What are books of account?

In a recent case, the Madras High Court concluded that P&L account and balance-sheet are not books of account as contemplated under the I-T Act.  

T. C. A. Ramanujam

Computation of business income under the income-tax law has to be made on the basis of 'books of account'. This law has been in operation since 1992, but surprisingly there was no definition of the term " till 2001. Finance Act, 2001 introduced the definition through Section 2(12A). The definition, which took effect from June 1, 2001, reads thus:

"Books or books of account includes ledgers, day-books, cash books, account-books and other books, whether kept in the written form or as print-outs of data stored in floppy, disc, tape or any other form of electro-magnetic data storage device". This is an inclusive definition.

The Memorandum explaining the amendment, mentions that the passing of the Information Technology Act, 2000 necessitated the insertion of this definition in the I-T Act, 1961. A new Section 2 (22AA) was also brought in to define "document", as including electronic record as defined in Section 2(1)(t).

Books of account are prescribed by Rule 6F of the I-T Act. The proviso to this Rule grants exemption from the requirement of maintenance of books of account if the gross receipts from the profession do not exceed Rs 60,000. Section 44AA makes it obligatory for every person carrying on business or profession to maintain books of account if the income, turnover or gross receipts exceeded the prescribed limits. Failure without reasonable cause to maintain books may attract penalty under Section 271A read with 273B.

P&L account

Since the definition is inclusive and not exhaustive, the question of what constitutes books of account arises. If a profit and loss (P&L) account is maintained and credits are found in such an account, can we consider the same to be books of account? This is an interesting issue and not merely academic. It was taken up for detailed consideration by the Madras High Court in CIT vs Taj Borewells (291 ITR 232 Madras).

Taj Borewells did not maintain books of account since the gross receipts were below Rs 5 lakh. The partners of the firm had brought in Rs 5,25,00 as investments. The assessing officer (AO) did not accept the claim about the investment by partners. He concluded that the amount represented the undisclosed income of the firm and added the same under Section 68 of the I-T Act.

The Income Tax Appellate Tribunal (ITAT) annulled the addition and the department took up the matter in appeal before the Madras High Court. .

The Madras High Court quoted with approval the definition given in Ramanatha Iyer's Advanced Law Lexicon. The definition in the Lexicon appears wider than the in the tax law. A book containing a monetary transaction, according to the Lexicon, would attract the definition of books of accounts under the Indian Evidence Act.

Striking features

The High Court observed that books of account will mean any book which formed an integral part of a system of book keeping employed in any particular business and included the ledger and the books of original entry. After explaining the object behind the making of a P&L account, the court observed that the balance-sheet listing the assets and liabilities and equity accounts of the company is prepared "as on" a particular day and the accounts reflected the balances that existed at the close of business on that day. The court took note of earlier precedents on the subject and held:

"We can safely conclude that the profit and loss account and the balance-sheet are not books of account as contemplated under the provisions of the Act."

The court referred to three striking features in this case:

Since there are no books of accounts, there can be no credits in such books;

It is the first year of assessment of the assessee;

The Explanation offered by the assessee firm was not rejected and only the explanation offered by the partners was.

Hence, the High Court concluded that it was not a fit case for making addition under Section 68 of the Act. The judgment will have far-reaching ramifications both under tax law and company law.

(The author is a former Chief Commissioner of Income-Tax.)