2004 (4) TMI 287 - AT - Income Tax

Applicability of Section 44AB of the Income-tax Act, 1961 - Interpretation of terms total sales turnover, and gross receipts - Bona fide - Justification for the imposition of penalty u/s 271B - HELD THAT - The words used in section 44AB of the Act total sales , turnover or gross receipt have been used specifically and the scope of words gross receipt is quite wide, otherwise the legislature would have stopped after using the words sales or turnover . The ld. counsel for the assessee has not been able to show as to how the amount of Rs. 2.20 crores received as advance from customers will not be included in the words gross receipt . Further, these amounts were having element of profit in Income-tax Act, 1961. The amount of advance was to be adjusted towards the cost of the flat booked by each customer and the amount of advance must be having cost of construction as well as element of profit, which may subsequently be bigger in proportionate when whole of the amount fixed for sale of flat is realized, but it cannot be said that the amount of advance received by the assessee will not be included in the scope of words gross receipt . In case it is taken that assessee is following the system in which income is returned on completion of the project and in case project goes on for more than 5 years and assessee gets its books of account audited for last year in which project is completed, then from where Assessing Officer will be able to verify the figures of expenses and receipts etc. of earlier years. So, it is against the very principle of section 44AB that in project completion assessee would get the books of account audited in the last year and not in earlier years when he is debiting the expenses and showing sundry debits and different types of receipts are also there. Thus, I am of the view that assessee at the outset had not been able to bring before me the audit guideline and even if such guideline is there, the same is against the very provisions of section 44AB. Thus, I am of the view that assessee was under obligation to get its accounts audited but the same has not been done and it is a case of levy of penalty.

Summary

Issues Involved:
1. Applicability of Section 44AB of the Income-tax Act, 1961.
2. Interpretation of terms "total sales," "turnover," and "gross receipts."
3. Bona fide belief of the assessee regarding the applicability of audit requirements.
4. Justification for the imposition of penalty u/s 271B.

Summary:

1. Applicability of Section 44AB of the Income-tax Act, 1961:
The Assessing Officer (AO) initiated proceedings to levy a penalty u/s 271B of the Income-tax Act, 1961, as the assessee, a construction firm, failed to furnish an audit report despite having advances amounting to Rs. 2.20 crores. The AO argued that these advances should be considered as "gross receipts" under section 44AB, which mandates an audit for certain classes of assessees based on their gross receipts, sales, or turnover.

2. Interpretation of Terms "Total Sales," "Turnover," and "Gross Receipts":
The assessee contended that the terms "total sales," "turnover," and "gross receipts" were used interchangeably and loosely in the statute. They argued that these terms should only include transactions that have a bearing on the computation of taxable income and should exclude advances received for booking flats, as these do not have profit-making quality. The CIT(A) accepted this interpretation, noting that the guidelines from the Institute of Chartered Accountants suggested that advances received for construction projects should not be considered as sales until the project is completed.

3. Bona Fide Belief of the Assessee Regarding the Applicability of Audit Requirements:
The CIT(A) provided relief to the assessee by accepting their bona fide belief that the provisions of section 44AB were not applicable, as no sales or business had taken place. The CIT(A) noted that the assessee was prevented by a reasonable cause from getting their accounts audited due to the interpretation available at the time.

4. Justification for the Imposition of Penalty u/s 271B:
The Tribunal disagreed with the CIT(A)'s decision, emphasizing that the words "total sales," "turnover," and "gross receipts" were used deliberately by the legislature. The Tribunal held that the advances received by the assessee should be included in the "gross receipts" and that the assessee was under an obligation to get its accounts audited. The Tribunal also noted that the assessee had mentioned in their return that an audit report was enclosed, indicating their awareness of the audit requirement. Consequently, the Tribunal restored the AO's order imposing the penalty u/s 271B, reversing the CIT(A)'s decision.

Conclusion:
The appeal by the Department was allowed, and the penalty of Rs. 1 lakh imposed by the AO u/s 271B was restored, as the assessee was found to be under an obligation to get its accounts audited, and the plea of bona fide belief was not substantiated.