ITAT Jaipur deletes tax audit penalties on Sikar Urban Improvement Trust

The Jaipur bench of the Income Tax Appellate Tribunal (ITAT) has deleted tax audit penalties of Rs 1.5 lakh a year imposed on the Urban Improvement Trust, Sikar, for five assessment years from 2014-15 to 2018-19. In an order pronounced on 21 October 2026, the tribunal held that the Trust had shown a reasonable cause for not getting its accounts audited.

What Happened

The Trust was set up by the Government of Rajasthan in January 2013 under the Rajasthan Urban Improvement Act, 1959. According to the order, it did not file income tax returns for these years, and its accounts were audited only in 2019. The tax officer levied a penalty of Rs 1.5 lakh for each year under section 271B of the Income Tax Act for failing to get a tax audit under section 44AB, which applies to a person carrying on business with receipts above a set limit. The Commissioner of Income Tax (Appeals) confirmed the penalties.

The tribunal rejected the Trust's challenge on jurisdiction and limitation, holding that the penalty orders were passed in time. On merits, it held that section 273B bars the penalty when the taxpayer proves reasonable cause. It noted that whether such Trusts were tax-exempt local authorities was in litigation until the Supreme Court settled it against them on 12 October 2018. It also noted that the Trust's accounts are audited by the State's Examiner of Local Fund Audit, though it did not hold that this satisfies section 44AB. The tax officer had never assessed the Trust's income as business income, and nothing showed any loss of revenue, the tribunal said, calling the default technical.

What It Means

For taxpayers, the ruling restates that a tax audit penalty is not automatic. Relying on a Supreme Court principle, the tribunal said a penalty is not imposed merely because it is lawful to do so, and may be refused for a technical breach or a bona fide belief that the law did not apply. It also held that losing a claim for tax exemption does not by itself prove that the failure to get an audit had no reasonable cause. The burden of proving reasonable cause stays on the taxpayer, and each case turns on its own facts.

Source: ITAT order