TAX AUDIT REPORT MUST BE COMPLETE TO AVOID PENALTY

[C.A. DEV KUMAR KOTHARI]

Earlier article:

Earlier an article titled TAX AUDIT REPORT - LITTLE MORE CARE FOR BETTER AUDIT SERVICE written by author was hosted on the website on 19.11.2008

In the said article author has pointed out some gray areas in connection with TAR based on his experience during consultancy, appeal etc. Considering the purpose of TAR author had suggested that the TAR should be complete and comprehensive and the facts and figures given in TAR should be duly verified by the auditor and not based on mere certification of management.  

Incomplete TAR means deficient audit service:

 In case auditor do not verify major facts and figures available with documentary evidence and gives information in report only as certified by the management, the persons concerned with such report may feel aggrieved. If the report is rejected by authorities and the assessee is made liable to penalty, the assessee may justifiably ask the auditor to indemnify him of such loss for inadequate or inefficient audit service. Therefore, the tax auditor must be very careful in discharging his onerous duty of verifying and certifying the facts and figures given in the report.

The following paragraph from the earlier article is reproduced in the context of present topic and analysis of recent judgment of Karnataka High Court. 

Audited accounts: 

Audited accounts of each unit or consolidated accounts of assessee consisting of different units or accounts are to be attached. In case of an individual all proprietary concerns accounts can be consolidated with his personal account. In case income of any person is to be clubbed, the accounts of such person will also require audit and relevant information on points covered in Form No. 3CD are to be given.

Audited accounts are annexed to TAR:

Full set of audited accounts that is the report of auditors, Balance Sheet, Profit and Loss, and accompanying documents are required to be annexed to the TAR- in form no.3CA or 3CB as the case may be. Therefore, merely submission of form no. 3CD will not be full compliance and the report without audited accounts is liable to be rejected. It has come to notice that in some cases TAR without audited accounts (or even draft accounts) was filed in form no. 3CD. Such report does not fulfill compliance and the assessee may be held liable to penalty. Therefore, care should be taken to prepare full and complete tax audit report. In case for any reason accounts have not been audited, at least provisional unaudited accounts can be annexed with TAR to show substantial compliance. Later after finalization and audit of accounts, revised TAR can be submitted.

Recent judgment of High Court:

2010 -TMI - 35244 - KARNATAKA HIGH COURT

1. The Asst. Commissioner of Income -Tax, 2. The Commissioner of Income Tax Versus Dr. K. Satish Shetty 2010 -TMI - 35244 - KARNATAKA HIGH COURT

In this case the question arose about penalty u/s 271B when TAR was not complete for the assessee. The assessee a business person he has got TAR of only one business unit which had turnover exceeding Rs. 40 lakh. However, he did not get TAR of other two units where turnover was less than Rs.40 lakh for each unit. The assessee was under bonafide belief that TAR is required only when turnover of any unit exceed Rs.40 Lakh. This means that the assessee, a doctor by profession was under bonafide belief that turnover of a particular unit of which accounts are separately maintained is to be considered separately for the purpose of TAR.

AO levied the penalty u/s 271B for failure in getting complete TAR, CIT(A) confirmed the penalty  however, the ITAT deleted the penalty. Revenue preferred appeal before the High Court. The question raised read as follows:

"Whether the Tribunal was correct in applying the principle laid down by the Hon'ble Supreme Court in the case of HINDUSTAN STEEL LIMITED VS. STATE OF ORISSA reported in 83 ITR 26 to the facts of the case for the purpose of levying penalty under Section 271 (B) of the Act ?"

The facts of the case as noted by the court are analyzed below:-

The assessee is proprietor of three concerns namely:

        (1) Satish Enterprises - IOC Dealer

        (2) M/s. Khyathi Motors - Workshop

        (3) M/s. Kyathi Enterprises - Insurance Agency.

He filed return of income on 31.10.2001 declaring the net taxable income of Rs.5,33,640/-. The return filed by him was processed under Section 143(1).  Subsequently, it was taken up for scrutiny and the assessment was completed on 25.3.2003 determining the income of the assessee at Rs. 5,86,620/-. In the said computation of income, the total income derived by him from all the three concerns was aggregated.

The assessee obtained the audit report as required under section 44AB of the Act only in respect of M/s. Sathish Enterprises (IOC Dealer). 

In respect of two other businesses, according to assessee, due to his ignorance of law and bonafide mistake, he had not obtained Audit Report with regard to M/s. Khyathi Motors and M/s. Kyathi Enterprises. For these two business he had not obtained audit reports on the ground that individually from these two businesses, he had not exceeded the total turnover of Rs. 40,00,000/- for the relevant assessment year, as contemplated under Section 44AB of the Act.

For not obtaining proper audit report in respect of other two businesses, Assessee was issued a show cause notice. The Assessee gave his reply.

AO imposed penalty under sec. 271B of the Act amounting to Rs. One Lakh for the aforesaid default. On appeal by assessee the Commissioner of Income Tax (Appeals), Mysore, dismissed the appeal.

On appeal by assessee, the Income Tax Appellate Tribunal, after considering the matter from all angles, came to the conclusion that no penalty could have been imposed on the assessee as there was no willful default on his part and the appeal of the assessee was allowed.

Thereafter appeal was preferred by the Revenue before the High Court.

The High Court has for ready reference, referred to reproduced the relevant portion of Sec. 44AB as follows:

"Sec.44AB:- Every person,-

(a) carrying on business shall, if his total sales, turnover or gross receipts, as the case may be, in business exceed or exceeds forty lakh rupees in any previous year; or

(b) XXX  XXXX  XXX

(c) XXX  XXXX XXX

get his accounts of such previous year audited by an accountant before the specified date and furnish by that data of report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed."

The court also considered that to clarify the position with regard to obtaining of audit report, it is necessary to read the definition of  "business" as contained under Sec.2(13) of the Act, which is also reproduced for ready references :-

"Section 2(13) "business" includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture"

The court on the conjoint reading of the aforesaid provisions took view as follows:

These provisions  make it clear that every person who is carrying on business and whose total sales of turnover exceeds Rs. 40 Lakhs in any previous year would be required to get his accounts audited by the Accountant. 

This does not show anywhere that in case assessee is carrying on many businesses, then the aggregate of the businesses has to be arrived at and thereafter, the same is required to be audited.

Views of ICAI about TAR:

The Court also observed that subsequently, it appears that some doubts were raised with regard to the correct interpretation of the aforesaid provisions of law, the matter was clarified by the Chartered Accountants of India under the heading:-

"Individual businesses - single Form No. 3CD or consolidated form?"

An assessee owns four proprietorship businesses.  The aggregate annual turnover of all the concerns exceeds Rs. 40 lakhs but individually each business turnover is below Rs. 40 lakhs.  Further, separate books or accounts are maintained for each business and profit and loss account and balance sheet are prepared separately.

(a) Will tax audit under Section 44AB be applicable?

(b) ---------.

Answer (a):- The requirement of tax audit in the case of an assessee is to be determined taking into consideration the 'sales', 'turnover' or 'gross receipts' of all the business carried on by him. If the aggregate annual turnover of the four proprietary concerns exceeds Rs. 40 Lakhs, Section 44AB would be clearly applicable.

(b) ………………..

Therefore, from the above, it is clear that tax audit as such is conducted in respect of "an assessee" and not in respect of particular business."

Assesses Explanation:

The court has also take note of explanation of assessee in response to SCN which reads as under:-

"I am ignorant about incomplete audit report and the provision of law in this regard omission on my part if any was not intentional.  Hence, you are requested to drop penalty proceedings and oblige." and

"This is in continuation to my submission dated. 4.4.2003 submitted to you on the above subject and in response to your notice dated 10.4.2005. For the A.Y. 2001-02 I through my accountant submitted for audit the accounts of M/s.Satish Enterprises, M/s Kyathi Motors (Workshop) Manipal and Khyathi Enterprises, Udupi. The auditors submitted the report under 44AB only, in respect of Satish Enerprises, the turnover in which exceeded the limit of Rs.40 Lakh. I am ignorant of the law in this regard. Hither to my auditor used to give the report under Section 44AB only, in respect of the audit conducted by him for Satish Enterprises as and when turnover exceeded the limit of Rs.40 Lakh. For the A.Y. 1999-2000 and 2000-01 since the turnover limit did not exceed the prescribed limit, no report was obtained in respect of any of the concerns.

For A.Y. 2001-02 audit report under Section 44AB was given but name of M/s Kyathi Motors (Workship) Manipal and Khyathi Enterprises were not specifically mentioned in the report. This aspect was brought to my notice only now.

Since there is no intention on my part to defraud the revenue, the default if any on my part may kindly be condoned as it is not intentional and has occurred for the first time."

Courts views:

On consideration of all aspects the court took view as follows:

Cumulative effect of provisions and explanations:

Taking the cumulative effect of the effect of the explanations offered by the assessee and from a reading of the relevant provisions of Section 44AB and Section 2(13) of the Act, we are of the considered opinion that the assessee was under a bonafide belief that he is required to obtain audit report only in respect of that business, the turnover of which crosses the limit of Rs. 40 Lakhs for each assessment year.

Conduct of assessee:

From the conduct, behavior and attitude of the assessee, it is clear that he was not aware that aggregate of the three businesses has to be taken into consideration for compliance of the provisions contained in Section 44AB of the Act.

First time default:

It is also clear from the records that this was for the first time he had committed this default.

No gain to assessee:

It is also relevant to mention that in any case, the assessee would not have gained in any manner whatsoever, if he had included other two businesses for working out the aggregate provided, he would have been award of the same.

No doubt, it is true that the assessee was being represented by his Chartered Accountant and he should have been little more careful and cautious in applying the legal proposition to the facts of the case. He should have added the aggregate of all the three businesses so as to have full compliance of section 44AB of the Act. But for the mistake or default of the Chartered Accountant, who may have also acted bonafide, being unaware of the correct interpretation of law, the assessee cannot be held responsible, even though the said Chartered Accountant acted as an agent of the assessee.  Since the issue involved was complicated, thus the clarification was issued by the Chartered Accountants of India, subsequently.

On issue of penalty:

Court referred to a judgment of the Supreme Court reported in the 1989 (42) E.L.T. 350(SC) in the case of GUJARAT TRAVANCORE AGENCY VS. COMMISSIONER OF INCOME TAX. In this case the Supreme Court has held that while imposing penalty, question of mens-rea is not required, but the obligation cast upon the assessee has to be discharged bonafide.

As mentioned herein above, a bare reading of the provisions of law makes it abundantly clear that the Assessee was required to furnish audit with regard to his business as Section 44AB does not show or contemplate that all business are required to be consolidated together for working out the aggregate of the turnover.  The subsequent clarification issued by the Chartered Accountants of India cannot be pressed into service to the disadvantage of the Assessee.

Tribunal has also placed reliance on yet another judgment of the Supreme Court reported in (1972) ITR 83 page 27 (HINDUSTAN STEEL LIMITED VS. STATE OF ORISSA), where it dealt with the provisions contained in Orissa Sales Tax Act.  While considering the general principles, the Apex Court has held that penalty can be levied on failure of the assessee to get itself registered as a dealer under the Sales Tax Act only when it is established that he had not acted bonafide, or acted deliberately in defiance of law or was guilty of conduct contumacious, or dishonest, or in conscious disregard of his obligations. If the assessee was under a bonafide belief that it was not a dealer, then levying of penalty could not be justified. In view of the foregoing discussions, it is clear to us that assessee had acted in bonafide belief and had no dishonest intention in not obtaining audit report for all the three businesses carried on by him.

 For all the above reasons, the court expressed opinion that the question of law, referred to herein above, has to be answered in favour of the assessee and against the revenue.

Author's view on the judgment:

The above case is an eye opener to be more careful in compliance about TAR. The Tribunal waived the penalty for the reason that there was bonafide on part of assessee- in as much as the assessee got accounts of one unit and the tax audit of other units would not have harmed the assessee, this was first year, and if at all there was mistake of concerned persons the assessee being a businessman having not understood complex law fully. Thus there were genuine reasons for not getting TAR for two units in which turnover was less than Rs.40 lakh individually. In other words the revenue was not a looser due to non submission of TAR of two units. The high Court also considered these aspects favorably in confirming order of the ITAT.

The court has considered that there is no indication as to consolidation of turnover of various businesses of assessee. However, with respect author feel that in view of S. 44AB, turnover of the person (assessee) engaged in business or profession is relevant. The turnover of all three concerns of assessee in this case amount to the turnover of the assessee because the three concerns are only three different trade names in which assessee is carrying his business. Therefore, clearly S. 44AB was attracted. It may be that accounts of three concerns were prepared by three different accountants and each accountant may not be aware of turnover of other business unit of assessee. Therefore, the person who prepared return should have taken care and advised the assessee to get his accounts audited for all concerns. However, no doubt, there can be a bonafide mistake due to complex law and in absence of any clarity in provisions each business can be considered to have a separate limit.