Maintenance of Books of Accounts under S. 44-AA of Income Tax Act by Professionals and Businessmen

(R. Krishna Iyer, B.Com.,F.CA., Chartered Accountant, Cochin)

A new Section has been inserted in the Income Tax Act by which certain category of tax payers have to maintain books of accounts. The object of the new provision is to enable the Income tax Officer to compute the correct income of the assessee and before the introduction of this section the assessee could also estimate the Income on some basis. The new Section casts an obligation on tax payers carrying on the Professon of Law, Medicine, Engineering, Architecture, Accountancy, Technical Consultancy, etc. to maintain books of accounts irrespective of the Income earned. In the case of persons who are in Profession whose Gross Receipts exceeds Rs. 60,000/- have to maintain books of accounts. Similarly in the case of persons from business whose turnover or Gross Receipts exceeds Rs.2,50,000/- have to maintain books of accounts. From the above it is very clear that the maintenance of books of accounts have no connection with the Income earned by the persons it depends on their Gross Receipts irrespective of their expenses, for earning such income or their Net Income. Therefore if the Gross Receipts of an Advocator a Doctor or any other Professional person exceeds Rs.60,000/- per year which works out only Rs.5,000/- per month, he is liable to maintain the books. Similarly in the case of a businessman or a Contractor whose contract receipts exceeds Rs.2,50,000/- per year (average daily sales works out to Rs.700/-) has to maintain books of accounts. The result is, taking into account the inflation and the price level, any moderate Professional or businessman would be liable to maintain books of accounts.

There are specific objects in introducing this provision in the Income tax Act. Recently in the Income tax Act certain provisions have been introduced restricting payments by cash for claiming deductions from Income. Individual payments exceeding Rs. 10,000/- has to be made by crossed cheques/drafts, otherwise such expenses would not be considered for the purpose ot deduction. Similarly the Loan repayments or receipts have to be made by Account Payee Cheques/Drafts when the payment exceeds Rs. 20,000/-. There is also a provision in the Income tax Act for the Compulsory Audit of accounts under certain condition. All these provisions are laid out in the Act in order to regulate, the transactions and to bring more and more assessees under the net of Taxation and also to control the circulation of black-money. One of the main reasons for inflation is the increases in prices due to the use/circulation of black-money and the Government is taking all possible measures to control the said circulation.

One of the measures to control the circulation of black money is to press for mandatorily maintaining books of accounts by the tax payers. An assessee may be correctly disclosing his turnover and his income in his return, but if no books of accounts are maintained, there are enough chances or facility for him to circulate either his or others black-money. Though he is declaring his correct income in the return, it cannot be said that he is not evading Income tax in such circumstances. By introducing the compulsory maintenance of accounts the department would be able to find out/restrict such type of circulation of black-money to a certain extent. Moreover the restrictions in payments etc. can be enforced only when books of accounts are maintained.

This new Section was introduced in the Income tax Act in the year 1976. The following books of accounts have to be maintained by the Professionals:

(a) Cash Book

(b) Journal (where the accounts are maintained on Mercantile System)

(c) Ledger

(d) Carbon copies of bills, serially numbered wherever the sum exceeds Rs.25/-

(e) Original Bills, Receipts for expenditure, vouchers exceeding Rs.50/-

In the case of Doctors:

(a) A daily case Register.

(b) An inventory on Stock of Medicines etc. as on first and last day of the previous year.

In the case of businessmen and contractors, no books of accounts have been specified but the books of accounts should be maintained as may enable the Income tax Officer to compute the total Income in accordance with the Provision of the Act.

Non-maintenance of books of accounts would attract penal action. Earlier in case the return of income of the assessee is accepted and the tax computed by the Income Tax Officer and the tax as per the return of Income is same, even in the absence of books of accounts the Income Tax Officer was not able to levy penalty and the position prevailed till 1-4-1989. In other words, if the Return of Income is accepted, non-maintenance of accounts would not attract levy of penalty. As per the existing policy, the Income Tax Department is accepting 97% of the Income Tax Returns without calling for the presence of assessee, or the records. In other words, only 3% of Returns are scrutinised in detail for which Income Tax Officer calls for the evidences. As mentioned earlier, for 97% of the cases, the Return are accepted and as such there will not be any additional demand on completion of these assessments. The amount of penalty is reckoned as a sum which shall not be "less than 10%" but which shall not exceed 50% of the amount of tax, if any, which would have been avoided if the Income returned by such person has been accepted as the correct income. For Example:

If the tax due as per the Return of income of the Assessee is Rs.2,000/- and after the scrutiny if the Income Tax Officer accepts the Return and there is no further demand, the penalty for the non-maintenance of accounts cannot be levied till 1-4-1989, but if as per the assessment, if there is an additional demand of Rs.1,000/- and if the assessee has not maintained books of accounts, the Incometax Officer would be able to levy a penalty, minimum of Rs.100/- (10% of Rs.1,000/-) or a maximum of Rs.500/- (50% of Rs.1,000/-).

In short till 1-4-1989 the penalty of non-maintenance of accounts could be levied only on the difference in Income Tax as per the Return and assessment.

However this provision has been amended w.e.f. 1-4-1989. If any person fails to keep and maintain books of accounts as per the Act or Rules, the Income Tax Officer can levy a minimum penalty of Rs.2,000/-(which can be extended uptoRs.1.00 lakh).

Therefore after the Amendment it is not necessary that there must be difference in Income Tax to levy penalty. It may also be noted that the levy of penalty has nothing to do with the Income. If the Statements of Accounts are not attached along with the Return, and the Income Tax Officer, finds that the assessee who is liable to maintain books of accounts, have not done so could initiate penalty proceedings. There is every chance that the Income Tax Officer would levy penalty, even in the first year of assessment itself. He may impose only minimum penalty in the first year but if default is continued he may impose the maximum penalty in the subsequent years, and in the case of Advocates, they may not get a lenient view from the Income Tax Officer. Moreover, eventhough the Section says: "may" it may be interpreted as "shall", in view of the fact that there is no provision in the Act, to condone if there is reasonable cause. Eventhough this provision was introduced as early as 1976, for the reasons stated above, there were some difficulties in levy of penalty for the non-maintenance of books of accounts, but after the amendment, the department has started initiating penalty proceedings and therefore it is absolutely necessary that the professionals and the businessmen should maintain books of accounts in order to escape from levy of penalty.

The amount of Rs.60,000 and Rs.2,50,000 was fixed in 1976. Considering the inflation and consequent increase in fees to the professionals it is high time that the Government may increase the limit of Rs.60,000 and Rs.2,50,000 to atleast Rs. 1,20,000 and Rs.5,00,000 respectively.

Regular books of accounts would not only help the assessee to prepare his Return of Income, but in case of scrutiny assessments, and if the Income Tax Officer is insisting to prepare the Wealth Statement of the assessee, this could also be helped. Suppose the assessment year is 1989-90 it relates to the financial year 1-4-1988 to 31-3-1989, the Income Tax Officer will call for the Assets & Liability Statement of the assessee as on 31-3-1988 and 31-3-1989, in order to ascertain the increase in wealth of the assessee in the year. The increase in Wealth should correspond to the Income returned and the excess if any would be treated as unaccounted Income of the year. Thus regular books of accounts are maintained, it would be easier to prepare the statement of wealth. Similarly, the assessee would be liable to pay Wealth Tax if his Assets exceed Rs.2,50,000/-, subject to certain exemptions. In the absence of regular books of accounts, it will not be possible to ascertain his net wealth to file the Wealth Tax Returns. Therefore regular books of accounts certainly helps the assessee in this respect. The assessee may also invest amounts in NSC, Fixed Deposits etc. and in his busy schedule of his/her Profession, there are possibilities of misplacing the receipt and he may forget to renew or encash the same on the due dates. The books of accounts should help him or remind him of the existence of such deposits. In the case of businessmen and contractors, one of the main sources of funds is Bank finance, and it has become necessary to furnish the Assets of the assessee to the Bank along with the Application for Loan and for the renewal of the same. The Professional people also may require loans from Banks or financial institutions to purchase cars, equipments, or flats, etc. for which also along with the Application, financial statements have to be attached.

From the above it is very clear that proper maintenance of books of accounts are essential and helpful not only for the purpose of Income Tax and Wealth Tax but also would serve the individual professionals in their own interests.

Right to Live Repugnant to Right to Die!?

(C.K. Radhakrishnan, Advocate, Ernakulam)

If a person has got the right to choose his residence, spouse, profession and mode of living, what impedes him to end his life too? Shall it be a matter of choice, how to die and when to die? If one has got the right to retain his being what prevents him to end it too? If a Socialistic Welfare State cannot provide a person adequate humane living conditions, why shall the law retrench his right to die?

Article 21 of Indian Constitution lays down that "No person shall be deprived of his life or personal liberty, except according to the procedure established by law." Whereas S.309 of I.P.C. state "whoever attempts to commit suicide and does any act towards the commission of such offence, shall be punished with simple imprisonment for a term which may extend to one year or with fine or with both. But catena of judicial pronouncements have accentuated that the term "life" is not limited to a mere physical existence, but it means life with dignity. Decency and dignity are non-negotiable faces of human life. The very canon of Art.21 enlivens that right to live with human dignity and all the bare necessities of life like food, clothing and shelter. II protection against the arbitrary deprivation of life is enunciated, enabling vistas for retention of life must also be ensured. Every right has a positive as well as negative aspects. Thus logically right to live corresponds right to end life also. If it is so, what gives the State the right to dictate to an individual as to how to exercise his rights? Such paternalistic approach should be abhorred. S.309 of Indian Penal Code clamps a restriction on the right of life guaranteed by Art.21. Indeed all rights may not be absolute, it may fall within the reasonable precincts erected by the State.

Suicide does not harm others and does no damage to the persons or properties of others. One's life or one's body with all its limbs are his sole property, and if the State transgresses on its disposal as and when one desires, it is arbitrary. This Section 309 of Indian Penal Code is an abrogation on the tenets of Article 21 of Indian Constitution. Suicide is an act of self destruction. It is an act of extinguishing one's own life by one's own act. If the State cannot keep a person contented with his life, what rationale is there to claim a right over him?

Right from the dawning days of republic Indian Judiciary has reproached the kernel of S.309 I.P.C. In State v. Sanjay Kumar (1985 Crl.L.J. 931) it was held that "Continuance of S.309 I.P.C. is an anachronism, unworthy of a humane society like ours. Instead of sending accused to a psychiatric clinic, society gleefully sends him to mingle with criminals, as if trying its best to see that in future he does fall foul of the punitive sections of Penal Code. S.309 has no justification right to continue, remaining on the statute book. Need is for humane, civilised and socially-oriented out look and penology". Even the Law Commissions had recommended for the deletion of this aboriginal provision - S.309 I.P.C - from the Code. Still the chauffers of administration are going on unheeded. The irony of this offence is that, if the accused fails in his mission he is incacerated, and if he succeeds, he escapes from the cudgils of law.

Legal Profession - Some Restrictions

(By P.S. Vasavan Pillai, Advocate, Trivandrum)

One of the problems that besets the legal profession today is the over-crowding of advocates in it. When the number of professionals increases, all. won't get enough remuneration. This will tempt them to adopt methods and habits which derogate from the high standards of professional ethics, manners and behaviour patterns. This in the result will lower the prestige and usefulness of this time-honoured and noble profession. So it is absolutely necessary to check the flow of hands into the legal profession.

With the above object in view I would suggest the following points.

1. The time between two enrolment functions should be increased. Now there is one enrolment after every three months or so. It is enough only once in a year the enrolment is held. This will tempt many not-too-serious candidates to seek other avenues.

2. Legal profession is one where more dedication, perseverance and intellectual acumen are required than in any other profession. Now any one with an LLB degree, however less meritorious it may be, can be allowed into the profession. Hereafter only those with atleast a second class LLB degree should be enrolled as advocates.

3. A limit to the number of advocates to be enrolled in a year should be prescribed taking into consideration the need of the hands required for a State Bar. I understand there is such a method before licensing the Chartered Accountants.

To compensate for the loss of revenue .to the Bar Council on account of this numerical restriction, the fee of enrolment can be increased from the present Rs.250/-to Rs.1000/- or so.

4. It is only good that an upper age limit is prescribed for future enrolment. Now there is a lower age limit. A person can get the LLB degree before he is 25. So the upper age limit can be fixed at 30. One need not be allowed to enter the profession because he does not find a place anywhere else. Those who love the profession shall come into it sufficiently early. Those who do not love it, will be liabilities for the profession. They will only deteriorate the standards. So they can be kept away.

An exception to this upper age limit can be given in the case of judicial officers because they are already associated with the legal profession and courts.

5. Now some advocates have more than enough briefs while some others have no briefs at all. This also is not an ideal situation. Accumulation of too many briefs in some hands will itself cause delay to the disposal of cases. On the other hand those without enough files will stoop to habits which militate against professional values, standards and prestige. To remedy the situation I would suggest that a limit should be fixed to the briefs which an advocate can accept in a year.

This is not at all a volatile suggestion in view of the fact that there are .already some restrictions enjoined on those advocates conferred with 'Senior" status.

The Bar Councils have a duty to see that the profession upholds the high standards and prestige. So they can legitimately enforce the above suggestions. If at present they are not empowered to do it fully, they can persuade the Government to amend the law.

An Anachronism

(By P.S. Vasavan Pillai, Advocate, Trivandrum)

India is proclaimed to be a secular democracy and its Constitution envisages equality of all persons. Art. 14 of the Constitution quite proudly states that all persons will have equality before the law and that there will be equal protection of laws within the territory of India. Art. 15 categorically prohibits discrimination on grounds of religion, race, caste, sex etc.

However, the Code of Civil Procedure, 1908 which is subject to the Constitution of India contains a section that prescribes discrimination on the basis of rank, race and nationality, even after its amendment in 1976. S.57 of the Code of Civil Procedure which guides all Civil Courts in India reads, "Subsistence allowance—The State Government may fix Scales, graduated according to rank, race and nationality, of monthly allowances payable for the subsistence of judgment debtors". Needless to say this section is violative of the explicit mandates of the Constitution and also its spirit.

It is astonishing that the offensive wording of S.57 of the Civil Procedure Code has escaped so far the notice of lawyers, the Ministry of Law and the Law Commission. It is a shame to retain this Section as such. Therefore it is to be reworded at the earliest.

Beneficiaries under the New Motor Insurance Law

(M.N. Srinivasan, Advocate, Banglore)

The provisions of the Motor Vehicles Act 1939 and in particular those of Chapter VIII relating to the Insurance of Motor Vehicles have been quite familiar to the members of the legal world connected with the dispensation of justice since over fifty years. During these years the provisions of this Chapter have suffered major amendments two or three times mainly on the lines of the changes in the English Road Traffic Acts. This was quite natural as the original provisions of Chapter VIII of 1939 Act itself was on the basis of English Act of 1930.

2. This Act has again been extensively overhauled by the 1988 consolidating and amending Act. Here again the changes in the provisions of the Chapter relating to Insurance of Motor Vehicles has been to some extent on the lines of the changes made in the English Act of 1972. All the while this process of adjusting our Laws from time to time to the changes in the corresponding English Acts has been partly with a view to get the benefit of the interpretation of those provisions by the superior English Courts.

3. Confining our attention to S.95, of the 1939 Act, which lays down the requirements of policies to satisfy the provisions of Chapter VIII and the corresponding provisions namely S.147 of the 1988 Act which is word for word the same as that of the old Act except for the deletion of one proviso to the section, it is interesting to examine whether the provisions of the section could at all have been drafted more elegantly. At any rate it appears from what follows that there is avoidable overlapping and consequent want of clarity.

4. S.147(l)(b)(i) is the same as S.95(l) (b)(i) of the old Act and refers to the requirement that the policy should cover the risk of death or injury "to any person of a Third party caused by the use of the vehicle" Third party has been construed as any person other than the Insurer and the Insured, who are the two parties to the Policy (Viscount Simon L.C. in Digby v. General Accident (1942) 2 All. E.R. 319 HL). Here the words 'person' and 'vehicle' are both unqualified.

Hence this clause is comprehensive enough to include risks caused by the use of any kind of vehicle, that is, whether it is a private Motor vehicle or a public service vehicle which is defined as one used for the carriage of passengers for hire or reward etc. It is also comprehensive enough to include the risk to 'any person' other than the Insurer and the Insured, that is, whether he is a passenger in the vehicle or not and whether he is a gratuitous passenger, or one being carried for hire or reward or whether he is an employee of the Insured or not. It may therefore be safely said that apart from liabilities under the Workmens' Compensation Act 1923 the amplitude of this clause (l)(b)(i) of S. 147 by itself is quite comprehensive to cover the Act liability in respect of all persons other than the Insurer and the Insured caused by or arising out of the use of all kinds of motor vehicles for which the Act intended to make provision.

5. If what is stated above is correct we will have to examine in what way the second clause of S.147 (l)(b) adds to or takes away from what clause (i) of S.147 (l)(b) comprehensively provides. In the first place it must be pointed out that the opening words of clause (ii) "against the death of or bodily injury to" made no sense as no policy of insurance can be taken against the death or injury but only against any liability that may be incurred in respect of the death of etc.

6. Now clause (ii) of S.147(l)(b) states that the policy must cover the risk of injury to any passenger of a public service vehicle caused by the use of the vehicle. This it is already seen above is covered under clause (i) itself, because clause (i) covers the case of injury of all persons by the use of all kinds of vehicles. Hence this clause (ii) is redundant, unless it can be held that' vehicle in clause (i) does not include public service vehicles. This cannot be. Again Clause (ii) is silent about the case of the public service vehicle causing death of or injury to a third party who is not a passenger that is not being carried in the vehicle. For this again recourse is to be had to clause (i) as pointed out above. Thus in both ways cl. (ii) is ill conceived and serves no purpose.

7. Proviso (ii) to S.95(l) of the old Act stated that the liability to passengers also must be covered only in the case of vehicles in which passengers are carried for hire or reward or by reason of or in pursuance of the contract of employment. In view of this proviso it was held in Pushpabai v. Ranjit G. and P. Company 1977 SC 1735, that gratuitous passengers in private cars are not required to be covered for death or injury. Now that this provision (ii) is omitted altogether in the 1988 Act it follows that passengers in private cars as well as in public service vehicles are also to be covered whether they are gratuitous or fare paying passengers. It must be pointed out here that the question whether ticketless passengers in buses are entitled to be covered or not was left open by the Supreme Court in MPSRTC v. Zenabai, 1977 SC 2206 under the 1939 Act.

8. If there is any ambiguity in the legislation the "question has to be resolved having regard to the under lying purpose of the provisions of Chapter 8(now Chapter XI). That is a sensitive process which has to be accommodate the claims of society as reflected in the purpose". Please see Motor Owners Insurance Co. v. J.K. Modi, 1981SC 2059.

9. Such defective drafting of Legislation when pointed out should be examined early and corrections suggested by the Executive or the Law Commission in order to avoid wasteful litigation. Arecent PTI report of 12-ll-1990shows that Motor accidents which caused 5106 deaths and 37731 injuries in 1960 were responsible in 1988 for 255278 accidents in which there were 49218 deaths and 206060 severe injuries.

10. It therefore appears quite in order to interpret thedeletioninthel988Act of Proviso ii to S.95(i) of the old Act as an indication that the purpose of the legislation is that all passengers being carried in private cars or in public service vehicles whether they are gratuitous or fare paying should be covered by compulsory insurance policies required under Chapter XI of the 1988 Motor Vehicles Act and paid just compensation for the suffering caused to them.