C.H. Aboobacker Haji vs ITO
Citation 109 TTJ 408
 
Validity of penalty order - Penalty levied before completion of assessment

In the absence of completion of assessment, the AO could not levy penalty on the assessee on the ground that no books of accounts as required under s.44AA of the Income Tax Act 1961 were maintained and also could not form an opinion that the assessees income was non-computable due to non-maintenance of books. Therefore, the levy of penalty was invalid even if the provisions of s.44AA of the Act were violated.

ITAT, Cochin

C.H. Aboobacker Haji vs ITO

ITA No 293/Coch/2006; Asst. yr. 2004-05

N. Barathvaja Sankar, A.M and Riyaz S. Padvekar, J.M

14 July 2006

T.M. Sieedharan for the Appellant
A.S. Bindu for the Respondent

ORDER Riyaz S. Padvekar, J.M :

This appeal is filed by the assessee challenging the order of the CIT(A)-III, Kochi dt. 13th* March, 2006 for the asst. yr. 2004-05.

2. The assessee has taken seven grounds in this appeal, but the only issue involved for our consideration is whether the AO was justified in levying the penalty under s. 271A of the IT Act, 1961.

3. The facts of this case are in a narrow compass. The assessee is a civil contractor. He filed the return of income for the asst. yr. 2004-05 on 1st Nov., 2004. It was noticed by the AO that as per the income computation statement filed along with the return of income, the assessee had a turnover of Rs. 69,22,579 and he had estimated the income at the rate of 5 per cent of the total contract receipts. Subsequently, there was a survey action against the assessee under s. 133A of the Act on 8th Feb., 2005 and some of the files were impounded. It was found by the AO that for the earlier years i.e. asst. yrs. 2000-01 and 2001-02, the assessee has declared the income at the rate of 8 per cent on the gross contract receipts. During the course of survey action, sworn statement of the assessee was recorded and he stated that he is not maintaining any day book and ledger in respect of the contract work and only separate files were kept with details of the purchases, receipts from contractee Department, etc. During the course of survey, it was found that some of the contract receipts were omitted by the assessee. The AO, therefore, came to the conclusion that the assessee has violated the provisions of s. 44AA and hence, he issued notice under s. 274 r/w s. 271A, dt. 10th Jan., 2005 to the assessee requiring to show cause as to why penalty under s. 271A should not be levied. The assessee filed his reply but that was rejected by the AO. The AO in his own way interpreted the provisions of s. 44AA. The AO proceeded to levy the penalty under s. 271A of the Act.

4. The assessee challenged the impugned order of the AO before the CIT(A) but without any success. Now, the assessee has challenged the impugned order of the CIT(A) before us.

5. We have heard Shri T.M. Sreedharan, the learned counsel for the assesses and Smt. A.S. Bindu, the learned Departmental Representative for the Revenue. The learned counsel submitted that the AO initiated the penalty proceedings before the completion of the assessment and the assessment of the assessee for this year has been completed by the AO only on 23rd July, 2006 whereas the AO finalized the levy of penalty under s. 271A vide order, dt. 26th July, 2005. It was further submitted by the learned counsel that the assessee was filing the statement of the net wealth showing the assets as well as liabilities along with the return. Moreover, the assessee was regularly following the same method for declaring his income. It was further submitted that subsequently, there was a survey action against the assessee under s. 133A of the Act i.e. on 8th Feb., 2005 and some statement of the assessee was recorded and on the basis of the statement recorded, the AO came to the conclusion that there is failure on the part of the assessee to comply with the provisions of s. 44AA when, in fact, s. 44AA is not applicable as far as the facts of the assessee's case are concerned. It was further submitted that the AO has passed the penalty order like passing the assessment order. In fact, penalty proceedings are quasi-criminal proceedings and while interpreting the provisions of the Act for punishing somebody, there should be strict interpretation. The learned counsel further submitted that as far as s. 44AA is concerned, by virtue of sub-s. (1) certain class of the persons carrying on specified business or profession are required to maintain the books of account as would be notified in the official gazette. As far as sub-s. (2) is concerned, it is expected that normally, the books of account should be maintained as may enable the AO to compute his total income in accordance with the provisions of the Act. The learned advocate emphasized on the word "may" used in sub-s. (2) of s. 44AA and submitted that "may" does not mean that the assessee must maintain the books of account and other documents. It was further submitted that the assessee himself has offered Rs. 5 lacs as additional income and the AO has not disputed the income offered by the assessee and that goes to show that the AO has no grievance for computing the income of the assessee. It was further submitted that as far as the assessment is concerned, even there are additions where regular books of accounts are kept and that cannot be the case for the AO to levy the penalty. He further submitted that nothing has been brought on record to show that the conduct of the assessee is in defiance of law because for all the earlier years, the assessee had adopted the same method which was never questioned by the AO. It was further submitted that subsequent survey action against the assessee cannot justify the levy of penalty for violation of s. 44AA. If at all the AO wants to levy penalty presuming for the sake of argument that sub-s. (2) of s. 44AA is applicable to the assessee, in that case, the AO can draw the inference only after completion of the assessment as the words used are "as may enable the AO to compute his total income in accordance with the provisions of this Act". But in this case, even before the completion of the assessment, the AO levied the penalty. The learned counsel relied on the following precedents :

(i) Hindustan Steel Ltd. vs. State of Orissa (1972) 83 ITR 26 (SC) wherein it has been observed as under :

"An order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceeding, and penalty will not ordinarily be imposed unless the party obliged, either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation. Penalty will not also be imposed merely because it is lawful to do so. Whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances."

(ii) Mattannur Builders vs. ITO ITA No. 296/Coch/2001, Tribunal, Cochin Bench dt. 27th Feb., 2004.

6. On the other hand, the learned Departmental Representative supported the order of AO as well as CIT(A).

7. We have heard the rival submissions of the parties. We have also carefully considered the facts of this case. We have also gone through principles laid down in the precedents relied on by the assessee. The assessee is a contractor and it is not disputed in this case that he filed his return of income for the asst. yr. 2004-05 on 1st Nov., 2004. It is also not disputed in this case that penalty proceedings for levy of penalty under s. 271A were initiated on 10th Jan., 2005 and the assessment for this year has been completed on 23rd June, 2006. Now, the only issue which emerges for our consideration is whether on the facts of this case, provisions of s. 44AA are applicable to the assessee and presuming that the provisions are applicable, then whether the AO was justified in levying the penalty under s. 271A. Sec. 44AA reads as under :

"44AA. (1) Every person carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or any other profession as is notified by the Board in the Official Gazette shall keep and maintain such books of account and other documents as may enable the AO to compute his total income in accordance with the provisions of this Act.

(2) Every person carrying on business or profession not being a profession referred to in sub-s. (1) shall,

(i) if his income from business or profession exceeds one lakh twenty thousand rupees or his total sales, turnover or gross receipts, as the case may be, in business or profession exceed or exceeds ten lakh rupees in any one of the three years immediately preceding the previous year; or

(ii) where the business or profession is newly set up in any previous year, if his income from business or profession is likely to exceed one lakh twenty thousand rupees or his total sales, turnover or gross receipts, as the case may be, in business or profession are or is likely to exceed ten lakh rupees, during such previous year; or

(iii) where the profits and gains from the business are deemed to be the profits and gains of the assessee under s. 44AD or s. 44AE or s. 44AF or s. 44BB or s. 44BBB, as the case may be, and the assessee has claimed his income to be lower than the profits or gains so deemed to be the profits and gains of his business, as the case may be, during such previous year, keep and maintain such books of account and other documents as may enable the AO to compute his total income in accordance with the provisions of this Act.

(3) The Board may, having regard to the nature of the business or profession carried on by any class of persons, prescribe, by rules, the books of account and other documents (including inventories, wherever necessary) to be kept and maintained under sub-s. (1) or sub-s. (2), the particulars to be contained therein and the form and the manner in which and the place at which they shall be kept and maintained.

(4) Without prejudice to the provisions of sub-s. (3), the Board may prescribe, by rules, the period for which the books of account and other documents to be kept and maintained under sub-s. (1) or sub-s, (2) shall be retained."

As far as sub-s. (1) of s. 44AA is concerned, if the assessee is carrying on legal, medical, engineering or architectural profession or profession of accountancy or technical consultancy, etc. which is notified by the Board in the Official Gazette is required to maintain such books of accounts. As far as sub-s. (2) is concerned, it merely states that the assessee who carries on the business or profession other than the profession mentioned in sub-s. (1), then if his income exceeds specified limit in any one of the three years immediately preceding the previous year or in case of a newly set up business or profession, it is likely to exceed the specified limit of the income or turnover during the previous year or if the income of the assessee is computed under the presumptive scheme where ss. 44AD, 44AE, 44AF, etc. are applicable and the assessee has claimed his income to be lower than the profit or gain less than prescribed under the said sections, in that case, the assessee should keep the books of accounts as may enable the AO to compute his total income in accordance with the provisions of this Act. As far as sub-s. (3) and sub-s. (4) are concerned, the said sub-sections speak about the power of the Board to prescribe the books of accounts to be kept. As far as the assessee's case is concerned, his case is not covered by sub-s. (1) of s. 44AA. At the most, sub-s. (2) of s. 44AA may be applicable but for attracting the condition, the circumstances may exist that the AO was unable to compute the income of the assessee due to the non: maintenance of the accounts. In this case, we find that the AO issued the show-cause notice for levy of penalty under s. 274 r/w s. 271A dt. 10th Jan., 2005 and after more than 17 months, the AO completed the assessment. In our opinion, without completing the assessment, the AO cannot come to the conclusion that he was unable to compute the income of the assessee due to the non-maintenance of the day book and ledger. Moreover, no specific books of accounts have been specified or notified by the Board in respect of contract business. If the AO was of the opinion that he was unable to compute the correct income of the assessee, then he should have waited at least for the completion of the assessment and only after completion of the assessment, he may have reasonably come to the conclusion that due to the non-maintenance of the books of account on the part of the assessee, it was not possible for him to compute the correct income under the Act. It is interesting to refer to the assessment order also, copy of which is filed by the assessee. that the assessee has offered Rs. 5 lacs as an additional income from his contract business which has been accepted without further comments or observations by the AO.

8. It is well settled principle of law as laid down by the apex Court in the case of Hindustan Steel Ltd. (supra) that penalty proceedings are quasi-criminal in nature and it must be brought on record by the AO that the assessee has deliberately acted in defiance of law or was guilty of conduct contumacious or dishonest, but in the reasoning given by the AO in the assessment order, nothing has been mentioned. Moreover, as we have observed hereinabove, the AO was in a hurry to levy the penalty than to complete the assessment. In our opinion, as far as sub-s. (2) of s. 44AA is concerned, only after the completion of the assessment, the AO may initiate the penalty proceedings, for the levy of penalty under s. 271A. Merely because there was a survey action, and that too after the issue of notice to the assessee to levy the penalty under s. 271A, that cannot be the ground justifying the levy under s. 271A of the Act. Sec. 44AA is to be interpreted strictly for attracting the penal consequences. In our opinion, the AO was not at all justified in levying the penalty on the facts of this case. We, therefore, delete the penalty levied by the AO under s, 271A and set aside the order of the CIT(A).

9. In the result, the assessee's appeal is allowed.