 ITR 445, Guj), the Gujarat High Court held that a bona fide belief based on an article published by the Bombay Chartered Accountants Society regarding banking business and interpretation of gross receipts was sufficient cause to avoid penalty under Section 271B.
7. Auditor’s Failure Despite Timely Submission of Books: In CIT v. U.P. Rajya Sahkari Evam Bhoomi Vikas Bank Ltd (\[2013] 353 ITR 152, All), the Allahabad High Court held that where the assessee submitted the books to the auditor on time, but delay occurred due to the auditor’s fault, penalty should not be imposed.
8. Auditor Appointment Not Under Assessee’s Control: Uttarakhand Courts in CIT v. Iqbalpur Cooperative Cane Development Union Ltd (\[2013] 356 ITR 343, Uttarakhand) and CIT v. District Co-Operative Bank (\[2013] 217 Taxman 145, Allahabad) ruled that where appointment of auditors was the responsibility of the Registrar or State Government, delay could not be attributed to the assessee, and hence, no penalty was warranted.
9. Mistaken Filing of Unsigned Audit Report: In CIT v. Shivalik Medicare (P.) Ltd (\[2014] 223 Taxman 19, Allahabad), the court considered the submission of an unsigned audit report as a curable irregularity. Since it was rectified upon notice, no penalty under Section 271B was applicable.

Decisions on ” Reasonable Cause” by Income Tax Appellate Tribunal (ITAT)

1. Bona Fide Belief Based on ICAI Guidelines: In Prem Prakash Gupta v. ITO (\[2015] 168 SOT 58, Jaipur), the assessee, a licensed stamp vendor, believed in good faith — supported by ICAI guidelines and CBDT Circular No. 452 — that Section 44AB was not applicable. The ITAT held that no penalty should be imposed.
2. Sudden Resignation of Auditor: The Hyderabad ITAT in Progressive Constructions (P.) Ltd. v. ITO (20 ITD 182) held that the resignation of the auditor leading to a delay in filing the report constituted a reasonable cause.
3. Delay Due to Reconciliation of Accounts: In H. Ajitbhai & Co. v. ACIT (\[1993] 47 TTJ 22, Ahd.), the ITAT held that delay due to final reconciliation of accounts with customers and other stakeholders was a valid reason.
4. Late Completion of Statutory Audit: In APL India (P.) Ltd. v. JCIT (OSD) (\[2014] 62 SOT 91, Mumbai), the ITAT observed that late completion of the statutory audit and consequential late receipt of the tax audit report were reasonable causes for non-compliance with Section 44AB.

If readers know any new case law, please write in the comments, so that this list becomes big and useful for all.