ITAT Chennai Cancels Section 271B Penalty: Belated Tax Audit Report Filed Prior to Reassessment Order — COVID-19 Constitutes Reasonable Cause

Overview of the Case

In a significant ruling favourable to assessees facing penalty proceedings for delayed filing of Tax Audit Reports, the Income Tax Appellate Tribunal, Chennai Bench, has cancelled the penalty imposed under Section 271B of the Income Tax Act, 1961. The case — Kalaiarasan Selvaraj Vs ITO (ITAT Chennai) — arose for Assessment Year 2020-21 and involved an individual assessee who had filed the Tax Audit Report belatedly, but well before the Assessing Officer completed the reassessment proceedings. The Tribunal's decision rests on two pivotal pillars: the technical nature of the breach and the COVID-19-related exclusion of limitation periods as directed by the Supreme Court.

Background and Factual Matrix

The assessee, an individual, did not file his return of income originally within the prescribed due date for AY 2020-21. Subsequently, upon receipt of a notice issued under Section 148 of the Income Tax Act, 1961, the assessee filed his return of income on 12.09.2024, accompanied by the Tax Audit Report as mandated under Section 44AB. The total income declared in the return stood at ₹5,59,460.

Upon examining the return and the accompanying Tax Audit Report, the Assessing Officer accepted the declared income and passed an assessment order on 27.12.2024 under Section 147 read with Section 144B of the Income Tax Act, 1961. Notably, the Tax Audit Report was available on record with the Assessing Officer well before he concluded the reassessment.

However, following completion of the assessment, the Assessing Officer initiated separate penalty proceedings under Section 271B on the ground that the Tax Audit Report had not been filed within the originally prescribed due date. A penalty of ₹1.50 lakh — the maximum permissible under Section 271B — was ultimately levied on the assessee.

Proceedings Before the Commissioner of Income Tax (Appeals)

The assessee challenged the penalty before the Commissioner of Income Tax (Appeals)/NFAC, urging that:

  • The Tax Audit Report had been duly filed on 12.09.2024, i.e., more than three months prior to the assessment order dated 27.12.2024.
  • Since the report was submitted before the Assessing Officer framed the assessment order, its delayed filing should not be treated as a substantive default warranting penalty.
  • The delay was not the result of any wilful or deliberate non-compliance on the part of the assessee.

The Commissioner of Income Tax (Appeals), however, found no merit in these contentions and upheld the penalty as levied by the Assessing Officer, prompting the assessee to carry the matter further in appeal before the ITAT Chennai.

Arguments Advanced Before the Tribunal

Before the Tribunal, the assessee reiterated the position that: