Introduction

The case of Shri Sharad Kankaria, Jaipur v. Income Tax Officer, Ward-6-1, Jaipur adjudicated by the Income Tax Appellate Tribunal (ITA) on January 23, 2020, addresses the contentious issue of imposing concurrent penalties under Sections 271A and 271B of the Income Tax Act, 1961. Shri Sharad Kankaria challenged the legality of these penalties, arguing that they were arbitrary, unjustified, and contrary to the facts of his case.

The pivotal matters revolve around the non-maintenance of books of account necessary for income computation and the failure to have these accounts audited, despite surpassing the threshold limit prescribed under the Act.

Summary of the Judgment

The ITA Bench, presided by Justice Sandeep Gosain, examined two separate penalty orders issued by the Deputy Commissioner of Income Tax (Assam) for Assessment Year (AY) 2011-12:

• Penalty under Section 271A: Imposed a fine of ₹25,000 for willfully avoiding the maintenance of books of account as mandated under Section 44AA(2).
• Penalty under Section 271B: Levied a fine of ₹1,50,000 for non-audit of books of account as required under Section 44AB.

The appellant contested both penalties, seeking quashing of the ₹25,000 penalty under Section 271A and the ₹1,50,000 penalty under Section 271B.

Upon deliberation, the ITA upheld the penalty under Section 271A, affirming that the assessee had indeed failed to maintain the requisite books of account for turnover exceeding ₹10 lakhs, thereby justifying the imposition of the fine. However, the ITA dismissed the penalty under Section 271B, recognizing that the absence of maintained books inherently nullified the necessity and validity of an audit requirement.

Analysis

Precedents Cited

The judgment references the Coordinated Bench of ITAT in Roshni Devi vs ITO (ITA No. 953/JP/2017), which held that imposing a penalty under Section 271B for non-audit when books are not maintained under Section 44AA is erroneous. Additionally, the decision of the Gauhati High Court in Rajmal Parsuram Todi was cited, reinforcing that initiating a penalty under Section 271A precludes a subsequent penalty under Section 271B due to the impossibility of auditing non-existent books.

Legal Reasoning

The Tribunal meticulously unpacked the statutory provisions:

• Section 44AA: Mandates the maintenance of books of account for individuals whose gross receipts exceed ₹10 lakhs.
• Section 271A: Empowers authorities to levy penalties for failure to maintain books of account.
• Section 271B: Prescribes penalties for non-audit of accounts where such audit is requisite.

The crux of the Tribunal’s reasoning was that without the maintenance of books as required under Section 44AA, mandating an audit under Section 44AB—and subsequently penalizing under Section 271B—is logically and procedurally flawed. Essentially, if the foundational compliance (book maintenance) is absent, the higher-order requirement (audit) becomes inapplicable.

Impact

This judgment sets a critical precedent by delineating the boundaries of concurrent penalties under Sections 271A and 271B. It underscores the principle that once a foundational requirement is unmet, further related penalties become untenable. Taxpayers can expect clarity on the hierarchy and interdependence of compliance obligations, potentially reducing the burden of multiple, overlapping penalties.

Moreover, it reinforces judicial prudence in ensuring that penalties are proportionate and logically sequenced, thereby promoting fairness in tax administration.

Complex Concepts Simplified

• Section 44AA: This section requires certain taxpayers to maintain detailed books of account if their gross receipts exceed a specified limit (₹10 lakhs). It ensures transparency in income declaration.
• Section 271A: Provides the authority to levy penalties for failing to maintain the necessary books of account, aiming to enforce compliance with Section 44AA.
• Section 44AB: Mandates the audit of accounts for businesses whose turnover exceeds prescribed limits, ensuring accuracy in reported income.
• Section 271B: Deals with penalties for not getting the accounts audited as required under Section 44AB.
• Penalties Interdependence: If a taxpayer fails to comply with the initial requirement (e.g., maintaining books under Section 44AA), it logically negates the necessity for subsequent requirements (e.g., audit under Section 44AB), thereby invalidating related penalties.

Conclusion