Rc/85/1996 Of The Commissioner Of Income Tax v. M/S Sri Jayalakshmi Tobacco Ltd

THE HON’BLE SRI JUSTICE V.V.S.RAOANDTHE HON’BLE SRI JUSTICE SAMUDRALAGOVINDARAJULU REFERRED CASE No.85 OF 1996 ORDER:(Per Hon’ble Sri Justice V.V.S.Rao) The Commissioner of Income-tax, Vijayawada gotthe present tax reference made by the Income TaxAppellate Tribunal, Hyderabad Bench-B. The question referred to this Court reads. Whether on the facts and circumstances of thecase the Tribunal is correct in law in allowing theassessee’s claim under Section 80HHC of the I.T.Act, 1961, on the basis of the Auditor’s certificatein form 10CCA which was not filed along with thereturn of income but filed before the completionof the assessment? After perusing sub-sections (1) and (4) of Section80HHC of the Income Tax Act, 1961 (the Act) and Rule18BBA(3) and Form 10CCAC of the Income Tax Rules towhich attention has been drawn, we reframe the questionreferred to as under. Whether on the facts and circumstances of thecase the Tribunal is correct in law in allowing theassessee’s claim under Section 80HHC of the I.T.Act, 1961, on the basis of the Auditor’s certificatein form 10CCAC which was not filed along withthe return of income but filed before thecompletion of the assessment? Background facts The short fact of the matter is as follows. Therespondent (assessee) is carrying on tobacco business.For the assessment year 1991-92, they filed return ofincome on 01.12.1991. Therein they claimed deduction ofRs.40,77,098/- under Section 80HHC. While assessing thereturn under Section 143(3), the Deputy Commissioner,Income Tax, Guntur in order dated 17.03.1994 rejected the claim on the ground that the assessee did not furnishcertificate from the Chartered Accountant in theprescribed Form 10CCAC as per said provision along withreturn. Being aggrieved, the assessee went in appealbefore the Commissioner of Income Tax (Appeals),Hyderabad. It was contended that the certificate ofaccountant was filed on 27.08.1992 after service ofintimation to the assessee before the completion ofassessment and therefore, there was due compliance withthe condition to claim deduction. The CIT (A) on textualinterpretation of the relevant provision came to thefollowing conclusion. In the absence of any judicialpronouncement on the issue and particularlykeeping in view the unequivocal and categoricallanguage of sub-section (4) of Section 80HHC, theclaim of the appellant cannot be allowed bydrawing upon analogies from judicial decisionsdelivered in the context of Charitable Trusts. Ifany relaxation on the rigours of sub-section (4) ofSection 80HHC were intended by the Legislature,some other provision would have beenincorporated in the Act and more precisely inSection 80HHC itself to that effect. I cannot also subscribe to the view that sub-section (4) of Section 80HHC is a mere proceduralsection and that it should not be construed asmandatory. … However, a look at sub-section (4)of Section 80HHC drives home the point that nosuch rectification has been provided for in thesaid sub-section. For all the reasons stated above,I am of the view that if the assessees are allowedto rectify at will and at any stage of theproceedings a statutory lacuna or shortcomingthrough rectificatory measures not conceived bythe statute itself, the very purpose of the statutewould be defeated. Hence, I decline to interfere and sustain thedisallowance of the deduction amounting toRs.40,70,098/- claimed under Section 80HHC ofthe Act. In the appeal before the learned Tribunal, theassessee relied on CIT v Gujarat Oil and Allied In the appeal before the learned Tribunal, theassessee relied on CIT v Gujarat Oil and Allied [1][2]Industries, CIT v A.N.ArunachalamandCIT vShivanand Electronics[[3]]and submitted that filing of thecertificate of accountant for claiming deduction underSection 80HHC(1) along with return is not mandatoryand is only directory and procedural. Having regard tothe opinion of Bombay, Gujarat and Madras High Courts,the learned Tribunal held in favour of the assesseeobserving that the assessing officer must allow the claimafter taking into consideration the certificate filed by theassessee before the assessment is made. Aggrievedthereby, the Commissioner of Income Tax soughtreference under Section 256(1) of the Act. Submissions of the counsel The Junior Standing Counsel for Revenue,M/s.Kiranmayee would submit that sub-section (4) ofSection 80HHC is mandatory; the Certificate ofChartered Accountant must be filed along with return ofincome to claim deduction under Section 80HHC(1) andthat the Tribunal was in error in not considering thequestion having regard to the plain language of theprovisions. The counsel for assessee Ms.Anjali Agarwal refutesthe contentions and submits that the Chapter VI-Acontains special provisions dealing with specialdeductions, and therefore, while construing theprovisions therein, they should be interpreted in such amanner that full scope and effect is given to theconcessions provided by the legislature. If an assessee iseligible for deduction under Section 80HHC(1), mere non- production of certificate of accountant along with thereturn would not bar the claim; the provision isprocedural and not mandatory and therefore, theassessee can file the certificate of accountant at any timeprior to assessment. She placed reliance on Gujarat Oil,Arunachalam, Shivanand Electronics, CIT v PunjabFinancial Corporation[[4]], CIT v Berger Paints (India)Limited (No.2)[[5]], CIT v Shiva Rice and Dal Mills[[6]]andCIT v Web Commerce (India) P. Ltd[[7]].She also placedreliance on a decision of this Court in CIT v Hemsons[8]Industries. Relevant Provisions of the Act Chapter IV-A of the Act deals with deductions whichshall be allowed from the gross income of the assessee.These deductions specified in Sections 80C to 80U aregrouped under four parts. Part C contains provisions forspecial deduction of profits and gains fromspecified/newly established undertakings as well asprofits earned from specified projects and businesses.Such deduction, however, is subject to fulfilling theeligibility criteria or conditionalities stipulated in themain provision/ Section and filing the certificate/auditreport of chartered accountant. Section 80HHC allows deduction of the profitssubject to provisions thereof derived from industrialundertakings or business of the hotel, established inbackward area. The benefit under Section 80HHC(1) ishowever subject to furnishing of duly signed audit reportof Chartered Accountant as defined in Explanation “below sub-section (2) of Section 288” by the assessee along withhis return of income. Under Section 80HHC(1), 20% ofthe profits and gains derived from a small scale industrialundertakings can be allowed to be deducted from thetaxable income. This also requires furnishing of the auditreport by the chartered accountant along with the returnof income. Section 80HHB(1) permits an assessee beingan Indian Company to claim deduction of profits andgains in computation of total income at the ratesspecified therein, if such profits are derived fromexecution of foreign projects. This is again subject toproduction of audited accounts along with return ofincome. Section 80HHBA(1) read with sub-section 2(i)thereof also require a copy of the audited accounts to befiled along with the return of income to claim deductionfrom profits and gains derived from execution of housingprojects funded by World Bank. That takes us to thespecial deduction under Section 80HHC(1) and sub-section (4) which we quote hereunder. 80HHC(1) Where an assessee, being anIndian company or a person (other than acompany) resident in India, is engaged in thebusiness of export out of India of any goods ormerchandise to which this section applies, thereshall, in accordance with and subject to theprovisions of this section, be allowed, incomputing the total income of the assessee, adeduction to the extent of profits, referred to insub-section (1B) derived by the assessee fromthe export of such goods or merchandise: Provided that if the assessee, being a holderof an Export House Certificate or a Trading HouseCertificate (hereafter in this section referred toas an Export House or a Trading House, as thecase may be) issues a certificate referred to inclause (b) of sub-section (4A), that in respect ofthe amount of the export turnover specifiedtherein, the deduction under this sub-section is tobe allowed to a supporting manufacturer, thenthe amount of deduction in the case of theassessee shall be reduced by such amount which bears to the total profits derived by the assesseefrom the export of trading goods, the sameproportion as the amount of export turnoverspecified in the said certificate bears to the totalexport turnover of the assessee in respect of suchtrading goods. (2) and (3) omitted as not relevant for this case. (4) The deduction under sub-section (1)shall not be admissible unless the assesseefurnishes in the prescribed form, along with thereturn of income, the report of an accountant,as defined in the Explanation below sub-section(2) of Section 288, certifying that the deductionhas been correctly claimed in accordance withthe provisions of this Section. Provided that in the case of an undertakingreferred to in sub-section (4C), the assessee shallalso furnish along with the return of income, acertificate from the undertaking in the specialeconomic zone containing such particulars as maybe prescribed, duly certified by the auditorauditing the accounts of the undertaking in thespecial economic zone under the provisions of thisAct or under any other law for the time being inforce. (emphasis supplied) A plain reading of sub-section (4) of Section 80HHCwould show that unless the assessee furnishes the reportof Chartered Accountant along with return of income, thededuction cannot be claimed. The question often arosewhether it is mandatory for an assessee to file the reportof Chartered Accountant along with return or is itsufficient to comply with the said condition before thecompletion of assessment of the income by the assessingofficer. The question has considerable significance for thereason that the special deduction under variouscircumstances as contemplated under Sections 80HHC,80HHB, 80HHBA and 80HHD is made conditional andcan be availed only when the report/certificate of theChartered Accountant accompanies the return of theincome. The Revenue would contend that giving plainmeaning to the text of the provision, the assessee, whofails to comply with the condition of furnishing thecertificate or report of the Chartered Accountant, samealong with return of income, would not be entitled for thespecial deduction provided under the relevant provisions.The plain meaning would no doubt supports such a view.But, the preponderance of judicial opinion as noticedherein below would not support the view of the Revenue.The High Courts of Andhra Pradesh, Bombay, Calcutta,Delhi, Gujarat, Madras and Punjab & Haryanainterpreting the provision which is similar to Section80HHC(4) have held that furnishing of thereport/certificate of the Chartered Accountant ismandatory to claim the special deduction provided by theAct, but the procedure of furnishing along with the returnof income is directory and therefore, the assessee canproduce certificate or report of the Chartered Accountantat any time before completion of the assessment. Precedents Precedents Gujarat Oilis a decision dealing with Section80J(6A)[[9]]which provided for special deduction in respectof profits and gains from newly established industrialundertakings or ships or hotel business in certain cases.The appellate Tribunal referred the question to theopinion of the High Court of Gujarat. The question was asto whether the Tribunal was right in law in coming to theconclusion that Section 80J(6A) merely requires that theaudit report should be furnished so that it would beavailable at the time of assessment. Section 80J provided special deduction of 6% of capital employed from thetotal income of the assessee reduced by aggregate of thedeductions if any admissible to the assessee underSection 80H and 80I. Sub-section (6A) thereof reads asunder. (6A) Where the assessee is a person otherthan a company or a cooperative society, thededuction under sub-section (1) from profits andgains derived from an industrial undertakingshall not be admissible unless the accounts ofthe industrial undertaking for the previous yearrelevant to the assessment year for which thededuction is claimed have been audited by anaccountant, as defined in the Explanation belowsub-section (2) of Section 288, and the assesseefurnishes, along with his return of income, thereport of such audit in the prescribed form dulysigned and verified by such accountant”. (emphasis supplied) The provision provided incentives to newestablishment and the benefit was made subject toproduction of audited accounts. The Revenue contendedthat the accounts should have got audited by theassessee prior to filing of the return so as to claim thebenefit of Section 80J of the Act, and that the words‘shall’ and ‘along with’ appearing in sub-section wouldhave to be construed strictly as conveying a meaning torender the provision mandatory. The Division Bench ofGujarat High Court did not accept the plea, and held asunder. In our view, the first part of Section 80J ismandatory in nature but the second part thereofwhich is procedural in nature and requires theassessee to submit a report of the audit alongwith the returns merely directory in nature and itcalls for only substantial compliance. The reasonsare obvious. It is possible that at the time whenthe returns of income are filed, by somemischance or negligence of the clerk or for anyother reason, even though the audited report isavailable, it might not have been annexed to thereturn and on such mistake being found out, themandatory in nature but the second part thereofwhich is procedural in nature and requires theassessee to submit a report of the audit alongwith the returns merely directory in nature and itcalls for only substantial compliance. The reasonsare obvious. It is possible that at the time whenthe returns of income are filed, by somemischance or negligence of the clerk or for anyother reason, even though the audited report isavailable, it might not have been annexed to thereturn and on such mistake being found out, the report may be tendered on the next day or even afew days thereafter to the Income Tax Officer. Ifany literal compliance with the words “assesseefurnishes report along with his return of income”is insisted upon, then, in such an unforeseencontingency, the assessee would be deniedbenefit of section 80J of the Act. Thus the provision which requires is furnishing ofthe audit report for claiming the benefit of deduction washeld to be mandatory in nature but the second part of theprovision extracted herein above was held to be merelydirectory and calling for substantial compliance. If anassessee furnishes the audit report before the completionof assessment, it would be sufficient compliance with theprovision. report may be tendered on the next day or even afew days thereafter to the Income Tax Officer. Ifany literal compliance with the words “assesseefurnishes report along with his return of income”is insisted upon, then, in such an unforeseencontingency, the assessee would be deniedbenefit of section 80J of the Act. Thus the provision which requires is furnishing ofthe audit report for claiming the benefit of deduction washeld to be mandatory in nature but the second part of theprovision extracted herein above was held to be merelydirectory and calling for substantial compliance. If anassessee furnishes the audit report before the completionof assessment, it would be sufficient compliance with theprovision. The decision of the Gujarat High Court referred tohereinabove was followed by Madras High Court inArunachalam and Bombay High Court in ShivanandElectronics. Further, the Calcutta High Court followedGujarat Oil. It was a case concerned with Section 32AB(5)and Section 80HHC(4), which also require furnishing ofaudit report for claiming the benefit under the respectiveprovisions. The Full Bench of Punjab & Haryana HighCourt in Punjab Financial Corporationwhile dealing withSection 32AB(5) followed Gujarat Oil and held it is notmandatory and assessing officer has a discretion toentertain audit report even though the same was not filedalong with return and give benefit of the deduction to theassessee in terms of Section 32AB(1). A Division Bench ofPunjab & Haryana High Court in Shiva Rice and Dal Millsconstrued Section 80HHA(4) in favour of assesseefollowing Gujarat Oiland Punjab Financial Corporation. InWeb Commerce, Delhi High Court while interpreting Section 80IA(7) also held that, the necessary audit reportcan be furnished before the assessment is completed. I n Hemsons Industries, a Division Bench of thisCourt was dealing with tax reference under Section256(1) of the Act, involving inter alia the followingquestion. Whether, on the facts and in thecircumstances of the case, the Income TaxAppellate Tribunal was justified in law in holdingthat the assessee’s activity of decortication ofgroundnuts was an industrial undertakingengaged in the manufacture or production activityand therefore entitled to benefit under Section80HH? Inter alia the question whether the benefit underSection 80HHC could be denied to the assessee solely onthe ground that the assessee did not file the audit reportwith the return, as per Section 80HH(5), also fell forconsideration. The Division Bench held that the mere factthat the assessee failed to enclose the audit report alongwith return itself would not disentitle him to claim thebenefit that if the assessee files audit report before theassessment order is passed, he will be entitled todeduction. Thus, the jurisdictional High Court hasalready spoke on the issue. As many as six High Courts inIndia have taken the view following the decision inGujarat Oil. While respectively agreeing with thereasoning of Gujarat Oil, we accordingly answer theReference in the affirmative in favour of the assessee andagainst the Revenue. The Reference stands disposed of accordinglywithout any order as to costs. _______________ 22.11.2011 PLN _____________________________________ (SAMUDRALA GOVINDARAJULU,J) [1](1993) 201 IT R 325 (Guj)(1993) 201 IT R 325 (Guj) [2](1994) 208 IT R 481 (Mad)(1994) 208 IT R 481 (Mad) [3](1994) 209 IT R 63 (Bom)(1994) 209 IT R 63 (Bom) [4](2002) 254 IT R 6 (P&H) (FB)(2002) 254 IT R 6 (P&H) (FB) [5](2002) 254 IT R 503 (Cal)(2002) 254 IT R 503 (Cal) [6](2005) 273 IT R 265 (P&H)(2005) 273 IT R 265 (P&H) [7](2009) 318 IT R 135 (Del)(2009) 318 IT R 135 (Del) [8](2001) 251 IT R 693 (AP)(2001) 251 IT R 693 (AP) [9]Finance (No.2) Act, 1996 with effect from 01.04.1989 omitted Section 80JFinance (No.2) Act, 1996 with effect from 01.04.1989 omitted Section 80J