ORDER
T.V.K. Natarajachandran, Accountant Member
1. This is an appeal by the revenue which is directed against the order of the CIT (Appeals), Nasik, dated 12-7-1988 wherein he has cancelled the penalty levied by the Assessing Officer under Section 271B of the Income-tax Act, 1961. The Assessing Officer has imposed the penalty for the assessee’s failure in not getting the books of accounts audited as required in Section 44AB of the Income-tax Act, 1961. According to the CIT (Appeals), there was a reasonable and bonafide belief for the assessee in not getting the accounts audited as the assessee is a kachha arahatia and sales were made on commission basis, there was no obligation to get the accounts audited.
2. Revenue has taken grounds to urge that on the facts and circumstances of the case, the CIT (Appeals) erred in cancelling the penalty levied under Section 271B and therefore, his order should be vacated and that the Assessing Officer should be restored.
3. The assessee has shown a turnover of Rs. 39,69,599 in sadi business said to have been carried on adat basis. The assessee has also shown interest income and adat receipts of Rs. 40,507 and Rs. 75,388 respectively. Including interest and adat receipt to the turnover in sadis, the total receipts came to Rs. 40,85,484 and thus exceeded the limit specified under Section 44AB(a), namely, Rs. 40 lakhs. Therefore, the assessee was required to get its books of accounts audited, but it failed to do so. After issuing show-cause notice to which the assessee filed written explanation on 29-2-1988 in which it was stated that the adat (commission receipts) of Rs. 75,388 cannot be included in sales of adat business in powerloom sadis. It is said that purchases of sadis from local dealers were made as per orders placed by different customers and they were handed over to the said merchants and customers when they visited the assessee’s premises for which commission has been charged by the assessee. Therefore, it was urged that the said commission receipts could not be considered as a part of turnover. Alternatively, it was submitted that if the aforesaid explanation was not acceptable, the assessee-firm was ready to get its books of accounts audited and then submit the audit report.
4. The written submission of the assessee was not acceptable to the Assessing Officer. According to the Assessing Officer, the amount received by the firm as consideration of sale price of sadis has to be included in the total sales or turnover. In other words, the Assessing Officer was of the view that adat, dalali, bank commission, insurance etc. received by the assessee formed part of price paid by the buyers and therefore, should be regarded as part of consideration of the sale of goods. The alternative submission made by the assessee was not acceptable for the reason that Section 44AB specified a time limit and the audit report was to be filed alongwith the return of income. Further the alternative submission also amounted to admission of default under Section 44AB. Therefore, the Assessing Officer was satisfied that the assessee has committed default by not getting the books of accounts audited as required by Section 44AB and consequently, a penalty of Rs. 20,427 was levied.
5. On appeal, same contentions were urged by the assessee before the CIT (Appeals). Written submissions were also filed which were reproduced in para 4 of the appellate order of the CIT (Appeals). The CIT (Appeals) held that the interest receipt cannot be taken as part of turnover. Adat is receipt on sales made which was Rs. 75,388. The gross profit in the trading accounts was Rs. 71,250 on a total of Rs. 39.69 lakhs which gave gross profit rate of 1.90 per cent only. From the aforesaid facts, the CIT (Appeals) concluded that the assessee has done some trading of its own and the assessee also has done kachha arahatia business and charged commission thereon. Other receipts had been separately accounted for in the profit and loss account and sales made even at cost price to the upcountry dealers have been taken as sales. On the basis of these facts and findings contained in para 5 of his appellate order, the CIT (Appeals) made a pertinent observation in para 6 of his appellate order that if credit even for a bit is given for sales made as kachha arahatia then the turnover would come below Rs. 40 lakhs and on this ground the assessee would get exemption from the provisions of Section 44AB. He also agreed with the contention of the learned counsel for the assessee that the penalty proceedings should have been initiated during the course of assessment proceedings. Further he also agreed with the contention of the assessee’s counsel that there was reasonable and bonafide belief in not getting the accounts audited because being a kachha arahatia and sales were effected on commission basis, there could have been no obligation to get the accounts audited nor was there any deliberate defiance of law on the part of the assessee and the assessee was even prepared to get the accounts audited if so advised by the Assessing Officer as alternatively pleaded by the assessee in the written submission before the Assessing Officer. For all these reasons, he held that it was not a fit case for imposition of penalty under Section 271B of the Income-tax Act, 1961. Accordingly, he cancelled the penalty.
6. At the time of hearing, the learned departmental representative has been duly heard and he has vehemently supported the order of the Assessing Officer and justified the penalty imposed.
7. The learned counsel for the assessee filed a paper compilation and referred to page 1 of the paper book which contains trading, profit and loss and allocation of profits among partners. It is stated that the gross profit of Rs. 71,250 shown under the sadi account actually represented recoveries on packing etc., while sales were effected cost to cost basis. In the profit and loss account, the so-called gross profits were separately credited vis-a-vis adat account receipt of Rs. 75,388,84 and interest amount of Rs. 40,507. At page 3 of the paper compilation, the assessee has furnished particulars of cost to cost basis of sales which amounted to Rs. 1,89,392. In this connection, reference was made to pages 55 to 63 of the paper compilation containing questions on Section 44AB of the Income-tax Act, 1961 and the answers given by Shri N.A. Palkhivala and Shri B.A. Palkhivala on 30-5-1985. In particular, reliance was placed on question No. 4 and answer thereto which read as under :-
Question No. 4: A purchasing commission agent purchases goods for undisclosed principals and supplies the goods at the same price at which he purchased the same; and he adds his commission and recovers expenses incurred on behalf of the principals. Whether the total purchases made by him will be taken into account or only the commission earned by him will be taken into account for considering the limit under Section 44AB?
Answer : If at no time the goods become the property of the agent and he is merely the hand to receive the goods from the seller and supply them to the purchasing principal, then only the gross commission will be taken into account.
From the aforesaid extracts, it is to be seen that if the goods did not become property of the agent and is merely a conduit pipe between the sellers and the purchasing principals, then only the gross commission will be taken into account for the purpose of Section 44AB which is said to be applicable in the case of the assessee. Further, reference was made by assessee to pages 52 to 54 which contains Board’s Circular No. 452, dated 17-3-1986 which has been issued in connection with Section 44AB of the Income-tax Act, 1961. Reliance was placed on para 4 of the said circular according to which the Board were advised that so for as kachha arahatias were concerned, the turnover did not include sales effected on behalf of the principals and only gross commission has to be considered for the purpose of Section 44AB. The submission of the learned counsel for the assessee was that the case of the assessee is one of kachha arahatia and not a pucca arahatia and, therefore, only gross commission has to be considered for the purpose of Section 44AB of the Income-tax Act, 1961.
8. We have duly considered the rival submissions and the impugned orders of the authorities and the paper compilation filed. At once, it is to be observed that the turnover of the assessee amounted to Rs. 28,03,351 with gross profit rate of 1.79 per cent for the immediately preceding assessment year 1985-86 and therefore, it was well within the turnover limit to attract the mischief of Section 44AB of the Income-tax Act, 1961. The turnover this year in the sadi account amounted to Rs. 39,69,599 which was just below the limit of turnover of Rs. 40 lakhs fixed for attracting Section 44AB. The CIT (Appeals) has excluded the adat receipt as well as interest receipt from the purview of turnover for the purpose of Section 44AB. Relying on the clarifications given by the Board in its Circular No. 452, dated 17-3-1986, he has categorised the assessee as kachha arahatia and he has charged expenses incurred on such business which resulted in gross profit rate of 1.09 per cent. Therefore, it is very much relevant to clinch the issue whether the assessee is a kachha arahatia or not. Going by the clarification issued by the Board in the aforesaid Circular No. 452, dated 17-3-1986 the case of the assessee fits in with the kachha arahatia vis-a-vis case of pucca arahatia. We have already noticed that the assessee has effected sales at cost to cost basis to the various undisclosed principals for which particulars were filed to the extent of Rs. 1,89,392 at page 3 of the paper compilation. Out of the 12 instances furnished, except in two cases, the purchases and sales were effected on the same date. In remaining 2 cases sales were effected next day or couple of days thereafter, charging sale price at which the sadis were purchased or procured. In fact, no margin of profit has been charged in respect of these transactions which is very peculiar feature of the business carried on by the assessee. Even the gross profit of Rs. 71,250 shown in the cloth account, it is stated, represented recoveries towards packing etc. incurred on behalf of up country principals. Adat or commission receipt in respect of sadis procured from the weavers and sold to unknown up country principals amounted to Rs. 75,388.84 Ps. which is separately credited in the profit and loss account. Interest is also separately credited in the profit and loss account. There is no dispute about the factual position stated above. The fundamental or the crucial issue is whether the so-called cloth account actually represented transaction of a kachha arahatia or pucca arahatia so as to attract the transactions within the purview of Section 44AB. From the answer to Question No. 4 by the Palkhivalas and the clarification given by the Board (supra), it is abundantly clear that the assessee has acted as a conduit pipe or merely as the hand to receive goods from the seller and supplying them to the principals or acted as kachha arahatia as contemplated by the Board in the circular. Though he has maintained accounts in the peculiar style of having purchased and sold sadis, this was evident from the fact that the so-called gross profit is nothing but recoveries effected towards packing, forwarding etc. Therefore, if true character or nature of the transaction in sadi is taken into account and appreciated and gross commission receipt is the criterion, the turnover or total sales would go below the limit of Rs. 40 lakhs as viewed by the CIT (Appeals). We agree with the CIT (Appeals) that interest receipt cannot be part of sale. But however the gross receipts including the adat and interest would take the case of the assessee beyond the limit of Rs. 40 lakhs prescribed under Section 44AB(a). In the circumstances, therefore, there was reasonable cause for the assessee in not getting its accounts audited as contemplated by Section 44AB and therefore, there was no deliberate defiance of law in this regard, as rightly held by the CIT (Appeals). In any case, this is the first year in which mischief of Section 44AB has been attracted. Therefore, in all fairness, the alternative plea taken by the assessee ought to have been allowed and the assessee would have been enabled to get accounts audited as required by law. This was rejected by the Assessing Officer simply on the ground that the assessee was required to get books audited as provided under Section 44AB before the specified date and submit the same alongwith the return of income. Since there was only a venial breach or a technical default which, in the facts and circumstances stated above, amounted to a reasonable cause or sufficient cause, though it is not specifically provided for in Section 44B, nonetheless, it can be imported in the statute penalising the assessee for such default. In this view of the matter, therefore, we agree with the CIT (Appeals) and consequently, uphold his order cancelling the penalty levied by the Assessing Officer.
9. In the result, the appeal is dismissed.