Income Tax Appellate Tribunal - Hyderabad
Income-Tax Officer vs Vinedale Distilleries (P.) Ltd. on 23 October, 1992
Equivalent citations: [1992]43ITD703(HYD)
ORDER
Chander Singh, Accountant Member
1. The appeal by the Revenue and the cross objection by the assessee for assessment year 1985-86 deal with levy of penalty of Rs. 1.00.000 under the provisions of Section 271B of the Income-tax Act, 1961. These are consolidated and disposed of by a common order for the sake of convenience.
2. We first take up the appeal by the Revenue. The admitted facts of the case are as follows. The assessee-company closed its books of account on 31-10-1984 and, for assessment year 1985-86, filed return of income on 30-9-1985. The turnover of the assessee for the year under consideration was over Rs. 2 crores and, therefore, as per the provisions of Section 44AB of the Income-tax Act, the assessee-company was required to get its accounts audited. The audit report and a further report in form Nos. 3CA and 3CD were required to be obtained by the assessee before the stipulated date. The Income-tax Officer, however, found that the assessee had not got its accounts audited under the provisions of Section 44AB and also did not file the prescribed forms 3CA and 3CD. The ITO was, therefore, of the view that the assessee-company had failed to perform the statutory obligation. He accordingly issued a show-cause notice to the assessee and after giving an opportunity of being heard to the assessee, he was of the view that the assessee failed without reasonable cause to meet the requirements of Section 44AB. He, therefore, levied a penalty of Rs. 1.00,000 under the provisions of Section 271B of the IT Act.
3. In appeal before the Commissioner of Income-tax (Appeals), it was pleaded by the assessee that the assessee had got its accounts audited under Section 227(4A) of the Companies Act, 1956, which was completed on 27-7-1985. The assessee was required to obtain the audit report under the provisions of Section" 44AB of the IT Act by the extended date of 30-9-1985. Since the audit had been done under Section 227(4A) of the Companies Act, there was no further necessity for the assessee to get the accounts audited under the provisions of Section 44AB of the IT Act. It was, therefore, pleaded before the CIT (Appeals) that the levy of penalty under Section 271B of the IT Act was not called for. The CIT (Appeals), on these facts, held that in view of the proviso to Section 44AB of the IT Act and the assessee having had its accounts audited before 27-7-1985 under the Companies Act, it was not liable to penalty under Section 271B of the IT Act. She accordingly cancelled the penalty order of the ITO.
4. Being aggrieved, the Revenue has come up in appeal before us. It is pleaded by the learned departmental representative, Sri K.T.V. Charyulu, that the order of the CIT (Appeals) is erroneous on facts and in law. The CIT (Appeals) should have appreciated that the specific particulars as required by Section 44AB read with Rule 6G(2)(a) in form No. 3CD were not furnished by the assessee and that the completion of statutory audit as per Companies Act cannot be taken as sufficient compliance with the requirements of the Income-tax Act and the Rules made thereunder. On the facts, the CIT (Appeals) should have held that in so far as the requirements of Section 44AB are concerned, the assessee has failed to comply with the same and hence it is liable to penalty under Section 27 IB. The learned departmental representative draws our attention to the provisions of Section 44AB and points out that the audit under Section 227(4A) of the Companies Act, 1956, may be sufficient compliance provided the .assessee obtains the further report in the form prescribed. He refers to proviso to Section 44AB which is reproduced for the sake of convenience :
Provided that in a case where such person is required by or under any other law to get his accounts audited, it shall be sufficient compliance with the provisions of this section if such person gets the accounts of such business or profession audited under such law before the specified date and obtains before that date the report of the audit as required under such other law and a further report in the form prescribed under this section." (Emphasis provided) The requirement of the proviso, in the opinion of the learned departmental representative, is that an assessee should not only get his accounts audited and obtain the report thereof under any other law, but also has to obtain a further report in the prescribed form under Section 44AB of the IT Act. The completion of audit under Section 227(4A) of the Companies Act, 1956, in the case of the assessee was not, therefore, sufficient to fulfil the conditions laid down under the provisions of Section 44AB as the assessee failed to obtain the further report in the prescribed form. He, therefore, urges that the CIT (Appeals) was not justified in vacating the penally order. A prayer has, therefore, been made to vacate the order of the CIT (Appeals) and restore the order of the ITO.
5. On the other hand, the learned counsel for the assessee, Sri K.K. Viswantham, supports the deqision of the CIT (Appeals). He contends that the assessee filed the return of income for the year under consideration on 30-9-1985 along with the statutory audit report as required under Company Law, along with annexures. The assessee was under the impression that the report submitted along with the return of income was sufficient compliance under Section 44AB as clearly laid down under the proviso to that section. He urges that Section 44AB provides that in addition to the statutory report, a further report is also required from the statutory auditors to be obtained. Nowhere in the Act it is stipulated that this should be submitted along with the return of income. As per the provisions of the Income-tax Act, the duty of an assessee is only to obtain a statutory audit report and the further report in the prescribed form, but for the assessment year under consideration, it has nowhere been laid down that such a statutory audit report or the further report in the prescribed form has to be submitted before the ITO. The submission of form 3CA and form 3CD, therefore, is not a statutory requirement for assessment year 1985-86. Such an amendment, as a matter of fact, was incorporated in the Act with effect from 1-4-1989. As far as the year under consideration is concerned, the assessee was merely required to obtain the statutory report which it had done under the Companies Act.
6. The learned counsel continues that assessment year 1985-86 was the first year in which an assessee was required to statutorily get his accounts audited. The assessee was, therefore, under a bonafide impression that the audit done under Section 227(4A) of the Companies Act, 1956, will meet the requirements of Section 44AB of the IT Act also. It is an admitted fact that in the case of the assessee, the audit under Section 227(4A) of the Companies Act was completed before 27-7-1985 and the report of such audit was also obtained by the assessee. It, therefore, cannot be said that the assessee failed to carry out the statutory obligation under the provisions of Section 44AB of the IT Act. The assessee did not obtain the further report in form Nos. 3CA and 3CD for a variety of reasons. First of all, the assessee was under the bonafide impression that the report already obtained under Company Law would serve the purpose and secondly, the books of account of the assessee were impounded by the ITO on 11-3-1987. The assessee came to know about obtaining the further report in the prescribed form only after the receipt of letter dated 20-2-1987 from the ITO in which the ITO required the assessee to furnish the audit report in form Nos. 3CA and 3CD. By the time the assessee realised the mistake, the ITO had insisted for the production of books of account which were subsequently impounded. The default, if any, on the part of the assessee, is, therefore, unintentional and technical. For the technical and venial default, no penalty under the provisions of Section 271B could be imposed. In this regard, the learned counsel has placed reliance on the decision of the Andhra Pradesh High Court in the case of J and J Dechane v. CIT [1990] 182 ITR 345.
7. It is further argued that the penalty under Section 271B has been initiated and levied by the ITO on wrong premises. The ITO was of the view that the assessee was required not only to obtain the report and further report in the prescribed forms, but such report or further report was also to be filed before the ITO. In this regard, he draws our attention to the ITO's letter dated 20-2-1987 in which the ITO observes:
During the year under consideration the total sales effected by you is Rs. 2,02,87,090.85 "Ps. Under the provisions of Section 44AB of the IT Act, 1961, you are required to furnish the Audit Report in Form 3CA and 3CE. I find that the same is not enclosed to the return of income. Please show cause why the same has not been enclosed? You are hereby directed to furnish the Audit Report immediately.
Thus, the ITO was of the view that the further report in the prescribed form was to be furnished before him. The learned counsel has also drawn our attention to the penalty order under Section 271B of the ITO and points out that in the said order also, the ITO has mentioned that the audit report and the further report were to be furnished by the assessee before 30-9-1985. The ITO was thus under the impression that the assessee was required to furnish the audit report and the further report in prescribed forms for the failure of which he levied penalty under Section 271B. This being not a requirement of law and since the assessee was only required to obtain the report for the year under consideration, the premise on which the penalty was levied is itself wrong. On this issue alone, the penalty levied by the ITO was rightly cancelled by the CIT (Appeals).
8. The learned counsel also raises a legal contention and points out that under the provisions of Section 27IB for assessment year 1985-86, obtaining the further report in the prescribed forms was not one of the requirements. He takes us through the provisions of section 271B of the IT Act applicable to assessment year 1985-86, which read as under:-
If any person fails, without reasonable cause, 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, the Income-tax Officer 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.
The learned counsel points out that in this section, the words "and a further report in the form prescribed under this section" have not been included. It, therefore, appears that Section 27IB had made punishable the offence of failure to obtain the audit report. Therefore, failure to obtain the further report in the prescribed form does not fall within the ambit of Section 27IB of the IT Act. The assessee had already obtained the audit report under Company Law and, therefore, levy of penalty cannot be justified on this ground also. The learned counsel, therefore, prays that the order of the CIT (Appeals) should be confirmed.
9. In reply, the learned departmental representative contends that the further report in the prescribed form need not be included in Section 271B of the IT Act. The report includes further report and, therefore, obtaining the statutory audit report should include the complete report including the further report in the prescribed forms. He. therefore, reiterates that the CIT (Appeals) was in error in cancelling the penalty.
10. We have heard the rival submissions in the light of the judicial precedent relied upon. The provisions of Section 44AB were inserted by Finance Act, 1984, with effect from 1st April. 1985, for and from assessment year 1985-86. Before the insertion of the provision, two categories of assessees were statutorily required to get their accounts audited, firstly, accounts maintained by a limited company were required to be audited under the Companies Act, 1956; similarly, accounts maintained by a co-operative society were also subjected to audit under the Co-operative Societies Act. 1912. There was no obligation on other assessees to submit their accounts for the purpose of audit. However, Section 44AB of the IT Act has made it mandatory for certain businesses and professions to get their accounts statutorily audited. The provision was introduced with a view to ensure that books of account and other records are properly maintained and that the books of account maintained during the course of the business faithfully reflect the income of a taxpayer and claims for deductions are correctly made by him. Such an audit would also help in checking fraudulent practices. It can also facilitate administration of tax laws by a proper presentation of the accounts before the tax authorities and considerably save the time of the Assessing Officer in carrying out the routine verifications like checking the correctness of totals and verifying whether purchases and sales are properly vouched or not. The time of the Assessing Officer thus saved could be utilised for attending to more important investigational aspects of the case.
11. The scope and purpose of the section has also been elaborated by the speech of the Finance Minister, reported in 146 ITR 66 (Statutes), where the Honourable Finance Minister stated:
With the reduction in rates and expeditious disposal of assessments, I believe there can now be no excuse for any leniency to be shown to those who abuse our laws. Such cases will necessarily have to be dealt with severely. In order to discourage tax avoidance and tax evasion, I am also introducing some further measures. In all cases where the annual turnover exceeds Rs. 20 lakhs or where the gross receipts from a profession exceed Rs. 10 lakhs, I am providing for a compulsory audit of accounts. This is intended to ensure that the books of account and other records are properly maintained and faithfully reflect the true income of the turnover.
It is, therefore, clear that the provisions were introduced with a view to check certain malpractices and to save the time of the Assessing Officer on some smaller issues. The provisions, perhaps, were not made as a tool of further tax collection by way of penalty under Section 271 B of the IT Act. The provisions of Section 271B, perhaps, were provided as a deterrent to the taxpayers so that their books of account are subjected to audit and are maintained in such a manner that the true profits are reflected. The intention of the legislature, therefore, was to ensure that an assessee has properly maintained the accounts which reflect the true profit. This intention of the legislature has been fulfilled by the assessee before us by getting its accounts audited under Section 227(4A) of the Companies Act, 1956. It may also be mentioned that Section 44AB of the IT Act itself gives permission to an assessee to get his accounts audited under any other law. In our view, therefore, the assessee has fulfilled the conditions laid down under Section 44AB of the IT Act.
12. Regarding obtaining a further report in the prescribed forms under Section 44AB, we are of the view that this was prescribed again to ensure that an assessee discloses the correct and true income. In our view, there is no other function of obtaining the further report in the prescribed forms except to ensure that the assessee has maintained the books of account which reflect the true profit of the business. If the true profit of the business could be arrived at by the ITO on the basis of the audit report itself, we do not find any necessity for sustaining a penalty for the failure to obtain the further report in the prescribed forms.
13. It is settled tnat before a penalty is imposed, the assessee must be apprised of the precise charge brought against him. He must be told that he has contravened the provisions of a particular section. In the case before us, for the assessment year under appeal, the statute required the assessee only to get its accounts audited and obtain the report thereof and a further report in the prescribed forms. In this year, there was no requirement that such audit report or further report in the prescribed forms was to be submitted to the ITO. The furnishing of such a report along with the return of income was introduced with effect from 1-4-1989 and, therefore, it was not mandatory for the year under appeal. The ITO, however, as per his letter dated 20-2-1987, proposed penalty on the assessee for the default of failure to file the audit report and further report in the prescribed forms. Even in the penalty order, the ITO has mentioned that the assessee, without reasonable cause, failed to furnish the report of the audit for which he levied the penalty of Rs. 1,00,000. Thus, the penalty levied by the ITO is for the failure to furnish the audit report which was not a condition precedent for the year under consideration. The assessee was required only to obtain the audit report which it had done on 27-7-1985 by getting the accounts audited under Section 227(4A) of the Companies Act, 1956. It may also be mentioned that the penalty under Section 27IB will not be imposed merely because it is lawful to do so. Whether a penalty should be imposed for a failure to perform a statutory obligation is a matter of discretion of the ITO which should be judicially exercised on a consideration of relevant circumstances. In the case before us, the only failure on the part of the assessee was to obtain a further report in the prescribed forms. This lapse on the part of the assessee, in our view, cannot be considered so serious as to warrant imposition of penalty of Rs. 1,00,000. Moreover, the assessee was under the bonafide impression that obtaining the audit report under the provisions of the Companies Act was sufficient and no further action need be taken. It is not the case of the Revenue that the assessee had intentionally and without any justifiable reason failed to obtain the further report in prescribed form. Moreover, we find from the facts of the case that the assessee had also other reasonable cause due to which the further report in the prescribed forms could not be obtained. By the time the assessee realised that he was required to obtain the further report in the prescribed forms. the books of account of the assessee were admittedly in the custody of the ITO. On this ground also, we do not consider it a fit case for the levy of penalty.
14. It is settled that the penalties under the Income-tax Act are penal in nature and, therefore, must be strictly construed. The penalties are to be construed within the terms and language of the particular statute. The status creating the penalty is the first and last consideration in that respect. The popular and literary notion about penalty and the concepts associated with it have to subordinate themselves to the actual words and terms used in the statute creating the penalty and laying down the procedure for its imposition. The golden rule is that if the provision is capable of two alternative meanings the court should lean in favour of the assessee; if the provision lacks in clarity and no meaning is reasonably clear, the courts will be unable to regard it as of any effect and naturally the assessee cannot be penalised. The provisions of Section 271B as reproduced above do not make it abundantly clear that the failure to obtain the additional report in the prescribed forms is liable to be penalised under Section 27IB of the IT Act. Though section 44AB speaks of "and a further report in the form prescribed in this section", Section 271B envisages penalty only for the failure to get the accounts audited and obtain a report thereof. As already mentioned, the assessee has already got the accounts audited under Company Law and, therefore, in our view, the provisions of Section 271B are not at all attracted.
15. Considering all the facts and circumstances of the case, we are, therefore, of the view that the CIT (Appeals) was justified in cancelling the penalty order. We accordingly uphold his order. The Revenue's appeal is dismissed.
16. Coming to the cross objection by the assessee, it is seen that the cross objection has been filed to support the order of the CIT (Appeals). Since we have upheld the order of the CIT (Appeals), the cross objection has become infruetuous and is, therefore, dismissed as such.