BY TIOL News Service

ERNAKULAM, AUG 14, 2018: THE ISSUE is - Whether when a proprietary firm being an assessable unit has kept cash-in-hand, the same is liable to be taxed as 'assets' u/s 2(ea)(vi) of the Act even if, disclosure was made in its books of accounts. And the verdict is NO.

Facts of the case:

The assessee, an individual, engaged in businesses of jewellery, chit funds, bar hotels and production and export of cashew had returned income for the relevant AY. During the assessment proceeding, the AO noted that the assessee's proprietorship concerns were involved in purchase of old gold and also had a huge turnover as also phenomenal stock. The assessee's proprietorship concerns could only be remunerated with cash. The assessee had cash in the form of loans which were availed from financial institutions. The said cash resulted in liability to interest which the proprietor was obliged to pay on loans. The AO was of the view that even if the cash was generated from the business, keeping the same in hand the assessee looses interest and he does not get any advantage other than its employment in the business. Accordingly, the AO treated the cash-in-hand as found from the books of accounts as an 'asset' u/s 2(ea).

The High Court held that,

++ sec. 2(ea)(vi) was brought in based on the Chelliah Committee report, which seeks to discourage the tendency to keep 'assets' dead without it being put to any productive use. The recommendations were also to ensure investment of dead capital in productive activities. The speech of the Finance Minister, adopting the recommendation of the Chelliah Committee, lays emphasis on the need to encourage tax payers to invest in productive assets, such as shares, securities, bank deposits, bonds. The Finance Minister's speech also spoke of assets like residential houses, farm houses and urban land, jewellery, bullion, motor cars not being put to use for commercial purposes, being included in the definition of assets, which are liable to taxation under the Act. What was sought to be taxed was ostentatious investments, stashing or hoarding of wealth, without the same being put to productive use contributing to national economy and the general welfare; in larger public interest;

++ a partnership firm, though a compendium of individuals and legally not treated as separate from the partners; for income tax purpose, the firm itself is an assessable unit as is an association of persons. An assessable unit whether it be an individual, a firm, a proprietorship concern or a company, whether incorporated as a company registered under the Indian Companies Act, or otherwise; are all required to maintain books of accounts for the purpose of Income Tax Act, the officers of which Department also makes assessments under the Wealth Tax Act. The requirement to maintain the books of accounts also is insofar as the proprietorship concern being assessable to income tax, while many of those classified as individuals, for example, a salaried individual, not being required to maintain any books. The classification has hence to be understood as one facilitating the levy of tax on unproductive assets and the categorization is of those persons required to maintain books of accounts and others who have no such statutory liability. The use of the word 'other persons' reveals a common stream of persons, qualified with recording of cash-in-hand in the books of accounts. There can be no classification on the basis of the mere status, of an individual, HUF or Company. The classification has to be understood as between persons who are statutorily mandated to maintain accounts and those who are not. The former is engaged in productive activities, generating income for themselves, taxable under the Income Tax Act and those assets acquired from the income generated, being kept productive. When such books of accounts are maintained, there is absolutely no reason why the assessable units and the cash-in-hand of such assessable units, which is recorded in the books of accounts, should be included in the definition of 'assets' for the purpose of taxation under the Act;

++ the cash-in-hand held by the assessee herein are with respect to business transactions, the accounts of which were regularly maintained and the income thereon proffered for assessment before the Income-tax authorities. The cash so held in their hand were also recorded in the books of accounts, with certain exceptions, as we see from the orders of the AO. The exceptions are in so far as the AO having taxed only such amounts, which were kept in hand and which were in excess of Rs.50,000/- on a reading of Sec. 2(ea)(vi). The levy made by the authorities of all such cash-in-hand, whether disclosed in the accounts or not was only of that in excess of Rs.50,000/-. Sub-clause (vi) of Sec. 2(ea) is in two limbs, one covering individuals & HUF's and the second 'the other persons'. As far as the former is concerned, only such cash-in-hand in excess of Rs.50,000/- would be brought to tax under the Act and as far as the second limb 'the other persons' are concerned, any amount, even within the limit of Rs.50,000/- kept in hand and not recorded in the books of account will be brought to tax under the Act. We have also found that there is no warrant for assuming that 'other persons' as seen from the provision includes or refers only to Companies. We are of the opinion that 'the other person' refers to any assessable unit on whom there is a specific statutory mandate to maintain books of accounts, in the present case under the Income Tax Act;

++ the Companies Act definitely mandates maintenance of books of accounts by a company as a regular measure, whereas the Income Tax Act insists on such maintenance for the purpose of proper assessment of income, also making it mandatory for a statutory audit with respect to certain assessees on the basis of the income exceeding a particular limit. As in the case of Companies, a proprietorship firm, partnership firm or an association of persons carrying on trading activities are also required to maintain books of accounts as per the Income Tax Act. The emphasis as we see from clause (vi)(ea) is on the cash-in-hand being recorded in the books of accounts of 'other persons', who are required to statutorily maintain such books of accounts. We see from all the W.T.Appeals, the assessees were maintaining books of accounts and the Income Tax officials responsible for assessment of their income under the Income Tax Act has looked into the cash-in-hand disclosed in the books of account to proceed for assessment under the Act. The AO, in some cases, had also excluded those amounts in excess of Rs.50,000/-, when disclosed in the books of accounts, following an earlier Tribunal order, which was taken up for suo motu revision;

++ there is a definite policy as discernible from the Act, as also the specific amendment brought in by way of introduction of clause (ea) in Sec. 2, which is to tax non productive assets, including cash, in excess of Rs.50,000/- in case of individuals & HUF's and with respect to all other persons who regularly maintain books of accounts, on cash so held without disclosure. There is no classification which is arbitrary or discriminatory and violating the rights guaranteed of equal protection of laws. The policy and principle discernible from the enactment provides clear guidelines for selecting those to be taxed and does not leave it to the arbitrary exercise of the officers constituted under the Act. The classification herein is on the basis of whether an assessee is required to maintain regular books of accounts in the course of business or not. For anyone, who is not so required, the tax will be on any cash-in-hand exceeding Rs.50,000/-. For the others, for whom the requirement is mandatory, any cash not disclosed in the books of accounts will be taxed as wealth. The classification is based on a reasonable differentia and has a reasonable nexus with the object sought to be achieved by the taxing enactment;

++ the law, in this case the specific amendment seeking to tax the non-productive cash-in-hand as wealth, available in Sec. 2(ea)(vi) is constitutionally valid. However, the officers have deviated from the policy and principle explicit from the enactment and hence such action taken under the Act for assessment of cash-in-hand of the assessees, disclosed in the books of accounts, but in excess of Rs.50,000/-, has to be set aside. We find the challenge to be capable of decision, on the said principles extracted from Shri.Ram Krishna Dhalmia. We do not hence find any reason to set aside the provision as arbitrary or discriminatory nor to read it down; on the interpretation placed by us on Sec. 2(ea)(vi). We dispose of the Writ Petition declaring and holding that the 'other persons' as coming in the second limb of Sec. 2(ea)(vi) includes those persons who carry on a commercial activity and are statutorily required to maintain books of accounts under the Income Tax Act. The writ petitioner, a proprietary firm engaged in the business of jewellery, is declared to be entitled to be absolved from the liability to tax under the Wealth Tax Act, for any amounts held as cash-in-hand, recorded in the books of accounts. It is made clear that any amounts not recorded in the books of accounts of similarly situated individual proprietorships, without reference to any limit of Rs.50,000/-, would be exigible to tax under the Wealth Tax Act.

(See 2018-TIOL-1606-HC-KERALA-WT)