Penalty Under Section 271B Is Sustainable When Failure to Audit Accounts Is Backed by Reasonable Cause

By | August 11, 2026
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Penalty Under Section 271B Is Sustainable When Failure to Audit Accounts Is Backed by Reasonable Cause

Issue

Whether penalty under Section 271B for failure to get accounts audited under Section 44AB can be sustained when the assessee demonstrates reasonable cause under Section 273B and the return of income is accepted without any addition.

Facts

  • Business Activity: For Assessment Year 2019-20, the assessee, an individual, acted as an agent for a dairy union, earning a commission/trade discount of approximately ₹5.37 lakhs on the sale of milk pouches.
  • Reassessment Proceedings: Reassessment proceedings were initiated under Section 148, pursuant to which the assessee filed her return of income along with complete books of account and financial details.
  • Acceptance of Return: The Assessing Officer accepted the returned income without making any variations or additions to total income.
  • Penalty Imposition: The Assessing Officer subsequently imposed a penalty under Section 271B on the ground that the total gross receipts/turnover exceeded the prescribed audit threshold under Section 44AB.
  • Reasonable Cause Pleaded: The assessee explained the specific nature of her commission agency business and claimed protection under Section 273B, establishing a reasonable cause for not getting the accounts audited.

Decision

  • The penalty levied under Section 271B was deleted in favor of the assessee.
  • The Tribunal/Court held that since the assessee provided all relevant details explaining her commission business and established a bona fide reasonable cause under Section 273B, penalty under Section 271B could not be sustained.
  • The deletion was further supported by the fact that the Revenue accepted the books of account and returned income during reassessment without making any additions.

Key Takeaways

  • Protection Under Section 273B: Penalty under Section 271B is not automatic; if an assessee proves a reasonable cause for non-compliance with audit requirements under Section 44AB, penalty cannot be imposed.
  • Impact of Unchanged Reassessment: Where the Revenue accepts the assessee’s books of account and financial details without making any additions, it reinforces the bona fides of the assessee’s reasonable cause defense.
  • Commission Business Context: Nature of commission transactions and genuine belief regarding applicability of audit thresholds constitute valid grounds for asserting reasonable cause under Section 273B.
IN THE ITAT SURAT BENCH
Bhavishaben Bhajivala
v.
Income-tax Officer
T.R. Senthil Kumar, Judicial Member
and Ratnesh Nandan Sahay, Accountant Member
IT Appeal No. 355 (SRT) of 2026
[Assessment year 2019-20]
JULY  30, 2026
 of legal and factual position of the case and the details/documents/materials filed on your records there is no escapement of income as well as no taxable and hence, considering the above settled lawful position and circumstances of the case, I have once again to request you to drop the penalty proceedings under section 271B of the Act taking lenient view and oblige.”
2.2. Above submissions were considered by the AO and held that since the turn over is above 1 crore. The assessee ought to have get her books audited u/s. 44AB of the Act and failure of the same imposed penalty of Rs. 57,916/- u/s. 271B of the Act namely @ 5% of the gross receipts.
3. Aggrieved against the penalty order, assessee filed an appeal before ld. CIT(A) who has also dismissed the appeal for non prosecution.
4. Aggrieved against the exparte appellate order, assessee is in appeal before us, raising following Grounds of Appeal:-
1. On the facts and in the circumstances of the case as well in law, the learned CIT (Appeals) has erred both on facts and in law in deciding the appeal ex-parte in violation of the principles of natural justice and without granting to the assessee a fair, proper and meaningful opportunity of being heard and the inferences of the CIT (Appeals) that the appellant is not interested in pursuing the appeal is without jurisdiction, perverse, invalid, arbitrary, bad in law and hence, liable to be struck down.
2. On the facts and in the circumstances of the case as well in law, the learned CIT (Appeals) has erred both on facts and in law in confirming the penalty levied u/s 271B of the Act on account of failure to get accounts audited u/s 44AB of the Act and hence, the order of both the lower authority lacks standing in the eyes of law and therefore, liable to be struck down.
3. Your appellant further reserves his rights to add, alter, amend or modify any of the aforesaid grounds before or at the time of hearing of an appeal.
5. We have heard rival submissions and perused the materials available on record. It is undisputed fact, the assessee has not filed return of income for A.Y 2019-20 which has resulted in reopening of the assessment but in the reassessment also the ld. AO concluded accepting the returned of income filed by the assessee namely commission income earned on sale of Milk Pouches. Though, the penalty is being levied u/s 271B for not getting the books audited, the assessee during the penalty proceedings submitted all the relevant details, materials explaining the nature of business and commission earned and requested to drop the penalty proceedings and the reasonable cause for the failure to get its book audited. The same was not considered by the AO as well as by ld. CIT(A). Section 273B of the Act clearly provides any ‘reasonable cause’ explained by the assessee is a ground to drop the penalty proceedings. This was not considered by the lower authorities especially in a case where there is no addition made in the re-assessment proceedings. Therefore, we hereby direct the JAO to delete the penalty levied u/s 271B of the Act. Thus, the Grounds raised by the assessee are hereby allowed.
6. In the result, the appeal filed by the assessee is allowed.