Gujarat High Court
Commissioner Of Income-Tax vs Gujarat Oil And Allied Industries on 8 September, 1992
Equivalent citations: [1993]201ITR325(GUJ)
Author: S.B. Majmudar
Bench: S.B. Majmudar
JUDGMENT S.B. Majmudar, J.
1. The Commissioner of Income-tax has got the following question referred for our opinion in this case :
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that section 80J(6A) merely requires that the audit report should be so furnished so that it would be available at the time of assessmen ?"
2. In order to appreciate the nature of the controversy underlined in the question, it is necessary to get the introductory facts. They are as under :
The assessee-concern is functioning at Rajkot. The relevant assessment year is 1976-77. The accounting year was the year ending on June 30, 1975. The assessee filed its return on June 29, 1976. It claimed the benefit flowing from section 80J of the Income-tax Act, as applicable at the relevant time. Along with the return, the audit report was not filed. However, before the Income-tax Officer could frame the assessment after processing the return, the audit report was already filed by the assessee before him and thereafter the Income-tax Officer framed the assessment on March 7, 1979. Amongst others, the Income-tax Officer, relying upon these circumstances, took the view that the assessee was not entitled to the benefit of section 80J, sub-section (2), on account of non-compliance with the provisions of section 80J(6A). The said view of the Income-tax Officer was confirmed by the income-tax appellate authority. Commissioner of Income-tax, in the appeal of the assessee. The assessee thereafter carried the matter in second appeal before the Tribunal at Ahmedabad which took the view that the words employed by the said provisions that the audit report should be filed along with the return would mean that the audit report should also be furnished and should be made available to the Income-tax Officer at the time of assessment and, as that was done by the assessee, the assessee's claim for getting reliefs under section 80J(1) could not have been denied. The Tribunal, therefore, directed this matter to be restored to the file of the Commissioner of Income-tax for considering the assessee's claim on the merits and for passing appropriate orders in accordance with law. As noted earlier, this view of the Tribunal has been made the subject-matter of the solitary question posed for our opinion at the instance of the Revenue. Before we deal with the question, it is necessary to note that, out of the two members, the learned judicial Member was inclined to take the view canvassed by the assessee while so far as the Accountant Member was concerned, he had some reservation as seen from his supporting judgment of even date that is September 29, 1981, but, in view of the fact that his learned brother had taken the view which was favourable to the assessee, the Accountant Member also fell in line in agreeing with it. Now, coming to the question, it is necessary to note the statutory context in which this question arises for our consideration. Section 80J of the Act as it stood at the relevant time referred to the deduction in respect of profits and gains of a new industry in several contingencies. Sub-section (1) thereof provided that where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking or a ship or the business of a hotel to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains (reduced by the deduction, if any, admissible to the assessee under section 80HH or section 80HHA) of so much of the amount thereof as does not exceed the amount calculated at the rate of six per cent. per annum on the capital employed in the industrial undertaking or ship or business of the hotel, as the case may be, computed in the manner specified in sub-section (1A) in respect of the previous year relevant to the assessment year, the amount calculated as aforesaid being hereafter, in this section, referred to as the relevant amount of capital employed during the previous year. As the said allowances would be subject to the provisions of sub-section (6A) of section 80J of the Act, it becomes relevant, It reads as under :
"6 (A). Where the assessee is a person other than a company or a co-operative society, the deduction under sub-section (1) from profits and gains derived from an industrial undertaking shall not be admissible unless the accounts of the industrial undertaking for the previous year relevant to the assessment year for which the deduction is claimed have been audited by an accountant, as defined in the Explanation below sub-section (2) of section 288, and the assessee furnishes, along with his return of income, the report of such audit in the prescribed form duly signed and verified by such accountant."
3. When section 80J, sub-section (1), is read is juxtaposition with sub-section (6A) thereof, it becomes clear that the benefit of this provision is available to new undertakings or ships or hotel business. It is no doubt a beneficial provision for giving incentives to such new establishments. It is of course true that this benefit will be subject to what is provided by sub-section (6A). When we turn to the first part of sub-section (6A), we find that there is a mandate to the assessing authority that the deductions under sub-section (1) from profits and gains shall not be admissible unless the accounts for the previous year relevant to the assessment year for which the deduction is claimed have been audited by an accountant. That part of the provision obviously refers to the stage where the assessing authority sits down to apply its mind on the returned figures with a view to finding out whether the deductions contemplated by sub-section (1) of section 80J are admissible or not and at that stage, the assessing authority has to find out whether the account of the concerned industrial undertaking claiming such deduction so far as the previous year relevant to the assessment year is concerned are audited or not and such audit has to be done by an accountant as defined by the Explanation to sub-section (2) of section 288 of the Act. It cannot, therefore, be gainsaid and it was not disputed by any of the parties that this part of the provision is mandatory in nature. It becomes obvious that when the assessment is being framed by the Income-tax Officer, the assessee, i.e., the concerned industrial undertaking must be able to show to the Income-tax Officer that the relevant accounts for the previous year have been a already audited by a competent accountant as defined in the Explanation below sub-section (2) of section 288 of the Act. It is not in dispute that this part of the provision was complied with by the assessee as, by the time the assessment was framed on September 18, 1979, the audited accounts and report of the qualified accountant were available with the Income-tax Officer as they were already filed at least about six months back by March 7, 1979. But the dispute centres round the second part of sub-section (6A) of section 80J. The assessee, while he filed the returns on June 29, 1976, had not furnished along with the return, the audit report of the accountant for the relevant period and such a report along with audited accounts came to be filed later on but before the assessment was completed. The Income-tax Officer and the Assistant Commissioner took the view that, therefore, the requirement contained in the second part of section 80J, sub-section (6A) were not complied with by the assessee as the report was not furnished along with the return of income but subsequent to the filing of the return. It is only on this ground that they denied the benefit of section 80J of the Act to the assessee. The Tribunal took a contrary view on a close scrutiny of sub-section (6A) of section 80J of the Act. In our view, the first part of section 80J is mandatory in nature but the second part thereof which is procedural in nature and requires the assessee to submit a report of the audit along with the return is merely directory in nature and it calls for only substantial compliance. The reasons are obvious. It is possible that at the time when the returns of income are filed, by some mischance or negligence of the clerk of for any other reason, even though the audited report is available, it might not have been annexed to the return and on such mistake being found out, the report may be tendered on the next day or even a few days thereafter to the Income-tax Officer. If any literal compliance with the words "assessee furnishes report along with his return of income" is insisted upon, then, in such an unforeseen contingency, the assessee would be denied benefit of section 80J of the Act. One other illustration can be considered to highlight the position. As per section 139(1) read with section 139(5) of the Act, the assessee can file return within the period permitted thereunder and even during the extended period or can file a revised return as per this provision, of course, after following the procedure laid down therein. If the assessee is prompt, he may file the return in time, but at that stage, for reasons beyond his control, the audit report is not ready, he files the return in time but without its being accompanied by the auditor's report while another assessee who is not prompt enough may not file the return at the first opportunity. In such a contingency, a prompt assessee who files the return in time would stand to suffer only because the auditors' report has not physically accompanied the return while another assessee who waits till the end of the expiry of the period the files the return with the report will stand to gain, as he would get the benefit of section 80J(1) while the assessee who files the return at the first opportunity would stand to suffer though, in both the cases, at the time when the assessments are framed, the audited reports are made available by both the assessees to the Income-tax Officer. This would result in absurdity. Hence, in our view, the Tribunal was right when it took the view that the second part of the provision regarding furnishing of the report of the auditor along with the return is not a mandatory provision and it requires substantial compliance in the sense that it should be made available to the Income-tax Officer before the assessment is framed and, by that time, if the assessee puts his house in order, the Income-tax Officer will be required to consider the case of the assessee for deductions under section 80J(1) of the Act on the merits. It has also to be kept in view that, by the mere non-filing of the auditor's report along with the return of income, the assessee does not stand to gain anything nor does the Revenue stand to lose as even after the return is filed, it is obvious that it may take time before the Income-tax Officer applies his mind to the merits of the return when he sits down to frame the assessment. In fact, that is the relevant stage at which the house of the assessee should be in order. If that stage is missed, obviously, the assessee will not be entitled to the benefit of section 80J(1) but, till that time, the return filed would be just lying in the office of the Income-tax Officer awaiting disposal and the Income-tax Officer, in the meantime, was not expected to apply his mind to such a pending return till he takes it up for consideration. By that time, if the report is already made available, all the procedural requirements of sub-section (6A) can be considered to have been complied with. The Revenue thereby would both stand to lose or suffer anything while, on the other hand, if only on the ground that along with the return the auditor's report was not filed but subsequently it was made available, the Income-tax Officer refuses to look into the merits of the claim, such new concern or establishment for whose benefit the provisions of sections of section 80J(1) have been enacted would stand to suffer only on a technicality without any substantial benefit to any one. It is also necessary to keep in view that, at the time of framing the assessment, the assessing authority is vested with full powers under the Civil Procedure Code as laid down by section 131(1) of the Act. He can also ask for production of books of account and other documents. That shows that the stage which is relevant for considering the merits of the claim of the party is the stage when the assessing authority sits down to assess the income for the purpose of computing income-tax after framing appropriate assessment and it is at that stage that the requirements of section 80J(1) of the Act read with sub-section (6A) thereof can be taken into consideration. It is, therefore, not possible to agree with the submission of learned counsel for the Revenue that, as per sub-section (6A) of section 80J, even the accounts should have been got audited by the assessee prior to the filing of the return so as to enable the assessee to claim the benefit of section 80J of the Act. The first part of sub-section (6A) of section 80J(1) shows that the Income-tax Officer will not admit the deductions as claimed by the assessee unless it is shown to his satisfaction that the accounts of the industrial undertaking of the previous year for which deductions have been claimed have been audited by a qualified accountant. Thus, it is at the stage of deciding whether the deductions are admissible or not that the Income-tax Officer has to look into these aspects of the matter and not at the previous stage of the filing of the return. It was then submitted by learned counsel for the Revenue that, if the Income-tax Officer had framed the assessment prior to the time when the audited accounts and the auditors' report were submitted by the assessee on March 7, 1979, the assessee could not have raised any grievance about the rejection of his claim. This is neither here nor there. So long as that had not happened, the assessee had locus penitentiae to put his house in order by submitting the report which he has done in this case and, therefore, on the construction of the provisions, we find that the view taken by the Tribunal is quite just and appropriate and it needs no interference. However, we may refer to some of the decisions on the point which were brought to our notice. In the case of CIT v. Kaira District Co-operative Milk Producers' Union Ltd. [1979] 116 ITR 319, the Division Bench of this court was concerned with section 84 of the Income-tax Act. The Division Bench, speaking though B. K. Mehta J., observed that the scheme of tax holiday as envisaged by the Act read with rule 19 of the Income-tax Rules was a benevolent scheme meant for the benefit of the new establishments. How such a scheme was to be construed was also laid down in that judgment. The following caution was highlighted for the courts to follow (headnote) :
"If on construing rule 19M, the court finds that the main object or the purpose of section 84, mainly, tax holiday on the basis of employment of capital is thwarted or frustrated by an apparently plain or literal reading of the provisions of the rule, the court must read the rule in such a manner as to avoid manifest absurdity, apparent injustice and irrational or absurd conclusion, so that the object and purpose of the main enactment can be effectuated fully."
4. It is obvious that the main purpose and object of section 80J(1) is to give incentive and development benefit to the new industries covered by the provisions of the Act. Consequently, while considering it, care has to be taken to see that the relevant purpose underlying section 80J is augmented and fortified and not frustrated by a construction put upon the said provision. Even assuming that another view is possible on the construction of the second part of sub-section (6A) of section 80J, as that view is likely to frustrate the very object and purpose of the scheme underlying section 80J(1) and would result in absurdity as indicated earlier, the other view by which the beneficial provision of section 80J(1) is made fully operative should be preferred and even in that view of the matter also, we endorse the interpretation put upon these provisions by the Tribunal. It is true that, as submitted by learned counsel for the Revenue, a Divisions Bench of the Punjab and Haryana High Court has taken a contrary view in the case of CIT v. Jaideep Industries [1989] 180 ITR 81 (P&H). In that case, the Division Bench of the Punjab and Haryana High Court examined the very same question. Sodhi J., speaking for the Division Bench of that High Court, read section 80J(1), sub-section (6A), and, observed that there is no escape from the conclusion that the requirement of filing the auditors' report along with the return is rendered mandatory by the provisions thereof. It is pertinent to note in this behalf that this provision clearly lays down for the assessee to file along with the return, the audit report in the prescribed form duly signed and verified by the accountant. With due respect, it is not possible to agree with this view of the Punjab and Haryana High Court which is merely an ipse dixit of the learned judges. They have not shown how the second part of section 80J, sub-section (6A) is mandatory in nature. So far as the admissibility of the deductions is concerned, it is found in the first part of the provision. We have already seen that it is mandatory in nature. So far as the second part which is procedural is concerned, we fail to appreciate how non-annexing or furnishing the audit report along with the return would necessarily put the assessee out of the court so far as a claim for deduction under section 80J(1) is concerned. We, therefore, with respect, do not find ourselves in agreement with the view expressed by the Punjab and Haryana High Court.
5. Mr. Kaji, learned counsel for the assessee, on the other hand, took us to various decisions of the Supreme Court and other High Courts including this court in support of his contention that the charging provisions have to be strictly construed but not the machinery provisions or the procedural provisions. He submitted that the word "shall" is employed by the Legislature in the first part of section 80J, sub-section (6A), in connection with the admissibility of deductions to be considered by the Income-tax Officer when he frames the assessment. So far as the second part which is procedural in nature in nature goes, the mentioning of the requirement of filing the audit report with the return does not mean that it is a mandatory provision and while construing that part of sub-section (6A) of section 80J(1) of the Act, the word "shall" can be interpreted as "may". We find considerable force in the submission of Mr. Kaji, learned counsel for the assessee. Once it is held, as we have done, that the second part which is procedural is directory in nature, its substantial compliance should be considered to be sufficient for the purpose of getting the benefit of deduction under section 80J(1) and to that extent, the word "shall" as employed by the Legislature in the second part of sub-section (6A) of section 80J(1) will have to be read as "may".
6. In the case of Director of Inspection of Income-tax (Investigation) v. Pooran Mall and Sons [1974] 96 ITR 390, the Supreme Court, while considering the provisions of section 132, sub-section (5) of the Act, speaking through Alagiriswamy J., laid down as under (headnote) :
"It is not every provision of a taxing statute that will fall under the rule of strict interpretation. The question whether a certain provision of law is directory does not fall to be decided on different standards because it is found in a taxing statute. There is no rule that every provisions in a taxing statute is mandatory. The strict construction that a citizen does not become liable to tax unless he comes within the specific words of a statute is a different proposition. That a person cannot be taxed on the principle of estoppel does not admit of much argument."
7. Then he relied upon another decision of the Supreme Court in the case of CIT v. National Taj Traders [1980] 121 ITR 535, wherein the Supreme Court has observed as under (headnote) :
"The principle that a fiscal statute should be construed strictly is applicable only to taxing provisions such as charging provision or a provision imposing penalty and not to those parts of the statute which contain machinery provisions."
8. In the case of Goodyear India Ltd. v. State of Haryana and other group matters, reported in [1991] 188 ITR 402, the Supreme Court once again considered this question and, speaking though Sabyasachi Mukharji J. (as he then was), made the following pertinent observations (headnote) :
"It is well-settled that a reasonable construction of the taxing statute should be followed and literal construction may be avoided if that defeats the manifest purpose and object of the statute."
9. In the case of Motilal Ambaidas v. CIT [1977] 108 ITR 136, this court was concerned with the interpretation of section 41(1) of the Act. It was held therein that this provision is not a charging section and hence, it has to be construed in such a manner as to make it effective and machinery workable.
10. Coming nearer to the point, our attention was drawn to certain decisions which had occasion to interpret the words "along with" as employed in the provisions construed by them. In the first place, Mr. Kaji took us to the decision of the Supreme Court in the case of Lakshmiratan Engineering Works Ltd. v. Assistant Commissioner (Judicial) 1, Sales Tax [1968] 21 STC 154. In that case, the Supreme Court had to consider as to whether rule 66 of the U. P. Sales Tax Rules, 1948, Which requires that the memorandum of appeal should be accompanied by a challan showing deposit in the treasury of the tax admitted by the appellant to be due or of such instalments thereof as might have been payable was mandatory in character. It was observed that it lays down one uncontestable mode of proof which the court will always accept. The proviso to section 9 is, however, general and it provides that the court should accept satisfactory proof. Rule 66 does not, therefore, exclude the operation of the proviso to the section when equally satisfactory proof is made available to the Officer hearing the appeal, and it is proved to his satisfaction that payment of the tax has been duly made in time. Rule 66 is only directory and provides only one of the modes of proving that the tax has been duly paid. If the challan was lost, the dealer should produce a copy of the challan from the treasury or obtain a certificate from the Treasury Officer or he could obtain from the bank the discharged cheque by which the amount of cheque was deposited by him and produce it. A certificate from the Sales Tax Officer is as good a proof as the challan from the treasury. All these means of proof will be equally irrefutable. Interpreting the word "entertain" in the proviso, it was observed that it meant the first occasion on which the court takes up the matter for consideration, it may be at the admission stage or if, by the rules of that Tribunal, the appeals are automatically admitted, it will be the time of hearing of the appeal. The words "no appeal... shall be entertained" in the proviso to section 9 do not denote the filing of the memorandum of appeal but refers to the point of time when the appeal is being considered. Therefore though the memorandum of appeal filed within time is not accompanied by the challan showing payment of tax, if before the appeal is being considered, satisfactory proof of the payment of tax is given, then the proviso to section 9 is satisfied. It was held that rule 66 thereof is directory and shows the modes of proving that the taxes have been paid. Placing reliance on this decision, Mr. Kaji, learned counsel for the assessee, submitted that in this case, sub-section (6A) of section 80J(1) of the Act also employs similar terminology, namely, furnishing of the report of the auditor along with the return. It is not mere physical accompaniment of the report to the return that would enable the assessee to claim permissible deduction and the proper stage for considering as to whether he is entitled to such deduction or not would be reached when the Income-tax Officer sits down to frame the assessment and not before that and if, before that, the assessee puts his house in order, he could not be denied this benefit, if his claim is otherwise just and proper for deduction and it could not be summarily rejected.
11. Then he invited our attention to the two decisions, one of the Allahabad High Court and the other of the Patna High Court which had occasion to interpret the word "along with" as employed in the Income-tax Act. The Allahabad High Court, in the case of Addl. CIT v. Murlidhar Mathura Prasad in [1979] 118 ITR 392, had to interpret sub-section (7) of section 184 of the Income-tax Act. It provided that when the registration is granted or is deemed to have been granted to any firm for any assessment year, it shall have effect for every subsequent year and the proviso thereof stated that there is no change in the constitution of the firm or the shares of the partners as evidenced by the instrument of partnership on the basis of which the registration was granted; and proviso (ii) thereof stated that the firm furnishes, along with its return of income for the assessment year concerned, a declaration to that effect in the prescribed form and verified in the prescribed manner. The question before the Allahabad High Court was whether the renewal of registration to the assessee-firm could be denied on the ground that a declaration in Form No. 12 was not filed along with the return. Answering this question in favour of the assessee, the Division Bench of the Allahabad High Court, speaking through Satish Chandra C.J., laid down as under (headnote) :
"The essence of section 184(7) of the Income-tax Act, 1961, is that once registration has been granted to a firm, it is to have effect for every subsequent year in case there has been no change in the constitution of the firm or in the shares of its partners. The other requirements are merely to evidence this fact. The requirement that a firm shall furnish a declaration in Form No. 12 is merely to prove the facts in a particular way. The requirement that the declaration shall be filed along with the return of income is a procedural requirement. 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. Hence, the procedural requirements are to be treated as directory. If there is some defect in the declaration form, the assessee is to be given an opportunity for rectifying it under section 185(2). It cannot be ignored or rejected straight away. Similarly, the requirement that the declaration should be filed along with the return is directory. A firm has four years to file a return under section 139(4) or a revised under section 139(5) and it could validly file the declaration in Form No. 12 along with such return and it is entitled to continuation of registration. It does not then stand to reason that an assessee who is prompt and files a return before the time prescribed under sub-section (1) or sub-section (2) of section 139 should suffer merely because the declaration was not filed physically along with it. The taxation Laws (Amendment) Act, 1970 which came into force on April 1, 1971, has repealed and re-enacted section 184(7) and now the requirement that the declaration should accompany the return has been given up. However, definite time limit has been fixed for the filing of the declaration. This is another indication that prior to the amendment there was no specific time limit and the declaration could be filed up to the time of assessment."
12. We respectfully agree with the reasoning of the Allahabad High Court. The scheme with which we are concerned is almost parallel. Merely because the auditors' report has not physically accompanied the return, it cannot be said that it cannot be processed on merits for deciding the claim of deduction under section 80J(1) of the Act read with sub-section (6A) thereof are to be ascertained. We may now turn to the decision of the Patna High Court, taking a view similar to the one taken by the Allahabad High Court, in the case of CIT v. Sitaram Bhagwandas [1976] 102 ITR 560. It has been observed that (headnote) :
"Having regard to the spirit and substance of the provisions regarding registrations of firms in section 184(7) of the Income-tax Act, 1961. it is clear that the term 'along with its return of income' (as it stood before April 1, 1971) is merely directory and not mandatory. The law must be so construed as to not make it in way illogical or ridiculous. All that the Legislature intended was that the return should be duly filed and that the Legislature intended was that the return should be duly filed and that the declaration should be duly made and both the documents should be before the assessing authority at the time when he is applying his mind to the assessment of any particular firm. If he is then satisfied that the return had been duly filed and that there was no change in the constitution of the firm and no change in the shares of the partners and the firm was registered during the previous year, then the necessary advantage of renewal conferred by sub-section (7) of section 184 must undoubtedly follow to the assessee-firm. The declaration could not be held to be invalid for the reason that it was not filed along with the return."
13. In Our view, the aforesaid reasoning of the Allahabad High Court and the Patna High Court would squarely apply to the facts of the present case. The provision about furnishing of the auditors' report along with the return has to be treated as a procedural provision, directory in nature, and its substantial compliance should suffice, meaning thereby that such report should be made available by the assessee has put his house in order and has furnished the report of the auditor for supporting the return, he can be said to have satisfied the requirement of section 80J(6A) of the Act.
14. As a result of the aforesaid discussion, the question referred for our opinion has to be answered in the affirmative, in favour of the assessee and against the Revenue. The question is, accordingly, answered. No order as to costs.