HIGH COURT OF RAJASTHAN

Bajrang Oil Mills v. Income-tax Officer

Section 44AB of Income-tax Act, 1961 – Compulsory tax audit – Assessment year 1994-95 – Whether expressions ‘sales’, ‘turnover’ and ‘gross receipts’ used in section 44AB are not words of art used in relation to any individual transaction independently but have been used as ‘sales’, ‘turnover’ or ‘gross receipts’ – Held, yes – Whether expression ‘total’ qualifies all other three expressions, viz., ‘sales’, ‘turnover’ and ‘gross receipts’; total sales indicate aggregate price of sales of commodities carried out by Assessee as a trading business – Held, yes – Whether for purpose of attracting section 44AB, receipts of an Assessee by way of sale or trading business and receipts for doing job work can be clubbed for purpose of finding out whether limit of Rs. 40 lakhs prescribed for attracting provisions of section 44AB is made out – Held, yes

Section 271B, read with section 44AB, of the Income-tax Act, 1961 – Penalty – For failure to get accounts audited – Assessment year 1994-95 – Assessee filed its return declaring total receipts from sales and receipts for job work done by it – Assessing Officer opined that assessee was under an obligation to get its accounts audited under section 44AB and levied penalty under section 271B – Assessee’s case was that it was under bona fide belief that it was not required to get its account audited under section 44AB in as much as its sales and job work receipts on being considered separately did not exceed Rs. 40 lakhs – Whether, on facts, there was reasonable cause for assessee’s failure to comply with provision of section 44AB and, therefore, penalty levied was unjustified – Held, yes

Facts

The assessee filed its return for the assessment year 1994-95 declaring the total receipts from sales and receipts for job work done by it. Since the gross receipt of the assessee from the sales and the job work done by it exceeded Rs. 40 lakhs, the Assessing Officer opined that the assessee was under an obligation to get its accounts audited under section 44AB. The assessee contended that under section 44AB, three expressions, viz., ‘total sales’, ‘turnover’ and ‘gross receipts’ are used by the Legislature and each of them is independent criterion and one does not overlap the other. It further contended that since in instant case neither ‘turnover’, nor ‘total sales’ nor ‘gross-receipts’ excluding ‘turnover’, nor ‘total sales’ on being considered independently exceeded Rs. 40 lakhs, it was not liable to have its accounts audited for the assessment year 1994-95. However, the Assessing Officer opined otherwise by finding that the gross receipts include the receipts from all sources and; since the aggregate of the sales and the gross receipts from the job work taken together exceeded Rs. 40 lakhs the assessee was liable to compulsory audit. The Assessing Officer, issued show-cause notice to the assessee for levy of penalty under section 271B. In response to notice to show cause against levy of penalty under section 271B, the assessee pleaded that even if it be assumed that interpretation put by the Assessing Officer was correct, since the assessee was under bona fide belief, in view of the language that was deployed by the legislation, that it was not liable to subject itself to compulsory audit, the penalty ought not to be levied on it for the breach of technical provision since there was no failure on its part to make complete and correct disclosure. The Assessing Officer rejected the contentions of the assessee and imposed penalty under section 271B. The Commissioner (Appeals) as well as the Tribunal affirmed the order of the Assessing Officer.

On appeal :

Held

Scope of section 44ab

The maximum limit of Rs. 40 lakhs in section 44AB has been fixed in the case of every person who is carrying on business and whose total receipts from the business activity, which come under the head ‘Income from the profit and gains from the business, has to be viewed as one integrated whole and not independently. The assessment of a person is on the total income and not on the income derived from the different sources separately. The three expressions used by the legislation, viz., the ‘total sales’, ‘turnover’ or ‘gross receipts’ though not defined under the Act, in the ordinary sense, refer to the volume of the business to which it relates and which is/are carried on by the assessee and in making assessment of profits and gains from the business whether such volume is a part of the business concerns trading in commodities or otherwise the business activities where the assessee has to indulge in incurring cost before receiving the amount in relation to that business or he is carrying on other business activities in which the cost factor is excluded by the assessee and what he is receiving as charges for the work done by him, like job wo
rk, where the raw material is provided by the other manufacturer, the assessee is merely to relate his receipts to labour charges or procuring cost incurred by him along with part of his profit. It is in that sense that business which is carried on by the assessee has to be taken in totality. The ‘sales’, ‘turnover’ and ‘gross receipts’ are not words of art used in relation to any individual transaction independently but have been used as ‘sales’, ‘turnover’ or ‘gross receipts’. The expression ‘total’ qualifies all the other three expressions, viz., ‘sales’, ‘turnover’ and ‘gross receipts’. Total sales indicate the aggregate price of the sales of commodities carried out by the assessee as a trading business. [Para 23].

Obviously, it would not include such transfer of immovable or movable property by way of investment. Similarly, where the assessee is not merely selling the movable commodities, but relating to other trading activities, e.g., where assessee is a land developer and he is engaged in business of acquiring land, developing it and selling houses or purchasing or is indulged in leasing business or is indulged in stock market so on and so forth, the expression ‘turnover’ is made out to denote receipts from such activities. There may be third or residuary category which may not be termed properly a trading activity yet it is carrying on as business activity like job works for others, without himself being the manufacturer and selling such manufactured goods, or running a motor service garage, for the receipts of such business can aptly be termed as receipts of firm. However, integral relation of receipts by a person from business, does indicate that it refers to revenue receipts only and do not include capital receipts and certainly not the receipts which are not relatable to business and may fall under the expression income to be subjected to tax as income from sources other than profits or gains from business, profession or vocation. [Para 23]

Thus, on true interpretation of section 44AB(a), the assessee, in the instant case, was required to get his accounts audited as his gross receipts had exceeded Rs. 40 lakhs during the previous year relevant to the assessment year 1994-95. [Para 24]

Penalty under section 271B

The clear purpose of section 139(9) is that whenever from the return submitted by the assessee, it appears to the ITO or the Assessing Officer that accounts of the assessee are required to be audited under section 44AB and, therefore, the return ought to have been accompanied with the auditor’s report, before rejecting the return as invalid return, he is required to afford an opportunity as a matter of statutory obligation under section 139(9) to the assessee to submit the auditor’s report. On receiving such notice, an assessee can avail such opportunity either by submitting the auditor’s report if the accounts have already been audited and if the accounts have not been audited by then and he realises that the accounts are required to be audited, then he can in the given time get his accounts audited and submit the accounts along with the report of the auditor in terms of clauses (bb) and (d) of section 139(9) and on furnishing of such report with or without audited accounts as the case may be, the return becomes valid and will be required to be processed as such. [Para 42]

There may be yet another contingency where the assessee considers that he is not under an obligation to get his accounts audited under section 44AB. In such an event, he may raise this objection before the Assessing Officer in response to notice under section 139(9). Where such objection is raised, it will be for the Assessing Officer to decide such objection before taking any decision about validity of return. In case the Assessing Officer accepts the objection, that will be the end of matter. The Assessing Officer, in that case, will proceed with assessment on the basis of return already submitted before him. However, in case the objection raised by assessee is overruled, the Assessing Officer will be required then to call upon the assessee to comply with the provisions of section 44AB within reasonable time to enable a valid return to come before him which could be processed for regular assessment. The question of considering the issue of penalty cannot arise, until that stage has arisen. [Para 43]

The question of penalty for non-compliance cannot be inquired into without reading the provisions of sections 271B and 273B as both are integrally enacted. While section 271B provides for consequence of non-compliance of section 44AB, section 273B provides defence or way by which the assessee can seek absolution from liability to penalty that arises under section 271B. [Para 44]

Apparently, in terms of section 273B, the Assessing Officer will be required to consider whether not getting the accounts audited by 31st October of the relevant assessment year was due to any reasonable cause which the assessee may put forward as defence for the failure to comply with the aforesaid provisions. In either case, where the assessee raises an issue that his case does not fall within the purview of section 44AB, before penalty could
be levied, the Assessing Officer would be under an obligation to decide such objection raised by the assessee. If the objection is sustained, obviously, no occasion would arise either of filing of auditor’s report along with the return so as to complete the defective return on such receipt of the notice under section 139(9) or to suffer penalty under section 271B. In case where the Assessing Officer overrules the assessee’s objection and holds that the assesses is/was liable to get his accounts audited in terms of section 44AB, the question is always be germane to consider whether such objection raised by the assessee as to his obligation under section 44AB was frivolous or a plausible stand, before arriving at conclusion whether in such case penalty could be levied. [Para 46]

As a matter of law, it cannot be said that in all cases where ultimately the assessee’s objections as to his liability to get his accounts audited under section 44AB or for any matter non-compliance of any provision, are overruled, his defects or reasons for non-compliance cannot be considered to be not bona fide. The fact that ultimately on the analysis of the provisions, the successive authorities or the Court may come to the conclusion that the objections raised by the assessee about the requirement to comply with the provisions of the Act are not sustainable, does not make objection raised by the assessee to be not bona fide or groundless. The fact that the assessee raises certain questions about interpretation of the statute which needs interpretational exercise, prima facie supports the assessee in that the objection raised by him is bona fide and he seeks the decision on its merit. The fact that ultimately the Court comes to the conclusion against the assessee is no reflection in all cases that objections raised by him were frivolous and that answer to objection raised by the assessee was self-evident, as appeared to have been assumed by the Tribunal. [Para 48]

Therefore, the Tribunal was not justified in rejecting the assessee’s contention that, even if it was ultimately held that the assessee was under an obligation to get his accounts audited under section 44AB, he was not under bona fide belief about the true interpretation of the provisions which constituted reasonable cause for not complying with the provisions of section 44AB without considering the matter in its totality. In the manner in which the defence of the assessee had been rejected summarily by holding that since the Tribunal found no merit against the assessee, the answer was self-evident about the interpretation of section 44AB and the default could not be said to be bona fide. [Para 49]

When a matter is brought in appeal before the Court, such appeal lies only in respect of substantial question of law to be framed at the time of admission. When no substantial question of law arises for considering the appeal, it cannot be entertained. For that matter, under the earlier provisions also, the questions of law only could be referred to the Court for its opinion by way of reference. In that connection, the position was also clear from the decisions of the Supreme Court that any question, answer to which is self-evident, is not a question of law which is required to be referred to the High Court or the question which is self-evident or self-governing cannot be said to be a substantial question of law which may need consideration in an appeal under section 260A. [Para 50]

The fact that the Tribunal had to take up the interpretational exercise by referring to the provisions and analyzing the different phraseology used in section 44AB(a) before reaching its conclusion at least gave a clue that the interpretational exercise in respect of objection raised by the assessee was not a self-evident exercise but needed a rational and reasoned approach keeping in view the content, context and object of provision itself, in conjunction with other provisions of the Act having a relevant bearing of concerned provision. [Para 51]

The fact that the Court while considering the admission of the appeal had found that interpretation of section 44AB was a substantial question of law requiring consideration by the Court prima facie suggested that the interpretation of section 44AB was not self-evident and needed an examination of provisions of section 44AB and different phraseology used with the aid of interpretation tools. [Para 52]

If that be so, it could not be said that the assessee was not bona fide in not getting his accounts audited for the assessment year 1994-95 because he had genuine doubts about his liability to do so which he raised when he was called upon to answer the non-compliance. The question about the interpretation of section 44AB was required to be considered by the revenue authorities before finding the assessee to be in breach of such provision and which had, in fact, been considered by the revenue authorities albeit ultimate answer was found against the assessee. Moreover, there was no dispute that for the subsequent years and thereafter, when the assessee’s total turnover from its business of manufacture was more than the prescribed limit, he had been subjecting his accounts to audit and was complying with the provisions of section 44AB regularly. [Para 53]

Further, failure to comply with such procedural provisions, under a bona fide belief that the assessee is not required to act in a particular manner under the statute and which does not affect its rights and obligation otherwise arising under the statute, nor by raising of objection, he obtains any advantage to which he is not otherwise entitled to, or where on fulfilment of such requirement, the assessee becomes entitled to certain benefits of statute which requires strict compliance with requirement of law in the manner prescribed, breach remains a venial and technical breach for which the penalty is not leviable merely because it is lawful to do so. [Para 54]

The Supreme Court, in Hindustan Steel Ltd. v. State of Orissa [1972] 83 ITR 26, has laid down 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 the provisions of the Act or where the breach flows from a bona fide belief that the offender is not liable to act in the manner prescribed by the statute. The aforesaid ratio in Hindustan Steel Ltd.’s case (supra) fully governed the facts of the instant case and, therefore, the assessee was entitled to absolution from the liability to penalty under section 271B for non-compliance of section 44AB. Failure to comply with the provisions of section 44AB could be directly related to a bona fide belief of the assessee that he was not liable to get his accounts audited under section 44AB looking at the different nature of receipts by him from the different activities. [Para 55]

Raising a contest by taking a plausible stand as true construction of statute which may ultimately be not found correct in the given circumstances constitutes a reasonable cause due to which the assessee can be said to have failed to comply with requirement of section 44AB by not getting his accounts audited for the relevant assessment year. If that is not so, it will be deterrent to a taxpayer even to raise any plausible defence to contest his liabilities and obligations within the framework of statute itself. It would be altruist statement that where the assessee succeeds in stand taken by him on construction of statute, no case would survive for levy of penalty. It is only where his contention fails on merit, and he is found in breach of a given provision ultimately that the question of consequence befalling for such non-compliance arises. [Para 56]

For the reason that the accounts are not audited where section 44AB is attracted, it does not affect the proper computation of income in terms of provisions of the Act nor does it affect any claim to any deduction by the assessee under any provisions of the Act. In such event, the breach remains a technical breach of the procedural requirement. The conduct of the assessee cannot be said to be lacking in bona fide or of gross negligence when he raised issue about the interpretation of a provision, which had used multiple expressions, construction of which could not be said to be self-evident but needed interpretation exercise. Because ultimately on construction of statute, the stand taken by the assessee was found to be wrong, it did not become a case of ‘self-evident’ interpretation, impinging on conduct of the assessee. [para 57]

Therefore, levy of penalty in the aforesaid circumstances under section 271B for non-compliance of section 44AB regarding the assessment year 1994-95 could not be sustained. [Para 58]

As a result, the appeal was to be allowed. The orders of the Tribunal, the Commissioner (Appeals) and the Assessing Officer, levying penalty against the assessee under section 271B were to be set aside.