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Commissioner Of Income-Tax v. A.N Arunachalam.
Factual and Procedural Background
The assessee, a registered firm of five partners engaged in powerloom cloth business, filed its income tax return on June 28, 1977, claiming relief under section 80J of the Income-tax Act. However, the return was not accompanied by the required audit report and certificate, which were submitted later on July 23, 1977. Despite the Income-tax Officer having the audit report at the time of assessment on November 26, 1977, the relief was denied on the ground that the audit report was not filed along with the return as mandated by section 80J(6A). This denial was upheld on appeal. The Appellate Tribunal, however, held that the requirement under section 80J(6A) was directory rather than mandatory, and since the audit report was available before assessment, the assessee was entitled to the deduction. The Revenue challenged this view, leading to the referral of two legal questions to the court.
Legal Issues Presented
- Whether the Appellate Tribunal was correct in law in holding that the assessee is entitled to relief under section 80J even though the audit report and certificate were not filed along with the return of income?
- Whether the Appellate Tribunal was correct in law in holding that the provisions of section 80J(6A) are directory and not mandatory in nature?
Arguments of the Parties
Revenue's Arguments
- Relied on the explicit wording of section 80J(6A) of the Income-tax Act, emphasizing that the deduction shall not be admissible unless the accounts have been audited and the audit report is furnished along with the return of income.
- Asserted that the provision was mandatory, supported by the Punjab and Haryana High Court decision in Commissioner Of Income-Tax v. Jaideep Industries, which held that the audit report must accompany the return for the relief to be granted.
Assessee's Arguments
- Contended that the Gujarat High Court has taken a contrary view, holding the provision to be directory rather than mandatory, allowing relief if the audit report is available before assessment.
- Referenced differing judicial opinions on similar provisions, including decisions by the Madras, Allahabad, and Patna High Courts, to argue against a harsh mandatory interpretation.
- Submitted that the provision should not be construed to frustrate the objective of granting relief under section 80J.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Commissioner Of Income-Tax v. Jaideep Industries, [1989] 180 ITR 81 (Punjab & Haryana HC) | Provision of section 80J(6A) is mandatory requiring audit report to accompany the return. | Referenced by Revenue to argue against relief; court distinguished this view in favor of a directory interpretation. |
| CIT v. Gujarat Oil and Allied Industries, [1993] 201 ITR 325 (Gujarat HC) | Section 80J(6A) is directory, allowing relief if audit report is available before assessment. | Adopted by the court as the correct interpretation supporting the assessee's entitlement to relief. |
| Halima Fancy Stores v. Commissioner Of Income-Tax, [1976] 104 ITR 190 (Madras HC) | Difference of opinion on whether a return must be accompanied by declaration for registration. | Used to illustrate judicial divergence on similar procedural requirements. |
| Addl. Commissioner Of Income-Tax v. Murlidhar Mathura Prasad, [1979] 118 ITR 392 (Allahabad HC) | Contrasting view on procedural compliance for registration. | Referenced to support the assessee's argument on directory nature of provisions. |
| CIT v. Sitaram Bhagwandas, [1976] 102 ITR 560 (Patna HC) | Similar view supporting directory interpretation. | Supported the assessee's position on non-mandatory nature of filing requirements. |
| K.P Varghese v. ITO, [1981] 131 ITR 597 (Supreme Court) | A statute should not be construed to be unconstitutional or discriminatory. | Applied to avoid discriminatory treatment between companies and other assessees regarding filing audit reports. |
| Director of Inspection of Income-tax (Investigation) v. Pooran Mall and Sons, [1974] 96 ITR 390 (Supreme Court) | Not every provision in a taxing statute is mandatory; some are directory. | Supported the court's conclusion that section 80J(6A) is directory, not mandatory. |
Court's Reasoning and Analysis
The court examined the wording of section 80J(6A), noting that while it requires an audit report to be furnished along with the return, there is no explicit stipulation on the precise timing of the filing except that it should accompany the return. The court observed that companies, whose accounts are routinely audited, are not required to file the audit report with their return to claim the relief, and a strict mandatory interpretation for other assessees would create an unconstitutional discrimination.
The court further reasoned that the purpose of the provision is to ensure that the Income-tax Officer has the audit report available before making the assessment to enable a proper evaluation of the claim. Since there is provision for extension of time for filing returns, the assessee could have delayed filing the return until the audit report was ready. However, in this case, the assessee filed the return first and furnished the audit report later, which the court found should not defeat the relief if the audit report was available before assessment.
The court relied on the principle from Director of Inspection of Income-tax (Investigation) v. Pooran Mall and Sons that not all provisions in taxing statutes are mandatory and that strict interpretation should not frustrate the objective of the statute. Thus, the court agreed with the Appellate Tribunal and the Gujarat High Court's view that the provision is directory, not mandatory, and that denying relief on a technicality would be incongruous and contrary to legislative intent.
Holding and Implications
The court answered the referred questions affirmatively in favor of the assessee and against the Revenue, holding that the provisions of section 80J(6A) of the Income-tax Act are directory and not mandatory. Consequently, the assessee was entitled to the relief under section 80J despite the audit report not being filed along with the return, so long as the report was available before the assessment.
The direct effect of this decision is that assessees will not be denied the deduction under section 80J solely on the ground of late filing of the audit report if it is available before assessment. The court imposed costs of Rs. 500 against the Revenue. No new precedent altering substantive law was set; rather, the decision clarified the procedural interpretation of section 80J(6A).
Rangarajan, J.:— The facts leading to the case are as follows:
The assessee is a registered firm of five partners, engaged in the business of powerloom cloth. In the return filed on June 28, 1977, the assessee claimed relief under section 80J. However, the return was not accompanied by an audit report and certificate, which were filed only on July 23, 1977. Even though the audit report and certificate were before the Income-tax Officer when he made the assessment on November 26, 1977, he denied the relief on the ground that the return was not accompanied by the audit report as required by section 80J(6A) of the Act. This was confirmed on appeal. In the further appeal, the Appellate Tribunal came to the conclusion that the requirement of section 80J(6A) was only directory and as long as the audit report was available before the assessment was made, the assessee could not be denied the deduction. At the instance of the Revenue, the following questions have been referred:
“1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in law in holding that the assessee is entitled to the relief under section 80J of the Act, even though the report and certificate were not filed along with the return of income?
(ii) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in law in holding that the provisions of section 80J(6A) are not mandatory but only directory in nature?”
2. Before us, learned counsel for the Revenue relied on the provisions of section 80J(6A) of the Income-tax Act, which is as follows:
“Where the assessee is a person other than a company or a cooperative 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. Stress was laid upon the provision that the deduction shall not be admissible unless the accounts were audited and the assessee furnished along with the return, the report of such audit.
4. Reliance was also placed on the decision of the Punjab and Haryana High Court in Commissioner Of Income-Tax v. Jaideep Industries., [1989] 180 ITR 81 to contend that the provision was mandatory and, therefore, the Tribunal was not right in granting the relief, when the report had been furnished along with the return. On the other hand, it has been contended by learned counsel for the assessee that the Gujarat High Court has taken a different view in CIT v. Gujarat Oil and Allied Industries, [1993] 201 ITR 325 and even in respect of similar provisions of section 184(7), before it was amended to relieve its harshness, there was difference of opinion as to whether a return should be accompanied by the declaration for getting registration, as between the Madras High Court in Halima Fancy Stores v. Commissioner Of Income-Tax, Madras., [1976] 104 ITR 190 and the Allahabad High Court in Addl. Commissioner Of Income-Tax v. Murlidhar Mathura Prasad., [1979] 118 ITR 392. It was pointed out that the Patna High Court also has taken a similar view in CIT v. Sitaram Bhagwandas, [1976] 102 ITR 560. It was submitted that the provisions of section 80J(6A) should not be construed as to frustrate that objective.
5. On a consideration of the submissions of both sides, we are inclined to take the same view as the Gujarat High Court, which has differed from the Punjab and Haryana High Court. The opening words of sub-section (6A) themselves indicate the necessity for submitting an audit report inasmuch as the accounts of companies are audited and assessees other than companies were required to get the accounts audited for the purpose of section 80J. Admittedly, in the case of companies, there is no insistence on the audit report accompanying the return for the purpose of obtaining the relief under section 80J. Therefore, if the present section is so construed as to make the filing of the audit report along with the return mandatory, it would discriminate between companies on the one hand and other assessees on the other. It has been held by the Supreme Court in K.P Varghese v. ITO, [1981] 131 ITR 597 that a section of the Act should not be so construed as to make it unconstitutional. Secondly, there is no stipulation as to the time when the audit report should be filed, except that it should be filed along with the return. Since there is a provision for extending the time for filing the return, all that the assessee was required to do was to delay the filing of the return until the audit report was made available. As the Tribunal has observed, the preparation of the audit report was beyond the control of the assessee and hence the assessee could justifiably delay the filing of the return itself so that it is accompanied by the audit report. In such an event, the Income-tax Officer could not deny the deduction since the purpose of the section would have been fulfilled even though the return itself was filed beyond the prescribed time. For instance, in the present case, if the assessee had filed the return with the audit report on October 21, 1977, the relief could not have been denied whereas it is sought to be denied only because he filed the return on June 29, 1977, and filed the audit report later on October 21, 1977, when it was made available. The section cannot also be construed to give such an incongruous result. As far as we can see, the stress laid by this provision was only to have the accounts audited and to make the audit report available for the Income-tax Officer to make a proper assessment. Hence, the audit report was to be available before the assessment was made. We agree with the view of the Gujarat High Court that the objective of the section should be carried out by granting the relief rather than pick out a venial fault for denying the relief, intended to be given by the statute. In coming to this conclusion, we have in mind also the principles stated by the Supreme Court in Director of Inspection of Income-tax (Investigation) v. Pooran Mall and Sons, [1974] 96 ITR 390, which are as follows (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 provision 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.”
6. We, therefore, agree with the view of the Tribunal that the provisions of section 80J(6A) of the Income-tax Act were not mandatory and we answer the questions in the affirmative and against the Revenue, with costs. Counsel fee Rs. 500.
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