1 IN THE HIGH COURT OF JUDICATURE FOR RAJASTHAN AT JODHPUR JUDGMENT M/s Bajrang Oil Mills VS. The Income Tax Officer, Balotra. D.B. INCOME TAX APPEAL NO.89/2001 against the order of the Income Tax Appellate Tribunal dt.27.4.95 passed in ITA No.2343/JP/96 for the Assessment Year 1994-95. Date of judgment : 2nd August, 2006 PRESENT HON'BLE MR. JUSTICE RAJESH BALIA HON'BLE MR. JUSTICE MANAK MOHTA Mr. Anjay Kothari for the appellant. Mr. Sangeet Lodha for the respondent. ------- Reportable By the Court: (PER HON'BLE RAJESH BALIA, J.) This appeal is arising out of the order of the Tribunal dated 27th April, 2001 sustaining the penalty levied against the assessee-appellant under Section 271B for failure on the part of the assessee to get its accounts audited and obtain the report of such audit before the date prescribed under Section 44AB. For the assessment year 1994-95, the 2 assessee has filed his return on 28th Sept., 1994 declaring the total receipts from sales at Rs.35,38,266.58 declaring total sales amounting to Rs.35,38,266.58 and receipts for job work done by him at Rs.5,57,879.40. Since the gross receipt of the assessee from the sales and the job work done by him exceeded Rs.40 lacs, the Assessing Officer opined that the assessee was under an obligation to get the accounts audited. The assessee's contention was that since under Section 44AB, three expressions (i) 'total sales', (ii) 'turn over' and (iii) 'gross receipts' are used by legislature each of them are independent criteria and one does not overlap the other. According to the assessee, since the three expressions are related to three types of business activities, it be considered that under each independent criterion unless the “total sale” or “turnover” or “gross receipts other than the sale or turn over” independently have exceeded 40 lacs, he was not liable statutorily to have his accounts audited. Since in the case of assessee neither “turnover” nor “total sales” nor “gross receipts” excluding “turnover” or 3 “sales” to be considered independently did not exceed Rs.40 lacs, he was not liable to have his accounts audited for Assessment Year 1994-95. Since for subsequent year he fell into criterion he has got his accounts duly audited and since then he has getting his accounts duly audited every year. However, the Assessing Officer opined otherwise by finding that the gross receipts include the receipts from all sources. Since the aggregate of the sales and the gross receipts from the job work taken together exceeded Rs.40 lacs he was liable to compulsory audit. The consequence of not getting compulsory audit as required under Section 44AB has been provided under Section 271B by way of levy of penalty. In response to notice to show cause against levy of penalty under Section 273B, the assessee pleaded that even if it be assumed that interpretation put by the Assessing Officer is correct, since the Assessee was under the bonafide belief, in view of the language that was deployed by the legislation, that he was not 4 liable to subject himself to compulsory audit, the penalty ought not to be levied on him for the breach of technical provision since there is no failure on his part to make complete and correct disclosure. He contended that merely because it is lawful to do so it was not necessary in each case that penalty ought necessarily be levied even on every venial or technical breach of law when assessee's conduct cannot be said to be contumacious or willful. However, these contentions did not prevail with the Assessing Officer. While holding that the assessee was liable to compulsory audit in terms of Section 44AB because aggregate of sales and other receipts from the job work exceeded Rs.40 lacs he had committed breach of the statutory obligation. Consequently, a penalty of Rs.20,530/- under Section 271B was imposed by the Assessing Officer. The order of the Assessing Officer has been successively affirmed by the CIT (Appeals) vide his order dated 30th Oct., 1996, and the order of the Tribunal under appeal. At the time of admission of the appeal, 5 the following substantial questions of law were framed which in the opinion of the Court arose for consideration in this appeal:- (I) Whether in the facts and circumstances of the case, for the purpose of attracting of Section 44AB, the receipts of an assessee by way of sale or trading business and receipts for doing the job work can be clubbed for the purpose of finding out whether the limit of Rs.40 lakhs prescribed for attracting the provisions of Section 44AB is made out? (II) If the answer to question (I) is in affirmative, whether holding of belief contrary by an assessee can be held to be bonafide so as to be considered as a reasonable cause in terms of Section 273B read with Section 271B of Income Tax Act, 1961? (III) Whether penalty u/s 271B could be validly imposed without invoking the provisions of Section 139(9) of the Income Tax Act, 1961? Coming to the first question, it would be apposite to refer to the provision of Section 44AB itself which was inserted vide Finance Act, 6 1994 w.e.f. 1.4.1985. This provision was primarily intended to ensure the credibility of accounts maintained by any assessee other than a company, which is otherwise required to get its accounts audited, and the cooperative societies which were also required to be audited by the Cooperative Societies Act. Object for which this clause was sought to be inserted was that a proper audit for the tax purposes would ensure that the books of account and other records are properly maintained and that they faithfully reflect the income of the tax payer and claims for deductions are correctly made by him. Such audit would also help in checking fraudulent practices. It can also facilitate the administration of tax laws by a proper presentation of the accounts before the tax authorities and considerations, like checking correctness of totals and verifying whether purchases and sales are properly vouched or not can be avoided. The time of the assessing officers thus can be saved and can be utilized for attaining to more important investigational aspects of the case. The aforesaid object was stated in memorandum of notice explaining the provisions in 7 the Finance Bill 1994 when it was proposed to be inserted in the Income Tax Act, 1961 during the course the Bill was placed before the Parliament. Coupled with this obligation cast on the assessees, the failure to get accounts audited where it was so required without reasonable cause was also subjected to the provisions of penalty under Section 271B read with Sec.273B as we have noticed above. The provisions read in the aforesaid context does reflect that the provision was made for compulsory audit both in the case of trading community who derive their income from profits and gains from the business as well as professionals who derive their income by way of professional receipts though they do not deal in commodities or the persons engaged in supply of services though the service is essential part of the profession rendered by them to their constituents. For this reason, the different terminology and the limit was fixed for classifying the persons who would fall within the scope of compulsory audit. Since the income from business of particular nature refers to three different aspects of the receipts by the 8 businessman namely; receipt from the sales, aggregate of turnover or the gross receipts from whatever sources where the assessee is not involved in the trading commodities. For the last category of persons, criteria laid was of the gross receipts. The assessee has claimed that in view of three expressions used in clause (a) of Section 44AB; the total sales or turn over or gross receipt are to be viewed in relation to the business to which such sales, turn over or gross receipt are attributable independently. In cases where the assessee is involved in the business of sales of any commodity, its aggregate sales have to be above Rs.40 lacs, if he is to be subjected to compulsory audit. In case his business is other than that of trading in commodity, his total turnover of the business as a whole must be above Rs.40 lacs or above. Where the assessee is not carrying on business in sale of commodity, if gross receipts of his business exceeds Rs.40 lacs, he is liable to compulsory audit, otherwise he is not liable to compulsory audit, if he is having in 3 different business not falling in same genere and 9 in each business his aggregate turn over, or sale proceeds or gross receipts separately less than Rs.40 lacs. Since the assessee carried on business of sales of the commodity manufactured by him, as well as doing the job work which did not relate to sale of commodity, the sale proceeds from sale of goods, and remuneration from job work, could not have been clubbed together for the purpose of Section 44AB. The receipts from job work being not a part of his “total sales” amount received from job work could not have been considered as “sales proceeds”. Therefore, it is contended at the first instance that the view taken by the Revenue authorities that sale proceeds from sales and receipts from job work are to be clubbed for operating Sec.44AB, which obligates the assessee to compulsory audit is erroneous. He further argued that all receipts of whatever nature are not to be included in computing the limit, crossing of which subjected any assessee to compulsory audit of his accounts. If the assessee has large number of investments other than his business, then the returns received on his investment are not to be included 10 in his gross receipts whether as a businessman or a professional, but it has to be kept aside notwithstanding his returns from investment may be more than Rs.40 lacs. In this connection, the attention was also invited towards clause (b) of Section 44AB which lays down the limit where the professional is required to have his various accounts audited. It is pointed out that where a person is carrying on profession, he is subjected to compulsory audit, if his gross receipts exceeds Rs.10 lacs only. The expressions “turn over” or “sales” have not been used in the case of the applicability of Section 44AB to professionals pointing out that three terms are not used in conjunction but in isolation. In the alternative, it was also contended that if it be taken that the “sales” and “turnover” and “gross receipts” are inter changeable, vis-a-vis the business carried on by the assessee, if any, in that event, the principle of ejusdem genes is aught to be invoked according to which wherever general words at the end of a group of words is used by the legislative it is to be understood that they take it colour from each other. 11 It was pointed out by the learned counsel that the word “gross receipts” in its wider sense means aggregate of all receipts of whatever nature from whatever sources. If the expression “gross receipt” in Sec.44AB is understood in this wider sense then the use of expression “total sales” or “turnover” by the legislature becomes redundant and otiose. The gross receipts in case of a person carrying on business and the gross receipts in case of professional would have served the purpose. Legislation cannot be imputed with using any expression which does not convey any definite meaning nor it is understood to have used surplus-sage. The learned counsel for the revenue urged that looking to the contents of statutory provision and its object, the expression “total sales”, “turnover” or “receipts” are primarily related to the “person” who is subjected to statutory obligation and such person must be one who is carrying on business. It is not the totality of volume of receipts of sales from individual business, where such person is carrying on number of businesses but aggregate of all business carried on by such persons which 12 make him subject to obligation of getting his accounts audited, else the very purpose of providing these provisions would be redundant. Since a professional is not supposed to indulge in trading or business activity other than the professional activity, he cannot have any volume of sales or turnover from the professional service rendered by him which explains exclusion of expression “sales” and “turnover” from sub- clause (b) of Sec.44AB. He further pointed out that since the aggregate of money received or payable to the assessee without claim to any deduction and his obligation under the head Profit and Gains from the business or profession but there is definite distinction between carrying on a business and carrying on a profession. Keeping this distinction in mind lesser limit of gross receipts in the case of a professional has been provided, crossing of which entails his accounts to be subjected to compulsory audit, since no capital investment factor is involved in carrying on profession. Where the assessee is a professional carrying on business in contradiction to profession, it involves investment in capital structure of business. The higher limit of volume of business of the assessee is envisaged for the purpose of 13 subjecting him to compulsory audit. But in either case it is the total volume of revenue receipts from businesses or professions carried on by the assessee that becomes the touchstone for the purpose of subjecting him to the compulsory audit of his account. The learned counsel pointed out as noticed by us above that object of the provision is to ensure the purity of accounts on the basis of which one may ultimately be assessed by the Assessing Officer which too serves in saving his time in verifying the facts which have been certified by the auditors and he can devote more time to deal with other complexities. Apart from the purity of accounts and saves delay in procuring information relating to the unaudited accounts by Assessing Officer, it is major device to check the possibility of tax evasion through manipulation of accounts either prepared at a later stage in order to suit the assessee's declaration or by smuggling something otherwise which may not be possible of the accounts is subjected to auditors vigilance by prescribed time. Having given our careful consideration 14 to the rival submissions and looking to the object with which the provisions have been enacted, it appears that the maximum limit of Rs.40 lacs has been fixed in the case of every person who is carrying on business and whose total receipts exceeds from his business activity which came under the head income from the profit and gains from the business has to be viewed as one integrated whole and not independently. The assessment of a person is on the total income and not on the income derived from the different sources separately. The three expressions used by the legislation, the total “sales”, “turn over” or “gross receipts” though not defined under the Act, in the ordinary sense refers to the volume of the business to which it relates and which is/are carried on by the assessee and in making assessment of profits and gains from the business whether such volume is a part of the business concerns the trading in commodities or otherwise the business activities where the assessee has to indulge in incurring cost before receiving the amount in relation to that business or he is carrying on other business activities in which the cost factor is excluded by the assessee and what he is receiving as charges for the work done by him, like job work, where the raw 15 material is provided by the other manufacturer, the assessee is merely to relate his receipts to labour charges or procuring cost incurred by him along with part of his profit. It is in that sense that business which is carried on by the assessee has to be taken into totality. It may be noticed that the “sales”, “turnover” or “gross receipts” are not words of art used in relation to any individual transaction independently but has been used as “sales”, “turnover” or “gross receipts”. The expression 'total' qualify all the other three expressions viz. 'sales', 'turnover' and 'gross receipts'. Total sales indicate the aggregate price of the sales of commodities carried out by the assessee as a trading business. Obviously, it would not include such transfer of immovable or movable property by way of investment. Similarly, where the assessee is not merely selling the movable commodities, but relating to other trading activities e.g. where assessee is a land developer and he is engaged in business of acquiring land developing it and selling houses or purchasing or is indulged in leasing business or is indulged in stock market so on and so forth, the expression “turnover” is made out to denote receipts from such activities. There may 16 be third or residuary category which may not be termed properly a trading activity yet it is carrying on as or business activity like job works for others, without himself being the manufacturing and selling such manufactured goods, or running a motor service garage, for the receipts of such business can aptly termed as receipts of firm. However, integral relation of receipts by a person from business, does indicate that it refers to revenue receipts only and do not include capital receipts and certainly not the receipts which are not relatable to business and may fall under the expression income to be subjected to tax as income from sources other than 'profits or gains from business, profession or vocation. Having come to the conclusion that on true interpretations of Section 44 AB clause (a) of the Income Tax Act, 1961, the assessee in the present case was required to get his accounts audited as his gross receipts had exceeded Rs.40 lacs during the previous year relevant to assessment year 1994-95, we may next consider the question No.(iii) that has been framed as substantial question of law before considering 17 question No.(ii). The question No.(iii) as framed relates to inter-play between the obligation of the assessee to get his accounts audited before the date specified under Explanation (ii) attached with Section 44 AB and the provisions of Section 139(9) in the light of the penalty provisions under Section 271 B read with Sec.273 B. Section 44 AB requires every person falling in any of the categories (a), (b) & (c) to get his accounts of previous year audited by accountant before the specified date and furnish the report of such audit in the prescribed form duly signed and verified by said accountant as may be prescribed along with return. The specific date has been stated to be 31st day of October of the assessment year. Sub-section (9) of Section 139 operates where a return has been submitted by the assessee and the Assessing Officer considers whether the return of income furnished by the assessee is defective. It requires the Assessing Officer where he finds that the return submitted by the assessee is defective, he must give him an 18 opportunity to rectify the defect within a period of fifteen days from the date of such intimation or within such further period which, on an application made in this behalf, the Assessing officer may, in his discretion, allow; and if the defect is not removed within the said period of fifteen days or within the extended period as may be allowed by the Assessing Officer, the return has to be treated invalid and the assessee is considered to have failed to furnish the return. The provisions of Section 139(9) is of singular importance from the point of view to allow a chance to assessee to make his return complete and specify the defects which are curable and for the purpose of curing that defect an opportunity has to be offered to the assessee before the consequences of such defects follow. In other words, the consequence of non-compliance of requirement of furnishing of valid return takes effect only after the assessee fails to remove the defects within time allowed until the assessee has opportunity to remove such defects, the consequence of such failure to comply with such defects cannot follow. Clause (bb) of the Explanation attached 19 with Sub-Section (9) reads as under:- “Explanation.- For the purposes of this sub-section, a return of income shall be regarded as defective unless all the following conditions are fulfilled namely :- (a) .... (b) .... (bb) the return is accompanied by the report of the audit referred to in section 44AB, or, where the report has been furnished prior to the furnishing of the return, by a copy of such report together with proof of furnishing the report.” Clause (d) of Explanation 2 is relevant which also refers to a return being defective, if it is not accompanied with the copies of audited Profit and Loss Account and Balance Sheet and auditor's report where the assessee maintains regular books of account and the account of assessee has been audited. In both the provisions requirement of valid return is that it should be accompanied with auditor's report. Where the accounts 20 required to be audited under Section 44 AB in terms of clause (bb) of the Explanation or where the account books of the assessee are regularly maintained and have been audited then too for a valid return the copy of audit report is required to be annexed to the return. Not annexing the required audit report with the return makes the return defective. In such events, it becomes the duty of the Assessing Officer to notify the assessee about the defect in the return submitted by him and requiring to remove those defects. The defects in respect of requirement of submitting audit report concerning the defect of procedural nature in submitting the return along with the audit report but this defect does not concern literally speaking where the accounts have not been audited as required by law. However, that fact can come to notice only later. At the time when the return shows that assessee's return discloses his turn over or gross receipts to be in excess of rupees forty lakhs, and it is not accompanied with an auditor's report, the Assessing Officer is under an obligation to issue notice calling upon the assessee to furnish the report within 15 days. The next step come when either the assessee does not submit such report within the time allowed by A.O., or finally 21 extended or he submits such report or he may submit an explanation for not submitting such report. If no such report is submitted the question may not carry further as in that event the return itself become invalid and it becomes a case where it is to be deemed that the assessee has failed to submit any return which may lead to consequence of default in filing return. However, the second and third contingency be set further question to be probed. If the accounts have duly been audited before 31st October of the Assessment Year, and such report is submitted after receipt of notice u/s 139(9) the return in all literal sense and substantial sense has to be considered as a valid return to be dealt with in accordance with provision of law. However, in response to notice u/s 139 (9) the assessee submits a auditor's report in terms of Sec.44 AB and also the audited accounts and balance sheet, but such audit has taken place after 31st October of the Assessment year, the question arises whether furnishing of such auditor's report and audited accounts, results in 22 filing of valid return or the return remains an invalid as if such belated audit is of no consequence? Similarly if the assessee, instead of submitting such auditor's report as notified joins an issue about requirement of getting his accounts compulsorily audited at all, whether in such case, the return has to be ignored or