1. Aggrieved against the order of the learned CIT(A) deleting the penalty of Rs. 1 lakh imposed by the ITO under Section 271B, the present appeal has been filed.
2. The assessee runs a proprietary concern having year ended Diwali 23-10-1984 as the accounting year. The assessee had turnover during the previous year ending Diwali 1984 of Rs. 3,16,18,425 and, therefore, the assessee came under the obligation of Section 44AB to obtain the audit report within a period stipulated for filing of the return under Section 139(1) of the Income-tax Act. The due date for filing of the return for the assessment year 1985-86 was 30-6-1985. Since this was the first assessment year for obtaining audit report under Section 44AB the Board as per its Circular No. 422, dated 19-6-1985 directed that penalty proceedings under Section 44AB should not be initiated for the assessment year 1985-86 where - (i) audit report prescribed under Section 44AB read with rule 6G has been obtained by 30-9-1985; and (ii) the self-assessment tax under Section 140A has been paid within the period prescribed under Section 139 for filing the return of income.
The assessee paid self-assessment tax on 19-3-1986 and obtained the tax audit report as per Section 44AB on 22-3-1986. Thus there was non-compliance with the provision of Section 44AB.3. The ITO issued show-cause notice bearing No. 1(3)/A-1379, dated 30-6-1988 to the assessee. In the said show-cause notice it is stated as under : You were required to get your accounts audited under Section 44AB by 30-9-1985 whereas you got the same done on 22-3-1986.
You are therefore requested to show cause why penalty under Section 271B will not be imposed on you.
If no reasonable explanation is received by 26-7-1988 penalty will be imposed under Section 271B without further reference.
Thus, it is evident from the show-cause notice that the ITO requested the assessee to show cause and give reasonable explanation before imposition of penalty under Section 271B of the Act. Subsequently through his letter dated 7-9-1988 the assessee's authorised representative submitted an explanation staling - (i) The books for the previous year ending 23-10-1984 could not be audited in time as the accounts of the preceding previous years could be finalised only in October 1985; (ii) It was for the delay in the finalisation of accounts for the years relevant to the assessment years 1982-83 and 1983-84 that had led to consequential belated filing of return for these two years on 18-10-1985; (iii) It is only after the matters for the assessment years 1982-83 and 1983-84 were finalised that the matters for the subsequent assessment years 1984-85 and 1985-86 could be progressed leading to belated auditing of the accounts for the years relevant to the assessment year 1985-86.
The main defence, therefore, of the assessee was that at the time when Finance Act, 1984 was passed bringing Section 44AB on the statute book the assessee was already in arrears of finalisation of his accounts for the earlier assessment years and since the completion of the finalisation of the accounts for the years took considerable time it was not possible for him to make compliance in time with the provisions of Section 44AB nor within the time extended by the CBDT till 30-9-1985. The other point of the assessee's explanation was that he could not pay the self-assessment tax until a tax audit under Section 44AB has been completed and since the audit was nearly completed he paid self-assessment tax on 19-3-1986. Thus the ITO found that the assessee had no plausible explanation for the delay in finalisation of the accounts for earlier years and, therefore, there was no proper explanation for the delay in complying which the provision of Section 44AB. He, therefore, held that it cannot be said that the assessee was prevented by sufficient cause for not complying with the provision of Section 44AB and, therefore, he imposed a penalty of Rs. 1 lac.
4. The CIT (Appeals) before whom the first appeal was filed deleted the penalty on the ground that there was no material before the ITO to form a reasonable belief about the failure and that since the assessee had given explanation staling the causes therein then it was duty of the ITO to conduct further enquiry if he disbelieved the explanation or the causes before imposing penalty. According to the CIT (Appeals) once an explanation is filed and if the ITO disbelieves or is not satisfied with explanation further hearing should follow. It is also mentioned by the CIT (Appeals) in the impugned order that as per Section 273B which cast a burden on the assessee to prove that the failure to comply with Section 44AB was without reasonable cause stands discharged no sooner the explanation is filed and causes shown. It is deemed that the burden which lay on it under Section 273B of proving the failure is discharged. The burden thereafter shifts to the ITO to establish that the assessee is guilty for violation of the provision of Section 44AB.The CIT (Appeals), therefore, came to the conclusion that the assessee had reasonable cause which is proved and, therefore, no penalty was imposable and deleted the same.
5. The revenue has filed the appeal before us and the learned departmental representative contends that the learned CIT (Appeals) ought not to have deleted the penalty since the assessee has failed to 'prove' that there was a reasonable cause for the failure to comply with the provision of Section 44AB. Mere filing of an explanation with reasons and causes for the failure without anything further does not mean that the assessee has proved his case as laid down under Section 273B. It was the duty of the assessee to adduce further evidence along with the explanatory letter or subsequently before the imposition of penalty by the ITO. Since the assessee has failed to 'prove' the reasonable causes by proper evidence the penalty was clearly attracted and rightly imposed by the ITO and the CIT (Appeals) has grossly erred in deleting the penalty for the grounds and reasons mentioned by him in the impugned order.
6. The learned counsel for the assessee Sri S.D. Tiwari submits that the delay had occurred due to the non-finalisation of the accounts of three earlier years namely, 1982-83, 1983-84 and 1984-85. The returns for the assessment years 1982-83 and 1983-84 were filed on 18-10-1985 and after the final adjustment of the accounts in relation to the previous year relevant for assessment year 1984-85, the return for the assessment year 1984-85 was filed on 27-3-1986. Though the audit, under Section 44AB commenced in respect of the transactions in relation to the previous year for the year under consideration the report could not be given by the Chartered Accountants till 30-9-1985 as per Board's Circular No. 422 quoted above as the balances from the accounts of 1983 Diwali could not be carried forward and incorporated in the accounts relating to the assessment year 1984-85. His further submitted by the assessee's counsel that the ITO through his show-cause notice dated 30-6-1988 only demanded causes and reasonable explanations for the failure of compliance with the provision of Section 44AB and the assessee in compliance to his notice furnished the causes and the explanation for the failure. If the ITO disbelieved the causes or the explanation mentioned in its reply to the show-cause notice he could have fixed another date for hearing and after conducting & valid and proper enquiry into the causes and reasons advanced by the assessee and after appreciating the evidence which would have been adduced in such inquiry ought to have levied the penalty. The ITO has, therefore, passed the order without giving reasonable opportunity of hearing to the assessee as is mandatory laid down in Section 274 of the Act. The assessee's counsel submits that penalty proceedings under Section 271B read with Section 273B are not criminal in nature and the assessee cannot be placed in the position of an accused as in the criminal case and the standard of proof required in such penalty proceedings is not the same as in criminal cases while trying an accused for the crime or offence committed under the penal laws. Thus, according to assessee's counsel the assessee or the person concerned is not under Section 273B expected to prove beyond reasonable doubt for the failure as in criminal cases. It is added by the assessee's counsel that the assessee had given causes which were reasonable in the circumstances of the case and, therefore, it has proved his case and not caught within the mischief of Section 273B and, therefore, not liable for any penalty under Section 271B.7. We have heard the rival submissions made before us and also perused the paper book filed by the assessee's counsel at the time of hearing and after careful consideration we feel that the assessee is not liable for any penalty under Section 271B. The ITO in order to impose a penalty issued a letter dated 30-6-1988 demanding causes and reasonable explanation from the assessee for the failure to obtain audit report within the stipulated time as per Section 44AB of the Act. In compliance to such request of the ITO the assessee submitted and explained the causes and reasons for the delay namely, that since the finalisation of the accounts of the three earlier previous years were not finalised and completed till October 1985 as is evident from the filing of the return for the assessment years 1982-83 and 1983-84 which were filed on 18-10-1985. It was also explained by the assessee to the ITO that even the return for the assessment year 1984-85 was filed on 27-3-1986. Therefore, the case of the assessee before the ITO was that until accounts of the earlier years were not finalised and the closing balances of the respective years are not incorporated in the accounts for the previous year ending Diwali 1984 the accounts could not have been finalised and audit report could not be obtained by 30-9-1985 as per the Board's Circular. It the ITO was satisfied about the causes shown and the explanation given by the assessee or he wanted further clarification, information or evidence or if he disbelieved the assessee's explanation so offered he could have conducted a valid and proper enquiry into the matter before imposing the penalty. This is the basic requirement of rules of natural justice and the mandatory requirement of Section 274 which lays down that no penalty shall be levied without giving reasonable opportunity of hearing.
8. The Madras High Court in the case of V.L. Dutt v. CIT [1976] 103 ITR 634 at page 648 has observed as under : If the Income-tax Officer was not satisfied with the existence of the labour trouble or with the facts put forward by the assessee, then he could have given an opportunity to the assessee to establish the same by requiring him to produce any evidence. The assessee is not ordinarily bound to presume that the plea that he putting forward is going to be disbelieved by the Income-tax Officer. It would be open to an Income-tax Officer to accept a plea even on a prima facie reading of the explanation. If the explanation was not found prima facie acceptable, then natural justice demands that the assessee should be appraised of the same so as to enable him to put forward any further materials or details.
The provisions of Section 273B lays down that no penalty shall be levied under Section 271B if the person or the assessee 'proves' that there was a reasonable cause for the said failure. Therefore, in order to come out of the mischief of Section 273B two things are essential (i) there should be reasonable cause for the failure and (ii) there should be proof in respect of the reasonable causes. The question as to what is meant, by reasonable cause and what is the importance thereof in the matter of imposition of penalty has been elaborately dealt by the Full Bench of the Andhra Pradesh High Court in Addl. CIT v.Dargapandarinath Tuljayya & Co, [1977] 107 ITR 850 wherein the court pointed out: We do not think that there is any material difference between the expression 'sufficient cause' and 'reasonable cause'. As to what is 'sufficient cause' is, therefore, always 'reasonable cause'.
Even in Strout's Judicial Dictionary the word "reasonable" has in law the prima facie meaning of reasonable in regard to those circumstances of which the person is called upon to act reasonably or knows or ought not to know. If a cause is reasonable having regard to the circumstances in which it has occurred and with reference to the person who has conducted himself in the course of the act which is under examination and if that act or cause is found to be reasonable in the light of the circumstances by a reasonable man it is accepted as a sufficient cause. The Supreme Court in the case of Fedco (P.) Ltd. v.S.N. Bilgrami AIR There can be no invariable standard for 'reasonableness' in such matters except that the court's conscience must be satisfied, that the person against whom an action is proposed has had a fair chance of convincing the authority who proposes to take action against him that the grounds on which the action is proposed are either nonexistent or even if they exist they do not justify the proposed action. The decision of this question will necessarily depend upon the peculiar facts and circumstances of each case, including the nature of the action proposed, the grounds on which the action is proposed the material on which the allegations are based, the attitude of the party against whom the action is proposed in showing cause against such proposed action, the nature of the plea raised by him in reply, the requests for further opportunity that may be made, his admissions by conduct or otherwise of some or all the allegations and all other matters which help the mind in coming to a fair conclusion on the question.
9. The expression "sufficient cause" also came up for interpretation before the Supreme Court in the case of Dinabandhu Sahu v. Jadumoni Mangaraj AIR 1954 SC 411 and their lordships have observed that the words "sufficient cause" should receive a liberal construction so as to advance substantial justice and not negligence or inaction nor want of bona fides is imputable to the party. Therefore, the causes shown by the assessee are sufficient and as such reasonable and if the same are considered fairly and judiciously it will bring out that the assessee was not negligent or inactive in complying with the provisions of Section 44AB for which he is penalised under Section 271B. We agree with the learned counsel for the assessee that if the ITO disbelieved the causes or explanation advanced by him or if the ITO required further evidence he ought to have fixed another hearing in the matter and ought to have investigated and enquired into the whole matter before levying the penalty, which would have meant compliance of Section 274 of the Act. This has not been done so by the ITO. The assessee, therefore, had reasonable cause for the failure under Section 44AB.10. The next question regarding the "proof to be advanced in respect of the reasonable causes as has been laid down under Section 273B which has come into effect from 10-9-1986by virtue of Taxation Laws (Amendment and Miscellaneous Provision) Act, 1986. Now it was to be seen whether the assessee has to prove beyond reasonable doubt about the existence of reasonable causes in the same manner as it has to be proved beyond reasonable doubt in criminal cases or prosecution matters under the penal laws of the country. We have, therefore, to examine whether the penalty proceedings are criminal in nature and whether the standard of proof required is the same as is laid down in criminal cases. The Full Bench of the Andhra Pradesh High Court in the case of Dargapandarinath Tuljayya & Co. (supra), referred elsewhere above while dealing with the question of imposition 6i penalty under Section 271(1)(a) has held that proceedings under the Income-tax Act for levying penalty cannot be equated to that of prosecution attracting punishment and the penalty proceedings cannot be said to be criminal in nature. Almost identically the Madras High Court in the case of Cement Disiributors (P.) Ltd. v. IAC [1973] 871TR 163 at page 170 has observed that the authorities functioning under the Income-tax Act in the process of assessment leading to the reckoning of tax or discovery or of avoidance of tax liability is only functioning administratively and not exercising jurisdiction as if it is a court exercising criminal jurisdiction. Whereas in a criminal court the offence should be brought home to the accused beyond reasonable doubt by assessing the material and evidence placed before the Court during the trial which evidence should be strictly in accordance with the prescriptions in the Evidence Act. We feel that strict principles of adoption of rules of evidence are necessary when the ITO in the course of proceedings discovers a failure or default and proceeds to penalise the assessee. The Supreme Court in the well-known case of Dhakeswari Cotton Mills Ltd. v. CIT [1954] 26 ITR 775, 783 has observed that the ITO acting under the Income-tax Act is not bound by the strict rules of evidence. Again in the case of Raja Narayan Bansilal v. Maneck Phiroz Mistry [1960] 30 Comp. Cas. 644 the Supreme Court held the view that in assessment proceedings before the revenue, legal evidence is not required. In the judgment in the case of Gunda Subbayya v. CIT[1939] 71TR 21 the Madras High Court considered the principle as to how far rules of evidence as contained in the Indian Evidence Act would apply and their lordships expressed the view that the ITO is not confined to the evidence as is legally understood and explained in the Indian Evidence Act. The Supreme Court again had an occasion in the case of Asstt. Collector of Customs v. L.R. Melwani AIR 1970 SC 962 to consider the nature of proceedings before the Collector of Customs who has the power to levy penalty in case breach of specified provision of the Customs Act and has held at page 964 that proceeding before the Collector of Customs is not in the nature of prosecution.
11. In view of the authoritative judgments of High Courts and Supreme Court referred as above we are of the opinion that onus to prove, doubtlessly, is not as in a criminal case to be established beyond reasonable doubt but it is to be in accordance with the preponderance of probabilities as applicable in a civil suit. We also hold that the penally proceedings under Section 271B read with Section 273B arc not in the nature of a criminal trial and the standard of proof required in a criminal case or a prosecution is not the same in such penalty proceedings. It is sufficient if in such penalty proceedings under Section 271B evidence which could convince a reasonable man in a rational way is required to be advanced. In our view, therefore, the assessee was not exigible to any penalty under Section 271B which has rightly been deleted by the CIT (Appeals) though on different grounds.