Requirement to obtain Tax audit Report (TAR) - Sale, turnover or gross receipt in context of S. 44AB with reference to a case of money lender.

[C.A. DEV KUMAR KOTHARI]

Provisions relating to Tax audit report:

We find provision imposing obligation to obtain and to furnish tax audit report in section 44AB of the Income-tax Act 1961. The section with highlights (for analysis and understanding) reads as follows:

Audit of accounts of certain persons carrying on business or profession.

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

(c) carrying on the business shall, if the profits and gains from the business are deemed to be the profits and gains of such person under [section 44AD or section 44AE or section 44AF] [or section 44BB or section 44BBB], as the case may be, and he has claimed his income to be lower than the profits or gains so deemed to be the profits and gains of his business, as the case may be, in any [previous year,]] [***]

The following clause (d) shall be inserted after clause (c) of section 44AB by the Finance (No. 2) Act, 2009, w.e.f. 1-4-2011 :

(d) carrying on the business shall, if the profits and gains from the business are deemed to be the profits and gains of such person under section 44AD and he has claimed such income to be lower than the profits and gains so deemed to be the profits and gains of his business and his income exceeds the maximum amount which is not chargeable to income-tax in any previous year,

get his accounts of such previous year [***] audited by an accountant before the specified date and [furnish by] 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 or [section 44BBA], on and from the 1st 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 58 [***], 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 59 [furnishes by] that date the report of the audit as required under such other law and a further report [by an accountant] in the form prescribed under this section.

Explanation.—For the purposes of this section,—

(i) "accountant" shall have the same meaning as in the Explanation below sub-section (2) of section 288;

[(ii) "specified date", in relation to the accounts of the assessee of the previous year relevant to an assessment year, means the [30th day of September] of the assessment year.]]

Total sales, turnover or gross receipts:

The basis of requirement of TAR is total sales, turnover or gross receipt in business or profession. These words have to be considered in a meaningful purpose. The TAR is required as a helpful tool in determination of taxable income and satisfaction about certain compliances by the assessee, non compliance of which may attract penal action etc. Thus basically TAR is required to assist the AO to get relevant information in a standard form.

Capital and revenue receipts:

The income is derived from revenue receipts. Therefore, considering the purpose of TAR, only revenue receipts can be considered as forming part of sale, turnover or gross receipts. Capital receipts cannot be included in gross receipt for the purpose of TAR. This can be illustrated as follows:

A company is in process of setting up a new business, in course of this process company obtains share capital and loans of say Rs.50 crores. These sums cannot be considered as gross receipts for the purpose of TAR. As the company has no turnover or gross receipts from business company is not required to get TAR.

A person carrying financing business had advances loans of Rs.2 crores in earlier year. During the year he receives interest of Rs.18 lakhs. He also receive loan repayments of Rs. 1 crore and grant new loans of Rs. 1.10 crores. The amount of loan repayment received cannot be considered as turnover, or gross receipts from money lending business. Only interest received is to be considered. The loan repayment received is neither sales, turnover nor it can be called gross receipt for the purpose of TAR. This is because this is on principal account and not on revenue account.

A professional person starts new practice, he obtains loans of Rs.30 lakh, brings in his capital of Rs.30 lakhs to establish office and facilities, after setting up of business during march, he has professional receipts of only Rs. five lakh. The loan obtained and capital introduced are not gross receipts of profession, and therefore, these items will not be included in gross receipts form profession for the purpose of TAR.

A businessman has started shop, he has purchased goods worth Rs.50 lakh, the sales were Rs.30 lakh and closing stock is Rs. 25 lakh. He is not liable to get TAR  because his sales or turnover is only Rs.35 lakh. The closing stock is not sales, turnover, or gross receipt, though it is credited in the P & l account.

Broadly we can say that gross receipts or accrual of revenue items which are of revenue nature and entered into the profit and loss account as revenue can only be considered as sales, turnover or gross receipts for the purpose of S. 44AB and TAR.  

Requirement of TAR:

From reading of the above provisions we find that there are several situations in which TAR is required. The first requirement is based on sale, turnover, or gross receipts etc. from business or profession. The limit of Rs. forty lakh for business and Rs. ten lakh for profession have been provided since introduction of TAR without any change so far.

Main theme or Scope of this write-up- money lender:

This article is mainly concerned with requirement of TAR in case of business of money lending business as to when a money lender is required to get TAR. The pertinent questions are whether any money received in course of business of money lending can be regarded as gross receipt. A money lender may get money in following forms:

On capital account:

Capital by way of partners or shareholders capital,

Loan, advance or deposits taken,

Refund of loan, advance or deposits earlier granted.

On revenue account:

Interest on loan, advance or deposits granted.

Discounts in case of discounting of bills.

TAR  is concerned with tax on income from business or profession:

As discussed earlier TAR is required in case of business or profession and not in case of other income. In case of money lending business, the primary concern is to tax income of assessee engaged in  money lending business. Money lending is always an adventure in nature of commerce because it involves risks on account of capital and earnings both. However, in practice we find that money lending is not always treated as business activity. Salaried persons, retired persons, professionals, even businessmen engaged in other business treat interest income even from loans and advances as income from other sources and that is accepted by revenue. Therefore, only revenue receipts should be regarded to ascertain whether a person engaged in business of money lending is required to get his accounts audited. In this regard the following expressions used in relevant provisions are important:

total sales, turnover or gross receipts, as the case may be, in business gross receipts in profession.

The above expressions clearly show that the receipts which form basis of computation of income are relevant and not the receipts on capital account.

As illustrated earlier, a general businessman or a professional may obtain loans, or may advance surplus money to earn interest, in such cases amount of loans taken or given cannot be regarded as gross receipts for the purpose of section 44AB.

Therefore, even in case of money lending business, amount of loans taken or refunds of loan received  back cannot be considered as sale, turnover or  gross receipts of money lending business. The words need to be read as follows:

total sales, in business or

total turnover  in business or

total gross receipts,  in business… in case of business.

And

Total gross receipts in profession…. In case of profession.

Thus, the above expressions concerns with revenue receipts and not capital receipts of business or profession.

In case of money lending business receipts on revenue account that is interest, bill discount, finance charges, late payment charges, penalties for delayed payments etc. will only constitute gross receipts of money lending business in the context of TAR u/s 44AB.

Illustration:

Suppose a company engaged in money lending business  has following receipts:

Share capital - Rs. 100 lakh.

Loans and deposits taken - Rs.  100 lakh.

Loans and deposits refunded - Rs. 50 lakh

Loans and deposits renewed - Rs. + 30 lakh  Rs.80 lakh

In Money lending assessee granted short duration loans of 3-6 months to the tune of say 360 lakh, and got refund of 200 lakh. Thus at end of the year assessee had advanced loans of Rs.160 lakh.

The loan granted and refund received is on capital account and not on revenue account. The amount received back as refund of loan cannot be called "sale, turnover or gross receipt" of the business.

Assessee lent money to several persons and earned gross interest income of say Rs. 27 lakh. Assesse paid interest of Rs. 8 lakh and thus have a gross profit of Rs.19 lakh. After meeting admininstrative expenses, depreciation etc. of say Rs. 2 lakh, the assessee has net profit of Rs.17 lakh.

The question is whether the assessee is required to obtain TAR?

 In view of author, the loans taken as well as  refunds of loans granted cannot be regarded as sale, turnover or gross receipt of business. The gross receipts in this context is interest of Rs.27 lakh that is below Rs.40 lakh therefore, the assessee is not required to obtain TAR.

Construction Ejusdem Generis:

In view of expressions used in S. 44AB the Ejusdem Generis Rule is applicable. According to the Black's Law Dictionary (8th edition, 2004) the principle of Ejusdem Generis is where general words follow an

enumeration of persons or things, by words of a particular and specific meaning, such general words are not to be construed in their widest extent, but are to be held as applying only to persons or things of the same general kind or class as those specifically mentioned. It is a canon of statutory construction, where general words follow the enumeration of particular classes of things, the general words will be construed as applying only to things of the same general class as those enumerated.

The expression Ejusdem Generis means of the same kind.

Normally, general words should be given their natural meaning like all other words unless the context requires otherwise.

But when a general word follows specific words of a distinct category, the general word may be given a restricted meaning of the same category. The general expression takes it's meaning from the preceding particular expressions because the legislature by using the particular words of a distinct genus has shown its intention to that effect. This principle is limited in its application to general word following less general word only. If the specific words do not belong to a distinct. Genus, this rule is inapplicable. Consequently, if a general word follows only one particular word, that single particular word does not constitute a distinct genus and, therefore, Ejusdem Generis rule cannot be applied in such a case. Exceptional stray instances are, however, available where one word genus has been created by the courts and the general word following such a genus given a restricted meaning. If the particular words exhaust the whole genus, the general word following these particular words is construed as embracing a larger genus. The principle of Ejusdem Generis is not a universal application. If the context of legislation rules out the applicability of this rule, it has no part to play in the interpretation of general words. The basis of the principle of Ejusdem Generis is that if the legislature intended general words to be used in unrestricted sense, it would not have bothered to use particular words at all.

Conditions to apply the Rule:

We can summarize conditions and test its applicability to say that Rule of ejusdem general is applicable:

(1) The statute contains an enumeration by specific words in section 44AB we find sales and turnover as specific words. ;

(2) The members of the enumeration suggest a class - sales and turnover suggests the class of revenue receipts or accruals;

(3) The class is not exhausted by the enumeration- sales or turnover does not exhaust whole category of revenue receipts , revenue receipts can also be on account of honorarium, royalty, fees, service charges, discounts, rebates, interest, rent , licence charges etc.  

(4) A general reference supplementing the enumeration, usually following it in S. 44AB the general expression is 'gross receipts' followed by sales and turnover.

(5) There is not clearly manifested an intent that the general term be given a broader meaning than the doctrine requires- in section 44AB we do not find any indication that items of some other gene like capital receipts are to be included. What is manifest is the items of revenue nature which are in nature of gross receipts or accruals as income are regarded to form the basis of total sales, turnover or gross receipts.

Applying the above rule as tested in context of words used in section 44AB, as well as purposes seeking approach of TAR it is clear the words sale, turnover being specific words, and gross receipts being of general nature it can be said that gross receipts must belong to the category of sale or turnover. Thus gross receipts should be in nature of consideration of sale of goods or consideration for service or facility provided and not anything else.

Case before Gujarat high Court- question about turnover left open:

In the case of Income-tax Officer v. Sachinam Trust 2010 -TMI - 35306 - HIGH COURT OF GUJARAT before the Gujarat High Court the matter on this issue was involved. However, the Court reframed the questions and restricted itself to the issue whether there was reasonable cause for not getting TAR and therefore penalty u/s 271B was not leviable. The Court thus did not dealt with the matter as to what should be 'gross receipt' from business  in case of money lending business.

The facts of the case are as follows;

The assessee in view of Tax Audit Manual published by Bombay Chartered Accountants' Society, which contained legal opinion of eminent counsel took view that  in case of a person carrying on banking business, appropriate expression to be considered for deciding applicability of provisions of section 44AB would be term 'gross receipts', assessee, carrying on business of financing, bona fidely believed that gross receipt of interest and not gross amount of advance would constitute basis for ascertaining limit of Rs. 40 lakhs so as to attract section 44AB, assessee could be said to have a reasonable cause for not getting its accounts audited under section 44AB, and as such no penalty could be imposed on assessee

following substantial question of law was originally formulated:

"Is the Tribunal right in law and on facts in cancelling the penalty levied under s. 271B amounting to Rs. 72,451 on the ground that it is not the gross amount of advances made during the year which constituted turnover but the gross interest received which constitute the basis for liability under s. 44AB."

Thus according to this question it is clear that the Tribunal had held that gorss receipt would include only interest receipts and not loans granted (or refund received) However, the Court did not consider this aspect, because perhaps the court considered that real dispute is about demand for penalty. Thus after hearing  learned counsel for the respective parties, the Court felt that the correct and appropriate substantial question of law in the facts of the present case would be :

"Whether the assessee had a reasonable cause so as not to be visited with penalty under the provisions of s. 271B of the Act ?"

This question was accordingly considered by the Court.

The court viewed that in the circumstances, without entering into the analysis of provisions of s. 44AB of the Act, for the purpose of determining whether in the case of moneylender, turnover would constitute the basis for invoking the said provision or gross receipts would constitute the basis for applying the said provision, the appeal is decided on the ground as to whether the assessee had a bona fide belief which constituted reasonable cause in the facts and circumstances of the case. Under the provisions of s. 273B of the Act, legislature has provided that notwithstanding anything contained in the provisions of s. 271B of the Act, no penalty shall be imposable on a person or an assessee for any failure referred to in the said provisions if it is proved that there was reasonable cause for the said failure.

The concurrent orders made by the CIT(A) and Tribunal were therefore confirmed by the high Court.

The court could have answered main question:

It would have been better if the high Court answered the question about applicability of TAR to the assessee. By leaving that question open, the court has left the fields open for growing litigations, because the AO can still insist on his view that even loan should be considered as part of gross receipts. By not answering the main question, the court has created scope of more cases, more litigation and shortage of courts. If courts decide the issues in a manner that go to reduce the confusions, and scope of litigation then there is no shortage of courts in our country because unnecessary the cases will not come up before courts. This is personal view of the author on increasing litigation causing brain drain and wasteful expenses.