2006 (5) TMI 138 - AT - Income Tax

Nursing Home Business Activities Not Subject to Audit Requirements

The Tribunal determined that the operation of a nursing home constituted business activities rather than a profession under the Income-tax Act. As the ... Compulsory Audit Issues Involved:1. Whether the activity of running a nursing home constitutes a business or profession under section 44AB of the Income-tax Act.2. Whether the penalties levied under section 271B for not getting the accounts audited were justified.Issue-wise Detailed Analysis:1. Nature of Activity: Business or ProfessionThe primary issue was to determine whether the activity of running a nursing home by the assessee constitutes a 'business' or 'profession' under section 44AB of the Income-tax Act. The assessee contended that its activities were business-related, as the total receipts were less than Rs. 40 lakhs, thus not requiring an audit under clause (a) of section 44AB. The Revenue argued that the activities constituted a profession, requiring an audit if receipts exceeded Rs. 10 lakhs as per clause (b) of section 44AB.The Tribunal analyzed the definitions of 'business' under section 2(13) and 'profession' under section 2(36), noting that a profession involves specialized skills and knowledge. The Tribunal referenced the Supreme Court's guidelines in V.P. Shantha, which defined professions by characteristics such as specialized work, moral commitment, professional association, and high community status. However, the Tribunal found that the nursing home's activities, including room rent and nursing charges, did not align with these professional characteristics.The Tribunal emphasized that the nursing home, as a partnership firm, was distinct from the individual professionals (doctors) working there. It noted that the nursing home earned income from providing facilities and services, not from professional fees directly received by doctors. Consequently, the Tribunal concluded that the activities constituted business, not a profession.2. Justification of Penalties under Section 271BThe Tribunal also examined whether the penalties imposed under section 271B for failing to get accounts audited were justified. The assessee argued that it was under a bona fide belief that its activities were business-related, not professional, and thus did not require an audit under section 44AB. The Tribunal found merit in this argument, noting that the assessee consistently maintained this belief and even got the accounts audited belatedly to avoid litigation.The Tribunal referenced several judicial precedents, including decisions by the Madras High Court and the Gujarat High Court, which supported the view that professional activities could be conducted in a commercial manner, thus constituting business. Given the bona fide belief and the subsequent audit compliance, the Tribunal held that there was reasonable cause for the assessee's default.Conclusion:The Tribunal concluded that the activities of the nursing home constituted business activities. Since the turnover was below Rs. 40 lakhs, the assessee was not required to get its accounts audited under section 44AB. Additionally, the Tribunal found reasonable cause for the assessee's failure to comply with the audit requirement, thus cancelling the penalties levied under section 271B for the assessment years 1998-99 and 1999-2000. Both appeals of the assessee were allowed.