The Income Tax Appellate Tribunal, Delhi, has clarified that penalty proceedings under Section 271B of the Income-Tax Act, 1961, cannot be initiated where the assessee has not maintained books of account as required under Section 44AA. The Tribunal set aside the penalty imposed for failure to furnish an audit report, holding that such an obligation under Section 44AB is contingent upon prior compliance with the maintenance of accounts. This decision reinforces the hierarchical relationship between Sections 44AA and 44AB and provides critical guidance for practitioners handling penalty appeals.
The Verdict
The assessee won. The Income Tax Appellate Tribunal held that penalty under Section 271B cannot be imposed for failure to file an audit report under Section 44AB when no books of account were maintained in the first place, as required by Section 44AA. The Tribunal set aside the penalty order and the appellate order upholding it, finding that the legal pre-condition for invoking Section 271B was absent.
Background & Facts
The assessee, engaged in a contract business, filed his income tax return for assessment year 2017-18 on 26 August 2017, declaring a total income of Rs. 60,48,470. The return was selected for scrutiny under the Computer Assisted Selection System (CASS). The Assessing Officer passed an assessment order under Section 143(3) on 23 December 2019, accepting the income as declared. However, the AO noted that the assessee had not furnished a tax audit report as mandated under Section 44AB.
Penalty proceedings were initiated under Section 274 read with Section 271B on 23 December 2019. The assessee submitted two written replies, dated 9 December 2019 and 18 December 2019, explicitly stating that no books of account were maintained and that the business operated on a cash system. The return form itself contained a declaration that no regular books of account were maintained. Despite this, the AO proceeded to impose a penalty of Rs. 1,50,000 on 25 January 2022, relying on an erroneous checkbox in the return form indicating that accounts had been audited.
The assessee appealed to the Commissioner of Income Tax (Appeals), who dismissed the appeal on 13 March 2025. The assessee then filed the present appeal before the Income Tax Appellate Tribunal.
The Legal Issue
Can a penalty under Section 271B be levied for failure to furnish an audit report under Section 44AB when the assessee has not maintained books of account as required under Section 44AA?
Arguments Presented
For the Petitioner
The assessee’s counsel argued that Section 271B applies only when books of account have been maintained but not audited. He relied on the return form, which clearly stated that no accounts were maintained, and on the written replies affirming the same. He contended that the checkbox indicating audit compliance was an inadvertent error. He cited the Gauhati High Court’s decision in Surajmal Parsuram Todi v. CIT, which held that failure to maintain books under Section 44AA attracts penalty under Section 271A, not Section 271B. He emphasized that Section 44AB presupposes the existence of maintained accounts; without them, the obligation to get them audited cannot arise.
For the Respondent
The Departmental Representative argued that the assessee had, in the return form, indicated that accounts had been audited, and that the subsequent claims of non-maintenance were an afterthought. He contended that the mere assertion of non-maintenance could not override the formal declaration made in the return. He did not dispute the factual claim of non-maintenance but sought to uphold the penalty on the basis of the return’s inconsistent declaration.
The Court's Analysis
The Tribunal examined the statutory scheme of Sections 44AA, 44AB, and 271B. It noted that Section 44AA imposes the obligation to maintain books of account for certain classes of assessees. Section 44AB imposes the obligation to get those maintained books audited by a chartered accountant. Section 271B prescribes penalty for failure to comply with the audit requirement under Section 44AB.
The Tribunal held that the two obligations are sequential and not concurrent. The obligation under Section 44AB arises only if the obligation under Section 44AA has been triggered and complied with. Where no books are maintained, the requirement to get them audited cannot be said to have been breached - it simply does not exist.
"Maintenance of accounts is envisaged under section 44AA and on failure to do so the assessee shall be guilty and liable to be penalised under section 271A. Even after maintenance of books of account the obligation of the assessee does not come to an end. He is required to do something more, i.e., by getting the books of account audited by an accountant. But when a person commits an offence by not maintaining the books of account as contemplated by section 44AA the offence is complete. After that there can be no possibility of any offence as contemplated by section 44AB and, therefore, in our opinion, the imposition of penalty under section 271B is erroneous."
The Tribunal found that the AO had misapplied the law by conflating non-maintenance with non-audit. The reliance on the erroneous checkbox in the return form was legally unsustainable, particularly in light of the assessee’s consistent and contemporaneous disclosures. The CIT(A) erred in upholding the penalty without addressing this fundamental legal flaw.
What This Means For Similar Cases
This decision provides clear doctrinal clarity for practitioners handling penalty appeals under Section 271B. It establishes that the imposition of such penalties is legally untenable where the assessee has not maintained books of account. Practitioners should now routinely challenge Section 271B penalties where the return or other records indicate non-maintenance of accounts, regardless of any contradictory checkbox entries.
The ruling also reinforces the principle that statutory obligations must be interpreted in their hierarchical sequence. Section 271A remains the appropriate provision for penalizing non-maintenance of books, while Section 271B applies only to those who have maintained accounts but failed to get them audited. This distinction is critical for drafting appeals and advising clients on compliance risk.
Tax officers must now exercise greater diligence in distinguishing between non-maintenance and non-audit before initiating penalty proceedings. This judgment may lead to a significant reduction in frivolous Section 271B notices issued against small businesses and cash-based traders who are unaware of the distinction between Sections 44AA and 44AB.
