Income Tax Appellate Tribunal - Pune
Darshan Enterprises vs Income Tax Officer on 31 August, 2007
Equivalent citations: (2008)113TTJ(PUNE)857
ORDER
Ahmad Fareed, A.M.
1. This appeal by the assessee is directed against the order of the CIT(A) dt. 13th Sept., 2004, confirming the penalty of Rs. 89,530, under Section 271(1)(c) of the Act, for asst. yr. 2000-01.
2. The grounds raised by the assessee in this appeal are as under:
(1) The learned CIT(A) erred in confirming penalty under Section 271(1)(c) of Rs. 89,530 on the ground that the appellant had offered additional income in the return only after the survey operation wherein it was found that the appellant had maintained the books of accounts for its business and the profit as per the books was higher than the presumptive profits as per the provisions of Sections 44AE and 44AF of the Act while the appellant had shown in the return the presumptive profit as per these provisions only.
(2) The learned CIT(A) failed to appreciate that:
The appellant had maintained the books to note the receivable and payables in the business and not necessarily for determining the income.
The appellant was under a bona fide impression that under the provisions of Sections 44AE and 44AF, there was no obligation for the appellant to declare the profits as per the books in the return which were higher than the presumptive profits as per these sections.
As per the legal provisions, the appellant's impression of the law was fully justified and hence, the appellant could not be said to have concealed or filed inaccurate particulars of income.
As per the ratio of Supreme Court decision in the case of CAT v. Vegetable Products Ltd. , because two interpretations of the provisions were possible, the penalty could not be sustained in this case.
The appellant after the survey operation had agreed to be taxed on the higher income as per the books subject to no penalty be levied and hence, his agreement could not justify the levy of penalty.
(3) The learned CIT(A) was not justified in rejecting the appellant's explanation in this regard and in confirming the penalty under Section 271(1)(c).
The assessee firm was dealing in building material on retail basis and was deriving income from truck plying. In the return filed by the assessee for asst. yr. 2000-01 on 31st Oct., 2000, the total income was computed under Sections 44AF and 44AE of the Act, as under:
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Particulars Amount Amount
(Rs.) (Rs.)
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Income from business
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(i) Income from retail trade (building material 91,306 suppliers) estimated under Section 44AF of turnover of Rs. 18,26,129
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(ii) Income from 2 trucks plying business under Section 44AE of IT Act @ Rs. 2000 per month.
For truck i.e. Rs. 2000 x 12 x 2 48,000 1,39,306
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Income from other sources
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Interest received 3,08,385
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Less : Bank interest 1,05,648
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Other proportionate exp. (30% of Rs. 1,71,795) 51,539 1,57,187 1,51,198
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Total 2,90,504
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Less : Set off of losses 2,90,504
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Total income Nil
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During a survey conducted under Section 133A of the Act, at the business premises of the assessee on 28th Aug., 2002, it was noticed that the assessee was maintaining regular books of account which showed higher income than what was offered by the assessee for tax in its return of income. The assessee, subsequently, filed a revised return on 5th Sept., 2002 as under:
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Particulars Amount Amount
(Rs.) (Rs.)
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Income from business
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Net profit as per P&L a/c 4,68,561
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Add: Bad debts claimed 54,487 5,23,048
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Less: Set off of loss 2,90,504
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Total income 2,32,544
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The AO, then, levied penalty of Rs. 1,79,059 on 27th April, 2004 under Section 271(1)(c), computed as under:
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Particulars Amount (Rs.) Tax on income as per revised return i.e. Rs. 2,32,544 89,529
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Tax on income as per original return i.e. nil -
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Tax on concealed income 89,529
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Minimum penalty @ 100% 89,529
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Maximum penalty @ 300% 2,68,587
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Penalty levied @ 200% 1,79,059
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3. The CIT(A) confirmed the penalty, though he reduced the quantum to minimum of Rs. 89,529. His order has been challenged by the assessee in the present appeal.
4. Shri S.U. Pathak, the learned Authorised Representative, reiterated the arguments put forward on behalf of the assessee before the AO and the CIT(A). The submissions made by him are summarized below:
that the assessee was dealing in building material on retail basis and the turnover was only Rs. 18,26,129 and therefore it was covered by the provisions of Section 44AF.
that the number of trucks used by the assessee in the truck plying business was less than ten and therefore, it was covered by the provisions of Section 44AE.
that, in view of above, the assessee rightly computed its income on presumptive basis as per the provisions of Sections 44AF and 44AE of the Act.
that the assessee, was under no obligation to declare an income higher than what was prescribed under Sections 44AF and 44AE, merely because the books of account were maintained.
that the assessee had not committed any default for which penalty could be levied under Section 271(1)(c) of the Act.
5. Smt Anjala Sahu, the learned Departmental Representative, supported the order of the CIT(A). She vehemently argued saying that the order of the CIT(A) needed to be upheld.
We have considered the rival submissions in the light of material on record and we are of the view that the order of the CIT(A) confirming the penalty levied by the AO under Section 271(1)(c) of the Act cannot be sustained for the reasons discussed in the following paras.
6. In the return filed by the assessee for asst. yr. 2000-01 the profits and gains from its retail business and from its truck plying business was calculated under the provisions of Sections 44AF and 44AE of the Act. It is an admitted fact that the assessee was dealing in building material on retail basis and that his total turnover did not exceed an amount of Rs. 40 lacs in the relevant year. Therefore the case was surely covered by the provisions of Section 44AF of the Act. During the survey conducted under Section 133A at its business premises it was noticed that the assessee was maintaining books of account and that the profits and gains from business was more than 5 per cent of the total turnover. The assessee, accordingly, filed a revised return and offered for tax a higher income.
7. Now the question that arises for consideration in this case is, whether in such a situation as stated above, the AO and the CIT(A) were right in holding that the assessee had committed a default which made it liable for levy of penalty under Section 271(1)(c) of the Act. Before proceeding to answer this question we need to examine the provisions of Section 44AF r/w ss44AA and 44AB of the Act.
8. It needs to be noted that Section 44AF was inserted by the Finance Act, 1997, w.e.f. 1st April, 1998, in order to introduce a new scheme for making special provision, for computing profits and gains of retail business, whose total turnover did not exceed an amount of Rs. 40 lakhs in the relevant year, on presumptive basis, at 5 per cent of the total turnover. The objective was to simplify the procedure for small taxpayers by introducing a scheme of presumptive taxation. Section 44AF reads as under:
Special provisions for computing profits and gains of retail business.-(1) Notwithstanding anything to the contrary contained in Sections 28 to 43C in the case of an assessee engaged in retail trade in any goods of 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 purposes 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 written down value 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 insofar 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.
9. One can see that an assessee, who is covered Section 44AF, is not required to maintain his books of account and to get them audited. The Sub-section (4) of Section 44AF says that the provisions of Sections 44AA and 44AB shall not apply insofar as they relate to the business referred to in Sub-section (1) of Section 44AF.
However, if such an assessee claimed that the profits and gains from such business was less than 5 per cent of total turnover then, w.e.f. 1st April, 1998, the provisions of Section 44AA(2)(iii) and Section 44AB(c) make it obligatory for him to maintain books of accounts and to get such accounts audited.
10. Therefore, from a combined reading of Sections 44AF(1), 44AF(4), 44AA(2)(iii) and 44AB(c), the position in law, relating to an assessee who is engaged in retail business and whose total turnover does not exceed an amount of Rs. 40 lakhs, emerges as under:
(i) An assessee, who is engaged in retail business and whose total turnover does not exceed an amount of Rs. 40 lakhs in the relevant year, shall be deemed to have earned profits and gains from such business at 5 per cent of the total turnover.
(ii) The provisions of Sections 44AA(1) and 44AB(c), requiring an assessee to maintain books of account and get them audited, do not apply to business referred to in Section 44AF(1).
(iii) However, if an assessee, who is engaged in retail business and whose total turnover does not exceed an amount of Rs. 40 lakhs in the relevant year, claims that the profits and gains from such business was less than 5 per cent of the total turnover, in that case he will be required to maintain books of accounts under Section 44AA(2)(iii) and also to get them audited under Section 44AB(c).
(iv) The Section 44AF starts with a non obstante clause giving overriding effect to the provisions of this section over the provisions of Sections 28 to 43C.
11. In a normal situation the profits and gains of a retail business have to be computed under the provisions of Sections 28 to 43C of the Act. The expression "business" is defined in Section 2(13) of the Act and Sections 28 to 43C set down the manner of computation of profits and gains of business. But Section 44AF starts with a non obstante clause giving an overriding effect to the provisions of this section over the provisions of Sections 28 to 43C. The true effect of a non obstante clause in a section is that the provisions mentioned therein have full operation and that the provisions embraced in the non obstante clause do not become an impediment for the operation of that section.
12. Also, the deeming provision in Section 44AF(1) creates a legal fiction, saying that in the case of such an assessee the profits and gains from such business will be assumed to be that, calculated at 5 per cent of the total turnover. And it is trite law that in construing a legal fiction, it will be proper and necessary to assume all those facts on which alone the fiction can operate. A legal fiction has to be carried to its logical conclusion.
Lord Asquith in East End Dwelling Co. Ltd. v. Finsbury Borough Council (1952) AC 109 : (1951) 2 All ER 587, 589 (HL) observed that if one is bidden to treat an imaginary state of affairs as real, he must surely, unless prohibited from doing so, also imagine as real the consequences and incidents which, if the putative state of affairs had in fact existed, must inevitably have flowed from or accompanied it. One must not permit his imagination to boggle when it comes to the inevitable corollaries of that state of affairs.
13. In the present case, the assessee firm was admittedly engaged in retail business and his total turnover did not exceed Rs. 40 lakhs and therefore, it was governed by the deeming provisions of subs. (1) of Section 44AF. And because of the non obstante clause the provisions of Sections 28 to 43C do not apply. Therefore, it could not be said that there was any concealment or furnishing of inaccurate particulars of income on the part of the assessee within the meaning of Section 271(1)(c) of the Act. In the circumstances therefore, we are satisfied that this was not a fit case for levy of penalty under Section 271(1)(c). The penalty is accordingly cancelled.
14. In the result, the appeal filed by the assessee is allowed.