AHMAD FAREED, A.M.: ORDER This appeal by assessee is directed against order of CIT(A) dt. 13th Sept., 2004, confirming penalty of Rs. 89,530, under s. 271(1)(c) of Act, for asst. yr. 2000-01. 2. grounds raised by assessee in this appeal are as under : "(1) learned CIT(A) erred in confirming penalty under s. 271(1)(c) of Rs. 89,530 on ground that appellant had offered additional income in return only after survey operation wherein it was found that appellant had maintained books of accounts for its business and profit as per books was higher than presumptive profits as per provisions of ss. 44AE and 44AF of Act while appellant had shown in return presumptive profit as per these provisions only. (2) learned CIT(A) failed to appreciate that : appellant had maintained books to note receivable and payables in business and not necessarily for determining income. appellant was under bona fide impression that under provisions of ss. 44AE and 44AF, there was no obligation for appellant to declare profits as per books in return which were higher than presumptive profits as per these sections. As per legal provisions, appellant s impression of law was fully justified and hence, appellant could not be said to have concealed or filed inaccurate particulars of income. As per ratio of Supreme Court decision in case of CIT vs. Vegetable Products Ltd. 1973 CTR (SC) 177 : (1973) 88 ITR 192 (SC), because t w o interpretations of provisions were possible, penalty could not be sustained in this case. appellant after survey operation had agreed to be taxed on higher income as per books subject to no penalty be levied and hence, his agreement could not justify levy of penalty. (3) learned CIT(A) was not justified in rejecting appellant s explanation in this regard and in confirming penalty under s. 271(1)(c)." 3 . assessee firm was dealing in building material on retail basis and was deriving income from truck plying. In return filed by assessee for asst. yr. 2000-01 on 31st Oct., 2000, total income was computed under ss. 44AF and 44AE of Act, as under : Amount Amount Particulars (Rs.) (Rs.) Income from business (i) Income from retail trade (building material suppliers) 91,306 estimated under s. 44AF of turnover of Rs. 18,26,129 (ii) Income from 2 trucks plying business under s. 44AE of IT Act @ Rs. 2000 per month. 48,000 1,39,306 For truck i.e. Rs. 2000 x 12 x 2 Income from other sources Interest 3,08,385 received Less : 1,05,648 Bank interest Other proportionate exp. (30% of 51,539 1,57,187 1,51,198 Rs. 1,71,795) Total 2,90,504 Set off Less : 2,90,504 of losses Total Nil income 4 . During survey conducted under s. 133A of Act, at business premises of assessee on 28th Aug., 2002, it was noticed that assessee was maintaining regular books of account which showed higher income than what was offered by assessee for tax in its return of income. assessee, subsequently, filed revised return on 5th Sept., 2002 as under : Amount Amount Particulars (Rs.) (Rs.) Income from business Net profit 4,68,561 as per P&L a/c Add : Bad 54,487 5,23,048 debts claimed Set off Less : 2,90,504 of loss Total 2,32,544 income 5. AO, then, levied penalty of Rs. 1,79,059 on 27th April, 2004 under s. 271(1)(c), computed as under : Amount Particulars (Rs.) Tax on income as per revised return i.e. Rs. 89,529 2,32,544 Tax on income as per original return i.e. nil Tax on concealed income 89,529 Minimum penalty @ 100% 89,529 Maximum penalty @ 300% 2,68,587 Penalty levied @ 200% 1,79,059 6 . CIT(A) confirmed penalty, though he reduced quantum to minimum of Rs. 89,529. His order has been challenged by assessee in present appeal. 7. Shri S.U. Pathak, learned Authorised Representative, reiterated arguments put forward on behalf of assessee before AO and CIT(A). submissions made by him are summarized below : that assessee was dealing in building material on retail basis and turnover was only Rs. 18,26,129 and therefore it was covered by provisions of s. 44AF. that number of trucks used by assessee in truck plying business was less than ten and therefore, it was covered by provisions of s. 44AE. that, in view of above, assessee rightly computed its income on presumptive basis as per provisions of ss. 44AF and 44AE of Act. that assessee, was under no obligation to declare income higher than what was prescribed under ss. 44AF and 44AE, merely because books of account were maintained. that assessee had not committed any default for which penalty could be levied under s. 271(1)(c) of Act. 8 . Smt Anjala Sahu, learned Departmental Representative, supported order of CIT(A). She vehemently argued saying that order of CIT(A) needed to be upheld. 9 . We have considered rival submissions in light of material on record and we are of view that order of CIT(A) confirming penalty levied by AO under s. 271(1)(c) of Act cannot be sustained for reasons discussed in following paras. 10. In return filed by assessee for asst. yr. 2000-01 profits and gains from its retail business and from its truck plying business was calculated under provisions of ss. 44AF and 44AE of Act. It is admitted fact that assessee was dealing in building material on retail basis and that his total turnover did not exceed amount of Rs. 40 lacs in relevant year. Therefore case was surely covered by provisions of s. 44AF of Act. During survey conducted under s. 133A at its business premises it was noticed that assessee was maintaining books of account and that profits and gains from business was more than 5 per cent of total turnover. assessee, accordingly, filed revised return and offered for tax higher income. 11. Now question that arises for consideration in this case is, whether in such situation as stated above, AO and CIT(A) were right in holding that assessee had committed default which made it liable for levy of penalty under s. 271(1)(c) of Act. Before proceeding to answer this question we need to examine provisions of s. 44AF r/w ss. 44AA and 44AB of Act. 12. It needs to be noted that s. 44AF was inserted by Finance Act, 1997, w.e.f. 1st April, 1998, in order to introduce new scheme for making special provision, for computing profits and gains of retail business, whose total turnover did not exceed amount of Rs. 40 lakhs in relevant year, on presumptive basis, at 5 per cent of total turnover. objective was to simplify procedure for small taxpayers by introducing scheme of presumptive taxation. Sec. 44AF reads as under : "Special provisions for computing profits and gains of retail business. (1) Notwithstanding anything to contrary contained in ss. 28 to 43C in case of assessee engaged in retail trade in any goods of merchandise, sum equal to five per cent of total turnover in previous year on account of such business or, as case may be, sum higher than aforesaid sum as declared by assessee in his return of income shall be deemed to be profits and gains of such business chargeable to tax under head Profits and gains of business or profession : Provided that nothing contained in this sub-section shall apply in respect of assessee whose total turnover exceeds amount of forty lakh rupees in previous year. (2) Any deduction allowable under provisions of ss. 30 to 38 shall, for purposes of sub-s. (1) be deemed to have been already given full effect to and no further deduction under those sections shall be allowed : Provided that where assessee is firm, salary and interest paid to its partners shall be deducted from income computed under sub-s. (1) subject to conditions and limits specified in cl. (b) of s. 40. (3) written down value of any asset used for purpose of business referred to in sub-s. (1) shall be deemed to have been calculated as if t h e assessee had claimed and had been actually allowed deduction in respect of depreciation for each of relevant assessment years. (4) provisions of ss. 44AA and 44AB shall not apply insofar as they relate to business referred to in sub-s. (1) and in computing monetary limits under those sections, total turnover or, as case may be, income from said business shall be excluded. (5) Notwithstanding anything contained in foregoing provisions of this section, assessee may claim lower profits and gains than profits and gains specified in sub-s. (1), if he keeps and maintains such books of account and other documents as required under sub-s. (2) of s. 44AA and gets his accounts audited and furnishes report of such audit as required under s. 44AB." 13. One can see that assessee, who is covered s. 44AF, is not required to maintain his books of account and to get them audited. sub-s. (4) of s. 44AF says that provisions of ss. 44AA and 44AB shall not apply insofar as they relate to business referred to in sub-s. (1) of s. 44AF. 14. However, if such assessee claimed that profits and gains from such business was less than 5 per cent of total turnover then, w.e.f. 1st April, 1998, provisions of s. 44AA(2)(iii) and s. 44AB(c) make it obligatory for him to maintain books of accounts and to get such accounts audited. 1 5 . Therefore, from combined reading of ss. 44AF(1), 44AF(4), 44AA(2)(iii) and 44AB(c), position in law, relating to assessee who is engaged in retail business and whose total turnover does not exceed amount of Rs. 40 lakhs, emerges as under : (i) assessee, who is engaged in retail business and whose total turnover does not exceed amount of Rs. 40 lakhs in relevant year, shall be deemed to have earned profits and gains from such business at 5 per cent of total turnover. (ii) provisions of ss. 44AA(1) and 44AB(c), requiring assessee to (ii) provisions of ss. 44AA(1) and 44AB(c), requiring assessee to maintain books of account and get them audited, do not apply to business referred to in s. 44AF(1). (iii) However, if assessee, who is engaged in retail business and whose total turnover does not exceed amount of Rs. 40 lakhs in relevant year, claims that profits and gains from such business was less than 5 per cent of total turnover, in that case he will be required to maintain books of accounts under s. 44AA(2)(iii) and also to get them audited under s. 44AB(c). (iv) s. 44AF starts with non obstante clause giving overriding effect to provisions of this section over provisions of ss. 28 to 43C. 16. In normal situation profits and gains of retail business have to be computed under provisions of ss. 28 to 43C of Act. expression "business" is defined in s. 2(13) of Act and ss. 28 to 43C set down manner of computation of profits and gains of business. But s. 44AF starts with non obstante clause giving overriding effect to provisions of this section over provisions of ss. 28 to 43C. true effect of non obstante clause in section is that provisions mentioned therein have full operation and that provisions embraced in non obstante clause do not become impediment for operation of that section. 17. Also, deeming provision in s. 44AF(1) creates legal fiction, saying that in case of such assessee profits and gains from such business will be assumed to be that, calculated at 5 per cent of total turnover. And it is trite law that in construing legal fiction, it will be proper and necessary to assume all those facts on which alone fiction can operate. legal fiction has to be carried to its logical conclusion. 1 8 . Lord Asquith in East End Dwelling Co. Ltd. vs. Finsbury Borough Council (1952) AC 109 : (1951) 2 All ER 587, 589 (HL) observed that if one is bidden to treat imaginary state of affairs as real, he must surely, unless prohibited from doing so, also imagine as real consequences and incidents which, if putative state of affairs had in fact existed, must inevitably have flowed from or accompanied it. One must not permit his imagination to boggle when it comes to inevitable corollaries of that state of affairs. 19. In present case, assessee firm was admittedly engaged in retail business and his total turnover did not exceed Rs. 40 lakhs and therefore, it was governed by deeming provisions of sub-s. (1) of s. 44AF. And because of non obstante clause provisions of ss. 28 to 43C do not apply. Therefore, it could not be said that there was any concealment or furnishing of inaccurate particulars of income on part of assessee within meaning of s. 271(1)(c) of Act. In circumstances therefore, we are satisfied that this was not fit case for levy of penalty under s. 271(1)(c). penalty is accordingly cancelled. 20. In result, appeal filed by assessee is allowed. *** DARSHAN ENTERPRISES v. INCOME TAX OFFICER