Commissioner Of Income-Tax v. Rajni Kant Dave

Rajes Kumar, J.:— The Income-tax Appellate Tribunal, Allahabad, has referred the following question of law under section 256(1) of the Income-tax Act, 1961, (hereinafter referred to as “the Act”), for opinion of this court:

“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that where proper books of account and documents have been maintained under rule 6F of the Income-tax Rules, 1962, the income can be properly deduced therefrom and the proviso to section 145(1) of the Income-tax Act, 1961, cannot be invoked?”

2. The present reference relates to the assessment year 1991-92. The brief facts of the case are as follow:

The assessee is an individual having income from carrying on services of pathology, X-ray, and ultrasound test. The Assessing Officer noticed that a register of receipts of X-ray tests and ultrasound tests was maintained. According to him, there were discrepancies in it inasmuch as no stock register of raw material was maintained. The closing stock in consumption record showed some variation with closing stock as per inventory; there was no satisfactory explanation why X-ray films and ultrasound films more than the number of patients were used, some reports were prepared on the basis of screen display, but cash receipts were not issued, daily balances were not struck in the cash book and separate figures of consumption of ultrasound and X-ray films were not available. The Assessing Officer rejected the book results under the proviso to section 145(1) of the Act and enhanced receipts on estimate resulting in an addition of Rs. 9,14,675.

3. The assessee filed appeal before the Commissioner of Income-tax (Appeals). It was submitted before the Commissioner of Income-tax (Appeals) that the books of account had been maintained in accordance with section 44AA of the Act and rule 6F of the Income-tax Rules, 1962. The Assessing Officer wanted more information than contemplated therein. Some findings were also challenged on the facts. The Commissioner of Income-tax (Appeals), however, accepted the contentions partly, and observed that although the books of account were maintained, it was not possible to correlate the total number of films used with the receipts issued. Day to day stock register and daily balancing of cash book were not required under rule 6F of the Income-tax Rules. More than one film might have been used for one report. She also agreed that the addition resulted in a net profit rate of 47.7 per cent., which was an impossibility. The asses-see's results were better than those in a similar concern. However, she held that the proviso to section 145(1) was attracted since the total number of films consumed could not be correlated with the total receipts. The addition was reduced to Rs. 2 lakhs.

4. Being aggrieved by the order of the Commissioner of Income-tax (Appeals), the assessee filed second appeal before the Tribunal. The Tribunal allowed the appeal and held as follows:

“Coming to the merits, the assessee was carrying on medical profession and was obliged to maintain accounts as per section 44AA of the Act. This provision was introduced by the Taxation Laws (Amendment) Act, 1975 with effect from April 1, 1976. Earlier it had been held in certain cases like P. Appavu Pillai v. CIT, [1965] 58 ITR 622 (Mad), that adverse inference could not be drawn against an assessee for not having maintained any account of his income. Section 44AA of the Act statutorily supersedes the effect of the earlier decided cases for certain classes of assessee. In case such accounts are not maintained, section 271A prescribes penalty provisions.

It is laid down in section 44AA(1) of the Act that, inter alia, every person carrying on medical profession ‘shall keep and maintain such books of account and other documents as may enable the Assessing Officer to compute his total income in accordance with the provisions of this Act’. Thereafter, it is laid down in sub-section (3) that the Board may prescribe by rules the books of account and other documents to be kept and maintained under sub-section (1) and the particulars contained therein. The relevant rule is rule 6F of the Income-tax Rules, 1962.

sub-rule (1) of rule 6F lays down, inter alia, that every person carrying on medical profession shall keep and maintain the books of account and other documents specified in sub-rule (2). The books are quite extensive as the following, namely:

(i) a cash book;

(ii) a journal, if the accounts are maintained according to the mercantile system of accounting;

(iii) a ledger;

(iv) carbon copies of bills, whether machine numbered or otherwise serially numbered wherever such bills are issued by the person, and carbon copies or counterfoils of machine numbered or otherwise serially numbered receipts issued by him:

Provided that nothing in this clause shall apply in relation to sums not exceeding twenty-five rupees;

(v) original bills wherever issued to the person and receipts in respect of expenditure incurred by the person or, where such bills and receipts are not issued and the expenditure incurred does not exceed fifty rupees, payment vouchers prepared and signed by the person:

Provided that the requirements as to the preparation and signing of payment vouchers shall not apply in a case where the cash book maintained by the person contains adequate particulars in respect of the expenditure incurred by him.

Sub-rule (3) has prescribed additional books of account for persons carrying on medical profession. Extract is given below:

‘(3) A person carrying on medical profession shall, in addition to the books of account and other documents specified in sub-rule (2), keep and maintain the following, namely:—

(i) a daily case register in Form No. 3C;

(ii) an inventory under broad heads, as on the first and the last day of the previous year, of the stock of drugs, medicines and other consumable accessories used for the purpose of his profession.’

It is the assessee's case that all the prescribed books of account and documents were maintained. The discrepancies pointed out by the Assessing Officer did not survive before the Commissioner of Income-tax (Appeals) in this regard. The only reason why the Commissioner of Income-tax (Appeals) upheld the applicability of the proviso to section 145(1) was that the total number of films consumed could not be correlated with the total receipts. However, such a requirement is not a requirement of section 44AA of the Act or rule 6-F of the Income-tax Rules.

From a reading of sub-sections (1) and (2) of section 44AA and rule 6F of the Income-tax Rules, 1962, it follows that if the prescribed books and documents have been maintained, the assessee has maintained such books of account and other documents as might enable the Assessing Officer to compute his total income in accordance with the provisions of this Act. If a contrary view is taken, then there will be no purpose in keeping the prescribed books. It is only a natural corollary that if the prescribed books are maintained properly, then the Assessing Officer can compute his total income in accordance with the provisions of the Act.

In this connection, a reference should also be made to the proviso to section 145(1) of the Act. It is laid down therein that where the accounts are correct and complete but the method employed is such that the income cannot properly be deduced therefrom, the computation shall be made upon such basis and in such manner as the Assessing Officer may determine. We hold that where proper books of account and documents have been maintained under rule 6F of the Income-tax Rules, 1962, the income can properly be deduced therefrom and, therefore, the proviso to section 145(1) cannot be invoked. No error of discrepancy has been pointed out in the books and documents maintained under rule 6F of the Rules. We, therefore, hold that sustaining of an addition of Rs. 2 lakhs is not justified. The addition is deleted.”

5. We have heard Sri R.K Upadhyaya, learned standing counsel appearing on behalf of the Revenue, and Sri S.D Singh, learned counsel for the assessee-respondent.

6. Learned standing counsel submitted that the Tribunal has erred in holding that once the assessee is found to have maintained the books of account in accordance with rule 6F and no defect is found in such books of account, the proviso to section 145(1) cannot be invoked. He submitted that the proviso to section 145(1) can be invoked even in those cases where the books of account are found to be complete and correct but the method is such that in the opinion of the Assessing Officer the income cannot properly be deduced therefrom then the computation shall be upon such basis and in such manner as the Assessing Officer may determine. He submitted that in the present case the proviso to section 145(1) has been invoked because the total number of films could not be correlated with the total receipts. Thus even though the books of account maintained in accordance with rule 6F are found to be complete and correct and no defect is found but from the books of account the proper income could not be deduced because the assessee has not maintained any account to correlate the total number of films consumed with the total receipts. Learned counsel for the assessee submitted that the proviso to section 145(1) can be invoked only if it is found that the method employed is such that in the opinion of the Assessing Officer income cannot properly be deduced. He submitted that in the present case there is no objection of the assessing authority with regard to the method employed by the assessee. Therefore, in the absence of any account to correlate the total number of films consumed with the total receipts the proviso to section 145(1) cannot be invoked. He submitted that once for pathological tests, maintenance of particular books of account are prescribed for the doctor, it is not obligatory for the assessee to maintain any other books of account. He submitted that in the present case it was found that the assessee has maintained complete books of account as required under rule 6F and no defect in such books of account was found, the Assessing Officer cannot require any other account than the account required under rule 6F. Raising objection for non-maintenance of account, which is not prescribed under rule 6F amounts to exceeding jurisdiction and exercising power beyond the statutory provisions.

7. Section 145(1), section 44AA(1) and rule 6F(1) reads as follows:

“145.(1) Income chargeable under the head ‘Profits and gains of business or profession’ or ‘Income from other sources’ shall be computed in accordance with the method of accounting regularly employed by the assessee:

Provided that in any case where the accounts are correct and complete to the satisfaction of the Assessing Officer but the method employed is such that, in the opinion of the Assessing Officer, the income cannot properly be deduced therefrom, then the computation shall be made upon such basis and in such manner as the Assessing Officer may determine:

Provided further that where no method of accounting is regularly employed by the assessee, any income by way of interest on securities shall be chargeable to tax as the income of the previous year in which such interest is due to the assessee:

Provided also that nothing contained in this sub-section shall preclude an assessee from being charged to income-tax in respect of any interest on securities received by him in a previous year if such interest had not been charged to income-tax for any earlier previous year.

(2) Where the Assessing Officer is not satisfied about the correctness or the completeness of the accounts of the assessee, or where no method of accounting has been regularly employed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144.

44AA.(1) Every person carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or any other profession as is notified by the Board in the Official Gazette shall keep and maintain such books of account and other documents as may enable the Assessing Officer to compute his total income in accordance with the provisions of this Act.

Rule 6F. Every person carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or authorised representative or film artist shall keep and maintain the books of account and other documents specified in sub-rule (2):

Provided that nothing in this sub-rule shall apply in relation to any previous year in the case of any person if his total gross receipts in the profession do not exceed one lakh fifty thousand rupees in any one of the three years, immediately preceding the previous year, or, where the profession has been newly set up in the previous year, his total gross receipts in the profession for that year are not likely to exceed the said amount.

(2) The books of account and other documents referred to in sub-rule (1) shall be the following, namely:—

(i) a cash book;

(ii) a journal, if the accounts are maintained according to the mercantile system of accounting;

(iii) a ledger;

(iv) carbon copies of bills, whether machine numbered or otherwise serially numbered wherever such bills are issued by the person, and carbon copies or counterfoils of machine numbered or otherwise serially numbered receipts issued by him:

Provided that nothing in this clause shall apply in relation to sums not exceeding twenty-five rupees;

(v) original bills wherever issued to the person and receipts in respect of expenditure incurred by the person or, where such bills and receipts are not issued and the expenditure incurred does not exceed fifty rupees, payment vouchers prepared and signed by the person:

Provided that the requirements as to the preparation and signing of payment vouchers shall not apply in a case where the cash book maintained by the person contains adequate particulars in respect of the expenditure incurred by him.”

8. We have given our anxious consideration to the submissions of learned counsel for the parties and we find force in the argument of learned counsel for the assessee.

9. A perusal of section 145(1) of the Act shows that the assessing authority is vested with the power to compute the income on such basis and in such manner as he may determine in a situation when it is found that the method adopted by the assessee is such that the income cannot properly be deduced. There are commonly two methods for the maintenance of the books of account; one is cash and another is mercantile system. However, it is open to opt a hybrid system, i.e, mixed system of accountancy. In the present case, there is no allegation that the method of accountancy adopted by the assessee is such out of which the income cannot properly be deduced. The objection is that the assessee has not maintained any account to correlate the total number of films consumed with the total receipts. It means that the assessing authority desired that in addition to the books of account maintained by the assessee, the some books of account should be maintained in the nature to correlate the total number of films consumed with the total receipts. In our opinion, this cannot be the basis for invoking the provision of section 145(1) of the Act.

10. Section 44AA of the Act has been introduced by the Taxation Laws (Amendment) Act, 1975, with effect from April 1, 1976, which required a person carrying on the medical profession to keep and maintain such books of account and other documents as may enable the Assessing Officer to compute his total income in accordance with the provisions of the Act. Sub-section (3) provides that the Board may prescribe by rules the books of account and other documents to be kept and maintained with receipt and the particulars contained therein. The Board by rule 6F of the Income-tax Rules, 1962, contemplated certain books of account to be maintained by the medical profession. Thus, once the Board in respect of a particular nature of the profession prescribed maintenance of certain books of account, it is not open to the assessing authority to desire some other books of account to be maintained over and above the books of account required by rule 6F. Any view to the contrary will defeat the very purpose of introducing section 44AA and rule 6F. However, it is always open to the assessing authority to examine the books of account maintained by the medical professional in accordance with rule 6F and to examine their correctness. In case such books of account are found incomplete or incorrect, it is open to the assessing authority to invoke the provisions of section 145(2) of the Act and to make a best judgment assessment, but without pointing out any defect in the books of account and without raising any objection that the method adopted by the assessee is such by which the correct income cannot be deduced the provisions of section 145(1) or (2) of the Act cannot be invoked. As observed above, in the present case, the books of account maintained by the assessee were not found incomplete or incorrect and it has also not been held that the method adopted by the assessee was such by which the correct income cannot be deduced, the provisions of section 145(1) of the Act have wrongly been invoked. The Tribunal is also right in holding that where the proper books of account and documents have been maintained under rule 6F of the Income-tax Rules, 1962, the income can properly be deduced wherefrom and the provisions of section 145(1) of the Act cannot be invoked.

11. In view of the aforesaid discussions, the question referred hereinabove is answered in the affirmative, i.e, in favour of the assessee and against the Revenue.