2006 (8) TMI 97 - HC - Income Tax

Compulsory audit Question arises whether the receipts of an assessee by way of sale or trading business and receipts for doing the job work can be clubbed for the purpose of finding out the limit of Rs. 40 lakhs prescribed u/s 44AB Held that answer against the assessee but penalty is set aside

Summary

Issues Involved:
1. Whether the receipts from sales and job work can be clubbed for determining the Rs.40 lakhs limit under Section 44AB.
2. Whether a bona fide belief contrary to the interpretation of Section 44AB can be considered a reasonable cause under Section 273B.
3. Whether penalty under Section 271B can be imposed without invoking Section 139(9).

Issue-Wise Detailed Analysis:

1. Clubbing of Receipts for Section 44AB Limit:
The court examined whether the receipts from sales and job work should be combined to determine if the Rs.40 lakhs threshold under Section 44AB was exceeded. The assessee argued that the terms "total sales," "turnover," and "gross receipts" in Section 44AB are independent criteria and should not be aggregated. The Assessing Officer, however, included both sales and job work receipts, concluding that the total exceeded Rs.40 lakhs, thus necessitating an audit.

The court clarified that Section 44AB aims to ensure the credibility of accounts for tax purposes, applicable to both trading and non-trading businesses. The terms "total sales," "turnover," and "gross receipts" are not isolated but collectively indicate the volume of business activities. The court held that the total volume of business receipts should be considered as an integrated whole, not independently. Therefore, the aggregate of sales and job work receipts exceeding Rs.40 lakhs required the assessee to get the accounts audited.

2. Bona Fide Belief as a Reasonable Cause:
The court addressed whether the assessee's bona fide belief that he was not required to get his accounts audited could be considered a reasonable cause under Section 273B to avoid penalty under Section 271B. The assessee contended that he had a genuine belief based on his interpretation of Section 44AB.

The court emphasized that a bona fide belief about the interpretation of a statute, even if ultimately found incorrect, constitutes a reasonable cause. It noted that the assessee's interpretation required an interpretative exercise, indicating that the belief was not frivolous. The court referred to the Supreme Court's ruling in Hindustan Steels Ltd. v. State of Orissa, which stated that penalties should not be imposed for technical or venial breaches of the law. Consequently, the court found that the assessee's bona fide belief constituted a reasonable cause, absolving him from the penalty.

3. Penalty Without Invoking Section 139(9):
The court analyzed whether a penalty under Section 271B could be imposed without invoking Section 139(9), which deals with defective returns. Section 139(9) requires the Assessing Officer to notify the assessee of defects in the return and provide an opportunity to rectify them.

The court explained that if an assessee's return is defective due to the absence of an audit report, the Assessing Officer must notify the assessee to rectify the defect. If the audit report is submitted after the specified date but before the assessment, the return should be considered valid. The court held that the failure to get accounts audited by the specified date does not result in an incurable default. Instead, it may constitute a reasonable cause under Section 273B, preventing the imposition of a penalty under Section 271B.

Conclusion:
The court concluded that the assessee was required to get his accounts audited as the combined receipts exceeded Rs.40 lakhs. However, the assessee's bona fide belief about the interpretation of Section 44AB constituted a reasonable cause for not complying with the audit requirement, absolving him from the penalty under Section 271B. The court also emphasized that penalties should not be imposed for technical or venial breaches of procedural laws. Consequently, the appeal was allowed, and the penalty imposed by the Assessing Officer, CIT (Appeals), and Tribunal was set aside.