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TMI Blog2004 (8) TMI 340X X X X Extracts X X X X X X X X Extracts X X X X ..... On behalf of the Revenue, Shri B.G. Reddy, Senior Departmental Representative represented the matter before us. 3.1 The sole issue arising for adjudication in these appeals is whether the penalty levied under section 271B by the Assessing Officer, in the case of a Chit Fund Company, on the ground that gross subscriptions received by a Chit Fund Company should be taken as its turnover for the purpose of section 44AB was wrongly cancelled by the Commissioner of Income-tax (Appeals) by applying the provisions of section 273B. Brief facts of the case are as follows. 3.2 All these assessees are Chit Fund Companies. They are governed by the Chit Funds Act, 1982 and the A.P. Chit Funds Act, 1971 and the Rules formed thereunder. The assessees have filed their returns of income wherein they have disclosed their turnover from the business of Chit Funds as consisting of Foreman's commission, interest, dividend etc. This turnover was based on requirements specified under the Chit Funds Act, 1982 and the A.P. Chit Funds Act, 1971. The accounts have been audited under the Companies Act and audit report obtained under the Companies Act was filed along with the return of income. The Assessing O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cases are much above Rs. 40 lakhs when the total subscriptions received is considered as turnover and that by not getting its accounts audited as required under section 44AB of the Act the assessee had violated the Act and penalty was rightly levied under section 271B of the Act. 4.2 He referred to the Board's Circular that was issued in respect of commission agents i.e., Circular No. 452 [F. No. 201/3/'85-IT (AB)] dated 17-3-1986 in respect of Kachha Arahtias and Pacca Arahtias and submitted that in the case of Pacca Arahtias, the assessee makes himself liable upon the contract not only to third parties but also to his constituent. The Pacca Arahatias need not inform the members as to how the funds have been utilized or with whom the contracts have been entered into. In the case of Pacca Arahtias he has a personal interest of his own when he enters into a transaction and he has to suffer his own loss. He has submitted that the Board had clarified that in the case of Pacca Arahtias, total sales/turnover/gross receipts of the business should be taken into consideration for determining the applicability of the provisions or section 44AB. Drawing parlance from the Board Circular, he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asonable and cancelled the penalty. He vehemently contended that there is no finding in this decision as to whether there was sufficient cause for the assessee in not complying with the provisions. He argues that this decision cannot be taken as a precedent as all the aspects have not been gone into He submitted that the decision of Hyderabad Bench 'B' of this Tribunal in the case of Sri Venkateswara Chits & Financiers should be followed as all aspects were considered therein and in case because o conflicting decisions the Bench prefer to follow the later decision, h submitted that the issue may be referred to a larger Bench and not dismiss the appeal of the Revenue by following the latter judgment. 4.4 Though the learned counsel for the assessee had yet to argue the matter, the learned Departmental Representative, as a matter of abundant caution, and in anticipation of such an argument, argued that the Board instruction No. 1979 dated 27-3-2000 specifying monetary limits for the departmental appeals do not apply in the case of penalty. He referred to the Board's Circulars on the issue and argued that "Tax" does n include 'penalty'. The term "Tax" has been defined in the Income-ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an earlier decision of the A.P. High Court in the case of CIT v. Om Trading Co. [1996] 220 ITR 149 wherein the Standing Counsel for the Department withdrew the reference on the basis of the earlier instruction of the Board. He submitted that the jurisdictional High Court rejected the representation of the counsel in that case Lohia Trading Co. only because there was no such withdrawal by the Department in the case before them. The Court held that it was not necessary to enter into any discussion on the correctness of the view expressed by the Bombay High Court in regard to the circular under section 119 of the Act and further it did not dwell on the applicability or otherwise of the instruction in the case before it. Therefore, the Department cannot draw any support from that decision. On the other hand, as the issue was left open by the High Court, the Tribunal can go into the applicability or otherwise of the Instruction No. 1979 to penalties also. The rigour and strictness good enough for interpretation of statute, rules and even circulars cannot be applied to departmental instructions. The stated object of the instruction is for reduction of litigation and the words tax effect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e department is concerned, to say the least, is untenable. The instruction would only mean that if the Department is not satisfied with the outcome of the first appeal, a second appeal need not be filed where the revenue effect does not exceed Rs. 1,00,000. 5.3 Even if there is any High Court judgment implying that the instruction of the Department need not be taken cognizance of, once appeal is filed in contravention of instruction an interpretation of a High Court favourable to the assessee is required to be adopted in terms of the judgment of the jurisdictional High Court in the case of State of A.P. v. CTO [1988] 169 ITR 564 (AP) wherein the jurisdictional High Court approvingly referred to the judgment of the Bombay High Court wherein it was held that in the absence of a decision of the jurisdictional High Court or the Bench of the Tribunal to the contrary, a decision favourable to the assessee must be followed where there are conflicting decisions of other Courts or Benches of the Tribunal. In the present case too, it was submitted the decision of the Bombay High Court in Cameo Colour Co.'s case has to be followed. He then referred to another decision again of the Bombay Hig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned counsel, therefore, sought dismissal of the Departmental appeals. 5.7 Shri Raghavendra Rao further submitted that under the Central Sales Tax, turnover means the aggregate of sale price received and receivable and that under the Income-tax Act, the term 'turnover' is not defined and that applying the definition that has been given under the Sales Tax Act, chit collection do not come within the meaning of sales or turnover. He submits that gross receipts as referred to in section 44AB are gross receipts of the assessee. He vehemently contended that in the case of a Chit Fund Company the chit collections are not the receipts of the company. He relied on the A.P. Chit Funds Act, 1971 as well as the Guidance Note issued by the Institute of Chartered Accountants of India as well as the Circular of the CBDT No. 452 dated 17-3-1996 and submits that in the case of Chit Fund Company, the position is the same as that of a share broker as it has no control over the funds and its collections have to be deployed in the manner in which specified under the Chit Fund Act and that chit subscriptions cannot form part of the turnover. He placed reliance on the decision of the ITAT, Ahmedabad Ben ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... macious conduct or acted in utter disregard of law. He concluded his submissions by stating that the assessee under the honest and bona fide belief that he is not liable to file tax audit report under section 44AB and cannot be held to have been guilty of any contumacious or dishonest conduct. 6.1 Shri V. Prabhakar, learned counsel for the assessees M/s. Neeladri Chit Fund Pvt. Ltd., M/s. Kalpatharuvu Chit Funds (P.) Ltd. and M/s. Kathiani Chit and Finance (P.) Ltd., joining the issue submitted that the role of a Chit Fund Company is that of a trustee or custodian and to ensure proper appropriation of the Chit Fund subscription amounts and his acts are governed by the A.P. Chit Funds Act, 1971 and Chit Funds Act, 1982. He relied on sections 20 & 23 of the Chit Funds Act, 1982 and sections 12 & 16 of the AP Chit Funds Act, 1971 and submitted that these enactments prescribed the mode and manner of preparation of the Balance Sheet which are found in the Schedule and in the form prescribed thereunder. He submitted copies of the extracts of the sections as well as formats of the Balance Sheet and Profits & Loss Account and argued that as per these Central and State enactments all the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Chits & Financiers is to be held as per incuriam and the decision of this Bench in Lakshmi Maharaja Chit Funds (P.) Ltd's case should be followed. He strongly opposed the plea of the Department to refer the matter to a Special Bench under section 255 of the Act on this count. Replying to the contentions of the Revenue that wherever chit commission is founding excess of Rs. 10,00,000, the same may he treated as professional receipt for the purpose of tax audit, he submitted that the judgment of the Rajasthan High Court in the case of Abhay Kumar & Co. has no application nor relevant to the facts of the present case as their Lordships were deciding as to whether the provisions of section 44AB are constitutionally valid or not. He vehemently contended that chit commission is business income and the same cannot be treated as professional receipt. He further submitted that chit commission cannot be equated with professional receipts and the yardstick of Rs. 10,00,000 cannot be applied to this case as under section 44AB professional receipts are relevant only to those professionals that are referred to in section 44AB of the Act and not to others. Referring to the argument to the learne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... All.) (3) Soma Sundaram (P.) Ltd. v. CIT [1979] 116 ITR 620 (Kar.) (4) Anwar Ali's case (5) Kunhalaumma v. ITO [1968] 68 ITR 840 (Ker.) (6) Chhotey Lal v. ITO [1968] 69 ITR 709 (All.) Referring to the decision of the Bombay High Court in the case of P.S. Hathiramani the learned Departmental Representative, submitted that the expression "tax" has been defined in section 2(43) of the Act and there would be no scope for any argument that "interest" is "additional tax" and the principle of this judgment would apply equally to the case of the assessee before us though in the case of the assessee, the contradistinction is between "tax" and "penalty". He submitted that in Jogender Singh's case it was held that section 2(43) which defines "tax" does not specifically include penalty. Section 156 of the Act, which relates to notice of demand specifically refers to tax, interest, penalty, fine or any other sum payable under the Act. Chapter XXI of the Act deals with penalties. Various sections provide for imposition of penalty in addition to the amount of tax payable. Thus from a conjoint reading of the aforementioned provisions of the Act it follows that the word "tax" and "penalty" are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . On the preliminary issue of maintainability of these appeals in view of the Board's Instruction No. 1979, we hold as under. 9.2 The CBDT in the context of provisions of section 221 of the Act issued Instruction F.No. 16/87/67-IT(B) dated 10-7-1967. In this circular it is clearly given that under the 1961 Act, the term "tax" does not include within its connotation, concepts of penalty and interest leviable under the other provisions of the Act. Thus this Board circular dated 10-7-1967 clearly indicates the mind of the Board that the term tax effect mentioned in Board Instruction No. 1979 does not include penalties. This finding that the term "tax" does not include penalties is supported by the following judicial pronouncements: (1) Chhotey Lal's case (2) Kunhalaumma's case (3) Jogender Singh's case Thus the preliminary objections raised in this regard are hereby dismissed. 9.3 Coming to the merits of the case, there are two aspects of the issue that have to be decided. Before we go into these aspects, we have to give a finding on the preliminary point as to whether the decision of the Hyderabad Bench 'B' of the Tribunal in the case of Sri Venkateswara Chits & Financiers is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t a decision once rendered must later bind like cases." The Court further observed that: "We do not intend to detract from the rule that, in exceptional, instances, where by obvious inadvertence or over-sight a judgment fails to notice a plain statutory provision or obligatory authority running counter to the reasoning and result reached, it may not have the sway of binding precedents. It should be a glaring case, obtrusive omission." 9.4.ii When a decision is rendered without noticing a binding precedent or is inconsistent with statutory provisions, it is per incuriam and, therefore, loses its efficacy as a precedent. Except the parties to the list binds none. The application of the doctrine of per incuriam was considered by the Court of Appeal Induce v. Reliance System Ltd. [1987] 2 All ER 858, wherein Sir John Donaldson M.R. held as under: "I have always understood that the doctrine of per incuriam only applies where another division of this Court has reached a decision in the absence of knowledge of a decision binding on it or a statute, and that in either case it had to be shown that had the Court had this material, it must have reached a contrary decision. That is per inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r No. 1175 dated 16-5-1978, wherein they have directed that in case of prized subscribers where amounts are not collectable, they should be allowed as bad debt. If payments to Prized subscribers are to be allowed as expenditure as now claimed by the Revenue, there is no necessity of this Circular, because the amount will be allowed before it is a bad debt. The Assessing Officer wants to allow payments on capital account, which is more detrimental to Revenue. Further we draw parallel to the case of a bank, which gives loans and takes deposits also. When an amount of loan is disbursed or collected from a customer the amount is debited or credited to its personal account though the entire funds belong to the bank and though the bank conducts the business in its own right. What is taken to the Profit & Loss Account is only the interest earned on such loans and advances and commission and other incidental items. The entire amount given to a customer by a bank does not constitute an item of profit and loss account. When a customer deposits amount in his S.B. account, it is only credited to his personal account and not routed through P & L account. This method of accounting in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing principles state that a chit fund company, cannot take the subscriptions into its P & L account. 9.8 On the issue as to what constitutes turnover in the case of a chit fund company, the Guidance Note on Tax Audit under section 44AB of the Income-tax Act, 1961, issued by the Institute of Chartered Accountants of India, New Delhi, under "5. Sales, turnover, gross receipts", states as follows:- "5.6 Considering that the words "Sales", "Turnover" and "Gross receipts" are commercial items, they should be construed in accordance with the method of accounting regularly employed by the assessee. Section 145(1) provides that income chargeable under the head "Profits and gains of business or profession" or "income from other sources" should be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. The method of accounting followed by the assessee is also relevant for the determination of sales, turnover or gross receipts in the light of the above discussion." "5.7 Applying the above generally accepted accounting principles, a few typical cases may be considered: (vi) Sale proceeds of fixed assets would not form part of turnover ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... S) 11, 'The Effects of Changes in Foreign Exchange Rates', will be applicable only where a Chit Fund business has any foreign currency transactions and/or has foreign branches. In the application of certain standards to Chit Funds, certain peculiarities may arise which are discussed hereinafter. 3.13 In a Chit Fund business, the following items of revenue ordinarily arise: (i) Foreman's commission, (ii) Default interest. (iii) Interest on loans and advances. Application of the principles of AS 9 in respect of the above items of revenue is dealt with hereinafter." As per this publication, only foreman's commission, default interest, interest on loans and advances etc., are revenue items which are credited to the profit and loss account and subscription receipts from other members of the chit are not revenue in nature and do not form part of turnover of the organization. 9.10 The Central Board of Direct Taxes, with reference to agency and commission business, in Circular No. 452 dated 17-3-1986, has stated at paragraph 3 as follows:- "3. The matter was examined in consultation with the Ministry of Law. There are various trade practices prevalent in the country in regard to ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are distinct from the terms "Cash Inflows", or "Funds Inflows". A particular cash receipt should be received on revenue account and should form part of the profit and loss account as per the method of accounting regularly employed by the assessee, to come under the purview of the terms "Sales", "Turnover" and "Gross Receipts". The method of accounting followed by the assessee has not been rejected by the Revenue. 9.11 Thus, a combined reading of the Board's Circular No. 1175 dated 16-5-1978, Chit Funds Act, 1982, and A.P. Chit Funds Act, 1971, and Rules 1971 and Technical Guide on Accounting of Institute of Chartered Accountants of India, suggests that the opinion given in the form of Guidance Note by the Institute of Chartered Accountants of India is the correct position of law. The method of accounting is given in the Chit Funds Act and by following this method, chit subscriptions are not to be treated as income or turnover. Thus, we hold that the provisions of section 44AB are not attracted in the case of the assessee as its total turnover from carrying on chit fund business in the form of commission earned from chits, interest receipts etc., does not exceed Rs. 40,00,000, as p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessment is made the Assessing Officer may condone the delay and treat the return as a valid return. From the above it is amply clear that the question of treating the defective return as invalid and visiting the assessee with consequences of not filing the return will arise only after the assessment for the year for which the defective return is filed is completed or after the time for completion of the assessment is over. This is for the reason that if the assessee filed the return curing the defect at any time before the said date the assessing authority has got the power to condone the delay and to treat the return as valid." The Assessing Officer in all these cases not only accepts the return as not defective but also processed the same under section 143(1)(a). The returns of the assessees for all the earlier assessment years are accepted without a murmur of violation of section 44AB. In our considered opinion, if the Assessing Officer thought that there is a defect, he should give an opportunity to the assessee to rectify the defect and not straightaway levy penalty which is a harsh action. Thus on this ground also the penalty has to be quashed. 9.13.i The alternative ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fundamental accounting principles and guidance of the Apex accounting body. This is not a defiant, deliberate, contumacious or dishonest conduct of the assessee. 9.15 The Special Bench of the Income-tax Appellate Tribunal, in the case of Asstt. CIT v. Gayatri Traders [1996] 58 ITD 121 (Hyd.), at pages 135 and 136, held in paragraph 25 as follows:- "25. Levy of penalty under section 271B is neither mandatory nor a must. The plain language of section 271B provides that if any person fails to get his accounts audited or obtain a report as required under section 44AB, "the Assessing Officer may direct that such person shall pay by way of penalty". The use of the words 'may direct' clearly indicates that the Assessing Officer is vested with the discretion either to impose or not to impose penalty depending upon the facts and circumstances of the case. No doubt, it is true, the said discretion should be exercised judicially and not either arbitrarily or capriciously. When there is a technical or minor breach of the law, the ends of justice require that the discretion should not be exercised in favour of punishing a venial default. Further, it is not as though the moment a default under ..... X X X X Extracts X X X X X X X X Extracts X X X X
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