Income Tax Rules provide for maintenance and retention of books of accounts only by person carrying on specified profession

 

ITAT in the case of ITO Vs Dinesh Paper Marthas made following notable observation:

1. Sec. 271A provides for penalty in respect of two defaults, one is for failure to keep and maintain the books as provided by the Act, second is for failure to retain such books of account as prescribed by Rules.

2. In this case the penalty has been levied for the second default i.e., failure to retain the books of account. As the rules provide only for maintenance and retention of the books of account by the person carrying on a specified profession, if the person other than the person carrying on the specified profession has not retained the books of account, he cannot be penalised under s. 271A. It is because the s. 271A provides for levy of penalty for the failure of the persons to retain the books as prescribed by Rules.

3. Thus unless rules prescribed for the retention of the books of account, there cannot be failure of the assessee to retain as per rules. It is true that unless the books of account are retained till the assessment proceedings, the purpose of maintaining such books of account is defeated. However, the assessee can be penalised only if a penalty is prescribed under the IT Act for such default. The penalty under s. 271A is leviable only for two types of default and in none of such defaults the assessee’s case is covered, and therefore the assessee is not liable for any penalty under s. 271A.

In short, ITAT concluded that Assessee carrying on business was not liable for penalty under s. 271A for non-retention of books of account as there is no requirement for it to retain the books of account.

The copy of the order is as under:

INCOME TAX OFFICER vs. DINESH PAPER MART

ITAT, NAGPUR BENCH

K.P.T. Thangal, J.M. & G.D. Agrawal, A.M.

IT Appeal No. 607/Nag/1997; Asst. yr. 1991-92

3rd September, 1998

(1998) 17 CCH 0257 NagTrib

(1999) 64 TTJ 0674 : (1999) 70 ITD 0274

Legislation Referred to

S 271A, RULE 6F

ORDER

G.D. AGRAWAL, A.M.: :

Order

This appeal by the Revenue is directed against the order of the CIT(A) I, Nagpur. The only ground raised in this appeal is against the cancellation of penalty of Rs. 15,000 which was levied by the AO under s. 271A of the IT Act, 1961.

1. The facts of the case are that the assessee is a partnership firm which has maintained the books of account, which was audited as per s. 44AB of the IT Act. However, during the course of assessment proceedings the assessee did not produce the books of account despite several opportunities. Therefore, the AO came to the conclusion that the assessee has not retained the books of account. He levied the penalty of Rs. 15,000 for the assessee’s failure to retain the books of account. On appeal, the CIT(A) cancelled the penalty levied by the AO. Hence this appeal by the Revenue.

2. At the time of hearing before us, the learned Departmental Representative submitted that as per s. 44AA(2) the assessee carrying on business or profession is required to maintain the books of account which enables the AO to compute his total income. This provision itself implies that the assessee has to retain the books of account and produce during the course of assessment proceedings. If the books of accounts are not retained till assessment proceedings and not produced during the assessment proceedings then how the AO will be able to compute the assessee’s total income in accordance with such books. Thus, non-retention of the books of account till the completion of assessment is certainly violation of s. 44AA(2) of the IT Act. He further submitted that merely because by r. 6F the books of account have been prescribed to be maintained and retained by professionals, does not mean that the persons carrying on business are not required to retain the books of account. If the books of account are not retained even till the completion of assessment, the entire purpose of maintaining the books will be defeated. He stated that the provision of the law should be interpreted in such a manner which serve the purpose of the Act rather than defeating the purpose for which a provision is brought in the statute book. If it is held that the assessees are not required to retain the books of account then the entire purpose of s. 44AA i.e. provision for maintaining the books of account would be defeated. He, therefore, submitted that the penalty was rightly levied by the AO and the same should be upheld.

3. The learned counsel for the assessee argued at length. He submitted that the assessee is required to keep and maintain the books of account as per s. 44AA(2). It is undisputed that the assessee has kept and maintained such books of account. Sec. 44AA(4) empowers the CBDT to prescribe by rules the period for which the books of account are to be retained. As per r. 6F the CBDT prescribes the books of account to be maintained by the person carrying on legal, medical, engineering or other professions. Sub-r. (5) of r. 6F provides the period for which such books of account are to be retained. This rule is applicable only in respect of the person carrying on the profession specified in s. 44AA(1). Sec. 271A provides penalty for assessee’s failure to keep and maintain the books of account as required by s. 44AA and also for failure of the assessee to retain such books of account as specified in the rules. That the rules specified the period for which the books of account are to be retained by the certain professionals. No rule provides for the period of retention of the books by the person carrying on the business. Therefore, the assessee who is carrying on the business cannot be penalised under s. 271A for non-retention of the books of account. He concluded that the order of the CIT(A) should be upheld.

4. We have carefully considered the arguments of both the sides and have perused the material placed before us. Sec. 271A of the IT Act reads as under :

“Without prejudice to the provisions of s. 271, if any person fails to keep and maintain any such books of account and other documents as required by s. 44AA or the rules made thereunder, in respect of any previous year or to retain such books of account and other documents for the period specified in the said rules, the AO or the Dy. CIT(A) or the CIT(A) may direct that such person shall pay, by way of penalty, (a sum which shall not be less than two thousand rupees but which may extend to one hundred thousand rupees.)”

From the perusal of above, it is seen that this section provides for two types of penalty; (1) if the assessee fails to keep and maintain any books of account as required by s. 44AA or rules made thereunder, (ii) if the assessee fails to retain such books of account and other documents for the period specified in the said rules.

In this case the AO had levied the penalty for assessee’s failure to retain the books of account. To appreciate the arguments of both the sides it is essential to have a look at s. 44AA and rules made thereunder. Sec. 44AA(1) provides that every person carrying on legal, medical, engineering or architectural profession or profession of accountancy, etc.( hereinafter shall be referred to as “specified professions”) shall keep and maintain such books of account and other documents as may enable the AO to compute his total income. Sec. 44AA(2) provides that every person carrying on business or profession (not being the specified profession) shall, if their turnover or gross receipts exceeds Rs. 5 lakhs or income exceeds Rs. 40,000, keep and maintain such books of account and other document as may enable the AO to compute his total income. Sub-s. (3) of s. 44AA empowers the Board for prescribing by rules the books of account and other documents to be kept and maintained by the persons specified in sub-s. (1) or sub-s. (2), sub-s. (4) of s.44AA empowers the Board to prescribe the period for which the books of account and other documents shall be retained. As per r. 6F the Board has prescribed the books of account to be maintained by every person carrying on a specified profession. Sub-r. (5) of r. 6F provides for the retention of such books of account i.e. which are required to be maintained by the person carrying on a specified profession. Thus, in the case of person carrying on business or profession other than a specified profession, the CBDT has not prescribed any specific books of account which are required to be kept and maintained and also the period for which they are to be retained.

5. The learned Departmental Representative has vehemently contended that despite no books of account having been prescribed by the rules, the persons carrying on business should also keep and maintain such books of account as will enable the AO to compute the income. Such books of account should be retained also till the completion of assessment, otherwise it cannot be said that the assessee has made compliance of s. 44AA(2). As we have already discussed that s. 271A provides for penalty in respect of two defaults, one is for failure to keep and maintain the books as provided by the Act, second is for failure to retain such books of account as prescribed by rules. In this case the penalty has been levied for the second default i.e., failure to retain the books of account. As the rules provide only for maintenance and retention of the books of account by the person carrying on a specified profession, if the person other than the person carrying on the specified profession has not retained the books of account, he cannot be penalised under s. 271A. It is because the s. 271A provides for levy of penalty for the failure of the persons to retain the books as prescribed by Rules.

(Underlining, italicised in print, by us to supply emphasis)

Thus, unless rules prescribed for the retention of the books of account, there cannot be failure of the assessee to retain as per rules. We agree with the contention of the learned Departmental Representative that unless the books of account are retained till the assessment proceedings, the purpose of maintaining such books of account is defeated. However, the assessee can be penalised only if a penalty is prescribed under the IT Act for such default. As we have already mentioned earlier that the penalty under s. 271A is leviable only for two types of default and in none of such defaults the assessee’s case is covered, we hold that the assessee is not liable for any penalty under s. 271A of the IT Act.

We accordingly uphold the order of the CIT(A) cancelling the penalty levied by the AO.

6. In the result, the Revenue’s appeal is dismissed.