1986 (4) TMI 332 - HC - VAT and Sales Tax

Summary

Issues Involved:
1. Validity of Section 44AB and Section 271B of the Income-tax Act.
2. Interpretation of Sections 44AB and 271B of the Income-tax Act.
3. Alleged discrimination under Section 288 of the Income-tax Act.
4. Rationality of the classification of Rs. 40 lakhs and Rs. 10 lakhs under Section 44AB.
5. Alleged violation of Article 19(1)(g) of the Constitution.
6. Workability of Section 44AB in relation to other provisions of the Income-tax Act.
7. Applicability of Section 44AB to commission agents.

Detailed Analysis:

1. Validity of Section 44AB and Section 271B of the Income-tax Act:
The petitioners challenged the validity of Section 44AB on the grounds that it violated Articles 14 and 19(1)(g) of the Constitution and was inconsistent with other provisions of the Income-tax Act. The court upheld the validity of Sections 44AB and 271B, stating that these provisions were enacted to check fraudulent transactions and tax evasion, thereby facilitating the administration of tax laws. The court referenced several judgments, including R. Abdul Quader and Co. v. Sales Tax Officer, Second Circle, Hyderabad, to support the view that ancillary powers to prevent tax evasion are within the legislative competence under Entry 82 of List I of the Seventh Schedule to the Constitution.

2. Interpretation of Sections 44AB and 271B of the Income-tax Act:
The court interpreted Section 44AB as applicable to individuals whose total sales, turnover, or gross receipts in business exceed Rs. 40 lakhs or whose professional receipts exceed Rs. 10 lakhs. The court emphasized that the provision aims to ensure proper maintenance and verification of accounts to prevent tax evasion. The court also clarified that the penalty under Section 271B would apply if the audit report is not submitted without reasonable cause.

3. Alleged Discrimination under Section 288 of the Income-tax Act:
The petitioners argued that Section 288 allows seven classes of persons to represent assessees before the Income-tax Officer, but only chartered accountants can conduct audits, which is discriminatory. The court rejected this argument, stating that reasonable classification is permissible under Article 14 if it is based on an intelligible differentia and has a rational relation to the object sought to be achieved. The court held that the classification based on the expertise of chartered accountants is reasonable and not discriminatory.

4. Rationality of the Classification of Rs. 40 lakhs and Rs. 10 lakhs under Section 44AB:
The petitioners contended that the classification of Rs. 40 lakhs for business turnover and Rs. 10 lakhs for professional receipts was arbitrary. The court held that the legislature is the best judge to determine the limits for classification and that such classification is not discriminatory if it is based on rational criteria aimed at preventing tax evasion. The court referenced the case of Murthy Match Works v. Assistant Collector of Central Excise to support this view.

5. Alleged Violation of Article 19(1)(g) of the Constitution:
The petitioners argued that the provisions of Section 44AB imposed unreasonable restrictions on their business/profession, violating Article 19(1)(g). The court rejected this argument, stating that the restrictions imposed are reasonable and necessary to prevent tax evasion. The court referenced cases like Mohan Trading Co. v. Union of India to support the view that Sections 44AB and 271B do not violate Article 19(1)(g).

6. Workability of Section 44AB in Relation to Other Provisions of the Income-tax Act:
The petitioners argued that Section 44AB is unworkable because it is inconsistent with other provisions, such as Section 139(2), which allows the Income-tax Officer to extend the time for filing returns. The court held that both provisions can be read harmoniously, as Section 271B provides discretion to the Income-tax Officer to waive penalties if reasonable cause is shown. The court emphasized that the provisions are designed to work together to prevent tax evasion.

7. Applicability of Section 44AB to Commission Agents:
The court addressed whether Section 44AB applies to commission agents. The court held that if a commission agent only facilitates transactions and earns a commission, they are not subject to audit under Section 44AB unless their professional receipts exceed Rs. 10 lakhs. However, if the commission agent sells goods in their own name and shows it as their turnover, they are subject to audit under Section 44AB. The court referenced the case of Kandula Radhakrishan Rao v. Province of Madras to support this interpretation.

Conclusion:
The court dismissed all the writ petitions, upholding the validity and interpretation of Sections 44AB and 271B of the Income-tax Act. The court directed that no penalty or interest would be charged if the petitioners file their returns with the audit report within four months from the date of the order.