Court Rules S. 44AB Inapplicable if Assessee Has No Business Income

Case Name:** COMMISSIONER OF INCOME TAX VS MARKET COMMITTEE

**Key Takeaways:**

1. Section 44AB (of Income Tax Act, 1961), which requires mandatory auditing of accounts, is only applicable if the assessee has income from business or profession.

2. If the assessee's income is exempted under other sections of the Act, such as Section 10(20) (of Income Tax Act, 1961), then the provisions of Section 44AB (of Income Tax Act, 1961) do not apply.

3. The court emphasized that the applicability of Section 44AB (of Income Tax Act, 1961) is linked to the computation of profits and gains from business or profession as part of the total income.

**Issue:** Whether the provisions of Section 44AB (of Income Tax Act, 1961), which require mandatory auditing of accounts, are applicable to an assessee whose income is exempted under Section 10(20) (of Income Tax Act, 1961).

**Facts:**

The assessee, a Market Committee, filed its return for the assessment year 1996-97 declaring nil income, as its income from house property was exempted under Section 10(20) (of Income Tax Act, 1961). However, the Income Tax Department imposed a penalty on the Market Committee under Section 271B (of Income Tax Act, 1961) for failing to get its accounts audited as required under Section 44AB (of Income Tax Act, 1961), as the Market Committee's gross receipts exceeded the prescribed limit.

The Market Committee appealed the penalty, and the case went through multiple levels of appeals, ultimately reaching the High Court.

**Arguments:**

The Income Tax Department argued that since the Market Committee's gross receipts exceeded the limit prescribed under Section 44AB (of Income Tax Act, 1961), the Market Committee was required to get its accounts audited, and the failure to do so should attract the penalty under Section 271B (of Income Tax Act, 1961).

The Market Committee, on the other hand, argued that since its income was exempted under Section 10(20) (of Income Tax Act, 1961), the provisions of Section 44AB (of Income Tax Act, 1961) were not applicable, and therefore, the penalty under Section 271B (of Income Tax Act, 1961) should not be imposed.

**Key Legal Precedents:**

1. Section 44AB (of Income Tax Act, 1961), which requires mandatory auditing of accounts for businesses and professions with a certain level of turnover or gross receipts.

2. Section 271B (of Income Tax Act, 1961), which provides for a penalty for failure to comply with the requirements of Section 44AB (of Income Tax Act, 1961).

3. Section 10(20) (of Income Tax Act, 1961), which exempts certain types of income, including income of local authorities.

**Judgment:**

The High Court ruled in favor of the Market Committee, holding that the provisions of Section 44AB (of Income Tax Act, 1961) are not applicable if the assessee is not involved in or has no income from business or profession. Since the Market Committee's income was exempted under Section 10(20) (of Income Tax Act, 1961), and it had no income under the "profits and gains of business or profession" heading, the court concluded that the penalty under Section 271B (of Income Tax Act, 1961) was not leviable.

**FAQs:**

1. **Q: What is the key legal principle established in this case?**

  A: The key legal principle established in this case is that the provisions of Section 44AB (of Income Tax Act, 1961), which require mandatory auditing of accounts, are only applicable if the assessee has income from business or profession. If the assessee's income is exempted under other sections of the Act, such as Section 10(20) (of Income Tax Act, 1961), then the requirements of Section 44AB (of Income Tax Act, 1961) do not apply.

2. **Q: How does this case impact the application of Section 44AB (of Income Tax Act, 1961)?**

  A: This case clarifies that the applicability of Section 44AB (of Income Tax Act, 1961) is linked to the computation of profits and gains from business or profession as part of the total income. If an assessee has no such income, then the provisions of Section 44AB (of Income Tax Act, 1961) do not come into play, even if the assessee's gross receipts exceed the prescribed limit.

3. **Q: What are the key legal precedents cited in this case?**

  A: The key legal precedents cited in this case are:

  - Section 44AB (of Income Tax Act, 1961), which requires mandatory auditing of accounts for businesses and professions with a certain level of turnover or gross receipts.

  - Section 271B (of Income Tax Act, 1961), which provides for a penalty for failure to comply with the requirements of Section 44AB (of Income Tax Act, 1961).

  - Section 10(20) (of Income Tax Act, 1961), which exempts certain types of income, including income of local authorities.

4. **Q: What was the final outcome of the case?**

  A: The High Court ruled in favor of the Market Committee, holding that the provisions of Section 44AB (of Income Tax Act, 1961) were not applicable since the Market Committee's income was exempted under Section 10(20) (of Income Tax Act, 1961). As a result, the penalty imposed under Section 271B (of Income Tax Act, 1961) was also not leviable.

1. Learned counsel for the appellant has supplied the photo copies of the paper-books for the purposes of reconstruction of the files as the same were burnt in fire which took place in the premises of this Court. The same are taken on record and are treated to be reconstructed files.

2. This order shall dispose of ITA Nos. 494 and 495 of 2005 as identical questions of law and facts are involved in both the appeals. For brevity, the facts are being extracted from ITA No. 494 of 2005.

3. This appeal has been preferred by the revenue under Section 260A (of Income Tax Act, 1961) (in short “the Act”) against the order dated 25.2.2005 passed by the Income Tax Appellate Tribunal, Chandigarh Bench “B”, Chandigarh (hereinafter referred to as “the Tribunal) in ITA No. 657/CHANDI/2001, for the assessment year 1996- 97, claiming the following substantial question of law:-

“Whether on the facts and in the circumstances of the case the Hon'ble ITAT is correct in law in deleting the penalty of Rs.1 lac levied u/s 271B (of Income Tax Act, 1961) for the assessment year 1996-97 despite the fact that Market Committee had turnover exceeding the limit prescribed u/s 44AB (of Income Tax Act, 1961) and had failed to get its accounts audited before the specified date and furnish the audit report within the period prescribed?”

4. Put shortly, the facts necessary for the disposal of the present appeal as narrated therein are that the assessee filed its return on 13.2.1997 for the assessment year 1996-97 declaring nil income by giving a note in the computation of income that the income received from house property by it was exempted under Section 10(20) (of Income Tax Act, 1961). The assessee earned income from house property amounting to 7,72,300/- and TDS had been deducted thereon by the payer of the rent, the assessee sought refund of the TDS amount on the ground of the income being exempted. In response to the notice issued to the assessee, it filed income and expenditure account showing total receipt of 7,30,58,508.30. Subsequently, the assessee had also furnished the break up of this income as:-

“1. U/s 10 (of Income Tax Act, 1961) 59545/-

2. Market Fee 57871269/-

3. Composition Fee 15315/-

4. Sale of forms 19040/-

5. Other Misc. Fee 2000/-

6. Security 138/-

7. Misc. Income 79282.59

8. Rent 754076.10

9. Interest of investment 14092311.61

10. S/A 162300.00

73058507.30”

5. Since the gross receipts of the assessee were more than the prescribed limit under Section 44AB (of Income Tax Act, 1961) for the purpose of getting the accounts audited and submission of a copy of the audit report. The assessing having failed to comply with the provisions of Section 44AB (of Income Tax Act, 1961), a show cause notice was issued to the assessee for imposing penalty under Section 271B (of Income Tax Act, 1961). Accordingly, the Assessing Officer imposed a penalty of ` 1,00,000/- under Section 271B (of Income Tax Act, 1961). Feeling aggrieved by the said order, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) [in short “the CIT(A)”]. The CIT(A) vide order dated 2.5.2001 upheld the order of the Assessing Officer and dismissed the appeal. Against the order of the CIT(A), the assessee filed appeal before the Tribunal. The Tribunal vide order dated 25.2.2005 allowed the appeal and cancelled the penalty imposed by the Assessing Officer. Hence, the present appeal by the revenue.

6. Learned counsel the appellant-revenue submitted that the respondent-assessee was required to get its accounts audited under Section 44AB (of Income Tax Act, 1961) and the assessee having failed to do so, was liable for penalty under Section 271B (of Income Tax Act, 1961). According to the learned counsel, the Assessing Officer had rightly imposed a penalty of 1 lac which was upheld by the CIT(A) but the Tribunal had erred in deleting the same.

7. After hearing the learned counsel for the revenue, we do not find any merit in this appeal. It would be expedient to refer to Section 44AB (of Income Tax Act, 1961) as it existed at the relevant time which reads thus:-

“44AB. Every person,-

(a) carrying on business shall, if his total sales, turnover or gross receipts, as the case may be, in business exceed or exceeds forty lakh rupees in any previous year; or

(b) carrying on profession shall, if his gross receipts in profession exceed ten lakh rupees in any previous year; or get his accounts of such previous year or years audited by an accountant before the specified date and obtain before that date the report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed:

Provided that this section shall not apply to the person, who derives income of the nature referred to in section 44B (of Income Tax Act, 1961) or section 44BB (of Income Tax Act, 1961) or section 44BBA (of Income Tax Act, 1961) or section 44BBB (of Income Tax Act, 1961), on and from the Ist day of April, 1985 or, as the case may be, the date on which the relevant section came into force, whichever is later: Provided further that in a case where such person is required by or under any other law to get his accounts audited by an accountant, it shall be sufficient compliance with the provisions of this section if such person gets the accounts of such business or profession audited under such law before the specified date and obtains before that date the report of the audit as required under such other law and a further report in the form prescribed under this section, Explanation.-

8. Section 44AB (of Income Tax Act, 1961) requires every person carrying on business or profession to get his accounts audited where the turnover or the gross receipts exceeds the prescribed limits. The audit is to be carried out by the specified date.

9. Section 271B (of Income Tax Act, 1961) provides for levy of penalty in case of violation of provisions of Section 44AB (of Income Tax Act, 1961). Section 271B (of Income Tax Act, 1961) as it existed during the relevant assessment year was in the following terms:-

“271B. If any person fails to get his accounts audited in respect of any previous year or years relevant to an assessment year or furnish a report of such audit as required under section 44AB (of Income Tax Act, 1961), the Assessing Officer may direct that such person shall pay, by way of penalty, a sum equal to one-half per cent of the total sales, turnover or gross receipts, as the case may be, in business, or of the gross receipts in profession, in such previous year or years or a sum of one hundred fifty thousand rupees, whichever is less.”

10. Under Section 271B (of Income Tax Act, 1961), penalty is leviable for any of the following defaults:-

(1) Failure to get the accounts audited as required under section 44AB (of Income Tax Act, 1961); or

(2) Failure to furnish the said report.”

11. Chapter IV of the Act provides for 'computation of total income'. Section 44AB (of Income Tax Act, 1961) is one of the sections enacted under Chapter IV-D dealing with computation of profits and gains of business or profession. Section 44AB (of Income Tax Act, 1961) becomes operative where there is computation of profits and gains of business or profession as a part of total income. In other words, it has no applicability where the assessee is not involved in or has no income from profits and gains from business or profession. In the present case, it was not disputed that the income of the assessee was exempted under Section 10(20) (of Income Tax Act, 1961) which falls in Chapter III of the Act. There was no income of the assessee which would fall under heading “profits and gains of business or profession”. Once that was so, it could not be said that the provisions of Section 44AB (of Income Tax Act, 1961) were applicable and as a sequel thereto, penalty under Section 271B (of Income Tax Act, 1961) was not leviable. The Tribunal had rightly decided the issue in favour of the assessee.

12. In view of the above, the substantial question of law as claimed by the revenue is answered against the revenue. The appeals are accordingly dismissed.

(AJAY KUMAR MITTAL)

JUDGE

July 17, 2012 (G.S. SANDHAWALIA)

JUDGE