Compulsory tax audit

IN THE ITAT PUNE BENCH (SMC) S.J. Agarwal & Co. v. Income-tax Officer, Ward 5(4), Pune C.L. SETHI, JUDICIAL MEMBER IT APPEAL NOs. 1429 AND 1430 (PuNe) OF 2004 [ASSESSMENT YEARs 2001-02 AND 2002-03] FEBRUARY 15, 2007 Section 44ab, read with section 271B, of the Income-tax Act, 1961 - Compulsory tax audit - Assessment years 2001-02 and 2002-03 - Whether for purpose of section 44AB, it is not necessary that any books of account or any accounts maintained by assessee should at first be such books of account as are required under section 44AA; mere fact that an assessee has not kept or maintained such books of account and other documents as are required under section 44AA that would not by itself be sufficient to say, that any other accounts whatsoever maintained by assessee shall not be required to be audited under section 44AB - Held, yes Facts For the assessment years 2001-02 and 2002-03, the assessee-company filed its returns of income showing total turnover. As the turnover of the assessee exceeded Rs. 40 lakhs, the Assessing Officer required it to get its accounts audited by an accountant before the specified date and to furnish the audit report by that date as required under section 44AB. As the assessee failed to furnish the audit report by the specified date, the Assessing Officer issued a show-cause notice as to why penalty proceedings under section 271B be not initiated against it. In response, the assessee submitted that it did not maintain regular books of account and, as such, the question of getting the same audited did not arise, whereas, the Assessing Officer had issued the impugned notice by assuming that it had been maintaining regular books of account and had failed to furnish the tax audit report as required under section 44AB within the specified date. It was, therefore, submitted that it had committed an offence under section 44AA and was, thus, liable to be penalized under section 271A and not under section 271B. The Assessing Officer held that in the light of statement of total income, trading account, profit and loss account and balance-sheet as on 31-3-2001 enclosed by the assessee with its return of income, it was clearly proved that it had maintained the books of account which could be audited but without any reasonable cause it did not get those accounts audited as required under section 44AB. Therefore, the Assessing Officer levied penalty under section 271B. On appeal, the Commissioner (Appeals) upheld the order of the Assessing Officer. On second appeal : Held Section 44AB requires every person carrying on business or profession with gross receipts or turnover or sales exceeding prescribed limits to get his ‘accounts’ audited before the specified date and furnish by that date a report of such audit in the prescribed form duly signed and verified by the concerned accountant and setting forth such particulars as may be prescribed. Under section 44AB, the requirement is to get the ‘accounts’ audited and to furnish the report of such audit by the specified date. In section 44AB reference is made to the word ‘accounts’ and not to the words ‘books of account’ or ‘regular books of account’. The word ‘accounts’ denotes a statement of the debits and credits or reckoning of business dealings. There are three broad categories of accounts, such as, nominal accounts, real accounts and personal accounts where concerned debits and credits of a transaction are recorded. The nominal accounts deal with revenue and expenditure; real accounts deal with assets and capital; and personal accounts deal with list of creditors and debtors. Therefore, whatever records or documents are made where the entries (i) deal with revenue and expenditure; (ii) give details of assets and liabilities; and (iii) record the details of creditors and debtors, in whatever mode or form or manner, that would come within the term ‘accounts’. It is altogether a different matter that, though any person maintaining only accounts may not maintain the same so accurately or precisely and/or in such manner or system or a procedure and/or in such books or records as may be prescribed under any guidelines or rules or notifications issued from time-to-time by any lawful authority, but still the accounts whatsoever maintained by him would nonetheless be considered to be the ‘accounts’ of his business or profession for the purpose of section 44AB. Therefore, any records or books or documents whatsoever and in whatever manner or system are maintained or kept by any assessee in respect of revenue and expenditure, assets and capital and/or creditors and debtors of his business or profession are required to be audited by an accountant by the specified date and a report of such audit has to be furnished by the specified date to the ITO if the assessee’s turnover exceeds the prescribed limit as envisaged under section 44AB. [Para 11] The words used in section 142(2A) are pari materia with the words used in section 44AB, where also it is provided that every person carrying on business or profession shall, if his total sales turnover or gross receipts exceed the specified limit in any previous year, get his accounts of such previous year audited by an accountant before the specified date and furnish by that date the report of such audit in the prescribed form duly signed and verified by said accountant and setting forth such particulars as may be prescribed. In both the sections, the expression used by the Legislature is ‘accounts’ which are required to be audited, and not the expression ‘books of account’ or ‘regular books of account’ or ‘such books of account as are required to be kept and maintained under section 44AA’. [Para 12] Section 44AA provides for keeping and maintaining such books of account and other documents as may enable the Assessing Officer to compute the total income in accordance with the provisions of the Act. The accounts and other documents required to be kept and maintained under section 44AA may be prescribed by the Board by making the rules. It is, thus, clear that section 44AA is concerned with the keeping and maintaining of books of account and other documents as would enable the Assessing Officer to compute the total income in accordance with the provisions of the Act and as may be prescribed by the Board and not with regard to any accounts maintained by the assessee. Merely because the assessee has not kept or maintained such books of account and other documents as are required under section 44AA, that would not by itself be sufficient to say that any other accounts whatsoever maintained by the assessee, shall not be required to be audited under section 44AB. [Para 14] In the audit report in Form No. 3CB, the auditor is competent enough to give his qualification report whether, in his opinion, the proper books of account have been kept by the assessee so far as it appears from examination of his books. In case where no proper books or regular books of account are maintained by the assessee but only some accounts or books of account are maintained, the auditors would be in a position to give a qualifying report to be given under section 44AB. In Form No. 3CD, a column No. 9 is prescribed under which the auditor is required to state whether the books of account are prescribed under section 44AA and if answer is yes, list of books prescribed is to be given. In other words if the books of account maintained by the assessee are not prescribed under section 44AB, the auditor would say so in his report. In sub-clauses (a), (b) and (c) of clause (9) of Form No. 3CD, there is a requirement of giving list of books of account maintained, implying thereby that whatever books are maintained by the assessee that are to be stated in columns (a), (b) and (c) of column 9. Thus, for the purpose of section 44AB, it is not necessary that any books of account or any accounts maintained by the assessee should at first be such books of account as are required under section 44AA. [Para 15] It is, thus, clear that the expression ‘accounts’ used in section 142(2A) or under section 44AB is not merely books of account of the assessee, but it could include books of account, balance-sheets and all other records maintained by the assessee, irrespective of the fact whether the accounts maintained by the assessee may or may not be in such form or manner or system as is prescribed under section 44A. Therefore, the assessee’s contention that as it was not maintaining any regular books of account, it was not supposed to get its accounts audited under section 44AB, was devoid of any merit. The interpretation given to the word ‘accounts’ used in section 44AB, by the assessee that it would include only the regular books of account required to be maintained under section 44AA was prima facie an unsuccessful and non-bona fide attempt to create an unwarranted or unnecessary controversy to the meaning of ‘accounts’ as used in the section 44AB, so as to get himself rid of the obligation to get the accounts audited as contemplated under section 44AB. Giving such a meaning to the expression ‘accounts’ as given by the assessee would completely defeat the very purpose and object of the section 44AB, which has been inserted in the statute to ensure that the books of account and other records are properly maintained; that they faithfully reflect the income of the taxpayer and that claims for deduction are correctly made by him. Such an 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 the Assessing Officers in carrying out routine verifications, 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 utilized for attending to more important investigational aspects of a case. [Para 16] In the instant case, the assessee’s contention to the effect that it did not maintain any accounts was to be examined in the light of the facts and materials available on record. The Assessing Officer in the penalty order had categorically stated that the assessee had filed a return of income along with the enclosures, viz., statement of total income, trading account, profit and loss account and the balance-sheet as on 31-3-2001. The Assessing Officer had also stated that on going through these annexures, it was seen that the assessee had minutely included all the items which were normally required to be included in the trading account, profit and loss account and the balance-sheet. It was also observed by the Assessing Officer that the figures were given to the last decimal. The Assessing Officer, therefore, concluded that the assessee’s stand taken in the course of penalty proceedings that it did not maintain any books of account, was not correct. The Assessing Officer also concluded that the assessee did maintain some books of account which were required to be audited under section 44AB. The Commissioner (Appeals) in his order had also stated that the trading account, profit and loss account and the balance-sheet submitted by the assessee contained all the details of receipts and expenses squared up to a single rupee, implying thereby that the assessee had maintained some books of account to curl out the figures of expenses on materials, labour, transport, diesel, repairs, office, travelling, conveyance, etc., besides the expenses like bank interest, sales tax, depreciation. The Commissioner (Appeals) had also observed that such precise drawing of trading account, profit and loss account would not have been possible unless the assessee had maintained some records for quantifying the various expenses as well as the receipts like commission, interest and hire purchase. In the light of these specific materials available on record, the Commissioner (Appeals) held that the assessee was indeed maintaining the records and books of account on the basis of which the trading account, profit and loss account and the balance-sheets were drawn up by the assessee. These specific findings and observations of the Assessing Officer as well as of the Commissioner (Appeals) had not been disproved by the assessee to be false and misleading. The assessee had not given any clarification in this regard. The fact that the assessee had submitted the trading account, profit and loss account with the minute details of all the expenses as observed by the Assessing Officer as well as by the Commissioner (Appeals) in their respective orders, had not been disproved by the assessee except by making a general submission that it did not maintain any regular books of account. It was altogether a different matter that the manner, form and system of maintaining the accounts by the assessee might not have been accurate and complete or might not have been as per requirement of section 44AA but that by itself would not lead to a logical conclusion that the assessee was not maintaining any account for the receipts as well as for the expenses, on the basis of which it had itself drawn the trading account, profit and loss account and balance-sheet with minute details. Therefore, it could not be said that the assessee did not maintain any accounts or records in respect of its business. Its further contention, that the Assessing Officer had drawn a conclusion that it did maintain the books of account was purely based on presumption, was not acceptable inasmuch as the Assessing Officer had drawn a conclusion not on mere presumption that the assessee might have maintained books of account but he had drawn the conclusion on the basis of documents or annexures filed along with the return of income submitted by the assessee. Therefore, the assessee’s contention that he did not maintain any books of account or any accounts was without any merit being not supported by any adequate or reliable evidence. The assessee had taken this plea only with a view to avoid the consequences of the provisions of section 271B. The assessee’s such stand taken after receiving a show-cause notice of penalty from the Assessing Officer, was not at all found to be bona fide and genuine one but as an afterthought. The assessee had not come with the clean hands. It had made an attempt to hide the accounts whatsoever maintained by it from the department. Therefore, the conclusion that there was a default on the part of the assessee under section 44AB without any sufficient and reasonable cause, was without any doubt in it. [Para 17] As regards the levy of penalty, section 273B provides that notwithstanding anything contained in the provisions of section 271B, no penalty shall be imposable on the person or the assessee, as the case might be, for any failure referred to in the concerned provisions if he proves that there was a reasonable cause for the said failure. It was, thus, to be seen as to whether the assessee had been able to prove that there was a reasonable cause for it for not getting its accounts audited under section 44AB and then to furnish the report by the specified date. The assessee’s only reason given for not getting the accounts audited was that since he did not maintain any regular books or account or books of account, the question of getting them audited under section 44AB simply did or could not arise. No other reason or reasons had been given by the assessee for not complying with the provisions of section 44AB. The assessee’s stand was not found to be at all bona fide and honest one. It had taken this stand with a motive to avoid the penal consequences of section 271B. It was, thus, clear that the assessee had not been able to give any sufficient and reasonable cause for not getting the accounts, whatsoever maintained by it, audited under section 44AB. [Para 19] Therefore, the order of the Commissioner (Appeals) in confirming the penalty imposed by the Assessing Officer under section 271B for both the assessment years under consideration was to be upheld. [Para 20] In the result, the appeal was to be dismissed. [Para 21] Case review Central Warehousing Corpn. v. Secretary, Department of Reve-nue [2005] 277 ITR 452 (Delhi); Rajesh Kumar, Proprietor, Surya Trading v. Dy. CIT [2005] 275 ITR 641/144 Taxman 865 (Delhi) followed (para 13); Surajmal Parsuram Todi v. CIT [1996] 222 ITR 691 (Gau.); Ram Prakash C. Puri v. Asstt. CIT [2001] 77 ITD 210 (Pune) (SMC); Chadha Sudhir Kumar v. ITO [1996] 56 ITD 470 (Delhi) distinguished on facts. (para 18) Cases referred to Surajmal Parsuram Todi v. CIT [1996] 222 ITR 691 (Gau.) (para 3), Central Warehousing Corpn. v. Secretary, Department of Revenue [2005] 277 ITR 452 (Delhi) (para 13), Rajesh Kumar, Proprietor, Surya Trading v. Dy. CIT [2005] 275 ITR 641/144 Taxman 865 (Delhi) (para 13), Ram Prakash C. Puri v. Asstt. CIT [2001] 77 ITD 210 (Pune) (SMC) (para 18) and Chadha Sudhir Kumar v. ITO [1996] 56 ITD 470 (Delhi) (para 18). Abhay A. Avchat for the Appellant. Vilas Shinde for the Respondent.