Income Tax Audit not done u/s 44AB : No penalty if assessee acted bona fide

By | November 24, 2017
(Last Updated On: November 24, 2017)

Held

Even though the net profit / loss arising from the purchase and sale of securities was disclosed by the assessee in the profit and loss account, the value of such securities held by the assessee was fully and truly disclosed by the assessee under the head investment in the relevant balance sheet.The said method was followed by the assessee as per the relevant guidelines laid down by the ICAI.

The belief of the assessee about the non applicability of provisions of section 44AB based on such method of disclosure as adopted by it following guidelines of ICAI was a bona fide belief

IN THE ITAT KOLKATA BENCH ‘D’

Off- Shore India Ltd.

v.

Deputy Commissioner of Income-tax, Circle-4, Kolkata

P.M. JAGTAP, ACCOUNTANT MEMBER
AND S.S. VISWANETHRA RAVI, JUDICIAL MEMBER

IT APPEAL NO. 720 (KOL.) OF 2014
[ASSESSMENT YEAR 2003-04]

SEPTEMBER  22, 2017

P.J. Bhide, FCA for the Appellant. Kalyan Nath, Addl. CIT for the Respondent.

ORDER

 

P.M. Jagtap, Accountant Member – This appeal filed by the assessee is directed against the order of Ld. CIT (Appeals) – XII, Kolkata dated 14.02.2014 whereby he confirmed the penalty of Rs. 1,00,000/- imposed by the AO under section 271B of the Income Tax Act, 1961.

2. The assessee in the present case is a company and as per its memorandum of assets, it is engaged in the business of investment in debentures and shares. Although the securities held by it were shown at investment by the assessee company in the balance sheet, the profit or loss arising from the purchase and sale of such securities was treated as business income. During the course of assessment proceedings, the AO noticed that the gross receipts of the assessee from purchase and sale of securities were in excess of Rs. 40,00,000/-. According to him, the assessee company therefore was required to get its account audited and furnish the report of such audit as per the provisions of section 44A. Since there was no compliance on the part of the assessee company of the provisions of section 44AB, he initiated penalty proceedings under section 271B of the Act. In reply to the show cause notice issued by the AO in this regard, it was submitted by the assessee that the total income credited in the profit and loss account for the year under consideration was only Rs. 3,498/- and it was therefore under a bona fide belief that the requirement of section 44AB was not applicable. This stand of the assessee however was not found acceptable by the AO. According to him, the assessee company had disclosed only the net income from the business of purchase and sale of securities and the gross receipts of such business were not deliberately disclosed by it in the profit and loss account to avoid the compliance of section 44AB. He accordingly did not accept the claim of the assessee of having a bonafide belief about the non applicability of section 44AB and proceeded to imposed a penalty of Rs. 1,00,000/- under section 271B for the failure of the assessee company to comply with the requirement of section 44AB.

3. The penalty imposed by the AO under section 271B was challenged by the assessee in the appeal filed by the Ld. CIT (A). During the course of appellate proceedings before the Ld. CIT (A), a detailed submission in writing was filed by the assessee in support of its case that the penalty imposed by the AO u/s 271B was not sustainable. Reliance was also placed by the assessee inter alia on the decision of Hon’ble Gujarat High Court in the case ITO v. Sachinam Trust [2010] 320 ITR 445 in support of its case. The Ld. CIT (A) however did not find merit in the submission of the assessee and proceeded to confirm the penalty imposed by the AO u/s 271B for the following reasons given in paragraph no 5.1.3 of his impugned order:

“I have carefully considered the submission put forth on behalf of the appellant along with the judgement of the cases relied upon, perused the facts of the case including the impugned penalty order and other materials brought on record. The AO has imposed the penalty u/s 271B of the Act since the appellant failed to get its accounts audited by an accountant before the specified date and furnish the same within the specified date in terms of section 44AB of the Act within due date even though the turnover of the business was more than Rs. 40 lacs during the relevant previous year. The appellant explained before the AO that during the year the total sales, turnover or gross receipts of the appellant did not exceed Rs. 40 lacs and as such the provisions of S. 44AB were not applicable to the appellant and therefore the question of imposing penalty u/s 271B does not arise.

During the appellate proceeding, it is submitted before me that since the total income credited to the P& L Account was less than RS. 40 lacs the appellant did not obtain a Tax Audit Report u/s 44AB. In the impugned order the AO has stated that during the previous year the appellant had sold debentures of Spencer International Hotels Ltd. and Jubilee Investments & Industries Ltd. for a total sale consideration of Rs. 15,18,82,450/-. The total value of sale and purchase of investments was not disclosed and only the net figure of profit or loss which in the previous year was Rs. Nil was shown in the profit and loss account. It is submitted that the AO ignored the submissions of the appellant that the accountant concerned was under a bona fide belief that no Tax Audit was required in this case and thus held that the assessee company failed to comply with the provisions of Section 44AB without any reasonable cause which attracts penalty. However, by placing reliance on the provisions of section 44AB of the Act, it is argued that in the case of an assessee carrying on business is required to obtain and furnish a audit report in the prescribed form it his total sales, turnover or gross receipts in the business exceeds Rs. 40 lacs. The Income Tax Act does not define or mention as to what wouls constitute total sales, turnover or gross receipts in the business. The AR of the appellant contended that the issue whether in the case of shares and securities held as investments whether the gross sale value should be considered or any profit/loss arising from the sale of securities is required to be considered has been clarified by the Institute of Chartered Accountants of India (ICAI) in the Guidance Note on Tax Audit under section 44AB of the Income Tax Act. Para 5 of the said Guidance Note deals with sales, turnover or gross receipts. Thus, it is argued that in para 5.11 of the said Guidance Note issued by the ICAI it has been stated as to what items would not form part of ‘gross receipts in business’. In clause (ii) of Para 5.11 it has been stated that ‘sale proceeds of assets held as investments’ shall not form part of the ‘gross receipts in business’. In support of this contention, relevant extract from the Guidance Note issued by the ICAI (Fourth Edition 1999) is furnished. Thus, it is argued that where there is a sale of assets held as investments, the sale proceeds of the same shall not be forming part of ‘gross receipts in business’. Thus, relying on the contents of para 5.11 of Guidance Note issued by the ICAI, it is contended that the appellant was not required to get its account audited as the sale proceeds of the debentures shall not form part of the gross receipts in business.

It is also submitted that levy of penalty u/s 271B is not automatic. In terms of the provisions of section 273B where there is a reasonable cause for failure to obtain on audit report u/s 44AB no penalty can be imposed. As stated hereinbefore, in view of the Guidance Note issued by the ICAI which had clearly stated that sale proceeds of assets held as investments would not form part of ‘gross receipts in business’ on which the appellant had relied and it did not obtain a tax audit report. There was thus a reasonable cause in not obtaining the audit report u/s 44AB. In support of this contention, the appellant placed reliance on the decision of the Gujarat High Court (supra) and it is contended that the same squarely applies on the facts of the appellant’s case. In the appellant’s case reliance was placed on the guidance note issued by the ICAI and the appellant bona fidely believed that sale proceeds of assets held as investments would not form part of the gross receipts of business and ascertaining the limit of Rs. 40 lacs so as to attract provisions of section 44AB. Hence, there was thus a reasonable cause for not obtaining a audit report u/s 44AB and as such no penalty u/s 271B could be imposed.

It is observed that the appellant has heavily placed reliance on para 5.11 of the guidance note issued by the ICAI (Fourth Edition 1999) where it is mentioned that if there is a sale of assets held as investments, the sale proceeds of the same shall not be forming part of ‘gross receipts in business’. However, it is observed that this principle is applicable only when the assets have been held as investment, but in the instant case of the appellant ‘investment in debentures and shares’ is the business assets in terms of Memorandum of Association of the company. Therefore, the contention of the appellant that there was a reasonable cause for not obtaining a audit report u/s 44AB and as such no penalty u/s 271B could be imposed, cannot be entertained being factually incorrect and the supportive judgement of the Hon’ble Gujarat High Court (supra) is also found to be unuseful in this respect.”

Aggrieved by the order of the Ld. CIT (A), the assessee has preferred this appeal before the Tribunal.

4. At the time of hearing before us, the learned counsel for the assessee has mainly reiterated the submissions made on behalf of the assessee before the Ld. CIT (A). He has also invited our attention to the copies of profit & loss account and balance sheet of the assessee company placed at page no 5 and 6 of his paper book to point out that the securities held by the assessee were shown as investment in the balance sheet while profit / loss from purchase and sale of the said securities was shown in the profit and loss account. He submitted this method of disclosure was adopted by the assessee by following the relevant guidelines of the Institute of Chartered Accountant of India (ICAI) and even if the same is held to be not acceptable for the purpose of Income Tax Act, the belief of the assessee about the non applicability of the provisions of section 44AB based on the said method was bona fide. In support of this contention, he relied on the decision of the Hon’ble Gujarat High Court in the case of Sachinam Trust (supra).

5. The learned DR, on the other hand, strongly relied on the orders of the authorities below in support of the revenue’s case. He contended that when the assessee company was engaged in the business of purchase and sale of securities as per its memorandum of association and the profit / loss from purchase and sale of securities was offered to tax by it as business income, the provisions of section 44AB were clearly attracted when the gross receipts of the business of the assessee from purchase and sale of the security exceeded to Rs. 40,00,00/-. He contended that the assessee however deliberately however disclosed only net income of the said business in the profit and loss account instead of gross receipts in order to avoid its compliance of section 44AB.

6. We have considered the rival submissions and also perused the relevant material available on record. It is observed that even though the net profit / loss arising from the purchase and sale of securities was disclosed by the assessee in the profit and loss account, the value of such securities held by the assessee was fully and truly disclosed by the assessee under the head investment in the relevant balance sheet. It, therefore, cannot be said that this method of disclosure was deliberately followed by the assessee in order to avoid the compliance of section 44AB. On the other hand, the said method was followed by the assessee as per the relevant guidelines laid down by the ICAI and we find merit in the contention of the learned counsel for the assessee that the belief of the assessee about the non applicability of provisions of section 44AB based on such method of disclosure as adopted by it following guidelines of ICAI was a bona fide belief. In the case of Sachinam Trust (supra) cited by the learned counsel for the assessee, the assessee carrying on the business of financing had believed that gross receipts of interest and not gross amount of advances would constitute the basis for ascertaining the limit of Rs. 40,00,000/- so as to attract u/s 44AB and since the said belief was based on the legal opinion of eminent counsel contained in tax audit manual published by the Bombay Chartered Accountant Society, the assessee was held to have a bona fide belief which constituted the reasonable cause for not getting its accounts audited u/s 44AB. Hon’ble Gujarat High Curt accordingly held that no penalty u/s 271B could be imposed on the assessee. In our opinion, the ratio of the decision of Hon’ble Gujarat High Court in the case of Sachinam Trust (supra) is squarely applicable to the facts involved in the present case and respectfully following the same, we cancelled the penalty imposed by the AO u/s 271B and confirmed by the Ld. CIT (A).

7. In the result, the appeal of the assessee is allowed.

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