1. All these appeals are filed by the Revenue. As the sole issue arising in all the appeals is the same for the sake of convenience, they are heard together and disposed of by this common order.
2.1 I.T.A. No. 530/HYd/2000 is represented by Shri Raghavendra Rao, I.T.A.Nos.161/Hyd/01, 237/Hyd/01& 634/Hyd/2000 are represented by Shri V. Prabhakar while I.T.A. No. 240/Hyd/2001 is represented by Shri Hari Agarwal. In I.T.A. Nos. 545/Hyd/2001 (M/s. Jasya Bharagavi Chits & Finance (P) Ltd.) and ITA No. 18/Hyd/01 (M/s. Krishnajyothi Chits Funds (P) Ltd. none appeared on behalf of the assessee in spite of issue of notice for hearing, neither is there any petition seeking adjournment.
Under these circumstances, in both these cases we have decided to dispose of the matters ex-parte on merits, after hearing the learned Departmental Representative.
2.2 On behalf of the Revenue, Shri B.G. Reddy. Senior Departmental Representative represented the matter before us.
3.1 The sole issue arising for adjudication in these appeals is whether the penalty levied under Section 271 B by the Assessing Officer, in the case of a Chit Fund Company; on the ground that gross subscriptions received by a Chit Fund Company should be taken as its turnover for the purpose of Section 44AB was wrongly cancelled by the Commissioner of Income-tax (Appeals) by applying the provisions of Section 273B. Brief facts of the case are as follows.
3.2 All these assessees are Chit Fund Companies. They are governed by the Chit Funds Act 1982 and the A.P. Chit Funds Act 1971 and the Rules formed there under. The assessees have filed their returns of income wherein they have disclosed their turnover from the business of Chit Funds as consisting of Foreman's commission, interest, dividend etc.
This turnover was based on requirements specified under the Chit Funds Act 1982 and the A.P. Chit Fund Act 1971. The accounts have been audited under the Companies Act and audit report obtained under the Companies Act was filed along with the return of income The Assessing Officer was of the opinion that the assessee had not disclosed the correct turnover of business in as much as the chit amounts collected from the subscribers formed part of the turnover of the assessee and as such chit subscription amounts collected was more than 40 lakhs during the impugned assessment year, the assessee was liable to get its accounts audited under Section 44AB of the Act and as he had failed to do so levied penalty under Section 271B.3.3 On appeal, the first appellate authority on the ground that a Chit Fund Company cannot utilize the amount it receives by way of collection of chit subscriptions in the manner it likes and on the ground that the assessee had based on the guidance note of the Institute of Chartered Accountants of India which states that only Foreman's commission represents turnover had bona fide believed that chit subscriptions do not form part of turnover and on the ground that there was a bona fide difference of opinion between the assessee and the Assessing Officer on the issue as to what constitutes turnover held that the assessee had reasonable cause in not getting his account audited Under Section 44AB of the Act, applied the judgment of the Hon'ble Supreme Court of India in the case of Hindustan Steel Ltd. (83 ITR 26) and cancelled the orders imposing penalty. Aggrieved of this cancellation of penalty by the first appellate authorioty, the Revenue has filed these appeals.
4.1 The learned Departmental Representative submitted that the chit subscriptions collected by the assessees do form part of the turnover of the Chit Fund Company because as per the audited accounts of the assessee it is in the business of chit funds and not merely a commission agent. He vehemently contends that the relationship between the assessee and its principals is that of between two principals and not between a principal and an agent. He specifically relied on the order of the Assessing Officer dated 29.6.99 in the case of Mangal Dayak Chit Funds Pvt. Ltd. and specifically relied on pages 3 & 4 of that order and argued that the assessees carry on the business of Chit Funds in their own right and that the gross subscriptions collected should be routed through the profit and loss account of the assessee as it is turnover of the assessee. He submitted that the gross receipts of the business of the assessee in all these cases are much above Rs. 40 lakhs when the total subscriptions received is considered as turnover and that by not getting its accounts audited as required under Section 44AB of the Act the assessee had violated the Act and penalty was rightly levied under Section 271B of the Act.
4.2 He referred to the Board's Circular that was issued in respect of commission agents i.e. Circular No. 452 (F. No. 201/3/'85-IT (AB)) dated 17.3.1986 in respect of Kachha Arahtias and Pacca Arahtias and submitted that in the case of Pacca Arahtias, the assessee makes himself liable upon the contract not only to third parties but also to his constituent. The Pacca Arahatias need not inform the members as to how the funds have been utilized or with whom the contracts have been entered into. In the case of Pacca Arahtias he has a personal interest of his own when he enters into a transaction and he has to suffer his own loss. He has submitted that the Board had clarified that in the case of Pacca Arahtias, total sales/turnover/gross receipts of the business should be taken into consideration for determining the applicability of the provisions or Section 44AB. Drawing parlance from the Board Circular, he argued that all the conditions that were prescribed for Pacca Arahtias are squarely applicable to assessee's case as the assessee was in full control of the gross receipts received by it and if could utilize and exploit it in any manner it likes and it is responsible its own acts. The profit and loss he argued, arising out of these transactions belongs to the assesee himself and not to anybody else. He vehemently contended that these ingredients do show that the assesseae is not a commission agent but is in the business of Chit Fund and earning profit or loss arising there from and thus the gross receipt in his case is equivalent to the gross subscription received from various members of the Chit Fund Company.
4.3 Without prejudice to his submissions, he argued that if it is to be held that the assessee is only a commission agent, then the judgment of the Hon'ble Rajasthan High Court in the case of Abhay Kumar & Co. v.Union of India and Ors. (164 ITR 148)(Raj.) is applicable and that in those cases where gross commission exceeds Rs. 10 lakhs and the assesee has not obtained a Tax Audit Report as stipulated under Section 44AB, penalty under Section 271B had to be confirmed by reversing the order of the learned C.I.T.(Appeals). The learned Departmental Representative heavily relied on the decision of the ITAT, B-Bench, Hyderabad dated 3.12.97 in I.T.A. No. 629/Hyd/94 in the case of M/s. Sri Venkateswara Chits & Financiers, Nizamabad for the assessment year 1990-91, a copy of which is placed before us and submitted that it is clearly held in that case that chit collections certainly form part of the turnover of the assessee and also that the assessee is under an obligation to comply with the provisions or Section 44AB and that there is reasonable cause for the assessee in not getting his accounts audited. He submitted that this Bench of the Tribunal has to follow that order and reverse the order of the first appellate authority. Referring to the later decision of this Bench of the Tribunal dated 12.4.2004 in the case of DCIT, Cir. 7(4), Hyderabad v. Lakshmi Maharaja Chit Funds (P) Ltd., Hyderabad in ITA No. 347/Hyd/2000, he argued that this decision of the Bench was based on the ground that merely because in the ultimate analysis the Tribunal, held in a different case that the chit fund collections form part of turnover, it does not mean that the explanation tendered by the assessee is not reasonable and cancelled the penalty. He vehemently contended that there is no finding in this decision as to whether there was sufficient cause for the assessee in not complying with the provisions. He argues that this decision cannot be taken as a precedent as all the aspects have not been gone into. He submitted that the decision of Hyderabad Bench 'B' of this Tribunal in the case of Sri Venkateswara Chits & Financiers, Nizamabad should be followed as all aspects were considered therein and in case because of conflicting decisions the Bench prefer to follow the later decision, he submitted that the issue may be referred to a larger Bench and not dismiss the appeal of the Revenue by following the latter judgment.
4.4 Though the learned counsel for the assessee had yet to argue the matter, the learned Departmental Representative, as a matter of abundant caution, and in anticipation of such an argument, argued that the Board instruction No. 1979 dated 27.3.2000 specifying monetary limits for the departmental appeals do not apply in the case of penalty. He referred to the Board's Circulars on the issue and argued that "Tax" does not include 'penalty'. The term "Tax" has been defined in the Income-tax Act, 1961 and that as the issue involved is only, penalty, the Board's Circular does not apply to these cases.
5.1 Shri V. Raghavendra Rao, arguing for M/s. Mangal Dayak Chit Funds Pvt. Ltd. submitted that in view of the Board's Circular directing the Revenue not to file appeals in cases where the revenue impact is less than Rs. 1 lakh or below all the Revenue's appeals have to be dismissed in limine. He argued that "Tax" includes interest as well as penalty and for the proposition that "Tax" includes penalty, he relied on the following decisions: He vehemently contends that the revenue impact has to be seen and that tax effect and revenue impact are two different issues. He gave written submissions, which run into pages 1 to 7 on the issue. The main thrust of his argument is as under.
5.2 The CBDT vide Instruction No. 1979 dated 23.7.2000 directed that appeals should not be filed by the Department before the Tribunal where the tax effect does not exceed Rs. 1,00,000/-. The Bombay High Court has taken judicial notice of this instruction in its decision in the case of CIT v. Camco Colour Co. (254 ITR 565). He submitted that the effective penalty in the instant case being Rs. 1,00,000/- the above instruction applies to this case and the appeal of the department deserves to be dismissed. To rebut the argument of the Department that the words "Tax effect" occurring in the instruction referred to, do not cover penalty matter, he placed reliance on the decision of the jurisdictional High Court in C.I.T. v. Lohia Trading Co. (226 ITR 873) wherein an argument was taken for the first time before the High Court that in an earlier case the instruction of the Board to file references in cases where the tax effect was less than Rs. 30,000 per year was cited and reference withdrawn by the Department and that therefore, the reference made by the Department should be rejected in the case under reference. In that case the counsel had relied on an earlier decision of the A.P. High Court in the case of CIT v. Om Trading Co. (220 ITR 149) wherein the Standing Counsel for the Department withdrew the reference on the basis of the earlier instruction of the Board. He submitted that the jurisdictional High Court rejected the representation of the counsel in that case (226 ITR 873) only because there was no such withdrawal by the Department in the case before them.
The Court held that it was not necessary to" enter into any discussion on the correctness of the view expressed by the Bombay High Court in regard to the circular under Section 119 of the Act and further it did not dwell on the applicability or otherwise of the instruction in the case before it. Therefore, the Department cannot draw any support from that decision. On the other hand, as the issue was lefts open by the High Court, the Tribunal can go into the applicability or otherwise of the Instruction No. 1979 to penalties also. The rigour and strictness good enough for interpretation of statute, rules and even circulars cannot be applied to departmental instructions. The stated object of the instruction is for reduction of litigation and the words tax effect have to be understood in that context only. When the Board has decided not to file appeals wherever tax effect is below certain limits it would be quite contrary to argue that the Board was more concerned in pursuing penalty appeals rather than the tax appeals. The primary function of the Board being levy and collection of taxes it would be inappropriate to say that the Board was more concerned in the matter of collection of penalty than in collection of taxes. The Supreme Court held in the case of C.A. Abraham v. ITO (41 ITR 725) that penalty is only an additional tax and this decision was followed by the Apex Court in 42 ITR 123 in the case of C.I.T., A.P. v. Bhikaji Dadabhai & Co.
Referring to the argument of the learned Departmental Representative that penalties considered in the above judgments were all based on tax as the quantum of penalty to be imposed was to be fixed with reference to the amount of tax, the learned counsel submitted that it is oversimplification of the ratio laid down by the Apex Court. There is no warrant to say that the so-called technical penalties like the one under Section 271B and those enumerated under Section 273B are not covered by the Revenue effects referred to in the instruction. On the contrary penalties for technical breaches are always less serious than concealment penalties and if as argued, the tax effect might include concealment penalties but cannot take within its meaning technical penalties, it would imply that the technical, penalties must be pursued more vigorously rather than the concealment penalties on the reasoning that the Apex Court held the concealment penalty alone to be additional tax. According to the learned Counsel these contradictions arose only because of the Department's view that tax effect includes, only concealment penalties and nothing more. The judgment in the case of Anwar Ali reported in 76 ITR 696 is also not applicable and it does not over rule Supreme Court judgment in other cases cited supra. It was held therein that penalty is additional tax but penalty proceedings and burden of proof in penalty proceedings are different. The argument of the Department that as the maximum penalty under Section 271B of the Act is Rs. 1,00,000/- there will be no occasion for the Department to file appeals against such penalties before the Tribunal and this might be rendering the appeal provision in the matter of 271B redundant as far as the department is concerned, to say the least, is untenable. The instruction would only mean that if the Department is not satisfied with the outcome of the first appeal, a second appeal need not be filed where the revenue effect does not exceed Rs. 1,00,000/-.
5.3 Even if there is any High Court Judgment implying that the instruction of the Department need not be taken cognizance of, once appeal is filed in contravention of instruction an interpretation of a High Court favourable to the assessee is required to be adopted in terms of the judgment of the jurisdictional High Court in the case of Commercial Tax Officer v. State of A.P. (169 ITR 564) wherein the jurisdictional High Court approvingly referred to the judgment of the Bombay High Court wherein it was held that in the absence of a decision of the jurisdictional High Court or the Bench of the Tribunal to the contrary, a decision favorable to the assessee must be followed where there are conflicting decisions of other Courts or Benches of the Tribunal. In the present case too, it was submitted, the decision of the Bombay High Court (254 ITR 565) has to be followed. He then referred to another decision again of the Bombay High Court in C.W.T.v. Executors of Late D. T. Udeshi (189 ITR 319) wherein it was held that no Reference could be made where the tax effect did not exceed TOs. 8500/- in terms of the instruction of the Board which was in force at that time.
5.4 Apart from the applicability of Instruction No. 1979 and other submissions, on merits the learned counsel for the assessee submitted that the decision of the Tribunal, Hyderabad Bench A in ITA No.347/Hyd/2000 for assessment year 1998-99 dated in the case of Lakshmi Maharaja Chit Fund Pvt. Ltd., Hyderabad is directly on the issue involved in this appeal and that a later decision of the Bench of co-ordinate jurisdiction which has also considered the earlier decision of the Tribunal has to be followed as per judicial convention. In a nutshell the arguments of the assessees are as under.
5.5 The chit fund company has no domain over the funds it collects each month because those funds belong to the subscriber who bid the chit.
The company is no more than an agent guarantor to the subscriber to collect and pay the amount on the basis of the bid. In case of any deficiencies in service or disability or inability to collect monies from the subscribers, the chit fund is bound to make good the deficiency which will be an out go from the foreman's (company) commission i.e. to say, the own turnover of the chit fund company is never more than the commission to which it is entitled. Sometime it is less. The Institute of Chartered Accountants of India has issued guidelines in the case of chit fund companies according to which a chit fund company's receipts cover only the gross commission receipts. The above points constitute a reasonable case for not filing audit report under Section 44AB of the Act and otherefore penalty under Section 27IB is not attracted.
5.6 Levy of penalty in such situation can be ignoring the decision of the Supreme Court in the case of Hindustan Steel Ltd. v. State of Orissa (83 ITR 26) wherein it was held that penalty can be levied only if there exist contumacious conduct or utter disregard to law on the part of the assessee. To repeat the facts of this case are different from the facts considered by the earlier decision of the Hyderabad Bench on the basis of which a ground of appeal was raised by the Department. The ratio of the decision of the Tribunal, Hyderabad Bench "A" in ITA No. 347/Hyd/2000 dared 12.4.04 supra directly applies to the instant case. The learned counsel therefore sought dismissal of the departmental appeals.
5.7 Shri Raghavendra Rao further submitted that under the Central Sales Tax, turnover means the aggregate of sale price received and receivable and that under the Income-tax Act, the term turnover is not defined and that applying the definition that has been given under the Sales Tax Act, chit collection do not come within the meaning of sales or turnover. He submits that gross receipts as referred to in Section 44AB are gross receipts of the assessee. He vehemently contended that in the case of a Chit fund Company the chit collections are not the receipts of the Company. He relied on the A.P. Chit Funds Act 1971 as well as the Guidance Note issued by the Institute of Chartered Accountants of India as well as the Circular of the CBDT No. 452 dated 17.3.1996 and submits that in the case of Chit Fund Company. the position is the same as that of a share broker as it has no control over the funds and its collections have to be deployed in the manner in which specified under the Chit Fund Act and that chit subscriptions cannot form part of the turnover. He placed reliance on the decision of the ITAT, Ahmedabad Bench in the case of Asst. Commissioner of Income-tax V. Hasmukh M.Shah (85 ITD 99) as well as the CBDT Circular No. 452. He further argued that the assessee had reasonable cause inasmuch as he had bona fide felt that there was no need for filing Tax Audit Report under Section 44AB since its commission from running Chit Fund as Foreman does not exceed Rs. 40 lakhs. He submitted that the assessee had reason to believe so since the Department had never required the assessee to furnish audit reports under Section 44AB nor had initiated proceedings for failure to file such audit report for earlier years though in those years the chit collection exceeded Rs. 40,00,000/-. He relied on the decisions of the Ahmedabad Bench 'B' of the Tribunal in the cases of R.Wadiwala & Co. v. ACIT (72 TTJ 34) and 72 TTJ 35 for the proposition that no penalty can be levied under Section 271B when the Revenue is consistently accepting the method of accounting of the assessee in the earlier years.
5.8 He further relied on Explanation (bb) to Section 139(9) of the Act and submitted that the relevant return filed was not considered as defective by the Assessing Officer. The Assessing Officer, he submitted. accepted the return though the audit report under Section 44AB was not enclosed and this return was processed under Section 143(1)(a) and no resort to Section 143(2) or even re-opening under Section 147 was made which demonstrated that even without audit report the Department was satisfied about the correctness and completeness of the return and the income admitted. He vehemently contended that once the Officer had accepted the return of income and had not considered the same as defective, he cannot levy a penalty under Section 271B. He argued that the ambivalence on the part of the Department also fortifies the assessee's contention that there was a bona fide belief that the audit report was not required to be filed in this case.
5.9 He further submitted under these (acts and circumstances, the omission on the part of the assessee to file audit report is, if at all, only a breach which is venial and not venal. He once again relied on the Judgment of the Hon'ble Supreme Court in the case of Hindustan Steel Ltd. (83 ITR 26) and submitted that penalty cannot be levied merely because it is lawful to do so unless the party was found to be guilty of dishonesty or contumacious conduct or acted in utter disregard of law. He concluded his submissions by stating that the assessee under the honest and bona fide belief that he is not liable to file tax audit report under Section 44AB and cannot be held to have been guilty of any contumacious or dishonest conduct.
6.1 Shri V. Prabhakar, learned counsel for the assessees M/s. Neeladri Chit Fund Pvt. Ltd., M/s. Kalpatharuvu Chit Funds (P) Ltd. and M/s.
Kathiani Chit and finance (P) Ltd., joining the issue submitted that the role of a Chit Fund Company is that of a trustee or custodian and to ensure proper appropriation of the Chit Fund subscription amounts and his acts are governed by the A.P. Chit Funds Act, 1971 and Chit Funds Act, 1982. He relied on Sections 20 & 23 of the Chit Funds Act, 1982 and Sections 12 & 16 of the AP Chit Funds Act. 1971 and submitted that these enactments prescribed the mode and manner of preparation of the Balance, Sheet which are found in the Schedule and in the form prescribed there under. He submitted copies of the extracts of the sections as well as formats of the Balance Sheet and Profit & Loss Account and argued that as per these Central and State enactments all the chit Fund Companies have to prepare their balance sheet and profit & loss account in accordance with the aforesaid provisions. As per these mandatory provisions, he argued, only commission can be taken into account as gross receipts or turnover of a chit fund company and that holding a contrary view is violation of the provisions of these Acts. As to the reason for not taking the total subscriptions as gross receipts, he submitted, was that the chit fund company had no control over such amounts as they belong to the prized subscribers and as such those subscription amounts are shown as current liability in the balance sheet. He filed extracts of Section 76 of the Chit Funds Act 1982 and Section 56 of the A.P. Chit Funds Act 1971 and submitted that violation of the these Acts invite penal provisions as well as prosecution. On the order of B-Bench of this Tribunal in the case of Sree Venkateswara Chits & Financiers in ITA No. 629/Hyd/94, he submitted that order, judicial notice was not taken of the statutory provisions of the A.P. Chit Funds Act 1971 and Chit Funds Act 1982 and argued that this decision was per incuriam. He relied on Section 57 of the Indian Evidence Act and submitted that the court shall take judicial notice of all laws in force in the territory of India. The reason for this, he argues, is that whenever an issue relating a chit Fund company is dealt with under the Income-tax Act, 1961, the law governing such chit fund company shall also be taken judicial notice of. He referred to this Bench's decision in the case of Shriram Chit Funds P. Ltd. reported in 83 ITD792 and submitted that judicial notice of the Chit Funds Act was taken by the Bench therein. Thus he argued that in the case of M/s. Sree Venkateswara Chits & Financiers (supra) B-Bench of this Tribunal had rendered the decision in ignorance or due to an inadvertent omission of the legislation of Chit Funds and in such event this decision is to be treated as 'per incuriam' and it loses its efficacy as a binding precedent. For the meaning of 'per incuriam' he relied on the judgments of the Apex Court in the case of Municipal Corporation of Delhi v. Gurnam Kaur (1989) 1 SCC 101, 110 SC and in State of U.P. V. Synthetics & Chemicals Ltd. 163. He had fried written submissions from pages 1 to 5 to support his stand, that the decision of B-Bench of this Tribunal in Sree Venkateswara Chits & Financiers is to beheld as per incuriam and the decision of this Bench in Laxmi Maharaja Chit Funds Pvt. Ltd. (ITA No.347/Hyd/200 - order dated 12,4.2004) should be followed. He strongly opposed the plea of the Department to refer the matter to a Special Bench under Section 255 of the Act on this count. Replying to the contentions of the Revenue that wherever chit commission is founding excess of Rs. 10,00.000/-, the same may be treated as professional receipt for the purpose of tax audit, he submitted that the Judgment of the Rajasthan High Court in the case of Abhay Kumar & Co. v. Union of India and Ors. (164 ITR 148) has no application nor relevant to the facts of the present case as their Lordships were deciding as to whether the provisions of Section 44AB are constitutionally valid or not. He vehemently contended that chit commission is business income and the same cannot be treated as professional receipts. He further submitted that chit commission cannot be equated with professional receipts and the yardstick of Rs. 10,00,000/- cannot be applied to this case as under Section 44AB professional receipts are relevant only to those professionals that are referred to in Section 44AB of the Act and not to others. Referring to the argument to the learned Departmental Representative on the applicability or maintainability of the appeal in view of the Board's Instruction No. 1979 at. 27.3.2000, he wondered why the Revenue has raised this plea much before the assessee could contend on the same. He concluded his submission by praying that in the case of Mangal Dayak Chit Fund, Neeladri Chit Fund, Kalpatharuvu Chit Fund and Katiyani Chits & Finance, the orders of the Commissioner (Appeals) have to be upheld and the appeals of the Revenue have to be dismissed.
7. Shri Hari Agarwal appearing in the case of NES Chit Corporation Ltd., submitted that turnover of the business in the case of chit fund company is foreman's commission and that turnover is not defined under the Income-tax Act and the Institute of Chartered Accountant of India in its publication titled "Issues on Tax Audit" has explained the method of arriving at the turnover in the case of chil fund business and that the method of accounting followed by the assessee is highly relevant for arriving at the decision as to what constitute turnover and that the assessee is only care-taker till the funds are distributed to the successful bidder in the auction and that the assessee was under a bona fide belief that only chit fund commission constituted turnover in view of the information given by the ICAI. He vehemently contended that the assessee being a Limited Company got its accounts audited under the Companies Act 1956 and that it had no reason or difficulty in furnishing the particulars required, if it believed that Section 44 AB, in form 3CA and 3C.D-under Section 44AB of the Act and "that the failure if any, cannot be considered as intentional and at best can be considered as venial default. He relied on the judgment of the Hon'ble Bombay High Court in the case of CIT v. Heros Publicity Services (248 ITR 256)(Bom.) and submitted that the entire amount of total transaction could not be treated as receipt for the purpose of Section 44AB of the Act.
8.1 In reply the learned Senior Departmental Representative submitted that the Board's Circular makes the position under the Income-tax Act very clear and the word "tax" in the Board's Instruction No. 1979 does not include "Penalty". In support of this legal position he relied on the following decisions:Soma Sundaram (P) Ltd. v. CIT Referring to the decision of the Bombay High Court in the case of C.I.T. v. P.B. Hathiramani (supra) the learned Departmental Representative, submitted that the expression "tax" has been defined in Section 2(43) of the Act, and there would be no scope for any argument that "interest" is "additional tax" and the principle of this Judgment would apply equally to the case of the assessee before us though in the case of the assessee; the contradistinction is between "tax" and "penalty". He submitted that in Joginder Singh v. ITO (supra) it was held that Section 2(43) which defines "tax" does not specifically include penalty. Section 156 of the Act, which relates to notice of demand specifically refers to tax, interest, penalty, fine or any other sum payable under the Act. Chapter XXI. of the Act deals with penalties. Various sections provide for imposition of penalty in addition to the amount of tax payable. Thus from a conjoint reading of the aforementioned provisions of the Act it follows that the word "tax" and "penalty" are treated differently under the Act. He then drew the attention of the Bench to the decision of the Kerala High Court in Soma Sundaram P. Ltd. (supra) where the Hon'ble High Court observed hat not much assistance can be derived by the assessee from the observations made in CA Abraham's case (41 ITR 425)(SC). It further held that Section 2(43) of the I.T. Act defined "tax" during the relevant period as income-tax and super-tax chargeable under the provisions of that Act. Therefore, what is levied under the charging provision of that Act i.e. Section 4 of the I.T. Act, alone can be called income tax.
Interest penalties and fines, which are also payable under the other provisions of that Act cannot be termed as income-tax. They are imposed in addition to income tax for the purpose of enforcing the levy of income and this is clear from the decision of the Supreme Court in the case of Bhor Industries Ltd. v. CIT (42 ITR 57). In C.I.T. v. Anwar Ali (supra) the Apex Court observed that in CA. Abraham's case (supra) the Court was not called upon to determine whether penalty proceedings were penal or of quasi-penal nature and the observations made with regard to penalty being an additional tax, were made in a different context and for a different purpose. In Chhotey Lal V. ITO and Anr. (supra) the Allahabad High Court held that the word "income-tax" in Section 46(1) does not include "penalty". In view of the Board's Instruction, exhaustive definition of "tax" under Section 2(43) of the Act and the various decisions cited above, the learned Departmental Representative submitted that the word "tax" used in Board's Instruction 1979 does not include penalty and the decisions quoted by the learned counsel for the assessees were rendered in different context and for different purposes under the provisions of the Act. He therefore, prayed for setting aside the orders impugned and restoring the orders of the Assessing Officer Minder Section 271B.8.2 He further submitted that under the Chit Funds Act, 1982, while giving the format of the Profit & Loss Account and Balance Sheet, it is specifically stated that this is without prejudice to the provisions of the Companies Act. This he argues diluted the contention of the learned counsel for the assessee that the provisions of the Chit Fund Act are mandatory.
9.1 Heard both sides, read all the papers on record as well as the orders of the authorities below. On the preliminary issue of maintainability of these appeals in view of the Board's Instruction No.1979, we hold as under.
9.2 The C.B.D.T. in the context of provisions of Section 221 of the Act issued Instruction F. No. l6/87/67-IT(B) dated 10.7.1967. In this circular it is clearly given that under the 1961 Act, the term "tax" does not include within its connotation, concepts of penalty and interest leviable under the other provisions of the Act. Thus this Board circular dated 10.7.67 clearly indicates the mind of the Board that the term tax effect mentioned in Board Instruction No. 1979 does not include penalties. This findings that the term "tax" does not include penalties is supported by the following judicial pronouncements: Thus the preliminary objections raised in this regard are hereby dismissed.
9.3 Coming to the merits of the case, there are two aspects of the issue that have to be decided. Before we go into these aspects, we have to' give a finding on the preliminary point as to whether the decision of the Hyderabad Bench 'B' of the Tribunal in the case of I.T.O. v.Sree Venkateswara Chits and Financiers, Nizamabad is a binding precedent or whether the decision of this Bench of the Tribunal in the case of DCIT, Circle 7(4), Hyderabad V. Lakshmi Maharaja Chit Funds (P) Ltd. in ITA No. 347/Hyd/2000 (order dated 12.4.2004 is a binding precedent. The argument of the Revenue is that the issue should be referred to a larger Bench in view of the conflicting decisions. In the latter decision of A-Bench of this Tribunal the earlier decision of the Tribunal in Sree Venkateswara Chits and Financiers, Nizamabad was distinguished. After carefully going through both these orders of this Tribunal, we are of the considered opinion that reference to Special Bench is totally uncalled for the following reasons.
9.4 Reasonable cause leading to the cancellation of penalty cannot be said to be a covered issue. Each case of levy of penalty has to be examined on the facts and circumstances of that case. Just because in one of the cases it was held that there was no reasonable cause, justifying the levying of the penalty, the same cannot be universally applied in all other cases. Even otherwise it is well settled that a Tribunal can take a different view than what had taken earlier if some fresh material; or evidence justifies taking such a view. Reliance in this regard is placed on the Judgment of the Hon'ble Supreme Court in the case of C.I.T. v. Brijlal Lohia & Mahabir Prasad Khemka (84 ITR 273 (SC) where it is held at page 274 as follows: "(ii) that the fact that in the earlier proceedings the Tribunal took a different view of the two gifts was not a conclusive circumstance; the decision of the Tribunal reached in those proceedings did not operate is res judicata : there was a great deal more evidence before the Tribunal in the proceedings for the subsequent years." This Bench of the Tribunal in the case of Sree Venkateswara Chits & Financiers, Nizamabad had no occasion to consider the provisions of Chit Funds Act 1982 as well as the provisions of the A.P. Chit Funds Act, 1971. A finding was given without taking into consideration these two statutory enactments, as the same had not been argued before the Bench. Thus in our considered opinion this order cannot be considered as a binding precedent.
9.4.i. The Hon'ble Supreme Court in the case of Mamleshwar Kanhaiyalal (AIR 1975 SC 907 at page 909 observed as follows: "Certainty of law, consistency of ruling and comity of Courts - all flowering from the same principle converge to the conclusion that a decision once rendered must later bind like cases." "we do not intend to detract from the rule that, in exceptional, instances, where by obvious inadvertence or over-sight a judgment fails to notice a plain statutory provision or obligatory authorioty running counter to the reasoning and result reached, it may not have the sway of binding precedents. It should be a glaring case, obtrusive omission." 9.4.ii When a decision is rendered without noticing a binding precedent or is inconsistent statutory provisions it is per incuriam and, therefore, loses its efficacy as a precedent. Except the parties to the his it binds none. The application of the doctrine of per incuriam was considered by the Court of appeal induce v. Reliance System Ltd. (1987) 2 ALL ER 858, wherein Sir John Donaldson M.R. held as under: "I have always understood that the doctrine of per incuriam only applies where another division of this Court has reached a decision in the absence of knowledge of a decision binding on it or a statute, and that in either case it have to be shown that had the Court had this material, it must have reached a contrary decision.
That is per incuriam." 9.4.iii In the case of Venkateswara Chits & Finance, we find that the Bench has tacitly take a view that, payments made to chit subscribers are allowable expenditure under the Act as on the contra it held that chit subscription are income/turnover. This hits at the basic concepts of income and expenditure. This is a glaring case and thus cannot be followed. The mistake would be evident from our reasons given hereinafter.
9.5 On the aspect of what constitutes turnover in the case of a chit fund company, we hold as under.
9.6 It is well settled that the term sales, turnover and gross receipts have to be interpreted, with reference to the items which go into profit and loss account of a concern and that this has to be ascertained, based on the method of accounting regularly employed by the assessee. Items of receipts which are capital in nature do not go into the profit and loss account and are not turnover. In the case of a Chit Fund Company, the method of accounting to be adopted has been laid down by the Statute i.e. the Chit Funds Act 1982 and the A.P. Chit Funds Act 1971. Under this mandated method of accounting, when a subscription is received from a customer by the Chit Fund Company, it is credited to the personal account of the customer and not the Profit & Loss Account of the assessee. In other words, the initial entry passed in the books of account reflect that the amount of subscription is credited to the personal account of the subscriber. Only the commission or interest is debited to his personal account in the books of the Chit Fund Company and taken to the credit of the Profit and Loss account as income. In the method suggested by Revenue the chit subscriptions have to be first taken as income in the P & L account and then to give a credit to the personal account the subscription has to be debited to P & L account as expenditure. This is totally incorrect.
An amount debited to P & L account and credited to personal account in the first place cannot be allowed as expenditure at all. This is because the receipt and payment in question is on capital account. This is a very fundamental accounting principle, which has to be understood.
The receipt is neither income accrued nor the payments to prized subscriber is expenditure accrued which is allowable under the Act.
This is recognized by the CBDT itself when they have issued a Circular No. 1175 dated 16.5.78, wherein they have directed that in case of prized subscribers where amounts are not collectable, they should be allowed as bad debt. If payments to Prized subscribers are to be allowed as expenditure as now claimed by the Revenue, there is no necessity of this Circular, because the amount will be allowed before it is a bad debt. The Assessing Officer wants to allow payments on capital account, which is more detrimental to Revenue. Further we draw parallel to the case of a bank, which gives loans and takes deposits also. When an amount of loan is disbursed or collected from a customer, the amount is debited or credited to its personal account though the entire funds belong to the bank and though the bank conducts the business in its own right. What is taken to the Profit & Loss Account is only the interest earned on such loans and advances and commission and other incidental items. The entire amount given to a customer by a bank does not constitute an item of profit and loss account. When a customer deposits amount in his S.B. account, it is only credited to his personal account and not routed through P & L account. This method of accounting in the case of banks and financial institutions are laid down under the Banking Regulation Act and this is an accepted accounting practice. On the same analogy in the case of a chit fund company, which is a non-banking financial company, the Chit Funds Act 1982 in Part I and Part II of the Schedule specifies the format of Balance Sheet as well as format of Profit & Loss Account. For ready reference, Part II of the Form of Profit & Loss Account as specified in the Chit Funds Act 1982 is extracted below:1. To interest and deposits, Rs. 1. By foreman's commission Rs.2. To salaries, allowances, Rs. 2. By bonus Rs.3. To director's sitting fees Rs. 3. By Interest Rs.4. To rent, taxes, insurance Rs. 4. By indivisible income in auction Rs.5. To law charges Rs. 5. By rent Rs.6. To postage, telegram Rs. 6. By net profit on sale of Rs.7. To auditor's fees Rs. 7. By other receipts Rs.8. To filing fees Rs. 8. By loss Rs.12. To balance of profit ______Rs. _____ Total ______ Total _____ Section 23 of the Chit Funds Act 1982 and Section 16 of the A.P. Chit Funds Act 1971 laid down that the Balance Sheet has to be prepared in the manner prescribed therein and any contravention makes the chit fund company not only liable for penalty but also for prosecution. Penalties and prosecution as laid down in the Chit Funds Act 1982 prescribed punishment with imprisonment for a term, which may extend to two years as well as with fine. Under Section 56 of the A.P. Chit Funds Act 1971, similar provision of imprisonment, which may extend to one year, is prescribed.
9.7 The Revenue's argument that under Section 24 of the Chit Funds Act 1982 the expression 'without prejudice to the provisions of the Companies Act, 1956 do not come to the rescue of the assessee for the purposes of arriving at the turnover under the Companies Act and Income tax Act is devoid of merit, for the reason that there is nothing contrary in the Companies Act which requires a chit fund company to show the subscriptions collected as turnover. Even otherwise, under 16 of the A.P. Chit Funds Act, 1971 no such rider is available and the fundamental accounting principles state that a chit fund company, cannot take the subscriptions into its P & L account.
9.8 On the issue as to what constitutes turnover in the case of a chit fund company, the Guidance Note On Tax Audit under Section 44AB of the Income-tax Act, 1961, issued by the Institute of Chartered Accountants of India, New Delhi, under "5. Sales, turnover, gross receipts", states as follows:- "5.6 Considering that the words "Sales", "Turnover" and "Gross receipts" are commercial items, they should be construed in accordance with the method of accounting regularly employed by the assessee. Section 145(1) provides that income chargeable under the head "Profits and gains of business or profession" or "income from other sources" should be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee.
The method of accounting followed by the assessee is also relevant for the determination of sales, turnover or gross receipts in the light of the above discussion." "57 Applying the above generally accepted accounting principles, a few typical cases may be considered: (vi) Sale proceeds of fixed assets would not form part of turnover since these are not held for resale.
(vii) Sale proceeds of property held as investment property will not form part of turnover.
(viii) Sale proceeds of any shares, securities, debentures, etc., held as investment will not form part of turnover. However if the shares, securities, debentures etc., are held as stock-in-trade, the sale proceeds thereof will form part of turnover." In "Issues on Tax Audit", Second Revised Edition - January, published by the Institute of Chartered Accountants of India, at page 18, under the heading "Chit Funds", question No.25 and the answer thereto read as under:- "25. The assessee is engaged in the business of "chit funds". How will the turnover/gross receipts be calculated in his case for the purposes of Section 44AB? Ans. The terms "sales, turnover or gross receipts" have to be interpreted with reference to the items which go into the profit and loss account in accordance with the method of accounting regularly employed by the assessee.
Therefore, in the case of a chit fund, the turnover/gross receipts will be only the commission, brokerage and service and other incidental charges received by the assessee." 9.9 In the "Technical Guide on Accounting and Auditing for Chit Fund Business" issued by the Research Committee of the Institute of Chartered Accountants of India, it is stated in paragraph 3.9 at page 18 and paragraph 3.13 at page 20, as follows:- "3.9 A Chit Fund business will have to apply an Accounting Standard keeping in view its relevance to the transaction entered into by it.
Some of the Accounting Standards such as Accounting Standard (AS) 2, 'Valuation of Inventories'; Accounting Standard (AS) 7, 'Construction Contracts', etc., would not be applicable to a Chit Fund business since such a business would not normally have inventories and construction contracts as envisaged in the respective standards. Similarly, Accounting Standard (AS) 12, 'Accounting for Government Grants', would not be relevant to a Chit Fund business since normally such a business would not be receiving any government grants. Further, certain Accounting Standards may be relevant in case of specific situations. For example, Accounting Standard (AS) 14, 'Accounting for Amalgamations', will be applicable in the situation where one enterprise carrying on Chit Fund business amalgamates with another enterprise. Similarly, Accounting Standard (AS) 11, 'The Effects of Changes in Foreign Exchange Rates', will be applicable only where a Chit Fund business has any foreign currency transactions and/or has foreign branches. In the application of certain standards to Chit Funds, certain peculiarities may arise which are discussed hereinafter." "3.13 In a Chit Fund business, the following items of revenue ordinarily arise: Application of the principles of AS 9 in respect of the above items of revenue is dealt with hereinafter." As per this publication, only foreman's commission, default interest, interest on loans and advances etc., are revenue items which are credited to the profit and loss account and subscription receipts from other members of the chit are not revenue in nature and do not form part of turnover of the organization.
9.10 The Central Board of Direct Taxes, with reference to agency and commission business, in Circular No. 452 dated 17-3-1986, has stated at paragraph 3 as follows:- "3. The matter was examined in consultation with the Ministry of Law. There are various trade practices prevalent in the country in regard to agency business and no uniform pattern is followed by the commission agents, consignment agents, brokers, kachha arhatias and pacca arhatias dealing in different commodities in different parts of the country. The primary necessity in each instance is to ascertain with precision what are the express terms of the particular contract under consideration. Each transaction, therefore, requires to be examined with reference to its terms and conditions and no hard and fast rule can be laid down as to whether the agent is acting only as an agent or also as a principal." "5. The above distinction between a kachha arhatia and pacca arhatia may also be relevant for determining the applicability of Section 44AB in cases of other type of agents. In the case of agents whose position is similar to that of kachha arhatia, the turnover is only the commission and does not include the sales on behalf of the principals. In the case of agents of the type of pacca arhatia, on the other hand, the total sales/turnover of the business should be taken into consideration for determining the applicability of the provisions of Section 44AB of the Income-tax Act.
This circular supports the view that the method of accounting regularly followed by the assessee and the trade or commercial practice plays a vital role in determining as to what constitutes turnover in a particular business. The trade practice prevalent in the country for chit funds is that "chit subscriptions" are not taken as income or turnover of the chit fund company and this practice is codified by statute, i.e. by The Chit Fund Act, 1982. Trade practice cannot be contrary to statutory requirements. The views published in the Guidance Note issued by the Institute of Chartered Accountants of India that the terms Turnover, Sales and Gross Receipts, should be construed in accordance with the method accounting regularly employed by the assessee, are in line with the interpretation placed by the CBDT on the terms "total sales', 'turnover' and 'gross receipts'. The view herein as already stated is that the trade practices prevalent in the country with regard to this particular business have to be considered and are relevant for determining the turnover, sales and gross receipts for the application of Section 44AB of the Income-tax Act. The terms Gross Receipts, Sales and turnover are distinct from the terms "Cash Inflows", or "Funds Inflows". A particular cash receipt should be received on revenue account and should form part of the profit and loss account as per the method of accounting regularly employed by the assessee, to come under the purview of the terms "Sales", "Turnover" and "Gross Receipts". The method of accounting followed by the assessee has not been rejected by the Revenue.
9.11 Thus, a combined reading of the Board's circular No. 1175 dt.
16.5.78, Chit Funds Act, 1982, and A.P. Chit Funds Act, 1971, and Rules 1971 and Technical Guide on Accounting of Institute of Chartered Accountants of India, suggests that the opinion given in the form of Guidance Note by the Institute of Chartered Accountants of India is the correct position of law. The method of accounting is given in the Chit Funds Act and by following this method, chit subscriptions are not to be treated as income or turnover. Thus, we hold that the provisions of Section 44AB are not attracted in the case of the assessee as its total turnover from carrying on chit fund business in the form of commission earned from chits, interest receipts etc., does not exceed Rs. 40,00,000, as per its audited accounts. We also hold that the subscription amount collected by the foreman from the subscriber is on capital account and thus not part of turnover/gross receipts/sales for the purpose of Section 44AB of the Act. The terms "total sales", "turnover" and "gross receipts" referred to in this section, should be those, which have in them, income taxable or loss allowable under the Act. The main purpose of audit under Section 44AB is to ensure that the assessee does not claim deductions which are not allowable under the Act and that his taxable income is properly determined. The term "gross receipts" means those receipts which are normally assessable as business income.
9.12 On the facts of this case, we hold that the assessee was not required to comply with the requirements of Section 44AB, as its turnover as per the method of accounting adopted by it and as per trade practice and statutory requirements, did not exceed Rs. 40,00,000 during these years.
9.13 Even otherwise Section 139(9) obliges the Assessing Officer to intimate the assessee of any defect in the return of income filed by him and give him an opportunity to rectify the same. Explanation (bb) to Section 139(9) clearly states that when a return of income is not accompanied by a report under Section 44 AB the same shall be regarded as defective. Though the term used therein is "May" the Hon'ble Kerala High Court in the case of Kerala State Bamboo Corporation Ltd. V. CIT (236 ITR 288) held as follows: "Sub-section (9) of Section 139 of the Income-tax Act, 1961 obliges the Assessing Officer to intimate the assessee, the defect, if any, noted in the return. This is for the purpose of affording an opportunity to the assessee to cure the defects. The minimum period to be granted for the said purpose is fifteen days but if an application is made by the assessee requiring more time the assessing authority is given power to grant further time. If the assessee does not cure the defect within the time allowed by the assessing authority then notwithstanding any other provision of the Act the return shall be treated as an invalid return and all the consequences of not filing the return will follow. But it must be noted that this is subject to a rider which is mentioned in the proviso. It clearly says that if the assessee rectifies the defect beyond the time allowed by the Assessing Officer but before the assessment is made the Assessing Officer may condone the delay and treat the return as a valid return. From the above it is amply clear that the question of treating the defective return as invalid and visiting the assessee with consequences of not filing the return will arise only after the assessment for the year for which the defective return is filed is completed o after the time for completion of the assessment is over. This is for the reason that if the assessee filed the return curing the defect at any time before the said date the assessing authority has got the power to condone the delay and to treat the return as valid." The Assessing Officer in all these cases not only accepts the return as not defective but also processed the same under Section 143(1)(a). The returns of the assessees for all the earlier assessment years are accepted without a murmur of violation of Section 44AB. In our considered opinion, if the Assessing Officer thought that there is a defect, he should give an opportunity to the assessee to rectify the defect and not straightaway levy penalty which is a harsh action. Thus on this ground also the penalty has to be quashed.
9.13.i. The alternatives contention of revenue that the Chit Companies have to be treated as mere commission agents and that in case where the turnover crosses Rs. 10 lakhs, tax audit is attracted is devoid of merit. A Chit Fund Company is an organizer and is in the business of chits in its own right. The Chit Fund Act 1982 does not categorize such companies as commission agents. It is a fallacy to rely non the Board Circular in the case of "KACHHA ARHATIA" and "PAACCA ARHATIA", because these are cases of dealers in goods and merchandise. The purchases are expenditure and sales are income. Sale of Goods Act cannot be applied to Chit Fund Companies. Just because the Chit Fund Act 1982 and A.P.Chit Fund Act 1971 terms the income of the Chit Fund Companies as 'commission' it does not mean they are mere commission agents. A bank also charges commission on bank guarantees. Such an Act does not make a bank a mere commission agent and cannot be equated with "Katcha Arhatia". The Chit Fund Acts lay down the duties, rights and obligations of a chit fund company, and a plain reading of these lead to an inevitable conclusion that the alternative argument has to be necessarily dismissed.
9.14 Even otherwise, the assessee had based itself on the Guidance Note of the Institute of Chartered Accountants of India and the Chit Funds Act, 1982, and had taken only the commission, brokerage, service and other incidental receipts as its gross turnover and on the ground that this figure had not crossed the limit of Rs. 40,00,000, it had not got its accounts audited under Section 44AB, though it got its accounts audited by a Chartered Accountant under the Companies Act. Now, the question before us is whether the assessee had acted in defiance of law or in utter disregard of the statutory obligation cast on it entitling the AO to levy penalty. In our considered opinion, the assessee, on a bona fide belief that its turnover had not exceeded Rs. 40,00,000, had not got its accounts audited under Section 44AB. Almost all the chit fund companies are following a uniform practice and adopting the Guide on Accounting issued by the Institute of Chartered Accountants of India and are complying with the Chit Funds Act, as violation of Section 24 of the Chit Funds Act, 1982, is punishable with imprisonment. The turnovers are only reckoned as per the practice of trade, statutory requirements and fundamental accounting principles and guidance of the Apex accounting body. This is not a defiant, deliberate, contumacious or dishonest conduct of the assessee.
9.15 The Special Bench of the Income-tax Appellate Tribunal, in the case of ACIT v. Gayatri Traders, 58 ITD 121 (Hyd) (SB), at pages 135 and 136, held in paragraph 25 as follows:- "25. Levy of penalty under Section 271B is neither mandatory nor a must. The plain language of Section 271B provides that if any person fails to get his accounts audited or obtain a report as required under Section 44AB, "the Assessing Officer may direct that such person shall pay by way of penalty". The use of the words 'may direct' clearly indicates that the Assessing Officer is vested with the discretion either to impose or not to impose penalty depending upon the facts and circumstances of the case. No doubt, it is true, the said discretion should be exercised judicially and not either arbitrarily or capriciously. When there is a technical or minor breach of the law, the ends of justice require that the discretion should not be exercised in favour of punishing a venial default.
Further, it is not as though the moment a default under Section 44AB is committed, the levy of penalty under Section 271B is automatic.
The words 'without reasonable cause' that existed in Section 271B as applicable to the assessment years under consideration are important. If the assessee is able to show a reasonable cause for his failure to comply with the requirements of Section 44AB before the due date, no penalty is leviable under Section 271B. What is "a reasonable cause", in a given set of facts depends upon the peculiar facts of that case. A cause which a reasonable man accepts it as a reasonable one can be taken as a reasonable cause. The expression 'reasonable cause' requires to be interpreted liberally in a fair and reasonable manner so as to advance the cause of justice, since harsh legalistic approach should be mitigated by soft practical approach in applying penal provisions." Hyderabad Bench 'A' of the Tribunal in I.T.A.No. 347/Hyd/2000 for asst.
year 1998-99, order dated 12-4-2004, in the case "of DCIT v. Lakshmi Maharaja Chit Funds (P) Ltd., Hyderabad, on similar facts and circumstances, followed the aforesaid Judgment of the Special Bench and upheld the order of the first appellate authority deleting penalty under Section 271B. On the facts and in the circumstances of the case and in the light of the Judgments referred to above, we are of the considered opinion that the assessee company was under the bona fide impression that its turnover had not exceeded Rs. 40,00,000 and that it did not come under the ambit of Section 44AB and that this belief led to the assessee not filing the tax audit report. This act cannot be called a deliberate defiance of law nor can it be said to be in utter disregard of statutory obligation by the assessee and thus the failure if any is due to a reasonable cause and no penalty is imposable in terms of Section 273B of the Act. Thus, on this ground also the penalty has to be deleted as there is a reasonable cause for not complying with the provisions.
9.16 Thus, viewing the issue from any angle, we have to cancel the penalty levied under Section 271B for the asst. years under appeal in all the cases.