Income Tax Appellate Tribunal - Bangalore
Bangalore Steel Distributors vs Income-Tax Officer on 3 February, 1994
Equivalent citations: [1994]49ITD668(BANG)
ORDER
S. Bandyopadhyay, Accountant Member
1. Since a common issue is involved in all these three appeals filed by the assessee for the three successive years, the appeals have been consolidated and a common order is being passed for the sake of convenience.
2. All the appeals relate to penalty levied by the Income-tax Officer under Section 271B for failure on the part of the assessee to comply with the provisions of Section 44AB, strictly. It was found out during the course of a survey conducted by the Department on 10-11-1988 that although the turnover of the assessee for each of the three years under consideration had exceeded the limit of Rs. 40 lakhs, the assessee had not, however, filed the Audit Report as required under Section 44AB. Returns of income for these years were also filed much belatedly in April 1988 only. The ITO, after taking into consideration the objections of the assessee, ultimately levied penalties under Section 271B on account of default on the part of the assessee in not complying with the statutory requirements under Section 44AB, at the minimum levels of Rs. 28,510, Rs. 34,235 and Rs. 52,560 respectively.
3. The appeals filed by the assessee before the Commissioner of Income-tax (Appeals) against imposition of the abovementioned penalties were disposed of by the CIT(A). The CIT(A) brushed aside the contention of the assessee that its partners were not much agitated and that the work of filing the returns of income and complying with the other statutory requirements had been entrusted to the auditors of the assessee M/s. Singhvi & Associates, Bangalore, and that there was a failure on the part of the said auditors to actually comply with the said requirements. She emphasised on the survey conducted by the Department under Section 133A of the Act. She also stated that apart from stating that the auditors had delayed the matter, the assessee had not been able to file any convincing evidence or proof to substantiate its contention. In that view, she dismissed the appeals.
4. The assessee has now come up in further appeals before us. The learned counsel for the assessee has tried to attack the levy of penalty from two different angles. Firstly, he argues that the assessee was prevented by a reasonable cause from getting the audit as required under Section 44AB done in time. In that connection, the same argument as taken up before the lower authorities has been reiterated before us also. It is the contention of the assessee that the assessee-firm had come into existence in 1983 only and that the work of auditing its accounts and looking after its tax matters was entrusted to M/s. Singhvi & Associates, Chartered Accountants, It has furthermore been contended that the partners of the assessee-firm not being much educated, solely depended on the said Chartered Accountants for complying with the various provisions relating to tax matters. It is thus stated that the delay in not only filing of the returns but also in getting the audit work done is entirely attributable to the negligence of the said Chartered Accountants. It is also the contention of the assessee that the assessee became aware of the fact that the audit report as required under Section 44AB had not till then been filed, during the course of the survey conducted by the Department under Section 133A on 18-11-1988. It is stated that on contacting the said auditors, the assessee met with an un-cooperative attitude on the part of the auditors who expressed their unwillingness to continue as the tax counsels of the assessee. Thereafter the assessee had to change the said auditors and appoint another Chartered Accountant, viz., Shri Haiderali Jeewabhai as its new auditor and tax consultant. It has furthermore been stated that on being appointed as the auditor and tax counsel, Hyderali Jeewabhai completed the audit of the accounts of the assessee for all the three years under consideration very shortly and submitted the said audit reports which were thereafter presented to the Department some time in December 1988 along with revised returns of income for all the three years prepared in accordance with the said audit reports. It has furthermore been stated that at the time of making an enquiry with its former auditors, the assessee found audit report for assessment year 1985-86 in Form 3CB dated 25-6-1985 prepared by M/s. Singhvi & Assoiates but not signed by it. It is thus contended that the delay in getting the audit work done and submitting the same with the Department thus entirely rests with the former auditors of the assessee viz, M/s. Singhvi & Associates and the assessee should therefore be considered as absolved of any liability towards penalty in that regard. In support of the above contention, the assessee has filed on our record an affidavit stating all the abovementioned facts sworn by one of its partners viz., Shri Mohammad Mustaq, another affidavit filed by Shri Hyderali Jeewabhai, new auditor, copy of the bill raised by M/s. Singhvi & Associates dated 9-12-1985 relating to sales-tax matters of the assessee for the year 1983 and also a copy of the letter addressed by the said M/s. Singhvi & Associates dated 30-3-1987 to the ITO in support of the claim that M/s. Singhvi & Associates had earlier been employed by the assessee as its auditors and tax consultants and also the xerox copies of the unsigned reports in Form 3CB dated 25-6-1986 prepared by M/s. Singhvi & Associates. The learned counsel for the assessee has relied on the decision of the ITAT, Hyderabad Bench, in the case of Progressive Constructions (P.) Ltd. v. ITO [1987] 20 ITD 182 and also on another decision of the Madhya Pradesh High Court in the case of Addl. CIT v. B.K. Sethi [1980] 126 ITR 394 in support of his contention that the delay occurring on account of the negligence on the part of the auditors constitutes a reasonable cause towards the default.
The learned Departmental Representative, on the other hand, has argued that the assessee is a big dealer in iron and steels and that in the revised returns filed by the assessee, much higher incomes were returned and furthermore that this revision in the returns would not have been possible but for the audit conducted in accordance with the provisions of Section 44AB consequent to the survey conducted by the Department. It has furthermore been argued that the responsibility of getting the audit work done and thereafter filing the same with the departmental authorities rests with the partners and not with its auditors. It has been tried to point out that this very point has been noted by the ITAT in its combined order for these three years with regard to the imposition of penlaties under Section 271(1)(a) for delay in filing the returns and that the Tribunal did not accept these contentions of the assessee and, ultimately, rejected the argument of the assessee that the delay on its part in filing its returns of income in time was caused by the negligence on the part of its auditors.
5. The learned counsel for the assessee has also come up with another plea that in this particular case, the audit work as required under Section 44AB was ultimately completed and the said audit reports were filed with the Assessing Officer who based his assessments on the said audit reports. It has, thus, been argued that the section imposing penalty as it stood during the relevant time, envisaged penalty for a total failure of not getting the audit work done at all and that penalty was not exigible in case of partial failure as in the present case in simply getting the audit report belated. Reliance has been placed on the decision of the Calcutta High Court in the case of Calcutta Chromo type (P.) Ltd. v. ITO [1971] 80 ITR 627 and of the Allahabad High Court in the case of CIT v. Anchor Pressing (P.) Ltd. [1982] 136 ITR 505 (at page 511) in support of this particular argument of the learned counsel for the assessee.
6. When we look at the order of the Tribunal with regard to the penalties levied for these years, under Section 271(1)(a), we find that the Tribunal mainly depended on the assertion of the CIT (Appeals) to the effect that there had been no substantiation of the fact that the delay had occurred on account of any negligence on the part of the Chartered Accountant. Emphasis was also laid on the fact that the assessee had even failed to file applications in Form 6 asking for extension of time for filing the returns. Mainly on these two grounds, the Tribunal had come to the conclusion that there was no reasonable cause behind the delay in filing the returns and had upheld the levy of penalties.
However, so far as the present appeals are concerned, the assessee has tried to substantiate the version about the delay occurring on account of the negligence on the part of its erstwhile auditors M/s. Singhvi & Associates, by filing affidavits of its partner as well as of the new auditor as discussed above. Other evidences like copy of bill and also copy of the letter addressed to the ITO have also been filed on our record to show that M/s. Singhvi & Associates had earlier been appointed to look after the tax matters of the assessee-firm. It cannot also be denied that the partners of the assessee-firm are not much educated and, hence, are not supposed to be acquainted with the intricate provisions of the Income-tax Act especially regarding the requirements of getting the audit work done in accordance with the provisions of Section 44AB which had come into force rather very recently with effect from 1 -4-1985 only. The assessee has also come up with the evidence that the erstwhile auditors had tried to prepare the audit reports in Form 3CB, although for reasons best known to them they did not complete such audit reports and file the same with the authorities. Furthermore, the requirement of filing return of income in time has got to be considered with much more strictness than the requirement of getting the audit done in accordance with the provisions of Section 44AB, at least in the initial years of coming into operation of the relevant legal provisions relating to the latter requirement. Taking into consideration all these facts, we are of the opinion that the earlier decision of the Tribunal relating to penalties under Section 271(1)(a) should not affect our determination of the issue as to whether the assessee was prevented by reasonable cause from getting the work of audit of its accounts in accordance with the provisions of Section 44AB in time. In view of the circumstances of the case and also taking into consideration the fact that these were the initial years of operation of the said Section 44AB, it has got to be considered that the assessee was prevented by reasonable cause from getting the said audit work done in time. In that view, therefore, we hold that the penalty was not imposable in this case.
7. Let us now examine the other contention of the learned counsel for the assessee relating to non-impossibility of penalty under Section 271B in a case like this. Section 44AB of the Act which was brought to the statute book by the Finance Act, 1984 with effect from 1-4-1985, read as below during the relevant years:
44AB. Every person,
(a) carrying on business shall, if his total sales, turnover or gross receipts, as the case may be, in business exceed or exceeds forty lakh rupees in any previous year or years relevant to the assessment year commencing on the First day of April, 1985, or any subsequent assessment year; or ** ** ** get his accounts of such previous year or years audited by an accountant before the specified date and obtain before 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 the Explanation to the above section, "specified date" was stated to be date of the expiry of four months from the end of the previous year or, where there was more than one previous year, from the end of the previous year which expired last before the commencement of the assessment year, or the 30th day of June of the assessment year, whichever was later.
8. Section 271B, being the charging section relating to imposition of penalty for non-compliance of the provisions of Section 44AB, as it stood at the relevant time, read as below :
271B. If any person fails, without reasonable cause, to get his accounts audited in respect of any previous year on 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.
It may thus be seen from above that Section 44AB enjoins the duty, with effect from assessment year 1985-86, to get the accounts of an assessee whose turnover etc., exceed Rs. 40 lakhs, audited before the specified date and obtain before such date the report of the audit in the prescribed form. Section 271B contains two limbs and failure on the part of the assessee in accordance with either of the limbs would render him liable to penalty under that section. The first limb speaks of the failure to get the assessee's accounts audited and the second limb speaks of the failure on his part to obtain a report of such audit. The expression "as required under Section 44AB" as appearing in that particular section must be considered to be applying to both the limbs inasmuch as the requirement of getting the accounts audited and also the requirement of obtaining the report of such audit both emanate from the duty cast on the assessee under Section 44AB. There is no doubt about the fact that Section 44AB speaks of a particular time-frame viz., before the specified date, for getting both the above works done. Section 271B, however, simply mentions the failure in absolute terms of getting either of the two works done without any reference to the said time-frame. It thus appears that the language used in Section 271B by way of the expression "as required under Section 44AB" does not comprehend levy of penalty for failure to do either of the two works within the time-frame as mentioned in Section 44AB. Had the intention of the Legislature been to penalise the assessee for not being able to get either of the two works done within the said time-frame, then the Legislature should have used the expression "as required under Section 44AB within the time-limit as specified therein" or "in the manner as required under Section 44AB". On the other hand, the language used at present simply refers to the requirement of the accounts being audited and of obtaining a report and a reference to the requirement under Section 44AB simply specifies the requirement.
8.1 If we compare the provisions of this particular penal section with the other Section 271(1)(a), as it existed at the relevant time, we find that the language used therein was 271(1). If the Income-tax Officer ... in the course of any proceedings under this Act, is satisfied that any person
(a) has failed to furnish the return of total income which he was required to furnish under Sub-section (1) of Section 139 or by notice given under Sub-section (2) of Section 139 or Section 148 or has failed to furnish it within the time allowed and in the manner required by Sub-section (1) of Section 139 or by such notice, as the case may be, etc. It may be found that in Section 271(1)(a), the failure on the part of the assessee to file the return of income and also to do the same within the time limit as mentioned in Section 139, were both mentioned. Thus, in accordance with the said penal provisions, a defaulting assessee was liable to be penalised both for his absolute failure to file the return of income at all and also for his failure to file the return of income in time. In the instant case, however, the lack of mention of the time-frame in Section 271B seems to make it a penal provision only in respect of the absolute failure on the part of the assessee to get his accounts audited or to obtain a report of such audit as required under Section 44AB. We, therefore, feel inclined to agree with the contention of the learned counsel for the assessee on this issue that a belated act on the part of the assessee to get either or both the works done is not punishable under this particular section.
8.2 The scheme of determination of the quantum of penalty would also go to support our reasoning in this regard. The failure on the part of the assessee in terms of the provisions of Section 271B renders him liable to penalty by a sum equal to one-half per cent of the total sales, turnover or gross receipts, as the case may be, in business etc., in such previous year or years or a sum of one hundred thousand rupees, whichever is less. It may, thus, be seen that the quantum of penalty to be imposed under this section is not at all dependent on the amount of delay in getting the work of audit done or obtaining the audit report. Had it been the intention of the Legislature to take into consideration the delay in getting the accounts audited or obtaining the audit report, then the quantum of penalty would have been fixed at a rate more or less proportional to the quantum of such delay, as is the case with regard to penalty imposable under Section 271(1)(a).
9. The case decided by the Calcutta High Court in Calcutta Chromo type (P.) Ltd.'s case (supra), although relates to the penalty under the Super Profits Tax Act, however, seems to be in close similarity to the present issue. The Calcutta High Court held in that case that the ITO is not entitled to impose a penalty on an assessee on the ground of failure to file a return under Sub-section (1) of Section 6 of the Super Profits Tax Act, within the time prescribed under that section, when the return is filed before the assessment is made, as permitted by Sub-section (3) of Section 6 inasmuch as there are no specific words in Section 10 imposing penalty in such cases as there are in the corresponding provisions of the Income-tax Act.
In the present case also, as we have seen above, there are no express words rendering belated action on the part of the assessee liable to penalty under this particular section. We are, therefore, of the view that the above-mentioned decision of the Calcutta High Court, which has again been followed by the Allahabad High Court, in its judgment in Anchor Pressing (P.) Ltd.'s case (supra), lends enough support to the case of the assessee.
10. In interpreting the provisions of Section 271B, we may take help of the "mischief rule" relating to interpretation of statutes. For this purpose, it will be required of us to enquire into what was the purpose of enacting both the Sections 44AB and 271B with effect from 1 -4-1985 and what prevailing mischief did the enactment of these two sections tried to get rid of. For this purpose, paras 15 to 20 of the memo explaining provisions in Finance Bill, 1984, relating to the new measure introduced in the Income-tax Act of compulsory audit of accounts of certain persons carrying on business or profession, may be taken into consideration. The relevant paragraphs are being reproduced as below :
15. 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.
16. A proper audit for tax purposes would ensure that the books of account and other records are properly maintained and that they faithfully reflect the income of the taxpayer and claims for deductions are correctly made by him. Such audit would also help in checking fraudulent practices. It can also facilitate the administration of tax laws by a proper presentation of the accounts before the tax authorities and considerably saving the time of Assessing Officers in carrying out routine verification, like checking correctness 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 to more important investigational aspects of a case.
17. Having regard to the foregoing considerations, the Bill seeks to make a new provision in the Income-tax Act making it obligatory for a person carrying on business to get his accounts audited before the 'specified date' by an 'accountant'. If the total sales, turnover or gross receipts in business for the accounting year or years relevant to be assessment year 1985-86 or any subsequent assessment year exceed or exceeds twenty lakh rupees. A person carrying on profession will also have to get his accounts audited before the 'specified date'. If his gross receipts in profession for an accounting year or years relevant to any of the aforesaid assessment years exceed ten lakh rupees. The proposed new provision also casts an obligation on such persons to obtain before the 'specified date' a report of the audit in the prescribed form duly signed and verified by the 'accountant' setting forth such particulars as may be prescribed by rules made in this behalf by the Central Board of Direct Taxes.
18. In cases where accounts are required to be audited by or under any other law (as in the case of companies and co-operative societies), it will suffice if the accounts are audited under such other law before the 'specified date' and the assessee obtains before the said date the report of the audit as required under such other law, and also a report of audit in the form to be prescribed by the Central Board of Direct Taxes.
19. For the purposes of the proposed provision, the term 'accountant' will have the same meaning as in the Explanation below Sub-section (2) of Section 288 of the Income-tax Act. The expression 'specified date', in relation to the accounts of any accounting year or years relevant to any assessment year, would mean the date of the expiry of four months from the end of the accounting year or, where the assessee has more than one accounting year, from the end of the accounting year which expired last before the commencement of that assessment year or the 30th June of that assessment year, whichever is later.
20. If any person fails, without reasonable cause, to get his accounts audited in respect of any accounting year or years relevant to an assessment year or to obtain a report of such audit as required under the aforesaid provision, 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 the business or of the gross receipts in the profession, in such accounting year or years, subject to a maximum of one lakh rupees.
It may be found from above that the Memo explaining the provisions of the Finance Bill simply takes into consideration the necessity of getting the accounts of big businesses audited so that such audited accounts might be taken help of by the ITO at the time of assessing the income of such big businesses.. Although a time schedule was mentioned in the said enactment, yet, not much empphasis was laid on that time schedule. The Memorandum explaining the penal provision relating to this issue also did not speak anything about the failure on the part of the assessee to adhere to the said time schedule. It may, therefore, be considered that the prevailing mischief was considered to have been taken care of by introducing the provisions in the manner as done at the time without providing any specific penalty clause for failure to comply with the said provisions in time.
11. In trying to interpret a penal provision of law like the present one, the principle relating to strict construction of penal laws is required to be taken into account. Maxwell, in his treatise on The Interpretation of Statutes (12th edition by P. St. J. Langan) at page 239 has stated as below :
The principle applied in construing a penal Act is that if, in construing the relevant provisions, there appears any reasonable doubt or ambiguity, it will be resolved in favour of the person who would be liable to the penalty.
A reference was made therein to the remarks of Lord Esher M.R. in the case of Tuck & Sons v. Priester [1887] 19 Q.B.D. 629 as below :
If there is a reasonable interpretation which will avoid the penalty in any particular case we must adopt that construction. If there are two reasonable constructions we must give the more lenient one. That is the settled rule for the construction of penal sections.
The Supreme Court has already held in the case of CIT v. Vegetable Products Ltd. [ 1973] 88 ITR 192 that if two interpretations be available, the one more favourable to the taxpayer has got to be resorted to. If that be the position in respect of an ordinary provision of a fiscal law, the penal provision in a fiscal law, as is the present case, is required to be interpreted in a much more lenient way and in favour of the assessee if two views are available which have got equal force. In the present case, even the other view that failure on the part of the assessee to stick to the time schedule is also liable for imposition of penalty under Section 271B, does not have that much strength as the other view that such failure is not envisaged under the provisions of Section 271B, as we have seen earlier. Even if both the interpretations were of equal strength, the one sought for by the assessee and adverted to by us herein should be the correct interpretation of this particular section which not only forms a part of a fiscal law but is also penal in character. Taking into consideration all the abovementioned arguments, we finally come to the conclusion that since in the instant case, the assessee actually complied with the legal requirements under Section 44AB of getting its accounts audited and having a copy of the said audit report, although belatedly, and thereafter revised its returns of income on the basis of the said audit reports and since again the ITO, while completing the assessments took help of the said audit reports, the assessee cannot be considered to be liable to imposition of penalty under Section 271B simply for its failure to stick to the time-frame as referred to in Section 44AB. Hence, we reverse the orders of the authorities below and cancel the penalties for all the three years.
12. In the result, the appeals filed by the assessee are allowed.