Alleged undisclosed turnover not to be considered while determining prescribed limit of audit under section 44AB

Short Overvivew: Addition made by AO during the assessment proceedings on the basis of unaccounted sales cannot be regarded as the turnover for the purpose of section 44AB of the Act because the documents relied upon by AO are neither the part of books of account nor would substitute the books of account or constitute the books of account of the assessee regularly maintained.

In the instant appeal before Tribunal assessee challenged the order of CIT(A), wherein penalty under section 271B was upheld. Assessee contended that the turnover declared by assessee was below the limit prescribed under section 44AB. Case of assessee was that a certain sum alleging the same as undisclosed turnover, was included to determine the limit prescribed under section 44AB. Assessee contended that the said amount was not recorded in regular books of account thus could not be considered for levy of penalty under section 44AB.

it is held that Addition made by AO during the assessment proceedings on the basis of unaccounted sales cannot be regarded as the turnover for the purpose of section 44AB of the Act because the documents relied upon by AO are neither the part of books of account nor would substitute the books of account or constitute the books of account of the assessee regularly maintained. Therefore, the books of account maintained by the assessee in regular course of business cannot be substituted by the material gathered by the AO in the course of some survey in the case of third party though the said material may be relevant evidence for making the addition to the income of the assessee.

Decision: In assessee’s favour.

Referred: Nirmal Kumar Joshi v. ITO [ITA Nos. 73 & 74/JP/2018, dt. 27-3-2018] : 2018 TaxPub(DT) 2252 (Jp-Trib).

IN THE ITAT, JAIPUR BENCH

VIJAY PAL RAO, J.M. & VIKRAM SINGH YADAV, A.M.

Satya Prakash Mundra v. ITO

ITA No. 754/JP/2016

23 January, 2019

Assessee by: Manish Agarwal, CA

Revenue by: Anuradha, JCIT

Vijay Pal Rao, J.M.

This appeal by the assessee is directed against the Order, dated 29-6-2016 of learned Commissioner (Appeals), Ajmer arising from the penalty order passed under section 271B of the Income Tax Act, 1961 (in short the Act) for the assessment year 2011-12. The assessee has raised following grounds of appeal :–

“1. On the facts and circumstance of the case, the learned Commissioner (Appeals) erred in confirming the penalty of Rs. 31,607 levied by learned assessing officer under section 271B of the Income Tax Act, when the turnover declared by assessee was merely Rs. 24,80,995, i.e., below the limit prescribed under section 44AB of the Act. Appellant prays the penalty so levied may please be deleted.

1.1 That, the learned Commissioner (Appeals) has further erred in confirming the action of learned assessing officer of including a sum of Rs. 38,40,500, alleging the same as undisclosed turnover, to determine the limit prescribed under section 44AB by ignoring the fact that the said amount was not recorded in regular books of accounts thus could not be considered for levy of penalty under section 44AB of the Income Tax Act, 1961.

2. That the appellant craves the right to add, delete, amend or abandon any of the grounds of appeal either before or at the time of hearing of appeal.”

2. The assessee is individual and proprietor of M/s. Star Marbles. The assessee filed his return of income for the year under consideration on 17-10-2011 declaring total income of Rs. 2,95,140 on the total turnover of Rs. 24,80,995 under section 44AD of the Act. The assessing officer while completing the scrutiny assessment under section 143(3) of the Act made addition of Rs. 3,84,050 by considering the deposits in the bank account of one Shri P.C. Vijayvargiya of Rs. 38,40,000 as unaccounted sales of the assessee. Thus, the assessing officer added 10% of the said unaccounted sale in the assessment proceedings. Since the total turnover was considered by the assessing officer at Rs. 63,21,495 accordingly as per the provisions of section 44AB of the Act at the relevant point of time, the assessing officer held that the assessee has violated the condition of accounts be audited by an accountant before the specified date. The assessing officer subsequently initiated the proceedings under section 271B of the act and levied the penalty of Rs. 31,607 for violation of provisions of section 44AB of the Act. The assessee challenged the action of the assessing officer before the learned Commissioner (Appeals) but could not succeed.

3. Before us, the AR of the assessee has submitted that the assessing officer has invoked the provisions of section 44AB of the Act and consequential penalty under section 271B by virtue of the addition made by the assessing officer on account of deposits in the bank account of Shri P.C. Vijayvargiya and therefore, the assessee’s turnover as recorded and disclosed in the books of account was not exceeding the limits of Rs. 60.00 lacs as provided under section 44AB of the Act. He has further submitted that the turnover has not been defined in the Act and hence the same has to be considered in commercial sense and in normal accounting principle. The turnover for the purpose of section 44AB of the Act shall be the gross receipts or sale value of the transaction carried on by the assessee and recorded in the books. The assessing officer made the addition on the basis of the statement of third person and not on the basis of any unaccounted turnover found on the material or books of account of the assessee. The addition was made merely on the basis of statement of Shri P.C. Vijayvargiya. Thus, the learned AR has submitted that even if the said addition of 10% of the deposits in the bank account of Shri P.C. Vijayvargiya is made by the assessing officer, the same would not automatically attract the provisions of section 44AB and section 271B of the Act. In support of this contention, he has relied upon the decision of the Coordinate Bench of this Tribunal dated 27-3-2018 in the case of Nirmal Kumar Joshi & another v. ITO in ITA No. 73 & 74/JP/2018 : 2018 TaxPub(DT) 2252 (Jp-Trib). Thus, the learned AR has submitted that the addition made by the assessing officer on the basis of the unaccounted turnover would not attract the penalty provisions under section 271B of the Act.

4. On the other hand, the learned DR has submitted that the assessee has admitted the addition made by the assessing officer and therefore, the unaccounted turnover was also accepted by the assessee which would be relevant for the purpose of section 44AB of the Act. Since the assessee has not got its books of account audited, therefore, there is violation of provisions of section 44AB of the Act and consequently the penalty under section 271B of the Act was rightly levied by the assessing officer. She has relied upon the orders of the authorities below.

5. We have considered the rival submissions as well as relevant material on record. There is no dispute that the assessee has declared the turnover of Rs. 24,80,995 and the income was declared under section 44AD of the Act in the return of income. The turnover declared by the assessee in the books of account and return of income does not exceed the limit provided under section 44AB of the Act and therefore, there was no mandatory requirement of books of account to be audited under section 44AB of the Act. The assessing officer during the survey under section 133A of the Act conducted in the case of one Shri P.C. Vijayvargiya and others on 6-11-2011 found that Shri P.C. Vijayvargiya was having bank deposits which according to him was sale consideration of marble traders of Kishangarh. The under section proposed to make the addition of 10% of the unaccounted sale of Rs. 38,40,000 found to be belonging to the assessee. The assessee agreed to the addition of 10% of the said unaccounted sale in the assessment proceedings. Based on the said addition, the assessing officer was of the view that the assessee’s turnover has exceeded the limit of Rs. 60.00 lacs as provided under section 44AB of the Act and consequently the assessee has violated the mandatory condition of his books of account to be audited. The penalty under section 271B of the Act has been levied by the assessing officer due to the reason that there was an addition on account of unaccounted sale. Thus, it is clear that at the time of preparing the books of account, the turnover of the assessee was only Rs. 24,80,995 and consequently it was not necessary to get the books of account audited as required under section 44AB of the Act. The assessing officer has made the addition based on the survey conducted in the case of one Shri P.C. Vijayvargiya, however, no corresponding material in the possession of the assessee was found by the assessing officer to show that at the time of preparing the books of account, the assessee’s turnover was exceeding the limit of Rs. 60.00 lacs as provided under section 44AB of the Act. Hence, the requirement of audit of the books of account as per section 44AB of the Act is only in the case when the assessee on its own declared the turnover of more than the minimum amount prescribed under section 44AB of the Act. The Coordinate Bench of this Tribunal in the case of Nirmal Kumar Joshi & Anr. v. ITO (supra) while considering the identical issue has held in para 9 and 10 as under :–

“9. We have heard the rival contentions and perused the material available on record. We find that the assessing officer has accepted the income offered in the return of income filed under section 44AD of the Act and at the same time, has brought to tax the undisclosed business receipts of Rs. 43,34,064 offered for taxation during the course of assessment proceedings. The assessing officer has thus come to a conclusion that since the combined receipts exceed the prescribed threshold of Rs. 60 lacs, the assessee has failed to get his books of accounts audited. We find that by accepting the income offered under section 44AD(1), the assessing officer has thus accepted the assessee’s eligibility for presumptive basis of taxation under section 44AD. Once the said eligibility is accepted, if we read the provisions of section 44AD and in particular sub-section (5), it clearly provides that an eligible assessee who claims his income from the eligible business is below the presumptive rate of 8% of total turnover or gross receipts, he shall be required to maintain books of accounts and also get them audited and furnish a report as required under section 44AB of the Act. Therefore, only in a scenario, where such a claim is made by the assessee whereby he claims that his income to be lower than 8% of total turnover or gross receipts, he will be required to maintain books of accounts and get them audited. Corresponding provisions are provided in section 44AA(2)(iv) of the Act as well. In the instant case, the assessee has not made any such claim in his return of income. Further, the Revenue has accepted the claim of the assessee as being eligible for such presumptive taxation where the assessee has reported a net profit of 8.09% on total reported turnover of Rs. 48,98,269. In such a situation, having not disturbed the said position under section 44AD, it cannot be said that the assessee has failed to get his books of accounted where undisclosed business receipts of Rs. 43,34,064 are brought to tax during the course of assessment proceedings and whereby the prescribed turnover threshold has been breached. Had the Revenue rejected the assessee’s claim under section 44AD of the Act and thereafter, taking into consideration the declared turnover of Rs. 48,98,269 and undisclosed business receipts of Rs. 43,34,064, had come to a position that the assessee has failed to get offered his books of accounted, that in a such a scenario, the contention of the Revenue could have been accepted. Further, what has been referred in section 44AB is the books of accounts maintained in the regular course of business and where an admission is made by the assessee based on third party statement during the course of survey that the amount found deposited in the bank account belongs to the assessee, it cannot be said that regular books of accounts are maintained even in respect of unaccounted sales or business receipts and the penalty can be levied under section 271B of the Act. In this regard, we refer to the decision of the Coordinate Bench in case of Brij Lal Goyal v. ACIT (supra) wherein it has been held as under :–

“11. It is evident from the aforesaid observation that books of account maintained in regular course only make the assessee eligible for grant of immunity from penalty and not with reference to any of such books, which have not been maintained in the regular course of business. Admittedly, the additional sales found as a result of search, was not recorded in the books of account regularly kept in the course of business by the appellant. Merely because the appellant accepted the additional sates for the purpose of assessment of the relevant year on the basis of entries in the seized documents, the same would not constitute accounts of the appellant maintained in the regular course of business and on that basis alone liability cannot be fastened on the assessee by holding him to have committed the default. Furthermore, the word “accounts” has not been defined under the Income Tax Act. However, under section 34 of the Indian Evidence Act, 1872, sanctity is attached to the books of accounts, if the books are indeed “account books”, i.e., in original if they show on their face, that they are kept in the ‘regular course of business’. So, the accounts under section 34 of Indian Evidence Act means accounts which are maintained in the regular course of business. Accordingly we are satisfied that the record carrying entries from which the appellant admits of additional sales are not the accounts as referred to under section 44AB of the Act. On that basis it was not open to the assessing officer to hold that the sales of the assessee as referred in section 44AB of the Act have exceeded to Rs. 40 lakhs and by not getting such accounts audited from an accountant, the appellant has committed a default. Such a finding arrived at by the assessing officer is reversed.”

10. In light of above discussions and in the entirety of facts and circumstances of the case, the penalty levied under section 271B is hereby deleted. In the result, the appeal of the assessee is allowed.”

The addition made by the assessing officer during the assessment proceedings on the basis of unaccounted sale cannot be regarded as the turnover for the purpose of section 44AB of the act because the documents relied upon by the assessing officer are neither the part of books of account nor would substitute the books of account or constitute the books of account of the assessee regularly maintained. Therefore, the books of account maintained by the assessee in regular course of business cannot be substituted by the material gathered by the assessing officer in the course of some survey in the case of third party though the said material may be relevant evidence for making the addition to the income of the assessee. Hence, in view of the facts and circumstances and following the earlier decision of this Tribunal, the penalty levied under section 271B of the Act is deleted.

6. In the result, appeal of the assessee is allowed.