1. This appeal is filed by the assessee challenging the order of the Commissioner of Income-tax (Appeals)-III, Kochi dated 13-03-2006 for the Assessment Year 2004-05.
2. The assessee has taken seven grounds in this appeal, but the only issue involved for our consideration is whether the Assessing Officer was justified in levying the penalty Under Section 271A of i.e. I.T.Act, 1961.
3. The facts of this case are in a narrow compass. The assessee is a civil contractor. He filed the return of income for the assessment year 2004-05 on 1-11-2004. It was noticed by the Assessing Officer that as per the income computation statement filed along with the return of income, the assessee had a turnover of Rs. 69,22,579/- and he had estimated the income at the rate of 5% f the total contract receipts.
Subsequently, there was a survey action against the assessee Under Section 133A of the Act on 8-2-2005 and some of the files were impounded. It was found by the Assessing Officer that for the earlier year i.e. A.Y. 2000-01 and 2001-02, the assessee has declared the income at the rate of 8% on the gross contract receipts. During the course of survey action, sworn statement of the assessee was recorded and he stated that he is not maintaining any day book and ledger in respect of the contract work and only separate files were kept with details of the purchases, receipts from contractee department, etc.
During the course of survey, it was found that some of the contract receipts were omitted by the assessee. The Assessing Officer, therefore, came to the conclusion that the assessee has violated the provisions of Section 44AA and hence, he issued notice Under Section 274 read with Section 271A dated 10-1-2005 to the assessee requiring to show cause as to why penalty Under Section 271A should not be levied.
The assessee filed his reply but that was rejected by the Assessing Officer. The A.O. in his own way interpreted the provisions of Section 44AA. The A.O. proceeded to levy the penalty Under Section 271A of the Act.
4. The assessee challenged the impugned order of the Assessing Officer before the CIT (Appeals) but without any success. Now, the assessee has challenged the impugned order of the CIT (Appeals) before us.
5. We have heard Shri T.M. Sreedharan, the learned Counsel for the assessee and Smt. A.S. Bindu, the Id. Departmental Representative for the revenue. The learned Counsel submitted that the Assessing Officer initiated the penalty proceedings before the completion of the assessment and the assessment of the assessee for this year has been completed by the Assessing Officer only on 23-6-2006 whereas the Assessing Officer finalized the levy of penalty Under Section 271A vide order dated 26-7-2005. It was further submitted by the Id. counsel that the assessee was filing the statement of the net wealth showing the assets as well as liabilities along with the return. Moreover, the assessee was regularly following the same method for declaring his income. It was further submitted that subsequently, there was a survey section against the assessee Under Section 133A of the Act i.e. on 8-2-2005 and some statement of the assessee was recorded and on the basis of the statement recorded, the Assessing Officer came to the conclusion that there is failure on the part of the assessee to comply with the provisions of Section 44AA when, in fact, Section 44AA is not applicable as far as the facts of the assessee's case are concerned. It was further submitted that the Assessing Officer has passed the penalty order like passing the assessment order. In fact, penalty proceedings are quasi-criminal proceedings and while interpreting the provisions of the Act for punishing somebody, there should be strict interpretation.
The. Id. counsel further submitted that as far as Section 44AA is concerned, by virtue of Sub-section (1) certain class of the persons carrying on specified business or profession are required to maintain the books of accounts as would be notified in the official gazette. As far as Sub-section (2) is concerned, it is expected that normally, the books of accounts should be maintained as may enable the Assessing Officer to compute his total income in accordance with the provisions of the Act. The Id. advocate emphasized on the word "may" used in Sub-section (2) of Section 44AA and submitted that "may" does not mean that the assessee must maintain the books of accounts and other documents. It was further submitted that the assessee himself has offered Rs. 5 lacs as additional income and the Assessing Officer has not disputed the income offered by the assessee and that goes to show that the Assessing Officer has no grievance for computing the income of the assessee. It was further submitted that as far as the assessment is concerned, even there are additions where regular books of accounts are kept and that cannot be the case for the Assessing Officer to levy the penalty. He further submitted that nothing has been brought on record to show that the conduct of the assessee is in defiance of law because for all the earlier years, the assessee had adopted the same method which was never questioned by the Assessing Officer. It was further submitted that subsequent survey action against the assessee cannot justify the levy of penalty for violation of Section 44AA. If at all the Assessing Officer wants to levy penalty presuming for the sake of argument that Sub-section (2) of Section 44AA is applicable to the assessee, in that case, the Assessing Officer can draw the inference only after completion of the assessment as the words used are "as may enable the Assessing Officer to compute his total income in accordance with the provisions of this Act". But in this case, even before the completion of the assessment, the A.O. levied the penalty. The Id.
counsel relied on the following precedents:Hindustan. Steel Ltd. v. State of Orissa 83 ITR 26(SC) wherein it has been observed as under: ...An order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceeding, and penalty will not ordinarily be imposed unless the party obliged, either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation. Penalty will not also be imposed merely because it is lawful to do so. Whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances....
(ii) Mattannur Builders v. ITO, ITA No. 296(Coch)/2001, ITAT, Cochin Bench dated 27-2-2004.
6. On the other hand, the Id. Departmental Representative supported the order of Assessing Officer as well as CIT(Appeals).
7. We have heard the rival submissions of the parties. We have also carefully considered the facts of this case. We have also gone through principles laid down in the precedents relied on by the assessee. The assessee is a contractor and it is not disputed in this case that he filed his return of income for the assessment year 2004-05 on 1-11-2004. It is also not disputed in this case that penalty proceedings for levy of penalty Under Section 271A was were initiated on 10-1-2005 and the assessment for this year has been completed on 23-6-2006. Now, the only issue which emerges for our consideration is whether on the facts of this case, provisions of Section 44AA are applicable to the assessee and presuming that the provisions are applicable, then whether the Assessing Officer was justified in levying the penalty Under Section 271A. Section 44AA reads as under: 44AA. (1) Every person carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or any other profession as is notified by the Board in the Official Gazette shall keep and maintain such books of account and other documents as may enable the Assessing Officer to compute his total income in accordance with the provisions of this Act.
(2) Every person carrying on business or profession not being a profession referred to in Sub-section (1) shall,-- (i) if his income from business or profession exceeds one lakh twenty thousand rupees or his total sales, turnover or gross receipts, as the case may be, in business or profession exceed or exceeds ten lakh rupees in any one of the three years immediately preceding the previous year; or (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 one lakh twenty 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 ten lakh rupees, during such previous year; or (iii) where the profits and gains from the business are deemed to be the profits and gains of the assessee under Section 44AD or Section 44AE or Section 44AF or Section 44BB or Section 44BBB, as the case may be, and the assessee has claimed his income to be lower than the pr fits or gains so deemed to be the profits and gains of his business, as the case may be, during such previous year, keep and maintain such books of account and other documents as may enable the Assessing Officer to compute his total income in accordance with the provisions of this Act.
(3) The Board may, having regard to the nature of the business or profession carried on by any class of persons, prescribe, by rules, the books of account and other documents (including inventories, wherever necessary) to be kept and maintained under Sub-section (1) or Sub-section (2), the particulars to be contained therein and the form and the manner in which and the place at which they shall be kept and maintained.
(4) Without prejudice to the provisions of Sub-section (3), the Board may prescribe, by rules, the period for which the books of account and other documents to be kept and maintained under Sub-section (1) or Sub-section (2) shall be retained.
As far as Sub-section (1) of Section 44AA is concerned, if the assessee is carrying on legal, medical, engineering or architectural profession or profession of accountancy or technical consultancy, etc. which is notified by the Board in the official gazette is required to maintain such books of accounts. As far as Sub-section (2) is concerned, it merely states that the assessee who carries on the business or profession other than the profession mentioned in Sub-section (1), then if his income exceeds specified limit in any one of the three years immediately preceding the previous year or in case of a newly set up business or profession, it is likely to exceed the specified limit of the income or turnover during the previous year or if the income of the assessee is computed under the presumptive scheme where Sections 4AD, 44AE, 44AF, etc. are applicable and the assessee has claimed his income to be lower than the profit or gain less than prescribed under the said Sections, in that case, the assessee should keep the books of accounts as may enable the Assessing Officer to compute his total income in accordance with the provisions of this Act. As far as Sub-section (3) and Sub-section (4) are concerned, the said Sub-sections speak about the lower of the Board to prescribe the books of accounts to be kept.
As far as the assessee's case is concerned, his case is not covered by Sub-section (1) of Section 44AA. At the most, Sub-section (2) of Section 44AA may be applicable but for attracting the condition, the circumstances may exist that the Assessing Officer was unable to compute the income of the assessee due to the non-maintenance of the accounts. In this case, we find that the Assessing Officer issued the show cause notice for levy of penalty Under Section 274 read with Section 271A dated 10-1-2005 and after more than 17 months, the Assessing Officer completed the assessment. In our opinion, without completing the assessment, the Assessing Officer cannot come to the conclusion that he was unable to compute the income of the assessee due to the non-maintenance of the day book and ledger. Moreover, no specific books of accounts have been specified or notified by the Board in respect of contract business. If the Assessing Officer was of the opinion that he was unable to compute the correct income of the assessee then he should have waited at least for the completion of the assessment and only after completion of the assessment, he may have reasonably come to the conclusion that due to the non-maintenance of the books of accounts on the part of the assessee, it was not possible for him to compute the correct income under the Act. It is interesting to refer to the assessment order also, copy of which is. filed by the assessee, that the assessee has offered Rs. 5 lacs as an additional income from his contract business which has been accepted without further comments or observations by the Assessing Officer.
8. It is well settled principle of law as laid down by the Apex Court in the case of Hindustan Steel Ltd.(supra) that penalty proceedings are quasi-criminal in nature and it must be brought on record by the Assessing Officer that the assessee has de berately acted in defiance of law or was guilty of conduct contumacious or dishonest, but in the reasoning given by the Assessing Officer in the assessment order, nothing has been mentioned. Moreover, as we have observed hereinabove, the Assessing Officer was in a hurry to levy the penalty than to complete the assessment. In our opinion, as far as Sub-section (2 of Section 44AA is concerned, only after the completion of the assessment, the Assessing Officer may initiate the penalty proceedings for the levy of penalty Under Section 271A. Merely because there was a survey action, and that too after the issue of notice to the assessee to levy the penalty Under Section 271A, that cannot be the ground justifying the levy Under Section 271A of the Act. Section 44AA is to be interpreted strictly for attracting the penal consequences. In on opinion, the Assessing Officer was not at all justified in levying the penalty on the facts of this case. We, therefore, delete the penalty levied by the Assessing Officer Under Section 271A and se aside the order of the CIT(Appeals).