Income Tax Appellate Tribunal - Pune
National Agro Service vs Income-Tax Officer on 31 July, 1990
Equivalent citations: [1990]34ITD506(PUNE)
ORDER
T.V.K. Natarajachandran, Accountant Member
1. This is an appeal by the assessee which is directed against the order of the CIT(A), Nasik dated 3-11-1988 confirming the penalty imposed by the ITO Under Section 271B of the Income-tax Act, 1961. By raising several grounds, it is urged that the CIT(A) erred in his decision and in not appreciating the grounds taken by the assessee in appeal before him and therefore, his order should be set aside and penalty should be cancelled.
2. The relevant facts are that the assessee is a registered firm and deals in several ancillaries such as seeds, implements, pesticides, chemicals etc. It follows the year ending on 3rd April and for the assessment year 1985-86 the accounting year ended on 3-4-1984. It filed return on 29-3-1986 admitting income of Rs. 54,450. The turnover during the previous year exceeded Rs. 40 lakhs but the books of accounts were not audited as required under Section 44AB of the Income-tax Act, 1961. However, the assessment was completed on 14-7-1986 Under Section 143(1) of the Income-tax Act, 1961. In response to show-cause notice for default Under Section 44AB, the assessee explained that the assessee's financial year starts by Chaitra Shudha Padwa which some falls in the last days of March or sometimes in the beginning of April and therefore, the assessee felt that the provisions were not applicable for the assessment year 1985-86 under consideration. The explanation offered by the assessee was not accepted by the ITO as the deed of partnership provided that the year ending 3rd April was the previous year. As regards merits of the case, he observed that the assessee belongs to a large group of business houses and enjoys the benefit of expert advice on taxation and legal matters and therefore, there was no reasonable cause for the failure to get the account books audited and obtaining a report of such audit in the prescribed form. Therefore, he imposed a penalty of Rs. 47,846 in accordance with law.
3. On appeal, it was contended by the assessee that it was not liable to get the books of accounts audited as the accounting year ended only on 3-4-1984, i.e., only three days in the financial year relevant for the assessment year 1985-86 to which the provisions of Section 44AB applied. Thus there was bona fide misunderstanding on the part of the assessee in this regard. Further it was also the first year of application of provisions of Section 44AB. Moreover, the accounts themselves were not completed which is evidenced by the fact that return was filed only on 29-3-1986 whereas the return was due on 30-6-1985. The assessee ought to have obtained the books of accounts audited and obtained a report of the audit in the prescribed form before 30th September, 1985. Therefore, in the circumstances, compliance with Section 44AB was not practicable. It was also contended that as the ITO had not issued penalty notice Under Section 271(1)(a) presumably being satisfied that there was reasonable cause for the delay in filing the return of income, on the parity of reasoning, proceedings Under Section 271B should not have been initiated and penalty imposed. The assessee also pointed out that the return of income having been accepted Under Section 143(1), it was clear that the books of accounts were accepted in the same manner as audited books of accounts. Yet another plea made by the assessee was that in December 1985 and in June 1986, there were two deaths in the family of the partners and therefore, it was difficult to get accounts finalised and audit completed. A further contention was taken that levy of penalty was not compulsory in all cases as the word used is "may" which permitted judicial discretion to the Assessing Officer. After due consideration, the CIT(A) came to the conclusion that the plea of bona fide belief regarding non-application of the provisions of Section 44AB was not acceptable just because the accounting year ended on 3-4-1984. The firm had almost 15 months to file the return of income and 18 months to submit tax audit report. Having expert advice on taxation, the plea of bona fide misunderstanding of the implications of the provisions was also not acceptable to the CIT(A). Even the plea of bereavement was not accepted as it would not have any impact on the submission of the audit report. The plea that the ITO had not initiated penalty proceedings Under Section 271 (1)(a) was not a valid contention as the assessee would not take advantage of his own default. He has also rejected the justification sought by the assessee on the ground that the books of accounts produced were accepted by the ITO and the assessment completed Under Section 143(1) as presumptuous attitude on the part of the assessee. According to him, the manner of assessment was nothing to do with the default of the assessee and what was material was the discharge of the obligation on the part of the assessee imposed by the statute. For all these reasons, he totally rejected the contentions taken by the assessee and came to the conclusion that there was no valid reason for not getting the accounts audited. Consequently, he confirmed the penalty imposed by the ITO.
4. Shri S.N. Doshi, the learned chartered accountant, besides reiterating the grounds and the contentions taken before the authorities filed a small paper compilation and submitted that the assessee did apply for extension of time in Form No. 8 on 25-7-1985 seeking time till 31-8-1985 on the ground that the necessary details and information are to be completed. However, the request for extension of time was rejected by the ITO. The assessee could file the return of income only on 29-3-1986, i.e., nearly after nine months delay and therefore the assessee could not have been in a position to get the accounts audited and the audit report submitted on or before 30-9-1985 which was impracticable. In this connection, he referred to the provisions of Sub-section (9) of Section 139 of the Income-tax Act, 1961 relating to filing of defective return of income which shall be treated as invalid return if the defects pointed out by the ITO were not rectified within the specified time. One of the defects provided in the Explanation under proviso to Sub-section (9) of Section 139 is absence of report of audit obtained Under Section 44 AB of the Income-tax Act, 1961 which was required to be annexed to the return. This requirement was introduced by Finance Act, 1988 with effect from 1-4-1989 by inserting Clause (bb) in the said Explanation. In the circumstances, therefore, he urged that there was reasonable cause for default in furnishing the audit report for the assessment year 1985-86. Further he submitted that the non-corporate assessees were not required to get the books of accounts audited hithertofore a fact which weighed in the mind of the assessee in not complying with the provisions before 30-9-1985. However, he vehemently urged that the assessment year 1985-86 being the very first year in which the provisions were applied and there was uncertainty regarding application of provisions of Section 44 AB to the accounting year followed by the assessee and in the background of the family bravements there was reasonable cause for the default. In this connection, he referred to the decision of the Gujarat High Court in the case of Rajkot Engg. Association v. Union of India [1986] 162 ITR 28, for the proposition that the provisions of Section 44 AB being applicable for the first time in the assessment year 1985-86, a lot of inconvenience would be caused to the assessees coupled with the fact that the relevant rules were published for the first time on January 31,1985 especially to those assessees whose previous year ended on October 24,1984 or December 31,1984 where they would not have reasonable time to prepare and finalise the accounts in the manner in which the auditors required for the purpose of tax audit. Further the learned counsel for the assessee referred to Circular No. 387 dated 6-7-1984 issued by the Central Board of Direct Taxes containing the Explanatory Notes on Finance Act, 1984 especially paragraph 17.2 thereof which clarifies that the provisions were intended to check fraudulent practices. Relying on the aforesaid circular, he would contend that in the absence of any finding in the assessee's case as to the existence of any fraudulent practice or mal-practice, the assessee could be said to have reasonable cause for the default. In view of the above submissions, the learned counsel for the assessee urged that the authorities were not justified in imposing penalty which should be cancelled.
5. The learned departmental representative, on the other hand, submitted that the assessee belongs to the famous Navalakha Family consisting of two dozen entities having advice of eminent expert and the parties themselves were highly knowledgeable and therefore, there was no reason why the accounts could not be completed. He also could not subscribe to the view that non-corporate assessees found it difficult to switch over to the proper maintenance of accounts which was required for the purpose of audit. He would submit that Section 44AA with effect from 1-4-1976 enjoined maintenance of accounts by business and professional people and while Section 44AB enjoined submission of audit report in the prescribed form even while books of accounts were maintained in normal course. As regards non-issue of penalty notice Under Section 271(1)(a), he would urge that inasmuch as the ITO rejected the application for extension of time in Form No. 6, his intention was clear, though he was mistaken by not issuing notice Under Section 271(1)(a). Referring to Section 292B of the Income-tax Act, 1961, he urged that the return of income shall not be invalid or shall not be deemed to be invalid merely because of any mistake, defect or omission, if the return is in substance and in effect in conformity with or in accordance with the intent and purpose of the Act. Further he would justify the assessment made by the ITO Under Section 143(1), though not accompanied by audit report in the prescribed form.
6. We have duly considered the rival submissions and the paper compilation. In our view, the assessee is entitled to succeed for the following reasons. The accounting year of the assessee ended on 3-4-1984, i.e., only three days in the Financial Year relevant for the assessment year 1985-86. Though the assessee's accounting year normally ended on 3rd April, but in view of the specific provisions requiring compulsory auditing of accounts and obtaining of audit report in the prescribed form coming into force for the first time, the assessee would have been thrown out of gear to comply with those provisions so to say. The Finance Bill, 1984 was introduced in Parliament on 29-2-1984 and received the assent of the President on 11-5-1984. The rules were published for the first time on 31st January, 1985 which would clearly go to show that the assessee could not have anticipated the introduction of new law and prepared to switch over to the maintenance of accounts in the same manner in which the corporate assessees maintained accounts to facilitate compulsory tax audit in terms of Section 44AB. Practically the accounting year of the assessee ended in the Financial Year 1983-84 ignoring the three days which fell in the Financial Year 1984-85. These are legal impediments which came in the way of the assessee, besides other practical difficulties which were canvassed by the assessee before the authorities and which are duly recorded in their orders. The assessee could finalise the accounts even after rejection of the application for extension of time by the ITO only towards the end of March 1986 when the return was filed on 29-3-1986. The filing of application for extension of time showed the bona fides of the case of the assessee that accounts could not be completed for want of necessary details and information. It is in this background we consider that the observations made by the Lordships of the Gujarat High Court in the case of Rajkot Engg. Association (supra) at pages 66 to 68 are very much relevant and would go to support the stand taken by the assessee. The relevant portion of the judgment reads as under:
4.20.1. Most of the difficulties arising on account of non-maintenance of accounts or maintenance of incomplete or incorrect records as per (sic) of the accounts would be to the disadvantage of the firm and it is in his interest that he takes every care to see that all his transactions on capital as well as revenue accounts related to the business or profession carried on are properly recorded in the relevant books of accounts and adequate documents, vouchers and other records are also maintained.
It does not require much of knowledge of accountancy (sic) that the books of account of non-corporate assessees are not maintained in the manner in which the accounts are maintained by corporate assessees and required by auditors for purposes of commercial audit much less for tax audit. The fact that the impugned Section 44AB was placed on the statute book by the Finance Act, 1984, and was not made effective till April 1,1985,coupled with the Rules being published for the first time on January 31, 1985, as rightly contended by the learned Advocate-General, would cause great inconvenience to the assessees within the purview of the section. We have not been able to appreciate as to how the non-corporate assessees liable to tax audit can switch over their manner and method of accounting so as to satisfy the tax auditors. It is difficult for the assessees whose previous year ended on October 24,1984, or December 31, 1984, and whose specified date being June 30,1985, and for that matter those assessees whose previous year ended on March 31, 1985, and whose specified date being July 31, 1985, to satisfy these provisions by getting their accounts audited and obtain the auditors' report, particularly when their turnover was so high as to exceed the prescribed limits. The learned Advocate-General for the petitioners was, therefore, more justified particularly in respect of the assessment year 1985-86. In spite of our agreement on this aspect of inconvenience to the assessees, we are not able to agree with the learned Advocate-General for the petitioners that this will by itself ipso facto expose the defaulting assessees to the consequences of penalty and/or of their return being treated as defective. The reason is that Section 271B justifies imposition of penalty where an assessee fails to get his accounts audited and obtain the report by the specified date without reasonable cause. It will be for the Department to prima facie show that there was want of reasonable cause on the part of the assessee for committing the default as held by the Full Bench of this Court in Addl. CIT v. I.M. Patel & Co. [1977] 107 ITR 214 (FB). We do not think that the return can also be treated as incomplete merely because the assessee has committed default in annexing the auditors' report with the return. The ITO has to give him time to remove the defect and if within the stipulated time of a fortnight or the extended time, the assessee is able to comply with the requirement, we do not think that his return can be treated as defective or incomplete. We are sure that the income-tax authorities will bear in mind this peculiar situation as it prevails particularly in relation to the assessment year 1985-86 and will not be unmindful of the hardships of the assessee in not complying with this provision for some time to come particularly with reference to the assessment year 1985-86. In that view of the matter, therefore, the second limb of the contention, though no doubt it has some force in it insofar as it causes hardship to the assessee, particularly for the assessment year 1985-86 it cannot be said that the provision is unreasonable because it does not expose him ipso facto to the penalty nor to the consequences flowing from the return being treated as incomplete for reasons beyond control. The power to levy penalty is only when the ITO is satisfied that there was no reasonable cause for the default and the return can be treated as defective only if the defect is not removed within the stipulated time which cannot, therefore, be said to be the inevitable consequence of the default and, in any case, would not make the provision unreasonable. In order to mitigate the inconvenience and hardship to the assessee, particularly in relation to the assessment year 1985-86, the Board of Direct Taxes may consider as to the advisability of issuing directions on the lines contained in Circular No. 205 dated July 27,1976 (1976) 104 ITR (St.) 63, in respect of the requirement of maintenance of account books as enjoined Under Section 44 AA of the Act. The second limb of the contention, therefore, stands rejected.
7. From the above excerpt, it could be seen that their Lordships have drawn attention of the Board as to the advisability of issuing directions on the same lines as contained in Circular No. 205 dated 27-7-1976 contained in 104 ITR (St.) 63 which pertained to the requirement of maintenance of account books in terms of Section 44 AA of the Income Tax Act, 1961. In Circular No. 205 dated 27-7-1976, the Board clarified that though Section 44 AA enjoins persons carrying on legal, medical, engineering, architectural profession or accountancy or technical consultancy or interior decoration or any other profession notified by the Board and the section came into force with effect from 1-4-1976 requirements of Sub-sections (1) and (2) of Section 44AA regarding maintenance of books of accounts and documents would apply only in relation to books of accounts and documents in respect of the accounting years commencing on or after 1-4-1976. In other words, only for the accounts and documents in respect of accounting year commencing on or after 1-4-1976 provisions of Section 44AA would apply. Their Lordships of the Gujarat High Court have highlighted this Circular for consideration of the Board for issuing similar circulars to relieve inconvenience and hardship caused to the assessee in this regard. Viewed from this angle, we consider that the plea of reasonable cause taken by the assessee has force and has to be accepted, notwithstanding the fact that there was delay in submitting return of income for the assessment year 1985-86. It is only the failure to get compulsory tax audit done and submission of the audit report in the prescribed form without reasonable cause that attracts penalty and not mere failure to do so.
The learned counsel for the assessee referred to paragraph 17.2 of the Board's circular No. 387 contained in Explanatory Notes of Finance Act, 1984 pointing out that there was no mal-practice or fraudulent practice noticed by the authorities so as to justify levy of penalty. We are at a loss to find that notwithstanding the statutory requirements of Section 44AB and the accounts were maintained in the normal course of business, but not in the manner maintained by the corporate assessees, income returned by the assessee was accepted Under Section 143(1) which would imply that there was no mistake in the books of accounts or the books of accounts maintained by the assessee were acceptable. This being the factual position, default Under Section 44 AB would be only venial in nature and therefore, penalty need not be imposed as a matter of course, especially when the provisions came into force for the first time in the assessment year 1985-86. Reliance is placed on the decision of the Supreme Court in the case of Hindustan Steel Ltd. v. State of Orissa [1972] 83 ITR 26. In this view of the matter, therefore, penalty was not justified in the facts and circumstances of the case and therefore, we set aside the order of the CIT(A) on this point and cancel the penalty imposed by the ITO.
8. In the result, the appeal is allowed.