Calcutta High Court
Commissioner Of Income-Tax vs Hardeodas Agarwalla Trust on 24 July, 1991
Equivalent citations: [1992]198ITR511(CAL)
JUDGMENT Ajit K. Sengupta, J.
1. In this reference under Section 256(1) of the Income-tax Act, 1961, for the assessment year 1982-83, the following question of law has been referred to this court :
"Whether, on the facts and in the circumstances of the case and having regard to the provisions of Section 12A(b) of the Income-tax Act, the Tribunal is justified in law in setting aside the orders of the Commissioner of Income-tax (Appeals) and the Income-tax Officer and in directing the Income-tax Officer to accept the auditor's report in Form No. 10B and to process the assessee's claim for exemption under Section 11 of the Income-tax Act afresh?"
2. The facts leading to this reference are that the assessee filed a return for the assessment year in question without the auditor's certificate in Form No. 10B on December 16, 1983. The assessee, however, filed the balance-sheet as at March 31, 1982, and the income and expenditure account along with the return. The auditor's certificate was not furnished even at the time of hearing. The accounts of the trust have been audited on February 20, 1985, and the report of such audit in the statutory Form No. 10B had been signed by the chartered accountant on February 20, 1985. The Income-tax Officer completed the assessment denying exemption under Section 11 of the Income-tax Act, on March 5, 1985, on the ground that the certificate in Form No. 10B had not been filed as required by the law.
3. The assessee, being aggrieved, preferred an appeal before the Commissioner of Income-tax (Appeals). At the hearing of the appeal before the Commissioner of Income-tax (Appeals), the assessee submitted two copies of the audited accounts and the report of the auditor in Form No. 10B. The Commissioner of Income-tax (Appeals) held that the trust had not fulfilled the conditions laid down in Section 12A(b) and, consequently, its income was not entitled to exemption provided under Sections 11 and 12 for the assessment year under consideration. Against this finding of the Commissioner of Income-tax (Appeals), the assessee took the matter to the Tribunal.
4. In the appeal before the Tribunal, it was argued by the assessee that the filing of the auditor's report in Form No. 10B along with the return was not mandatory but it was only directory. Reliance was placed on certain decisions of the High Courts and the Tribunal. The Tribunal set aside the orders of the lower authorities and restored the matter to the file of the Income-tax Officer with a direction to accept the auditor's report in Form No. 10B and process the assessee's claim for exemption under Section 11 and frame a fresh assessment as per law after giving the assessee a reasonable opportunity of being heard.
5. At the hearing before us, it has been contended by learned counsel for the assessee that the Tribunal was justified in directing the Income-tax Officer to accept the auditor's report although it had not been filed before the assessment was completed. It was also contended that the provisions of Section 12A(b) of the Act are only directory and not mandatory. He has relied on several decisions in support of this contention.
6. Our attention has been drawn to a decision of the Gujarat High Court in Billimora Engineering Mart v. CIT [1985] 156 ITR 153. There the question was whether the application for registration of the firm was valid as it was not accompanied by an instrument evidencing the partnership.
7. There, the Gujarat High Court held that the procedural law is always to be construed and applied in a manner so as to make it a handmaid of justice, and it cannot be treated as a substantive provision so as to defeat the rights of the parties. Sub-section (5) of Section 185 no doubt provides that the application for registration shall be accompanied by the original instrument evidencing the partnership. The provision is, however, directory or, in any case, even if mandatory, is capable of being waived. Legislative intent conferring a right of condonation is an indication in that direction. Hence an application for registration of a firm which is not accompanied by an instrument evidencing the partnership cannot be treated as invalid.
8. Our attention has also been drawn to the decision of a Division Bench of this court in CIT v. Bharat Refineries Ltd. [1986] 162 ITR 652. There the question was whether the return which was not accompanied by the profit and loss account and the balance-sheet was a valid return. It was held that although the return filed did not contain the balance-sheet and the profit and loss account, subsequently the Income-tax Officer called for and obtained the copies of the balance-sheet and the profit and loss account and completed the assessment. Although copies of the balance-sheet and the profit and loss account might have been submitted subsequently, the return was none the less valid.
9. Learned counsel relied on a decision of the Madhya Pradesh High Court in the case of CIT v. Ganga Engineering Works [1987] 165 ITR 795. In that case, the Income-tax Officer did not allow any deduction under Section 80J of the Income tax Act, 1961, as the assessee had not made a claim for such deduction. The Commissioner (Appeals) allowed the claim of the assessee on the ground that though no formal claim was made at the assessment stage, necessary data was available with the Income-tax Officer. The Tribunal held that there was material on record on the basis of which deduction under Section 80J could be allowed to the assessee. On a reference, it was held that since there was material on record to justify the allowance under Section 80J, the assessee was entitled to the deduction.
10. Our attention has also been drawn to the decision of the Allahabad High Court in the case of CIT v. Sri Baldeoji Maharaj Trust [1983] 142 ITR 584. There, for the assessment year 1974-75, the assessee-trust filed its return under Section 139(4A) showing an income of Rs. 16,894. The auditor's report in the prescribed form as required by Section 12A of the Income-tax Act, 1961, was not attached to the return. Thereafter, the assessee filed a revised return under Section 139(5) along with the auditor's report. For the assessment year 1974 75, the Department prescribed a new form of return. The assessee, consequently, filed another return in the prescribed form along with the auditor's report. The Income-tax Officer rejected the assessee's claim for exemption under Section 11(1)(a) of the Act on the ground that it had failed to comply with the provisions of Section 12A(b) as its income, without giving effect to the provisions of Sections 11 and 12, exceeded Rs. 25,000 and the accounts were not audited by the time the original return was filed. The Income-tax Officer further held that the assessee was not entitled to file a revised return since it had filed the original return under Section 139(4A). The Appellate Assistant Commissioner took the view that the assessee was entitled to file the revised return under Section 139(5) as Section 139(4A) made all the provisions of the Act applicable to a return filed under Section 139(1). The Appellate Tribunal affirmed the order of the Appellate Assistant Commissioner.
11. On a reference, the Allahabad High Court held that a return filed under Sub-section (4A) of Section 139 should be treated as a return under Sub-section (1). It was further held that when a return is filed under Sub-section (4A), it has to be accompanied by an auditor's report. Since the original return filed by the assessee was not accompanied by an auditor's report, there was a clear omission in that return. Therefore, the assessee was entitled to file a revised return under Section 139(5).
12. In Lakshmiratan Engineering Works Ltd. v. Assistant Commissioner (Judicial) I, Sales Tax [1968] 21 STC 154, the Supreme Court held that though the memorandum of appeal filed within the time was not accompanied by the challan showing payment of tax as required by Section 9 of the Uttar Pradesh Sales Tax Act, if, before the appeal is considered, satisfactory proof of the payment of tax is given by the assessee, then the appeal was competent.
13. Our attention has also been drawn to a decision of the Allahabad High Court in the case of Addl. CIT v. Murlidhar Mathura Prasad [1979] 118 ITR 392. In that case, the assessee, a partnership firm, for the assessment year 1965-66, on August 3, 1965, filed a return showing an income of Rs. 28,918. On February 5, 1970, the Income-tax Officer noticed that the said return was not accompanied by the declaration under Section 184(7) of the Income-tax Act, 1961, and that there has been no change in the constitution of the firm or the shares of its partners. The Income-tax Officer refused renewal of registration on the ground that the firm had not been granted continuation of registration in the last two preceding years and the declaration in Form No. 12 ought to have been filed along with the return. He assessed the firm in the status of an association of persons. On appeal, the Appellate Assistant Commissioner held that the return which was filed on March 6, 1970, was not a valid one. It could not be treated as a revised return, because it had not been filed due to discovery of any omission or wrong statement in the original return. The declaration in Form No. 12 ought to have been filed along with the return filed on August 3, 1965, as is expressly required by Section 184(7). The assessment in the status of an association of persons was upheld. The assessee took up the matter to the Tribunal. The Tribunal observed that the assessee-firm had been granted registration for the two previous years. Since the declaration in Form No. 12 was filed before the assessment order was passed, it was in order, and the assessee was entitled to continuation of registration. The Tribunal, therefore, sent the case back to the Income-tax Officer for doing the needful after the assessee had, within a month, complied with the terms of Section 185(2) of the Act.
14. There, the Allahabad High Court held that the legislative intent appears to be that while dealing with the assessment of a firm, the Income-tax Officer should have clear-cut evidence that the essential fact, that there has been no change in the constitution of the firm or in the shares of the partners, has been proved satisfactorily in the required manner. The procedural requirements hence are to be treated as directory. If there is some defect in the declaration form, the assessee is to be given an opportunity of rectifying it (Section 185(2)). It cannot be ignored or rejected straightaway. Similarly, the requirement that the declaration should be filed along with the return of income is directory, because the Income-tax Officer is enabled to assess the firm provided the return is filed by the time he makes the assessment.
15. The contention of learned counsel for the assessee in substance is that the procedural requirement that a particular document should be accompanied by another must be treated as directory. Whether a provision is directory or mandatory has to be considered in the context in which the conditions are imposed. Whether a statute is mandatory or directory depends on the intent of the Legislature and upon the language in which the intent is clothed. The meaning and intention of the Legislature must govern and these are to be ascertained not only from the phraseology of the provision but also by considering its nature, its design, and the consequences which would follow from construing it one way or the other.
16. Under Section 12A of the Act, exemption from income-tax in respect of income derived from property held under trust or by way of voluntary contribution received from other charitable or religious trusts or institutions will be available only if the conditions mentioned in Clauses (a) and (b) of that section are satisfied. Sub-clause (b) with which we are concerned provides that, where the total income of the trust or institution (without giving effect to the provisions of Sections 11 and 12) exceeds Rs. 25,000 in any previous year, "the accounts of the trust or institution for that year have been audited by the accountant "and" the person in receipt of the income furnishes along with the return of income for the relevant assessment year the report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars" as may be prescribed.
17. For very many reasons, the audit report may not be available before the return is filed. Rule 17B of the Income-tax Rules, 1962, lays down that the report of audit of the trust or the institution should be in Form No. 10B. The annexure to Form No. 10B requires the auditor to certify as to the application of income for charitable or religious purposes and the non-application or non-user of income or property for the benefit of the persons referred to in Section 13(3). The certificate is ordinarily based on the statement of the managing trustees. The balance-sheet and income and expenditure statement would necessarily contain the particulars of the application of income and non user of income or property. The certificate of the auditor only affirms the statements contained in the balance-sheet and income and expenditure statement. The Assessing Officer can rely on the certificate for allowing the benefit of exemption. This is a procedural matter for the purpose of enabling the Assessing Officer to complete the assessment on the basis of the certificate of the auditor without even asking the assessee to furnish supporting documents in support of the claims and contentions made in the return based on the balance-sheet and the income and expenditure statement.
18. It is now well-settled that a procedural provision, ordinarily, should not be construed as mandatory, if the defect in the act done in pursuance of it can be cured by permitting the appropriate rectification to be carried out at a subsequent stage. Procedural laws are devised and enacted for the purpose of advancing justice. It does not mean that the procedural laws should be brushed aside by the court. It depends on the facts and circumstances of a particular case as to whether a breach in the observance of any procedural law, if not excused or overlooked, would cause real and substantial injustice to the parties.
19. In our view, having regard to the object of Section 12A, it cannot be said that the Legislature intended that, even where the trust has got its accounts audited and the certificate obtained in Form No. 10B before the assessment is completed, merely because such report could not be filed in the course of the assessment proceedings, it would deprive a trust of getting the exemption if it is otherwise entitled to it in law. As we have already indicated, in this case, the audit report had been obtained before the assessment was completed. The Income-tax Officer, before completion of the assessment, did not allow any opportunity to the assessee to furnish the audit report. The direction that the audit report should accompany the return is not mandatory as the omission to do it may be rectified by filing the report at a later stage before the assessment is completed. We have considered this question in I.T.R. No. 26 of 1990 (CIT v. Rai Bahadur Bissesswarlal Motilal Malwasie Trust ), where the judgment was delivered on April 22, 1991. There, it was held that, if the audit report is not filed with the return, the return becomes defective and the Income-tax Officer should give an opportunity to the assessee to submit the audit report to rectify the defect before completion of the assessment. Where an assessee, in compliance with the provisions of the Act, cures the defect in the return by filing the audit report before the completion of the assessment, the Assessing Officer cannot ignore such audit report or the return in completing the assessment.
20. In our view, the result of ignoring such return or the audit report will be denial of exemption to the trust although the income has been spent for charitable or religious purposes. This was not intended by the legislators. If an assessee fails to obtain the audit report in the prescribed form before the assessment is completed, he may not, ordinarily, be entitled to get the benefit of exemption. In this case, however, as we have indicated, the assessee was not given an opportunity to file the audit report in the prescribed form which was available with the assessee before the assessment was completed. In such a case, the appeal being a continuation of the original proceedings, the appellate authority has the power to accept the audit report and direct the Assessing Officer to redo the assessment. The appellate authority has plenary powers in disposing of an appeal and the scope of his power is coterminous and co-extensive with that of the Assessing Officer. He may, therefore, consider and decide any matter arising out of the proceedings in which the order appealed against is passed. He can do what the Assessing Officer can do and direct him to do what he has failed to do. Such powers are, however, subject to the limitation that what an Assessing Officer could not do validly, the first appellate authority also cannot do in appeal. This question, however, does not arise in this case as the assessee was entitled to file the audit report before the completion of the assessment with or without a revised return for the purpose of curing the defect in the original return filed without the audit report.
21. For the reasons aforesaid, we are of the view that, on the facts of this case, the Tribunal came to a correct conclusion.
22. We, therefore, answer the question in the affirmative and in favour of the assessee.
23. There will be no order as to costs.
Shyamal Kumar Sen, J.
24. I agree.