1. These are recalled matters. Revenue filed these appeals against the separate orders of the Dy. CIT(A), Nashik Range, Nashik dated 22-8-1991 wherein he has cancelled the penalties levied by the Assessing Officer under Section 271A of the Income-tax Act, 1961 for the failure of the assessee for not maintaining books of accounts without reasonable cause as contemplated by Section 44AA of the Income-tax Act, 1961. The appeals relate to the assessment years 1988-89 and 1989-90.
2. The relevant facts are that the assessee is dealing in umbrella cloth and as seen from the computation statement of income for the assessment years 1988-89 and 1989-90, the assessee has admitted that "regular books of accounts have not been maintained" and business income is estimated at Rs. 47,000 and Rs. 39,000 respectively for the assessment years 1988-89 and 1989-90. In the reply to show-cause notice, the assessee in its letter dated 15-1-1991 stated as under: It is very true that I have not maintained regular books of accounts such as cash book, ledger etc. but I have got available following information with me such as purchase bills and a register maintained regarding purchase of goods and amount paid to them.
Assessments were completed under Section 143(1)(a) for the assessment year 1988-89 and for the assessment year 1989-90 accepting the income returned.
3. Pursuant to the assessment orders, the Assessing Officer initiated penalty proceedings and imposed penalty of Rs. 10,000 and Rs. 5,000 respectively for these years under Section 271A of the Income-tax Act, 1961 for the failure of the assessee to maintain books of accounts as required under Section 44AA of the Income-tax Act without reasonable cause. The assessee furnished written explanation in response to penalty notice of the assessment year 1988-89 while he failed to do so for the assessment year 1989-90. The Assessing Officer concluded that he was satisfied that there was no reasonable cause for the failure of the assessee to maintain books of accounts and the explanation offered was also unsatisfactory. Hence he levied penalties of Rs. 10,000 and Rs. 5,000 respectively for the assessment years 1988-89 and 1989-90.
4. On appeal, it was contended on behalf of the assessee that the assessee dealing in umbrella material cloth has maintained purchase register and payments were made for purchases by demand drafts and therefore, provisions of Section 44AA and Rule 6F did not apply and consequently, penalty was not attracted.
5. The Dy. CIT(A) held that inasmuch as the income returned by the assessee for the assessment year 1988-89 was accepted under Section 143(1)(a) penalty under Section 271A was not leviable because till 31-3-1989 quantification of penalty had to be a sum which shall not be less than ten per cent, but shall not exceed 50% of the amount of tax, if any, which would have been avoided if the income returned has been accepted as correct income.
6. However, for the assessment year 1989-90, the Dy. CIT(A) concluded from the factum of retured income accepted under Section 143(1)(a), it could not be gainsaid that the total income so determined is not in accordance with the provisions of the Act and therefore, the taxpayer had rendered himself liable to penalty under Section 271A of the Act.
As he was of the view that acceptance of the income returned and levy of penalty was contradictory to each other, he held that penalty was not leviable. Accordingly, he cancelled the penalty imposed for the assessment year 1989-90.
7. At the time of hearing, Shri Gautam Kar, the learned departmental representative referred to Section 44AA(2) according to which persons carrying on business or profession not being a profession referred to in Sub-section (1) thereof shall keep or maintain such books of accounts and other documents as may enable the Assessing Officer to compute his total income in accordance with the provisions of this Act.
He further contended that the computation of income was different from estimation of income as was done by the assessee with reference to purchases. He further pointed out that Section 143(1)/143(1)(a) is a managerial tool of administration of tax. According to him, it was not open to the assessee to say that just because the assessment was completed under Section 143(1)(a), the books of accounts maintained by the assessee satisfied the requirements of law. He also pointed out that it was not necessary to prescribe rules for each and every line of business. Alternatively, he has also conceded that atleast minimum penalty could have been levied by the Assessing Officer.
8. Shri G.N. Gadgil, the learned counsel for the assessee was heard at great length. According to him, the Board has not prescribed books of accounts to be maintained for business as yet as in the case of profession. According to him, Section 44AA(1) requires that such books of accounts shall be kept and maintained which may enable the Assessing Officer to compute his total income in accordance with the provisions of the Income-tax Act, 1961. Referring to pages 5 and 6 of his paper compilation, he pointed out that the assessee could compute the business income with reference to purchase bills and purchase register and therefore, requirement of Section 44AA was satisfied. This practice is also sought to be reinforced by subsequent action of the Assessing Officer in accepting the income returned under Section 143(1)(a). He also pointed out that the Board has not prescribed books of accounts for persons carrying on business or profession other than those professions for which the Board has prescribed books of accounts in Rule 6F of the Income-tax Rules, 1962. He further vehemently supported the conclusion of the Dy. CIT(A) and the reasons assigned therefor by him.
10. We have duly considered the submissions of the parties and paper compilation filed by the assessee. In order to appreciate the controversy, it is considered necessary to refer Section 44AA of the Income-tax Act, 1961 which reads as under: Section 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 accounts 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 twenty-five thousand rupees or his total sales, turnover or gross receipts, as the case may be, in business or profession exceed or exceeds two hundred and fifty thousand rupees in any one of the three years immediately preceding the previous year; or (ii) where the business or profession is newly set up in any previous year, if his income from business or profession is likely to exceed twenty-five thousand rupees or his total sales, turnover or gross receipts, as the case may be, in business or profession are or is likely to exceed two hundred and fifty thousand rupees, during such previous year, keep and maintain such books of accounts 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 accounts and other documents (including inventories, wherever necessary) to be kept and maintained under Sub-section (i) 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.
(4) Without prejudice to the provisions of Sub-section (3), the Board may prescribe, by rules, the period for which the books of accounts and other documents to be kept and maintained under Sub-section (1) or Sub-section (2) shall be retained.
It would be seen that the requirement is the keeping and maintenance of books and that too such books of accounts and other documents which would enable the Assessing Officer to compute the total income in accordance with the provisions of the Income-tax Act. It is significant to note the words "compute his total income in accordance with the provisions of this Act". Therefore, the requirement of law is that the assessee should maintain such books of accoiints which would enable the Assessing Officer to compute the total income in accordance with the various provisions of the Act. Section 5 of the Income-tax Act, 1961 provides the scope of total income which includes all income from whatever source derived which is received or deemed to be received in India or accrues or arises or is deemed to accrue or arise to him in India during the previous year or accrues or arises to him outside India during such year in the case of a resident. Section 7 deals with income deemed to be received, while Section 9 deals with income deemed to accrue or arise in India. It is subject to the exclusion of income on the ground of exemption contained in Section 10 of the Act. Profits and gains of business or profession are chargeable to tax under Section 28 of the Act, but such profits shall be computed in accordance with the provisions of Sections 30 to 43C. Section 143 provides for methodology of making assessment, while Section 144 deals with best judgment assessment. Section 145 prescribes that income chargeable under the head profits and gains of business or profession or income from other sources shall be computed in accordance with the method of accounting regularly employed by the assessee. Proviso thereof contemplates that where the accounts are correct and complete to the satisfaction of the Assessing Officer, but the method of accounting is such that, in the opinion of the Assessing Officer, income cannot be properly deduced there from, then the computation of profits shall be made upon such basis and in such manner as the Assessing Officer may determine. The proviso provides that where no method of accounting is regularly employed by the assessee, any income by way of interest or securities shall be chargeable to tax as the income of the previous year in which such interest is due to the assessee. Sub-section (2) thereof provides that if the Assessing Officer is not satisfied about the correctness or the completeness of the accounts of the assessee, or where no method of accounting has been regularly employed by the assessee, the Assessing Officer may make an assessment in the manner prescribed in Section 144, i.e., best judgment assessment. Thus the aforesaid provisions of the Act contemplate that the books of accounts maintained by the assessee for the business or profession should be not only correct but also complete so as to compute total income to the satisfaction of the Assessing Officer and the method employed should be such that income could be properly deduced therefrom. For the purpose of computation of profits and gains, usually the method of accounting adopted is either mercantile or cash system or mixed or hybrid method.
Whatever might be the method of accounting adopted by the assessee, the requirements of the provisions of the Act must be satisfied in order to compute the total income.
11. Now we shall consider, what are the books of accounts required to be maintained. Neither the Act nor the rules have prescribed the specified books of accounts to be maintained for the purpose of business. Therefore, recourse is to be taken to the commercial parlance. The learned author Shri J.R. Batliboi in his books on "Advanced Accounting" 25th edn. states that ordinarily books of accounts may be divided into two classes, namely, (a) principal books, namely, Ledgers and (b) subsidiary books or books of original entry such as cash book, purchases book, sales book, journal, bill books, etc. In the light of what is understood as books of accounts in the commercial parlance, it is seen that what has been maintained by the assessee could not be considered as books of accounts at all. During the course of arguments, the learned counsel for the assessee laid stress on the facts that the assessee could furnish computation statement of total income and this has been accepted as correct and complete by the Assessing Officer.
12. Let us look into the computation statements filed by the assessee for these years which are similar. At once, it has to be stated that the assessee has only business income and not income from any other sources and therefore, business income itself has been taken as computation of total income. In the statement, the assessee has stated that regular books of accounts have not been maintained and income is estimated for which reference to notes enclosed war drawn. The assessee has maintained only bills for purchases and details or payment towards purchases by way of drafts. Thus the assessee has maintained only purchase bills and payments towards purchases. The modus operandi adopted by the assessee was that purchases were effected on credit basis and on realising the sale price for which there is no evidence whatsoever forthcoming the suppliers were paid by way of demand drafts and therefore the purchases are accounted for on that basis. It is not known as yet what are other purchases effected during the previous years relevant for the assessment years 1988-89 and 1989-90 for which payments were not made within the relevant previous years. In other words, the unpaid purchases effected by the assessee were not specified by the assessee. Similarly the sale price collected or collectible are not specified which is a vital defect in the so-called books of accounts maintained by the assessee, because it is only out of sale proceeds and after adjusting direct expenses and the cost of the goods sold, gross profits arise. The assessee has proceeded to estimate the sales by adding octroi and transportation charges to the purchases effected and adding estimated gross profit at 15% thereon, total sales effected has been arrived at. From the estimated gross profits, the assessee has adjusted business expenses such as travelling expenses, salary to employees and miscellaneous expenses to arrive at net business income. Further the assessee has paid by way of draft to two parties amounting to Rs. 55,000 for the assessment year 1988-89 for which details of purchases effected therefrom were not available.
Therefore, the assessee has offered Rs. 15,000 for taxation on that account. In respect of other suppliers the assessee has not maintained particulars of purchases or for that matter payments made to them.
Therefore, again the assessee has offered another sum of Rs. 10,000 for taxation. In the same way, the assessee has offered Rs. 22,000 as business income and Rs. 10,000 as additional income on estimate basis towards other parties in respect of whom details were not available.
Such is the sorry state of affairs of total income offered by the assessee. In these facts and circumstances of the case and despite the admission of the assessee in the computation statements filed alongwith the return that regular books of accounts have not been maintained, but income was only estimated, the contention which was strenuously made by the learned counsel for the assessee is not acceptable because to accept such contention would amount to travesty of truth. The mere fact that return has been accepted under Section 143(1)(a) itself would not support the plea of the assessee that complete and correct books of accounts have been maintained and the method of accounting has been systematically followed by the assessee. There may be several administrative reasons for which the income returned in petty cases might be accepted in order to save valuable time for applying to revenue yielding cases. But by itself it would not amount to maintenance of such books of accounts by the assessee which would enable the Assessing Officer to compute the total income. On the other hand, we are satisfied and the assessee also admitted that the assessee has not maintained regular books of accounts or such books of accounts as understood in the commercial parlance and that too correct and complete books of accounts so as to enable the Assessing Officer to compute the business income and also total income. Therefore, the statutory prescription contained in Section 44AA has not been satisfied. Consequently, the assessee has defaulted in terms of Section 44AA without reasonable cause and made liable for penalty under Section 271A. The parameter of 271A is that the assessee failed to keep and maintain any such books of accounts or other documents as are required by Section 44AA without reasonable cause. Inasmuch as the assessee has failed to do so, he has rendered himself liable to penalty under Section 271A. However, the quantification of the penalty is different for the assessment year 1988-89 vis-a-vis 1989-90 inasmuch as for the assessment year 1988-89 the quantification of penalty is based on the tax sought to be avoided. In other words, the base is tax payable on the difference of total income returned and assessed. The minimum penalty leviable is 10% and maximum penalty leviable is 50% of the tax sought to be avoided. Inasmuch as the income returned by the assessee has been accepted by the Assessing Officer, there could be no difference between the tax on the returned income and the assessed income. Therefore, on account of absence of difference of tax sought to be avoided, there could be no levy of penalty for the assessment year 1988-89. The learned departmental representative has fairly conceded this aspect at the time of argument.
13. Coming to the assessment year 1989-90, Direct Taxation Laws (Amendment) Act, 1987 has amended the provision with effect from 1-4-1989 by which minimum penalty imposable is Rs. 2,000 and maximum is Rs. 1,00,000. Keeping in view the alternative plea made by the assessee and in view of our finding that the assessee has failed to keep and maintain any such books of accounts which would enable the Assessing Officer to compute the total income without reasonable cause, we consider that levy of minimum penalty would be adequate. Accordingly, we modify the order of the Dy. CIT(A) and direct the Assessing Officer to levy minimum penalty for the assessment year 1989-90.
14. In the result, the appeal for the assessment year 1988-89 is dismissed, while the appeal for the assessment year 1989-90 is allowed.