No penalty if there is bonafide belief

M/s Koramangala Club vs. ITO (Karnataka High Court)

Brief of the Case

Karnataka High Court held In the case of M/s Koramangala Club vs. ITO that it is clear that the assessee was under the bonafide belief that the provisions of Section 44AB were not applicable to a Club, while supplying beverages, liquor etc., to its members as it was not engaged in any business, but only a mutuality. As per section 271B, no penalty shall be leviable to a person or on assessee for any failure to obtain audit report; if it is proved that there was reasonable cause for such failure. The explanation of bonafide belief offered by the appellant would constitute a reasonable cause to absolve the appellant from the imposition of penalty. Hence, no penalty is sustainable.

Facts of the Case

The assessee had failed to obtain the audit report under Section 44AB for which proceedings under Section 271B were initiated by the assessing officer while concluding the assessments for the relevant assessment years. The assessee offered an explanation that the appellant club was the mutual concern and was supplying the liquor and beverages only to its members and there was no business carried on by the appellant and accordingly, it was under the bonafide belief that the provisions of Section 44AB of the Act were not applicable to it. Consequently, the appellant did not obtain the audit report at the time of filing of the return of income. The assessing Officer rejected the explanation offered by the appellant and levied the penalty.

Held by CIT (A)

CIT (A) upheld the levy of penalty.

Held by ITAT

ITAT upheld the order of CIT (A).

Held by High Court

High Court held that the Apex Court in the case of JOINT COMMERCIAL TAX OFFICER vs. YOUNG MEN’S INDIAN ASSOCIATION [AIR 1970 SC 1212], while considering the case of a club, supplying various refreshments prepared in the club to its members, whether involves a transaction of sale or not has held that If the club even though a distinct legal entity is only acting as an agent for its members in the matter of, supply of various preparations to them no sale would be involved (1) [1968] 2 S.C.R.421. (2) [1924] 1K.B.390 as the element of transfer would be completely absent. Further The Tribunal in the case of M/S. CENTURY CLUB IN ITA NO.205-207/BANG/2006, DATED 28.07.2006 has held that the provisions of Section 44AB had no application to the club and further held that even assuming the provisions were applicable, the appellant’s bonafide belief that it did not required to get the accounts audited under section 44AB amounted to a reasonable cause for cancellation of penalty.

It is clear from Section 271(B) that no penalty shall be leviable to a person or on assessee for any failure referred to under the provision of Section 271B, if, it is proved that there was reasonable cause for such failure. The explanation of bonafide belief offered by the appellant would constitute a reasonable cause to absolve the appellant from the imposition of penalty under Section 271(B) if, examined in the light of the judgments of Sathish Shetty [(2009) 310 ITR 0366] and Sachinam Trust [(2010) 320 ITR 0445] coupled with understanding of the issue relating to Section 44AB in the light of the judgment of the Apex Court in Young men’s Association case [AIR 1970 SC 1212] vis-a-vis Section 2(13) read with Section 44AB of the Act, it could be safely held that the assessee had acted under a bonafide belief and there was reasonable cause in not obtaining audit report.

Thus, it is clear that the assessee was under the bonafide belief that the provisions of Section 44AB were not applicable to a Club, while supplying beverages, liquor etc., to its members as it was not engaged in any business, but only a mutuality. The authorities and the Tribunal failed to appreciate vital aspect of the explanation offered by the appellant in a right perspective and as such, in our considered opinion, the order passed by the Tribunal confirming the order of penalty is unsustainable.