Income Tax Appellate Tribunal - Cochin
Leyland Automobiles vs Income Tax Officer on 7 April, 2006
Equivalent citations: [2007]105ITD73(COCH), [2008]303ITR86(COCH), (2006)103TTJ(COCH)438
ORDER
N. Barathvaja Sankar, A.M.
1. This appeal has been preferred by the assessee M/s Leyland Automobiles, Kadappakkada, Kollam, for the asst. yr. 2000-01 against the appellate order dt. 30th Sept., 2004 of CIT(A)-IH, Trivandrum.
2. The brief facts of the case are that the assessee is a dealer in automobile spare parts and also owns a commercial complex which was let to various tenants. The appellant is assessed to income-tax by the ITO., Ward-II, Kollam. The return of income for the year under consideration was filed declaring a total income of Rs. 4,76,520 on 23rd Nov., 2001. The assessee had incurred a loss of Re. 3,04,138 in their retail business which was set off against the income from house property of Rs. 7,64,395. The case was selected for scrutiny and during the course of assessment proceedings the ITO proposed to disallow the entire loss from business and to estimate the business income applying the provisions of Section 44AF of the IT Act, 1961. According to the AO, there was only one issue to be addressed in this case, viz., whether the assessee can return a business profit less than 5 per cent under Section 44AF, if the assessee has his accounts audited after the specified date. Section 44AF(5) states explicitly that "...the assessee may claim lower profits and gains than the profits and gains specified in Sub-section (1)(of Section 44AF), if the assessee keeps and maintains such books of account and other documents as required under Sub-section (2) of Section 44AA and gets its accounts audited and furnishes a report of such audit as required under Section 44AB". Section 44AB states that "Every person...(c) carrying on the business shall, if the profits and gains from the business are deemed to be the profits and gains of such person under Section 44AD or 44AE or 44AF, as the case may be, and has claimed his income to lower than the profits or gains so deemed to be the profits and gains of his business, as the case may be, in any previous year,...get his accounts of such previous year audited by an accountant before the specified date and furnish by that date, the report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed." In addition, the specified date for such a report is the 31st day of October of the relevant assessment year, according to explanatory notes to the section. For the assessee to claim a lower profit than 5 per cent as envisaged under Section 44AF(1), he should maintain books of account and other documents stipulated under Section 44AA and should have got his accounts audited by an accountant, and should have furnished a report (Form 3CBB) to the AO before the specified date being 31st day of October of the relevant assessment year. In the instant case, the specified date was 31st Oct., 2000. The assessee had furnished the audit report dt. 11th Dec, 2000 only on 23rd Nov., 2001 very much after the specified date. In this connection the CBDT vide Circular No. 3, dt. 9th Feb., 2001, has specifically allowed a relaxation, extending the specified date only for asst. yr. 1998-99 to any date before the completion of the assessment. No such relaxation exists for later years. From this it is abundantly clear that for the assessee to claim lower profits under Section 44AF(5), it has to satisfy the conditions stipulated under Section 44AB. In the instant case, the assessee has failed in satisfying the statutory requirements for claiming the benefit under Section 44AF(5), No exemption is provided by CBDT vide its instructions for the relevant assessment year. By observing as above, the AO was of the view that the assessee was liable to be assessed at 5 per cent of total sales turnover in accordance with the provisions of Section 44AF(1). Thus he determined the profits from business at 5 per cent on the total sales turnover of Rs. 19,11,206 which worked out to Rs. 95,560. Thus in place of the loss of Rs. 3,04,138 claimed by the assessee the AO determined the profit at Rs. 95,560 by applying the provisions of Section 44AF(1) of IT Act,1961.
3. Aggrieved by the order of the AO, the assessee moved the matter in appeal before the first appellate authority. It was contended that the consequence of the default contemplated under Section 44AB is not the denial of the concession provided under Sub-section (5) of Section 44AF, but penalty under Section 271B of the Act. It was further contended that nowhere under Section 44AF it is provided that if the audit report is not filed within the specified time, the provisions of this Section 44AF would automatically have to be applied. It was also argued that the Board's Circular No. 3, dt. 9th Feb., 2001 does not provide for application of the provisions of Section 44AF in case of default in any other assessment year.
4. After considering the facts and circumstances of the case and the submissions of the assessee, the CIT(A) came to the conclusion that Sub-clause (2)(iii) of Section 44AA and Clause (c) of 44AB have to be read in consonance with Section 44AF(5) and when so read, it becomes obvious that the AO has proceeded on the correct basis. According to her, in order to claim an income lower than that deemed under Section 44AF, the assessee has not only to maintain accounts as prescribed under Section 44AA(2)(iii) and furnish report in Form 3C.but.also get its accounts audited and furnish audit report (Form 3CD) well within specified/prescribed time. After explaining the scope of. Section 44AA(2) as elaborated in Circular No. 763, dt. 18th Feb., 1998 the CIT(A) came to the following conclusion:
(a) the appellant's turnover of retail business does not exceed Rs. 40 lakhs;
(b) Section 44AF(1) is applicable;
(c) The appellant claimed lower profit under Section 44AF(5) than that deemed under Section 44AF(1); and
(d) Section 44AF(5) r/w Section 44AA(2)(iii) and Section 44AB(c) not satisfied in the appellant's case.
In view of the above conclusion, the learned CIT(A) upheld the order of the AO by dismissing the appeal of the assessee. Aggrieved by the order of the CIT(A), the assessee is in second appeal before the Tribunal with the following effective grounds of appeal:
2. The CIT(A) has erred in confirming the order of the ITO, Ward-II, Kollam, disallowing the business loss returned by the appellant and estimating the business income at 5 per cent of the turnover of the appellant under Section 44AF of the IT Act. The CIT has went wrong in applying the provisions of Section 44AF on the ground that the audit report under Section 44AB was not filed within the time specified under the provisions of Section 44AB.
3. The CIT (A) should have noted that the provisions of Section 44AF does net provide for application of estimation of income at 5 per cent of the turnover of the appellant, in case of delay in filing the audit report under Section 44AB.
4. The CIT(A) should have noted that the consequence for the delay in getting the accounts audited by assessees referred to in Clauses (a), (b) and (c) of Section 44AB, is the penalty under Section 271B and not application of the provisions of Section 44AF.
5. The CIT(A) should have noted that there is no differentiation in Section 271B between assessee's falling under Clause (a), Clause (b) and Clause (c) of Section 44AB and hence for the delay in getting the accounts audited under Section 44AB, the penalty provided under Section 271B is the only consequence and nothing else. So the order of the CIT(A) is erroneous and against the provisions of the Act.
6. The CIT(A) has erred in relying on the Board's Circular No. 763, dt. 18th Feb., 1998 for deciding the issue in the appeal, when that circular does not specify for application of the provisions of Section 44AF in case of delay in getting the accounts audited under Section 44AB.
5. At the time of hearing, the learned Counsel of the assessee, apart from reiterating the grounds of appeal raised before us as his submissions, also made similar submissions as made before the lower authorities. On the other hand, the learned Departmental Representative reiterated the contents of the orders of the authorities below as his submissions (which has already been extracted elsewhere of this order). He further submitted that the assessee cannot be exonerated from the application of Section 44AF when it has not complied with the conditions mentioned. In Section 44AF(5) of IT Act, 1961, if it wanted to avail the option provided under that sub-section.
6. We have heard rival submissions and considered the facts ad materials on record. The moot point in this appeal is whether the assessee can be denied the benefit of Sub-section (5) of Section 44AF claiming lower profits and gains than the profits and gains as specified in Sub-section (1) to Section 44AF by keeping and maintaining such books of account and documents and getting the same accounts audited but furnishing the report of such audit beyond the date specified in Section 44AB of the IT Act, 1961. Sections 44AF(1) to (5) read as under:
44AF.(1) Notwithstanding anything to the contrary contained in Sections 28 to 43G, in the case of an assessee engaged in retail trade in any goods or merchandise, a sum equal to five per cent of the total turnover in the previous year on account of such business or, as the case may be, a sum higher than the aforesaid sum as declared by the assessee in his return of income shall be deemed to be the profits and gains of such business chargeable to tax under the head "Profits and gains of business or profession":
Provided that nothing contained in this sub-section shall apply in respect of an assessee whose total turnover exceeds an amount of forty lakh rupees in the previous year.
(2) Any deduction allowable under the provisions of Sections 30 to 38 shall, for the purpose of Sub-section (1), be deemed to have been already given full effect to and no further deduction under those sections shall be allowed:
Provided that where the assessee is a firm, the salary and interest paid to its partners shall be deducted from the income computed under Sub-section (1) subject to the conditions and limits specified in Clause (b) of Section 40.
(3) The WDV of any asset used for the purpose of the business referred to in Sub-section (1) shall be deemed to have been calculated as if the assessee had claimed and had been actually allowed the deduction in respect of the depreciation for each of the relevant assessment years.
(4) The provisions of Sections 44AA and 44AB shall not apply in so far as they relate to the business referred to in Sub-section (1) and in computing the monetary limits under those sections, the total turnover or, as the case may be, the income from the said business shall be excluded.
(5) Notwithstanding anything contained in the foregoing, provisions of this section, an assessee may claim lower profits and gains than the profits and gains specified in Sub-section (1), if he keeps and maintains such books of account and other documents as required under Sub-section (2) of Section 44AA and gets his accounts audited and furnishes a report of such audit as required under Section 44AB.
7. A careful study of the various sub-sections of Section 44AF will lead to the following conclusions:
(i) If the assessee's turnover is more than Rs. 40 lakhs, the provisions of Sub-section (1) shall not be applicable, otherwise, i.e., if the turnover is below Rs. 40 lakhs the income from profits and gains of business or profession from the retail trade of an assessee will be assessed at 5 per cent of the total turnover in the previous year;
(ii) Once the income from retail business of the assessee is computed at 5 per cent of the total turnover, it would be deemed that the provisions of Sections 30 to 38 had already been given full effect to.
(iii) If the assessee is doing the retail business and is maintaining such books of account and other documents as required under Sub-section (2) of Section 44AA and gets its accounts audited and furnishes a report of such audit as required under Section 44AB, notwithstanding anything contained in the Sub-section (1) to (4) of Section 44AF, such assessee may claim lower profits and gains than the profits and gains specified in Sub-section (1) of Section 44AF.
In other words, if a retail trader wants to claim a lower profit than 5 per cent of the turnover as mentioned in Section 44AF(1), then such assessee has to maintain the books of account and other documents as required under Section 44AA and get its accounts audited and furnish a report of such report (audit) as required under Section 44AB of IT Act, 1961.
8. Now we have to look into the consequences that would follow if the assessee maintains such accounts and gets the same audited but files the said audit report beyond the due date specified in Section 44AB. There is nothing mentioned in Section 44AB as to what is the consequence if such audit report is not filed within the specified date mentioned therein. However, in Section 271B of the IT Act, 1961 the consequences of failure to get the accounts audited are mentioned, which reads as under:
271B. If any person fails to get his accounts audited in respect of any previous year or years relevant to an assessment year or furnish a report of such audit as required under Section 44AB, the AO may direct that such person shall pay, by way of penalty, a sum equal to one-half per cent of the total sales turnover or gross receipts, as the case may be, in business or of the gross receipts in profession, in such previous year or years or a sum of one hundred thousand rupees, whichever is less.
A combined reading of Sections 44AF(5), 44AB and 27 IB leads to the conclusion that if the assessee fails to furnish the audit report as required under Section 44AB [which has been incorporated in Sub-section (5) of Section 44AF] it may be liable to levy of penalty as mentioned in Section 271B of the IT Act, 1961. Nowhere in Section 44AF [right from Sub-section (1) to Sub-section (5)] it is mentioned that the assessee will be denied the benefit of claiming lower profits and gains than the profit and gains as specified in Sub-section (1) of Section 44AF, if it furnishes the audit report beyond the due date as mentioned in Section 44AB. Thus, it is clear that it is not the intention of the legislature to altogether deny the benefit of lower profits if the assessee maintains books of account and gets them audited and furnishes a report as required under Section 44AB though belatedly. Otherwise, it would have specified/mentioned in the section itself to that effect. Further on many occasions the various Courts have held that filing of audit report is only procedural in nature and the assessee cannot be denied the benefit of exemption claimed by it; to quote an example is the decision in the case of CIT v. A.N. Arunachalam (1994) 122 CTR (Mad) 87 : (1994) 75 Taxman 529 (Mad).
9. In view of the above discussions, we are of the considered opinion that the lower authorities went wrong in totally denying the benefit of Sub-section (5) of Section 44AF to the assessee in this case. Hence, we direct the AO not to apply the provisions of Section 44AF(1) of the IT Act, 1961 as it is not the remedy for the non/late filing of the audit report as required under Section 44AB of the Act, before the specified date, In this view of the matter we allow the appeal of the assessee.
10. In the result, the appeal of the assessee is allowed