Income Tax Appellate Tribunal - Delhi
Snam Progetti Spa. vs Joint Commissioner Of Income Tax on 1 April, 2005
Equivalent citations: (2005)95TTJ(DELHI)424
ORDER
A.D. Jain, J.M.
1. The first ground taken by the assessee in this appeal is that the learned CIT(A) has erred in upholding the levy of penalty under Section 271B of the IT Act.
2. Section 271B of the Act provides that if a 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 as envisaged in the said Section 271B.
3. Facts first. The assessee is a company incorporated under the laws of Italy, having its office in Milan, Italy. During the year under consideration, the assessee had earned income in the form of fees for technical services and royalty under various contracts, as consideration for rendering service's, providing technology, know-how, licence and designs, etc. This is not denied by the Department. The assessee's income for the year was assessed under Section 44D r/w Section 115A of the IT Act. The AO levied a penalty under Section 271B of the Act of Rs. 1 lakh, on the ground that only persons deriving income of the nature referred to under Section 44B or Section 44BB or Section 44BBA or Section 44BBB are exempted from the provisions of Section 44AB and that all other persons are required to get their accounts audited under Section 44AB and attach audit report along with the income-tax statement. Since the assessee had failed to do so, as per the AO, it was saddled with the impugned penalty under Section 271B. The learned CIT(A) upheld the penalty order.
4. The contention of Shri Y.K. Kapoor, the learned counsel for the assessee, before us is that Section 44D of the IT Act begins with a non obstante clause, i.e., "notwithstanding anything to the contrary contained in Sections 28 to 44C, ............"
Therefore, according to the learned counsel, the provisions of Sections 28 to 44C stand overridden. As to the import and purport of a non obstante clause in a statutory provision, Shri Kapoor has sought to rely on the following judicial pronouncements:
1. Woodward Governors India (P) Ltd. v. CIT (2002) 253 ITR 745 (Del).
2. ITO v. Nanak Singh Guliani (2002) 257 ITR 677 (MP).
3. CIT v. Manoj Lalwani (2003) 260 ITR 590 (Raj),
4. Asstt. DIT (Inv.) v. Kum. A.B. Shanthi (2002) 255 ITR 258 (SC).
5. CIT v. Capital Electronics (2003) 261 ITR 4 (Cal).
6. Orient Paper & Industries Ltd. v. State of Orissa AIR 1991 SC 672.
7. Prabhudev Mallikarjunaiah v. Ramachandra Veerappa & Anr. AIR 1996 SC 1962.
8. Smt. P.E.K. Kalliani Amma v. K. Devi AIR 1996 SC 1963.
5. It has been contended by Shri Kapoor that the non obstante clause with which Section 44D commences, obscures or eclipses the provisions of Sections 28 to 44C of the Act so far as regards and in relation to the said Section 44D. These sections include Section 44AB. The exclusionary effect brought about thereby exempts the assessee from the requirement of its accounts being audited. That being so, the levy of penalty is bad in law and accordingly, it be deleted.
6. Shri O.P. Meena, the learned Departmental Representative, on the other hand, supporting the orders of the taxing authorities, has submitted that the penalty has rightly been levied. The assessee not having complied with the statutory mandate of getting its accounts audited, has attracted the levy of penalty under Section 271B.
7. We have heard the parties and have perused the material on record. The nature of a non obstante clause contained in a statutory provision has been aptly dealt with in the aforementioned judicial decisions relied on by the learned counsel for the assessee. A non obstante clause present in a legal provision acts as a stop sign or a red light. In effect, so far as regards the provision in which it is contained, it obliterates, not just eclipses, the provisions referred to in itself.
8. If a non obstante clause reads "notwithstanding anything contained in section..........", it effectively does away with the section contained therein, for the purposes of the provision in which it itself stands incorporated. Where, however, such a clause is worded as "notwithstanding anything to the contrary contained in sections......" (emphasis, italicized in print, added to sharp-focus the controversy at hand), as is the case herein, the position is entirely different. Such a clause juxtaposes the contents of the provisions intended to be rendered otiose, with those of the one in which the clause itself exists and which are sought by that clause to override the former. However, as the words 'to the contrary' specify, the section meant to take precedence would do so only and only if the sections needed to lose effect embodied within themselves something--anything that is opposed or contra-distinctive to or which militates against the nudging section that imbibes the non obstante clause. Is it so here ?
9. Before the insertion of Section 44D in the statute book, income by way of royalty received under agreements made after 31st March, 1961, and approved by the Central Government was taxed in the hands of foreign companies @ 52.5 per cent. Income by way of technical services received under agreements made after 29th Feb., 1964, and approved by the Central Government, was also taxed at the same rate. In both cases, the taxable income was determined on a net basis, i.e., after allowing deduction in respect of cost and expenses incurred for earning the income.
10. Section 44D provides for a special procedure for computing income by way of royalty and for technical services received by a foreign company. The non obstante clause which commences Section 44D, pertains to this procedure. Sections 28 to 44C are the provisions for computation of profits and gains of business or profession.
11. The non obstante clause in question provides that anything contrary to the provisions of Section 44D, if so contained in the said Sections 28 to 44C, notwithstanding the computation of income by way of royalties and for technical services in the case of foreign companies, is to be done in accordance with the said section, i.e., Section 44D.
12. Section 44AB provides for audit of accounts of certain persons carrying on business or profession. The words in the section are explicit. Every person carrying on a business, subject to the provisions of the said section, shall get his accounts audited and furnished. Such requirement cannot be said to be "contrary" to the provisions of Section 44D, which, as noted hereinabove, is a special provision for computing income by way of royalties and technical service fees in the case of foreign companies.
13. By virtue of Section 44AB, every person carrying on business shall get his accounts audited in accordance therewith. The section requires every "person" to get the accounts audited and furnished. "Person", according to Section 2(31)(iii) of the Act, includes a company. "Company" as per Section 2(17) of the Act, does include foreign companies, to which class the assessee belongs. The requirement contained in the section, so far as regards a company, has been statutorily so mandated in order that the interests of the general body of shareholders of the company are protected and proper facts and figures are obtained so as to be relied upon to present a true and fair view of the financial health of the company.
14. The scope and ambit of audit and examination of accounts for the purpose of determining taxable income, however, is even wider. An auditor has to carry out the examination of the evidence supporting a particular item of expenditure or income. And his job does not end here. He has further to ascertain as to whether the expense is in fact allowable and if the income is actually taxable. Allowability of an item of expenditure hinges on its being reasonable or in consonance with the fair market value of similar goods or services. Such a matter depends on the subjective judgment of the AO. So too, regarding cash credits and other items, inference from facts is likely to differ from person to person. Then, there could well be cases where some bank accounts in the name of a taxpayer or his Benamidar are not disclosed to the auditor, or where some receipts and payments are omitted to be entered in the books.
15. The above considered shortcomings constrained the Wanchoo Committee, chaired by the Hon'ble Mr. Justice K.N. Wanchoo, the retired Chief Justice of India, to make certain recommendations. These recommendations were to the effect that malpractices like the presentation of false and misleading accounts could be checked to a great extent if it were made compulsory for taxpayers to present audited accounts in all cases where income or property exceeded certain limits. Thus, while disfavouring imposing a legal obligation on all and sundry to maintain accounts, the committee professed compulsory audit re-large income-fetching business. As such, the committee recommended enactment of requirement of compulsory audit of accounts to be made applicable to persons engaged in businesses or professions bringing in income or turnover/receipts in excess of certain specified limits. It was pursuant to this recommendation that Section 44AB was introduced on the statute by the Finance Act, 1984, w.e.f. 1st April, 1985.
16. Additionally, the explanatory notes on the provisions of the Finance Act, 1984, as clarified by the CBDT Circular No. 387, dt. 6th July, 1984, state, inter alia, that a proper tax audit for taxpayers 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; that such audit would also help in checking fraudulent practices; that it can also facilitate the administration of tax laws by a proper presentation of the accounts before the tax authorities and considerable saving in the time of AOs in carrying out routine verification like checking the correctness of totals and verifying if purchases and sales are properly vouched or not; and that the time of the AO thus saved could be utilised in attending to investigation of more important aspects of a case.
17. A perusal of the provision of Section 44AB shows that it does not contain anything contrary to the provisions of Section 44D. Section 44D gives special provisions for computing income by way of royalties, etc. in the case of a foreign company. Section 44AB envisages audit of accounts of certain persons carrying on business or profession, Section 44D(a) talks of "... deductions admissible under the said sections...". Surely, here, Section 44AB is not being considered, since that section does not admit of any deduction. Rather, it makes it obligatory for any person carrying on business to get his accounts audited before the specified date by an accountant, if the conditions contained in that section are obtaining.
So, when Section 44D(a) considers "deductions admissible under the said sections", it is not contemplating Section 44AB. Similar is the position with regard to Section 44D(b), when it states that ".... no deduction... shall be allowed under any of the said sections...". Therefore, obviously, Section 44AB does not stand overridden by the non obstante clause in Section 44D. Hence, the objection of the assessee that it is exempted, by virtue of that non obstante clause, from carrying out the mandate of Section 44AB, is not sustainable. It is rejected.
18. Coming to ground No. .2, as per this ground, the learned CIT(A) has failed to appreciate that the provisions of Section 44AB do not apply to the assessee because the assessee's income is chargeable to tax on a presumptive basis at the rate of 20 per cent for the relevant assessment year, under Section 44D r/w Section 115A of the Act. By way of ground No. 3, the assessee alleges that the learned CIT(A) failed to appreciate the intention of the legislature behind the insertion of Section 44AB of the IT Act. Ground No. 4 states that the order of the learned CIT(A) is erroneous and needs to be quashed.
19. The contention of the assessee appears to be correct. Under the gross basis of taxation, as is the case herein, where a foreign company files a return of income without claiming any expenditure or allowances as deductible expenses, conducting a tax audit would be redundant. In the present case also, the assessee is taxable at a flat rate of 20 per cent under Section 44D r/w Section 115A. The assessee has not claimed any deductible expenses comprising expenditure or allowances. Therefore, it is justified in asserting that conducting an audit under Section 44AB would not at all be required. Moreover, in such circumstances, penalising the assessee for not getting its accounts audited, is entirely uncalled for. As such, when in the said facts, the provisions of Section 44AB do not apply to the assessee, the penalty imposed cannot be sustained. It is hereby deleted.
20. As a result, the appeal is allowed.