DINESH KISHOR GOGIYA,ULHASNAGAR vs. ITO WARD 2(1) KALYAN, KALYAN

The assessee is aggrieved solely by the levy and confirmation of penalty on the allegation that he failed to get

Briefly stated, the assessee filed his return of income for the relevant assessment year declaring total income of Rs. 3,04,200/-. The assessee claimed to be engaged primarily in the business of commission agency, operating in the nature of a kachha arhatiya, wherein he procured orders on behalf of principals, collected sale proceeds from retail vendors through banking channels, deposited the same in his bank account, and thereafter remitted the amounts to the principal suppliers after retaining a small commission ranging between approximately 1.5% to 2%.

The assessment for the year was completed under section 147 read with sections 144 and 144B of the Act. During the course of assessment proceedings, the Assessing Officer noticed deposits aggregating to Rs. 3,13,25,504/- in the assessee’s bank account, treated the same as representing the assessee’s gross receipts, estimated income by applying a presumptive rate, and on that basis initiated penalty proceedings under section 271B for alleged failure to get the accounts audited under section 44AB.

In appeal before the Commissioner of Income Tax (Appeals), the assessee challenged the levy of penalty by explaining the nature of his business and contending that the deposits in the bank account represented collections made on behalf of principals and that only the commission earned

1. Dinesh Kishor Gogiya constituted his real turnover. It was, therefore, submitted that section 44AB was not applicable and, consequently, no penalty under section 271B could be levied.

The relevant observations and submissions made by the assessee before the First Appellate Authority are reproduced hereunder:

“The facts of the case are as under: I am engaged in the trading business on a very small scale and main activity is agency business wherein / collect sale proceeds from customers being retail vendors in the nearby markets on behalf of the principal through cheques and the collected funds are remitted to the principal suppliers through cheque only. My main nature of business is commission agent whereby on behalf of principals I have to procure orders for sale of goods from various customers and collect sale proceeds for sales effected by me on behalf of the principals The proceeds are then deposited in my Bank account maintained with Dhanlexmi Bank, Ulhasnagar Branch having account number - 019805300002214 after deduction of my commission (ie service charge) ranging between 1.5 to 2 percent of the transaction value. The account maintained with Dhanlaxmi Bank was used only to deposit sale proceeds collected on behalf of the principal and cheques are issued to the principals towards their Sale proceeds after deduction of my commission. I had filed Return of Income for AY 2015-16 with Total Gross Receipts reported at Rs 15,44,400/- wherein the income is earned from agency business by trading in goods on behalf of principals. The commission is charged around 1.5 percent to 2 percent on the transaction value. I have opted for presumptive taxation scheme under section 44AD for my Trading business and offered net commission income on estimated basis and so the provisions relating to maintenance of detailed books of accounts u/s 44AA does not apply Hence, I am not liable to maintain any books of accounts and get the books of accounts audited.

The Commissioner of Income Tax (Appeals), however, confirmed the penalty, primarily on the ground that the assessee had failed to comply and that the deposits in the bank account exceeded the threshold prescribed under section 44AB.

Aggrieved by the said order, the assessee is in appeal before us.

The learned counsel for the assessee reiterated that the very foundation of the penalty is misconceived, as the assessee was merely a commission agent and the deposits in the bank account could not be equated with his turnover. It was further submitted that similar penalties for earlier years had been dropped by the Assessing Officer and that, in any event, the quantum proceedings had been set aside, thereby eroding the basis of the penalty proceedings.

The learned Departmental Representative relied upon the orders of the authorities below.

We have heard the rival submissions, perused the material available on record and carefully examined the statutory setting in which the penalty has been levied. The controversy, though projected as a default under section 44AB, in substance hinges upon a more fundamental question, namely, what constitutes “sales”, “turnover” or “gross receipts” of the assessee for the purposes of section 44AB, having regard to the real nature of the assessee’s business. The assessee’s consistent case has been that he functions as a commission agent in the nature of a kachha arhatiya, collecting sale proceeds on behalf of principals and remitting the same after retaining commission. If this factual position is accepted, then the deposits in the bank account cannot, by any sound commercial principle, be treated as the assessee’s turnover.

Section 44AB mandates compulsory audit only where the assessee’s turnover or gross receipts exceed the prescribed threshold. The statute does not contemplate that every banking transaction or movement of funds through an account would automatically constitute turnover. The expressions “turnover” and “gross receipts” have to be understood in their commercial sense. In agency businesses, the bank account often functions as a conduit for funds belonging to others, and mere routing of monies through such account does not result in accrual of turnover in the hands of the agent. Unless it is shown that such receipts represent consideration for sales effected by the assessee on his own

In the present case, the assessee has explained that he procured orders on behalf of principals, collected sale proceeds from customers, deposited the same in his bank account and thereafter remitted the amounts to the principals after deducting his commission. The assessee has not claimed that the deposits are unexplained; rather, his case is that they are explained but do not belong to him. This distinction is legally significant. While estimation of income on deposits may have relevance in quantum proceedings, the jurisdictional fact for invoking section 44AB cannot be presumed merely on the basis of the magnitude of bank deposits.

At this juncture, CBDT Circular No. 452 dated 17 March 1986 assumes critical importance. The Circular clarifies that in the case of kachha arhatiyas, the turnover for the purposes of section 44AB does not include sales effected on behalf of principals and that only the commission earned is to be considered. This clarification is binding on the tax authorities. Therefore, once the assessee’s activity is found to be that of a commission agent, only the commission income can be reckoned as turnover for the purposes of section 44AB.

The assessee has also furnished a detailed reconciliation of the bank deposits, segregation between trading activity and agency business, computation of gross commission income,

Coming to the penalty under section 271B, it is well settled that penalty provisions are quasi-criminal in nature and must be strictly construed. Section 271B can be invoked only where there is a failure to get accounts audited “as required” under section 44AB. Thus, the existence of an enforceable obligation under section 44AB is a sine qua non for levy of penalty. If section 44AB itself is not applicable on a proper appreciation of facts and law, the penalty under section 271B cannot survive.

In the present case, once it is held that the assessee’s turnover, in the real and commercial sense, consisted only of commission income and did not exceed the prescribed threshold, the obligation to get accounts audited did not arise. Consequently, the very foundation of the penalty proceedings collapses. The penalty cannot be sustained merely because the assessment was framed ex parte or because the deposits in the bank account were substantial.

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