Balance sheet of assets and liabilities is not easy thing to prepare , specially by an Individual. But it is noted with from feedbacks given by various users of this site that the Assessing Officers , often ask for balance sheet from an Individual assessee .This is despite the fact that the present government has braught in lots of tax adminstration reform for helping tax payers specially served scrutiny notices . So question is whether the A.O has unhindered power to ask everyone to submit a balance sheet in case of scrutiny ? Readers should note that it is certianly not so . In many cicumstances, asking balance sheet in scrutiny case , will be illigal .
Balance Sheet Provision Under I.T.Act ?
Legislature understood the difficulties in mainting accounts , so it never required that Individual tax payer should keep a balance sheet of their assets and liabilities.
So, under Income Tax Act , the A.O can ask for balance sheet from an individual who is not supposed to maintain books of accounts or balancehseet only if
- the A.O seeks approval of Joint /Add. Commissioner of Income Tax who is his immediate superior in the range.
- The balance sheet asked is not more than three years prior to the previous year for which assessment proceedings are pending
The aforesaid provison is given under section 142(1) as under
142. (1) For the purpose of making an assessment under this Act, the Assessing Officer may serve on any person who has made a return under section 115WD or section 139 or in whose case the time allowed under sub-section (1) of section 139 for furnishing the return has expired a notice requiring him, on a date to be therein specified,
(i) …
(ii)] to produce, or cause to be produced, such accounts or documents as the Assessing Officer may require, or
(iii)] to furnish in writing and verified in the prescribed manner information in such form and on such points or matters (including a statement of all assets and liabilities of the assessee, whether included in the accounts or not) as the Assessing Officer may require :
Provided that
(a) the previous approval of the Joint Commissioner shall be obtained before requiring the assessee to furnish a statement of all assets and liabilities not included in the accounts ;
(b) the Assessing Officer shall not require the production of any accounts relating to a period more than three years prior to the previous year.
It is clear from proviso given in section 142 of the I T Act , that A.O can ask for balance sheet from any assessee , but only after taking approval from Joint Commissioner or Add.CIT . But that too not for more than three years prior to the previous years. It must also be noted that even if someone maintains accounts of a proprietorship , where all assest and liabilities are included . If in such a case, A.O asks for list of assets and liabilities not included in the said balanceshseet of the propritorship firm, the approval from JCIT/Addl.CIT will have to be taken .
Can A.O Invoke Power under sec. 131 ?
The assessing officer can still invoke the power vested in him u/s 131 of the Income Tax Act in a scrutiny proceeding.This has judicially held valid in case of Anil Kumar Ghatak vs ITO [1971 ]79 ITR 452 Cal .However the powers u/s 131 can be used in special cases only and the burden of proving why the powers u/s 131 was used when the usual power to call for information u/s 142 could have been used. The matter is purely legal and cast a greater burden on assessing officer when he invokes powers u/s 131 of the Income Tax Act.
It is also important to note that while power to call for books of accounts up to six years can be invoked u/s 131 , it has also following limitation
- Power u/s 131 cannot be invoked for diercting to prepare balance sheet.
- Power u/s 131 can not be used for books of accounts when assessee is not supposed to maintain books of accounts , as given in section 44AD , 44AE and other preumptive schemes.
- Power u/s 131 can not be used to call for information or books when the time for maintianing such books of accounst have elapsed.
- Power u/s 131 can not be used for books of accounst or documents which is not maintained by assessee or are maintained by others.
What to to when the A.O asks for balance sheet without seeking approval or beyond period prescribed u/s 142(1)
In my opinion, you should submit balance sheet for the period for which you are liable . For period beyond , if you are conmofrable to prepare and submit , do that . If you do not want , simply inform the A.O that the balance sheet for such years are not prepared and therefore can not be submitted at this point of time.
If A.O passes adverse order and you know for fact that approval for the balance sheet was not taken , raise this point before CIT(A) on the illegality .