[2013] 36 taxmann.com 412 (Article)
SECTION 44AA(2) IS BEING MISINTERPRETED
GAURAV PAHUJA
CA
Introduction
1. In this article, the requirement of maintaining books of accounts under section 44AA of the Income-tax Act, 1961 is discussed in-depth, especially with regard to a civil contractor in respect of which no books of account are prescribed and, hence, the questions of levy of penalty under section 271A for non-maintenance of books of account and the penalty under section 271B of the Act for not getting the books of account audited do not arise. Further, a few significant judgments have been referred to, including the critical analysis of the recent judgment delivered by the Hon'ble ITAT Cochin Bench in the case of K.V. Ramachandran v. Dy. CIT [2013] 32 taxmann.com 200.
Facts of the case
2. K.V. Ramachandran's case (supra).The assessee, a civil contractor, engaged in government contracts, did not maintain any books of account due to the fact that no books of account had been prescribed for a civil contractor. In view of this, it was submitted that the assessee was not guilty of non-compliance, as far as the provisions of the Income-tax Act were concerned. Although CIT(A) had already deleted the penalty under section 271A for non-maintenance of books of account after considering the judgment pronounced in the case of Asstt. CIT v.Aggarwal Construction Co. [2007] 106 ITD 129 (Chd.)(TM), yet the penalty under section 271B for not getting the books of account audited was affirmed by him. Thus, in the appeal before the ITAT it was argued that once the penalty for non-maintenance of books of account was held to be invalid in the absence of any prescribed books of account for a civil contractor, the penalty levied for not getting the books of account audited should also have been quashed. It was submitted that the question of audit arises only in a case where the books of account are maintained. The reliance was placed on the judgment pronounced by the Karnataka High Court in the case of CIT v. Babu Reddy[2010] 38 DTR 147 and on the decision of the Chandigarh Bench of ITAT in the case of Aggarwal Construction Co. (supra) and on the judgment of the Pune Bench in Ramchandra D Keluskar v. Dy. CIT [ITA No. 668/PN/10, dated 17-1-2011].
The DR, on the other hand, reiterated the requirement of section 44AB of the Act for obtaining the audit report and, thus, stated that the plea of the assessee, that no books of account were maintained, was not acceptable.
Critical analysis of the case
3. The significant question of law that arose in the aforementioned case was with regard to the justification for imposition of penalty under section 271B of the Act for not getting the books of account audited in a case where no books of account were maintained by the assessee. Although, the question was directly related with getting the books of account audited under section 44AB, at the same time it was indirectly but very closely related to the requirement of maintenance of books of account.
One cannot get the books of account audited, until and unless such books are maintained. So, the question of levying penalty for not getting the books audited must not be considered in isolation, but with more stress upon the requirement of maintaining the books of account as prescribed by section 44AA of the Act. The said section provides for the assessees who are required to maintain the books of account based upon the nature and size of the business and profession carried on by them and in few cases, the books of account are also prescribed. For the sake of ready reference, the relevant extract of section 44AA is reproduced below:
"44AA. (1) Every person carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or any other profession as is notified by the Board in the Official Gazette shall keep and maintain such books of account and other documents as may enable the [Assessing] Officer to compute his total income in accordance with the provisions of this Act.
(2) Every person carrying on business or profession [not being a profession referred to in sub-section (1)] shall,—
| (i) | if his income from business or profession exceeds [one lakh twenty] thousand rupees or his total sales, turnover or gross receipts, as the case may be, in business or profession exceed or exceeds [ten lakh] rupees in any one of the three years immediately preceding the previous year; or |
………
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keep and maintain such books of account and other documents as may enable the [Assessing] Officer to compute his total income in accordance with the provisions of this Act.
(3) The Board may, having regard to the nature of the business or profession carried on by any class of persons, prescribe, by rules, the books of account and other documents (including inventories, wherever necessary) to be kept and maintained under sub-section (1) or sub-section (2), the particulars to be contained therein and the form and the manner in which and the place at which they shall be kept and maintained."
Sub-section (1) of section 44AA provides that books of account are to be maintained by assessees carrying on a specified profession while sub-section (2) of section 44AA is meant for other assessees, i.e., those who are not covered by sub-section (1), meaning thereby that all assessee(s) carrying on business or professions are required to maintain the books of account, depending on the sub-section applicable to their respective business or profession. However, in those cases where sub-section (1) is applicable, the books of account that are required to be maintained are prescribed under rule 6F of the Income-tax Rules, whereas assessees covered by sub-section (2) are required to keep and maintain such books of account and other documents as may enable the Assessing Officer to compute his total income in accordance with the provisions of the Act, in the absence of any prescribed books of account (unlike for assessees covered by sub-section (1)), as is clearly evident from a plain reading of the section. Further, it is apparent that the business of a civil contractor is not within the ambit of sub-section (1), thus, no books of account are prescribed under rule 6F to be maintained by a civil contractor. Obviously, in such a situation one has to go to sub-section (2) which covers assessees who are not specifically covered by sub-section (1). Moreover, sub-section (2), subject to the monetary limits provided therein, requires an assessee to keep and maintain such books of account and other documents as may enable the Assessing Officer to compute his total income in accordance with the provisions of the Act. Hence, it is nowhere in dispute that the Legislature expects even a civil contractor to maintain books of account by virtue of section 44AA(2).
In view of the facts of the instant case and the above mentioned intention of the Legislature, it is not required to go in-depth of rule 6F, being non-applicable here, but what gains much more importance is section 44AA(2) which covers the remaining assessees, including a civil contractor. It has already been stated that the Legislature aimed to make all assessees to maintain at least some books of account to enable the Assessing Officer to compute his income. Sub-section (2) was inserted to achieve the same purpose. Although such minimum books of account are not prescribed exactly anywhere, yet section 44AA(2) has made it amply clear that whatever books of account are maintained by the assessee in the absence of any prescribed books of account, it must enable the Assessing Officer to compute his income. Accordingly, where it is stated unconditionally that the assessee did not maintain any books of account, as in the instant case, it seems to be in clear contravention of section 44AA(2). Had the Legislature intended to provide or prescribe books of account for each and every assessee, as is done in the case of specified professions mentioned in sub-section (1) of the said section, it would not have provided sub-section (2) to cover the remaining assessee's who are not covered under sub-section (1). Furthermore, where the Legislature intended to provide the relaxation from maintaining the books of account, such relaxation was granted by way of fixing the monetary limit as provided under section 44AA(2)(i). Hence, where an assessee's income or gross receipts from business or profession exceed such limit, he has to maintain minimum books of account to enable the Assessing Officer to compute his income. Even the Legislature provided for consideration of the three years immediately preceding the previous year. Needless to mention here that the Legislature was so cautious while framing the rules with regard to the maintenance of books of account that it firstly covered few professions expressly and prescribed the books of account to be maintained by such professionals, then covered the remaining businesses and professions to maintain such books of account so as to enable the A.O. to compute their income and even in doing so it provided relief to small businessmen and professionals by way of fixing cap thereon. So, the Legislature has taken every possible step to make its intention clear with regard to maintaining books of account in all respects, e.g., by whom and what books of account, where it is prescribed specifically and minimum books of account where it is not so prescribed with the intended purpose to compute income.
While such minimum books of account are not defined or prescribed by the CBDT, it would be preferable only to prescribe the so-called minimum books of account to avoid any confusion and provide absolute clarity as to what books of account are to be maintained by those assessees who are not covered under section 44AA(1), but it is not necessarily required to enable the public at large to comply with the Act in this respect. If at all CBDT has not prescribed the minimum books of account and has left it at the option of desired category of assessees, it must be aimed at providing the flexibility to the assessees simultaneously entitling the A.O. to cause the production of reasonable records and information so as to enable him to compute the income of the assessee.
4. Relevant Case Laws and comments
4.1 Babu Reddy (supra) -In this case it was observed that it was nowhere in section 44AA that the books of account had to be maintained as per the prescribed format. Also, books of account to be maintained had to be prescribed, but such books of account had not been prescribed under the Income-tax Rules, as far as the business of a civil contractor was concerned. In addition, it was stated that the Tribunal had allowed the appeal of the assessee on the ground that when no books of account had been prescribed, the books of account that were maintained by the assessee, could not be found fault with. Moreover, it was concluded that once the A.O. had accepted the return of income filed by the assessee and had processed the same, subsequent initiation of penalty for non-maintenance of books of account was not justified.
4.1-1 Comments - The decision of the Tribunal in this case seems to be absolutely in line with the law to the extent that maintenance of books of account is concerned, as an assessee can maintain such minimum books of account only so as to compute his income as no books of account to be maintained are prescribed. Therefore, the said case stands on a different footing and, thus, should not have been relied upon by the assessees counsel in the present case. Even if it was so relied upon, it must not have been accepted by the Tribunal to the extent the question of maintenance of books of account was concerned due to the very difference in the facts of the case whereas in the case of Babu Reddy (supra), it was stated that the assessee had maintained minimum books of account so as to compute his income and his contention was accepted in the absence of any prescribed books of account while in the present case of K.V. Ramachandran (supra), it was clearly declared by the assessee's counsel that the assessee did not maintain any books of account. The contention behind not maintaining any books of account was explained as no books of account were prescribed by the CBDT in respect of civil contractor. Moreover, the case ofBabu Reddy (supra)was also related to a civil contractor, but as minimum books of account were maintained in that case, the Hon'ble Karnataka High Court dismissed the appeal of the revenue against the assessee and upheld the order of the Tribunal which was in accordance with the principles of natural justice. Hence, in the present case, in the absence of any books of account the relief must not have been granted to the assessee relying upon the judgment pronounced in the case of Babu Reddy (supra).
4.2 Aggarwal Construction Co. (supra) - In this case which was decided by a Third Member, in the absence of consensus between the opinion of the Accountant and Judicial Member, it was mentioned that finding recorded by the A.O., that no books of account were maintained by the assessee, was found to be baseless, as it was not recorded in the assessment order that the A.O. was unable to compute the income of the assessee from the ledger maintained by the assessee, especially when it was admitted that income and expenditure were available in that ledger. It was concluded that section 44AA(2) does not require that the books of account maintained should be true and correct. Whenever a false claim is made by the assessee, the same is liable to be rejected, but even in that case it cannot be said that no books of account were maintained or A.O. was unable to compute the income of the assessee. In short, provisions of section 44AA cannot be said to have been violated, as in order to cover the case of false accounts separate provisions are there under section 271. Hence, provisions of one section, for example, section 271A cannot be clubbed or substituted by the provisions of any other section, say section 271 or vice versa.
4.2-1 Comments - In view of the fact that the assessee in the above case had maintained a ledger mentioning the income and expenditure, so as to enable the A.O. to compute his income, the finding of the A.O., that no books of account were maintained, was set aside by the Chandigarh Bench of ITAT. Thus, this case like the case of Babu Reddy (supra)should not have been relied upon by assessee or ought to have been rejected, as far as the question of maintenance of books of account was there due to the fact that here also at least minimum books of account were maintained to facilitate in computing the income.
4.3 Ramchandra D Keluskar (supra) - In this case also like in the present case, the issue of not getting the books of account audited came up before the Tribunal and that too in the case of an assessee who happened to be a civil contractor engaged in Government and Municipal contracts. Another similarity in the two cases was that no books of account were maintained by any of these two assessees and the return was filed on estimation basis only.
4.3-1 Comments - One difference in the two cases was that whereas in the case of Ramchandra D. Keluskar (supra),the issue of non-maintenance of books of account was not raised at all by the A.O., while in the present case i.e.,K.V. Ramachandran (supra),the issue of non-maintenance of books of account was well raised by the A.O. and, accordingly, he initiated the penalty under section 271A which was later on deleted by the CIT (A). The case of Ramchandra D Keluskar (supra) was decided by referring to the judgment of the Hon'ble Gauhati High Court in the case of Surajmal Parsuram Todi v. CIT [1996]222 ITR 691and the Hon'ble Allahabad High Court in the case ofCIT v. Bisauli Tractors [2008] 299 ITR 219/[2007] 165 Taxman 1and it was held that where no books of account are maintained by an assessee, the question of getting the books of account audited does not arise at all. The Hon'ble Allahabad High Court observed as under:
"If a person has not maintained the accounts book or any accounts the question of its audit does not arise. In such an event the imposition of penalty under the provision contained in section 271A of the Act for the alleged non-compliance of section 44AA of the Act may arise but the provisions of section 44AB of the Act do not get violated in case where the accounts have not been maintained at all and, therefore, penal provisions of section 271B of the Act would not apply."
In view of the abovesaid judgments, penalty imposed under section 271B was quashed.
Conclusion
5. In the present case, the issue whether the books of account ought to have been maintained under section 44AA(2) by a civil contractor was raised up to the level of the CIT(A) only and not before the ITAT. CIT(A) had concluded that books of account were not required to be maintained in the absence of any prescribed books of account and, thus, penalty raised by the A.O. under section 271A was deleted, but penalty under section 271B was confirmed by him. Had the issue of non-maintenance of books of account been raised before the ITAT by way of an appeal from revenue, it would have definitely decided the case otherwise, i.e., it would have confirmed the penalty under section 271A after considering the true intention of the Legislature (as stated above) behind insertion of section 44AA(2). Consequently, the assessee would not have been able to safeguard himself against the penalty imposed on him under section 271B, as one must not be allowed to take the advantage of his own wrongdoing.
Regards
Prarthana Jalan
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