Income Tax Appellate Tribunal - Ahmedabad
Manekchowk Co-Operative Bank Ltd. vs Assistant Commissioner Of Income-Tax on 2 September, 1998
Equivalent citations: [1999]70ITD183(AHD)
ORDER
1. All these appeals are directed against levy of penalties under section 271B for not filing audit reports under section 44AB of the Income-tax Act, 1961 along with returns of income for the assessment years 1989-90, 1990-91 and 1991-92. As common issue is involved in all these appeals they were heard together and are disposed of by this common order.
2. The assessee is a co-operative bank. Its income was exempt from taxation from 1970 i.e. from inception of its business including the assessment years under appeal. The assessee had filed returns for the impugned assessment years under section 139(4) but without any audit report under section 44AB. According to the Assessing Officer, the assessee was liable for levy of penalty under section 271B of the Act. He issued show-cause notices for the same. In response to the show-cause notices the assessee replied that while introducing section 44AB for the first time for the assessment year 1985-86, the then Hon'ble Finance Minister informed the Parliament that the compulsory audit under section 44AB for the assessees other than limited companies, co-operative societies, etc. would help in checking fraudulent practices and could reflect the correct income of the taxpayer. It was submitted that the assessee was a co-operative bank carrying on business of banking and its accounts are audited under Co-operative Societies Act. Its entire income were exempt under section 80P of the IT Act since its inception in the year 1970 and always assessed at Nil income including the years under appeal. Further, it was pleaded that in co-operative bank circles it was a common belief that when income of the co-operative banks was exempted under section 80P and there was no scope for fraudulent practices or tax evasion section 44AB was not applicable. It was further argued that audit report under section 44AB had been obtained. The assessee filed those audit reports along with the reply to the show-cause notice. Further, it was contended that the Assessing Officer should have given opportunity to the assessee under section 139(9) treating the returns as defective returns stipulated under Explanation (bb) of proviso to section 139(9) where not filing of audit report under section 44AB had been stipulated as a defect. According to the Assessing Officer, the assessee's explanation was not satisfactory. He was of the view that default of the assessee in respect of non-furnishing of tax audit reports under section 44AB along with the returns of income was not on account of any reasonable cause. He was of the opinion that the explanation of the assessee that as the co-operative bank is carrying on only business of banking and as its entire income was exempt under section 80P it was not required to file audit report in terms of section 44AB as there was no scope for fraudulent practice of tax evasion cannot be accepted because even such bank had ample chances of claiming exemption under section 80P. Even income is not exempted under section 80P in respect of income from non-banking activities. He pointed out that the Hon'ble Madras High Court had observed in the case of R. Sathya Murthy v. Union of India [1990] 50 Taxman 150 as follows :-
"Really, a proper audit for tax purposes would ensure a proper maintenance of accounts which faithfully reflect the state of affairs. It would only help in detective fraudulent practices and, therefore, it is for the benefit of facilitating the administrators of tax laws. The matter will have to be approached only from that perspective."
He further pointed out that memo explaining the provisions of Finance Act, 1984 reported in [1984] 146 ITR (St.) 161 are as follows :-
"Such audit will help in checking fraudulent practice. It can facilitate the administrators of tax laws by a proper presentation of accounts before the tax authorities and considerably saving the time of Assessing Officers in carrying out routine verification, while taking the corrections of totals and verifying whether purchases and sales are properly vouched or not. The time of the Assessing Officers thus saved could be utilised for attending for more important investigation aspects of the case. Therefore, the provisions of compulsory audit within specified time under section 44AB, is mandatory for the assessee looking into its great significance."
The Assessing Officer further viewed that the excuse that there was a common belief in the co-operative bank circles that section 44AB was not applicable in their cases could not hold good for any point either. Ignorance was not excuse as per established legal position. He referred to the Punjab and Haryana High Court in the case of Daljit Singh v. CWT [1981] 130 ITR 236 where it had been held that the assessee's plea was not acceptable that he was not conscious of his obligation under section 14(1) of the Wealth-tax Act, 1957 for filing return and penalty levied under section 18(1)(a) of the Act was found correct.
2.1 In respect of assessee's contention that the returns of income should have been considered as defective to give opportunity to the assessee would not in any way shift its legal obligation. According to the Assessing Officer, it was only discretionary on the part of him to convey the defect and it is not mandatory for him to do so. He also pointed out that role of an Assessing Officer came later on when the return of income was filed but when the default had been committed by the assessee prior to that penalty is leviable under section 271B. He, therefore, levied the penalty.
3. Before the ld. CIT(A) the assessee contended that penalty under section 271B was leviable if the audit report was not furnished along with the return of income filed under section 139(1) or in response to a notice under clause (i) of sub-section (1) of section 142. He pointed out that there was no obligation stipulated in the Act to file audit report under section 44AB along with the return filed under section 139(4) and as the assessee in this case had filed all returns for the impugned three assessment years under section 139(4) he could not be visited with penalty under section 271B. He contended that the returns which have been filed under section 139(4) could not be treated as returns filed under section 139(1). For that proposition he relied on several decisions had been noted by the ld. CIT(A) in his appellate order (which I may not repeat). In respect of the reasonable cause he reiterated the submission placed before the Assessing Officer that there was prevalent widespread impression that the audit report under section 44AB need not be filed with return of income for co-operative bank. It was further pointed out that in several other cases of co-operative banks audit reports were not filed but no penalty was levied under section 271B. He further drew attention to the departmental Circular No. 387 dated 6-7-1984 which reads as under :-
"(x) Compulsory audit of accounts of certain persons carrying on business or profession - 17.1. Accounts maintained by companies are required to be audited under the Companies Act, 1956. Accounts maintained by co-operative societies are also required to be audited under the Co-operative Societies Act, 1912. There is, however, no obligation on other categories of taxpayers to get their accounts audited."
He further pointed out that it is apparent from Hon'ble Finance Minister's speech that object and purpose of section 44AB was to curb fraudulent practices whereas the assessee could not be accused of indulging in any such practice which was apparent from the fact that the income of these years had been assessed at Nil accepting that it is exempted under section 80P and the apprehension of the Assessing Officer that only after receiving the report in terms of section 44AB the department would be able to assess taxable income even in case of co-operative bank where it indulged in the activities which do not fall in the exemption under section 80P was totally belied on facts. He pointed out that audit report under section 44AB was completed within the specified date. It was further argued that the assessee was certainly in a position to furnish audit reports along with the returns of income because it did not have to lose anything by filing the same because the entire income was exempt under section 80P and assessed at Nil but only because of the bona fide belief that no audit reports were required to be filed with the returns the same were not filed. In any case, he submitted that the deficiency of not filing the audit reports is curable under section 139(9) and the Assessing Officer should have given opportunity to the assessee in view of the departmental Circular No. 528 dated 16-12-1988 which reads as under :-
"Sub-section (6A) of section 139 of the Income-tax Act provides that an assessee engaged in any business or profession should furnish along with a return of income certain particulars. This section has been amended so as to provide that an assessee engaged in any business or profession who is required to get his accounts audited under section 44AB of the I.T. Act should file along with the return of income. Further, section 139(9) of the I.T. Act has also been amended to provide that a return of income shall be regarded as defective if the audit report obtained under section 44AB of the I.T. Act is not furnished with the return of income."
3.1 It was further submitted that in any case, when no tax was payable by the assessee in the impugned assessment non-filing of Form No. 44AB should be considered as technical default and no penalty should have been levied. For this purpose, he relied on the decision of the Hon'ble Supreme Court in the case of Hindustan Steel Ltd. v. State of Orissa [1972] 83 ITR 26 where it has been held that even if a minimum penalty is prescribed, the authority competent to impose the penalty will be justified in refusing to impose penalty, when there is a technical or venial breach of provisions of the Act or where the breach flows from a bona fide belief that an offender is not liable to act in a manner prescribed by the statute. He also referred to the decisions of Hon'ble Supreme Court in C. A. Abraham v. ITO [1961] 41 ITR 425 (SC), CIT v. Vegetable Products Ltd. [1973] 88 ITR 192 (SC) and ITO v. Mani Ram [1969] 72 ITR 203 (SC). The assessee further submitted that liabilities for a co-operative bank which had been assessed at Nil could be penalised under section 271B is doubtful or at least two views are possible one favouring the department and the other favouring the assessee in the circumstances of the case. He submitted that in these circumstances, the law laid down by the Supreme Court in C. A. Abraham's case (supra), in Vegetable Products Ltd.'s case (supra) and Kanpur Mani Ram's case (supra) the decision favourable to the assessee should be adopted. The ld. CIT(A), however, confirmed the penalties. In respect of the returns filed under section 139(4) he opined that those returns had to be construed as returns filed under section 139(1). For that he referred to the decisions of the Hon'ble Supreme Court in the case of CIT v. Kulu Valley Transport Co. (P.) Ltd. [1970] 77 ITR 518. He also referred to the decisions of Hon'ble Calcutta High Court in Mst. Zulekha Begum (Khatoon) v. CIT [1980] 129 ITR 560 (Cal.) and Kumar Jagdish Chandra Sinha v. CIT [1982] 137 ITR 722 and Hon'ble Madras High Court in Nanjappa Textiles v. CIT [1985] 153 ITR 109 (Mad.). He, therefore, argued that the assessee should have filed its audit reports along with the returns filed under section 139(4) and having failed to do so it was liable for penalty under section 271B. In respect of the argument that the Assessing Officer should have given opportunity to cure the defect as envisaged under section 139(9) Explanation (bb) to the proviso he viewed that it was not obligatory on the part of the Assessing Officer to do so because under section 139(9) the Assessing Officer may or may not inform the assessee of defective nature of the return. Further, he viewed that this was not very relevant for the purpose of levy of penalty under section 271B because even if the defect was intimated to the assessee and the audit reports were filed the original default of not filing the audit report along with the returns of income would not be wiped out. The assessee still would be liable to levy of penalty under section 271B unless, of course, it was approved that there was a reasonable cause for the said failure as per provisions of section 271B. According to him, the ultimate question turned upon as to whether there was reasonable cause for the failure and whether the assessee's onus to prove the existence of such reasonable cause had been discharged in the present case. He opined that after the Hon'ble Supreme Court decision relied on by the assessee in the case of Hindustan Steel Ltd. (supra), the Hon'ble Supreme Court decisions in Gujarat Transport Agency v. CIT [1989] 177 ITR 455/44 Taxman 278 and CIT v. I. M. Patel & Co. [1992] 196 ITR 297 held that mens rea is not an essential ingredient of penalty. He also relied upon the decision of Patna High Court in CIT v. Standard Mercantile Co. [1986] 160 ITR 613 where the Hon'ble Court had held that the onus was on the assessee to show that there was reasonable cause for not complying with the notice and if it failed to do so penalty had to be levied under section 271(1)(b). According to him, in the present case, it was not material that the income of the assessee was exempt under section 80P but whether the assessee had complied with the statute. According to him, the departmental circular cited by the assessee did not create any impression that the co-operative society is excluded from the purview of section 44AB. According to him, whether filing of such return could have or would have resulted into unearthing of any fraudulent practice was not a relevant consideration. The moot point was that there was liability on the assessee to furnish the audit report along with the returns of income and whether the failure to furnish such report was on account of a reasonable cause which had to be proved by the assessee as per section 271B. According to him, there was no reasonable cause for failure on the part of the assessee and therefore, the levy of penalty in these three assessment years under section 271B was justified.
4. The learned counsel for the assessee reiterated the submissions made by the assessee before the Assessing Officer and the ld. CIT(A). The Ld. Departmental Representative strongly supported the orders of the lower authorities.
5. I have considered the rival submissions, facts and material on record to which my attention was drawn. Penalty under section 271B can be levied in two situations. The first situation is if the audit report required under section 44AB is not obtained within the specified time and the second situation is if the audit report is not enclosed along with the return filed under sub-section (1) of section 139 or along with the return of income furnished in response to a notice under clause (i) of sub-section (1) of section 142. I quote the section 271B in support of my observation :-
"If any person fails to get his accounts audited in respect of any previous year or years relevant to an assessment year or obtain a report of such audit as required under section 44AB or furnish the said report along with the return of his income filed under sub-section (1) of section 139, or along with the return of income furnished in response to a notice under clause (i) of sub-section (1) of section 142."
These are not the cases that the assessee did not obtain audit report before specified dates or that the assessee had filed returns under section 139(1) or in response to notice under clause (i) of sub-section (1) of section 142. Therefore, if the strict interpretation of the section is adopted the assessee cannot be visited with the penalty under section 271B. The Hon'ble Supreme Court in the case of Vegetable Products Ltd.'s (supra) had held that strict interpretation should be made on penal provisions in taxing statute. The ld. CIT(A)'s opinion that the return filed under section 139(4) could be treated as return filed under section 139(1) is not according to law as found by the Hon'ble Supreme Court in the case of Kumar Jagdish Chandra Sinha v. CIT [1996] 220 ITR 67. It is pertinent to note that section 44AB itself does not stipulate that the audit report has to be enclosed to the return of total income in the prescribed form to be verified in the prescribed manner setting forth such other particulars as may be prescribed. The clear obligation of section 139(1) is to declare the total taxable income in the prescribed form. Therefore, all the particulars required under this sub-section are in respect of the taxable total income. As it was felt by the Legislature that in the form prescribed under section 139(1) it would be difficult to ask other particulars apart from those relating to the taxable income amendments were made inserting sub-sections (6) and (6A) in section 139. The above two sub-sections run as follows :-
"(6) The prescribed form of the returns referred to in sub-sections (1) and (3) of this section, and in clause (i) of sub-section (1) of section 142 shall, in such cases as may be prescribed, require the assessee to furnish the particulars of income exempt from tax, assets of the prescribed nature and value and belonging to him, expenditure exceeding the prescribed limits incurred by him under prescribed heads and such other outgoings as may be prescribed.
(6A) Without prejudice to the provisions of sub-section (6), the prescribed form of the returns referred to in sub-sections (1) and (3) of this section, and in clause (i) of sub-section (1) of section 142 shall, in the case of an assessee engaged in any business or profession, also require him to furnish the report of any audit obtained under section 44AB, the particulars of the location and style of the principal place where he carries on the business or profession and all the branches thereof, the names and addresses of his partners, if any, in such business or profession and, if he is a member of an association or body of individuals, the names of the other members of the association or the body of individuals and the extent of the share of the assessee of all such partners or the members, as the case may be, in the profits of the business or profession and any branches thereof."
The above sub-sections were inserted with effect from 1-4-1976.
5.1. It will be pertinent to note that these two sub-sections refer to sub-section (1) of section 139 and not sub-section (4) of section 139. Therefore, enclosing the audit report under section 44AB with the returns filed under section 139(4) has not been made obligatory. To obliterate this lacuna section 44AB had been amended where obligation of filing such report was made in that section itself so that the assessee can file its audit report within the specified date if it is obtained before the date and the return under section 139(1) is not filed. No such enabling section was there before the amendment of section 44AB came into effect before 1-7-1995 where in place of the words "obtained before" the words "furnished by" have been substituted. These amendments clearly show that before such amendment inspite of having the audit reports in hand before the specified date if the return under section 139(1) was not filed the assessee had no obligation or any opportunity of filing the audit report before the specified date. The retention of filing of report under section 44AB with 139(1) return even after the amendment of section 44AB had been made clearly supports the proposition that in case of return filed under section 139(1) the assessee can file report under section 44AB and when he is not able to file return under section 139(1) he can file the same by the specified date as provided in amended section 44AB from 1-7-1995. Now in respect of the opinion of the ld. CIT(A) that the Assessing Officer is not bound to give an opportunity to rectify the defect enabling the assessee to file audit report under section 44AB is contrary to the view taken by the Hon'ble Calcutta High Court in the case of CIT v. Rai Bahadur Bissesswarlal Motilal Malwasie Trust [1992] 195 ITR 825/65 Taxman 273 where it has been held at page 832 as follows :-
"In our view, therefore, Assessing Officer ought to have given the assessee an opportunity to submit the audit report as the return was defective inasmuch as the audit report was not filed along with the return ........"
I am therefore, unable to accept the view of the ld. CIT(A) that the Assessing Officer is not bound to give opportunity to rectify the defect.
5.2 Coming to the bona fide impression, I am of the opinion that there is no provision of law every one must be presumed to know formal technicalities of every Act. The obligation for filing a return under section 14(1) of the Wealth-tax Act or under section 139(1) may be a very well-known obligation but the formal and technical compliance cannot be presumed to be known to every one. Further, from the speech of the Hon'ble Finance Minister in the Parliament, in the circumstances of the present case, is definitely a reasonable cause to carry the impression that where separate audits have been made under the respective laws further audit is not necessary. This statement of the then Finance Minister might have been given, presumably, to reply other Hon'ble Members of Parliament where they might have asked the reasonability of multiple audits of same concern i.e. once under the respective law again under the Income-tax Act. Further, a departmental Circular No. 387 dated 6-7-1984 cannot be ignored as cause of such impression which says that accounts maintained by the companies are required to be audited under Companies Act, 1956. Accounts maintained by the co-operative societies are also required to be audited under the Co-operative Societies Act, 1912. There is, however, no obligation on other categories of taxpayers to get their accounts audited. This observation of the department clearly shows that the audit under section 44AB was to be made where there was no obligation for filing audit report. Therefore, taking totality of the circumstances, I am of the opinion that there was reasonable cause for not filing the audit report along with the returns filed by the assessee apart from the legalities of levy of penalty if the audit reports are not filed along with the returns under section 139(4) when returns under section 139(1) were not filed and audit report in terms of section 44AB was obtained before the specified date.
5.3 In any case, according to me, the default committed by the assessee is only technical and no penalty should have been levied in view of the decision of the Hon'ble Supreme Court in the case of Hindustan Steel Ltd. (supra). The above law laid down by the Hon'ble Supreme Court has not been altered vide subsequent decisions in the case of Gujarat Travancore Agency (supra) and I. M. Patel & Co. (supra) relied on by the ld. CIT (A). In the decisions of the Hon'ble Supreme Court in the case of Gujarat Travancore Agency (supra) and I. M. Patel & Co. (supra) it would be seen that the Hon'ble Supreme Court had decided the issue on the basis of "mens rea". The Hon'ble Allahabad High Court in the case of CIT v. Chander Prakash [1991] 188 ITR 654 has distinguished the case as follows :-
"Learned Standing Counsel for the Revenue relied upon a decision of the Supreme Court in Gujarat Travancore Agency v. CIT [1989] 177 ITR 455. The Supreme Court held that, in a case under section 271(1)(a), mens rea is not to be established. There can be no quarrel about this proposition. The question, however, is whether, in this case, it can be said that the assessee had failed to furnish a return of total income without reasonable cause. His bona fide belief was a reasonable cause and the mere fact that he agreed to a settlement does not necessarily militate against his bona fide belief."
In respect of the ld. CIT(A)'s opinion that everybody is expected to know the law is contrary to the decision of the Hon'ble Supreme Court in the case of Motilal Padmapat Sugar Mills Ltd. v. State of Uttar Pradesh [1979] 118 ITR 326 where the Hon'ble Supreme Court held as under as reported in the head notes on page 330 of the report as follows :-
"(ii) There is no presumption that every person knows the law. It is often said that every one is presumed to know the law, but that is not a correct statement : there is no such maxim known to the law."
The above decision is more applicable in this case because it is not a general law which has not been considered by the assessee but the technicalities of the law. Further, none of the decisions in the case of Gujarat Travancore Agency (supra) and I. M. Patel & Co. (supra) considered the decision of the Hon'ble Supreme Court in the case of Hindustan Steel Ltd. (supra) where it has been held that only for technical or venial default penalty should not be levied. It would be pertinent to note that the two decisions referred to by the ld. CIT (A) were decided by two Judge Bench whereas the case of Hindustan Steel Ltd. (supra) was decided by three Judge Bench directly involving reasonableness of levying penalties for venial and technical defaults.
5.4 Taking totality of the facts and circumstances of the case I have no hesitation, to hold that penalty should not have been levied under section 271B in this case.
6. The appeals are allowed.