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Zenith Processing Mills v. Commissioner Of Income-Tax

Gujarat High Court
Sep 28, 1995
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Structured Summary of the Provided Opinion

Factual and Procedural Background

The assessee (a firm) appealed a Tribunal reference arising from its order dated 15 September 1982 in ITA No. 1030/Ahd/81 for the assessment year 1976-77. The Income-tax Officer (ITO) framed the assessment on 22 March 1979 and allowed the assessee's claim for deduction under section 80J in respect of profits and losses from a newly established undertaking. Sub-section (6A) was inserted into section 80J with effect from 1 April 1976, requiring that, for persons other than companies or co-operative societies, the accounts of the industrial undertaking for the relevant previous year be audited and that the assessee furnish the auditor's report in the prescribed form along with the return.

The Commissioner of Income Tax (CIT), exercising powers under section 263, issued a notice and considered the allowance under section 80J (inter alia) to be against the interest of revenue because the assessee had not furnished the prescribed auditor's report (Form No. 10D) along with the return. The CIT directed amendment of the assessment. The assessee contended that the furnishing of the auditor's report along with the return was directory and that it had in fact filed audited accounts (with stamped remarks and auditor's seal). The Tribunal held that section 80J(6A) was mandatory and dismissed the assessee's appeal. The present opinion considers two questions of law referred by the Tribunal.

Legal Issues Presented

  1. Whether, on the facts and circumstances of the case, the Tribunal was justified in holding that the assessee was not entitled to an opportunity to file the statutory audit report in Form No. 10D in revisional proceedings before the CIT?
  2. Whether, on the facts and circumstances of the case, the Tribunal was justified in law in observing and/or holding that provisions of s. 80J(6A) were mandatory and not directory as claimed and pointed out by the assessee?

Arguments of the Parties

Assessee's Arguments

  • The requirement to furnish the auditor's report in the prescribed form (Form No. 10D) along with the return is directory (procedural) and not mandatory; therefore the assessee should be permitted to furnish it later when the claim is being considered for disallowance.
  • The assessee asserted that audited accounts had been filed before the ITO; the accounts bore stamped remarks and the Chartered Accountant's seal indicating correctness, which the assessee treated as compliance or substantial compliance with the requirement.

Revenue / CIT's Arguments

  • The CIT maintained that sub-section (6A) of section 80J lays down a mandatory requirement: the accounts must be audited and the audit report in the prescribed form must be furnished along with the return; absence of the prescribed report disentitles the assessee to the deduction.
  • At a later stage (as argued by Revenue's learned advocate), reliance was placed on observations in Gujarat Oil & Allied Industries to contend that the auditor's report must be furnished before the assessment is completed and the assessee cannot produce it subsequently to claim deduction under section 80J.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
CIT vs. Gujarat Oil & Allied Industries (1993) 201 ITR 325 (Guj) The Court considered the same provision (s. 80J(6A)) and held that furnishing the auditor's report in the prescribed form along with the return is directory; adopted views of earlier High Courts. The present Court relied on this decision as a precedent supporting the view that the requirement to furnish the auditor's report with the return is procedural/directory and that substantial compliance suffices; the Court explained that Gujarat Oil & Allied Industries did not stand for an absolute bar on later production where substantial compliance is shown and opportunity was wrongly denied.
Addl. CIT vs. Muralidhar Mathura Prasad (1979) 118 ITR 392 (All) Interpreted the phrase "along with" (in related statutory context) as not converting a procedural requirement into a mandatory forfeiture if proof can be produced at a later stage. The present Court adopted the Allahabad High Court's view (as cited in Gujarat Oil & Allied Industries) to support the conclusion that the phrase "along with" does not render the auditor's report mandatory in the sense of precluding later production for the purpose of determining entitlement to deduction.
CIT vs. Sitaram Bhagwandas (1976) 102 ITR 560 (Pat) Adopted the interpretation that the requirement to furnish auditor's report "along with" the return is procedural and allows thereafter production for merits of the claim. The present Court relied on the Patna High Court's reasoning (as adopted in Gujarat Oil & Allied Industries) to reinforce that substantial compliance and later production of the auditor's report may be permitted when the ITO considers the claim on merits.

Court's Reasoning and Analysis

The Court analyzed sub-section (6A) of section 80J and identified two distinct requirements:

  1. That the accounts for the previous year relevant to the assessment year be audited by an accountant (a substantive requirement forming the foundation for claiming the deduction); and
  2. That the assessee furnish, along with the return of income, the auditor's report in the prescribed form (a requirement concerning the manner of producing proof of the substantive fact).

The Court reasoned that the first requirement (audit of accounts) is mandatory because it goes to the substantive entitlement to the deduction. The second requirement (physical furnishing of the auditor's report along with the return) is procedural and therefore directory: it concerns the form and timing of producing evidence of the mandatory pre-condition rather than the existence of that pre-condition itself.

The Court relied on its prior consideration in CIT vs. Gujarat Oil & Allied Industries (1993) 201 ITR 325 (Guj), which had adopted the views of the Allahabad High Court (Addl. CIT vs. Muralidhar Mathura Prasad) and the Patna High Court (CIT vs. Sitaram Bhagwandas) that the phrase "along with" does not make production at the time of return an absolute condition for entitlement. The Court held that substantial compliance with the procedural requirement is sufficient.

Applying these principles to the facts, the Court noted that the assessee had filed audited accounts stamped with the auditor's seal and that the assessment was framed on that basis. The deficiency regarding the prescribed auditor's report came to light during proceedings under section 263. The assessee had asked for an opportunity to produce the auditor's report to satisfy the requirement. The Court found that the CIT should have afforded the assessee that opportunity to furnish the prescribed report before withdrawing the allowance already made by the ITO.

The Court further explained that procedural opportunities inherent in assessment proceedings — for example, under section 143(3) where a show-cause notice is required if the AO proposes to modify an assessment — include the opportunity to rectify directory procedural defects. Thus, where a claim has been allowed by the AO without complete formal proof but the matter is later being considered for disallowance, the assessee ought to be given an opportunity to remedy the procedural defect by producing the auditor's report.

Holding and Implications

Core Ruling: Both questions referred by the Tribunal were answered in the negative. Specifically, the Court held that the requirement in section 80J(6A) to furnish the auditor's report in the prescribed form "along with" the return is directory and not mandatory, and that the assessee should have been given an opportunity to produce the auditor's report in revisional proceedings before the CIT.

Direct Consequences and Implications:

  • The assessee may be permitted to produce the auditor's report at a later stage when the question of disallowance is being considered, subject to the facts and circumstances of the case.
  • The CIT's withdrawal of the allowance under section 80J without first affording an opportunity to the assessee to produce the prescribed auditor's report was not justified; the assessee's request for opportunity to furnish the report should have been granted and the admissibility of the claim re-examined on the basis of such proof.
  • The decision operates as an application of established principles (as discussed and applied in the cited precedents) rather than as a pronouncement that creates a novel rule; the Court applied the existing line of authority to the facts at hand. The opinion expressly frames the outcome as being "in favour of the assessee and against the Revenue."
Show all summary ...

1. At the instance of the assessee, the Tribunal, Ahmedabad Bench-C referred following questions of law arising out of its order dt. 15th Sept., 1982 in ITA No. 1030/Ahd/81 for the asst. yr. 1976-77.

"1. Whether, on the facts and circumstances of the case, the Tribunal was justified in holding that the assessee was not entitled to an opportunity to file the statutory audit report in the Form No. 10D in revisional proceedings before the CIT ?

2. Whether, on the facts and circumstances of the case, the Tribunal was justified in law in observing and/or holding that provisions of s. 80J(6A) were mandatory and not directory as claimed and pointed out by the assessee ?"

We first take up question No. 2.

The assessee is a firm. For the asst. yr. 1976-77 the ITO framed order on 22nd March, 1979. While framing the assessment the ITO allowed the assessee's claim for deduction in respect of profits and loss arising from its newly established undertaking. With effect from 1st April, 1976 sub-s. (6A) was inserted in s. 80J vide Finance Act, 1975 which reads as under :

"(6A) Where the assessee is a person other than a company or a co-operative society, the deduction under sub-s. (1) from the profits and gains derived from an industrial undertaking shall not be admissible unless 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 Expln. below sub-s. (2) of s. 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."

The CIT exercising his powers under s. 263 considered the allowance of deduction under s. 80J inter alia along with allowance of initial depreciation in so far as it is against the interest of Revenue issued notice to the assessee. While the assessee did not contest the notice under s. 263 with respect to initial depreciation the assessee contested the withdrawal of relief under s. 80J. According to the CIT, sub-s. (6A) of s. 80J lays down mandatory requirement that before a claim under s. 80J is admissible for any assessment year the assessee must have his accounts of the relevant previous year audited by an accountant and the assessee must furnish along with his return of income report of such audit in the prescribed form duly signed and verified by such accountant. According to the CIT the assessee had not furnished the report of such audit in the prescribed form duly signed and verified by the accountant, the assessee was not entitled to relief under s. 80J. The assessee had claimed that furnishing of report of such audit in the prescribed form which is Form No. 10D under the rules r/w r. 18c, is not mandatory but a directory provision and, therefore, when question of disallowance on that ground is considered, the assessee may be permitted to furnish them. This contention did not find favour with the CIT and he directed that the ITO should make necessary amendment in the assessment order for year 1976-77. The assessee appealed against the order of the Tribunal. The Tribunal came to the conclusion that provisions of s. 80J(6A) are mandatory and that the assessee has filed return for the asst. yr. 1976-77 on 26th Aug., 1976 without audited statement of accounts and the prescribed report. In this connection a further finding which needs be noticed is that the assessee had also contended that the assessee had filed audited accounts before the ITO. However, the statement of accounts with stamped remarks that the Chartered Accountant also found correct were not read by the CIT. In these circumstances the appeal of the assessee was dismissed.

We have heard the learned counsel for the parties.

2. From perusal of sub-s. (6A) it is apparent that compliance of two things is necessary. First requirement is that statement of accounts for the previous year relevant to the assessment year for which deduction is claimed must have been audited by an accountant and second part is that the assessee must furnish along with his return of income the report of such audit in the prescribed form duly signed and verified by such accountant. It can be stated without fear of contradiction that the former is the requirement which furnishes substantial foundation for claiming allowance and the latter is the requirement of furnishing proof that foundation for claiming such deduction has been laid. In our opinion while compliance of the former before the deduction is claimed is mandatory and so far as manner of submitting proof of such compliance of filing along with the return is concerned, is directory because such requirement falls in the realm of procedure for furnishing evidence in support of the claim and which can be furnished at the time while allowance or disallowance under s. 80J is being considered by the concerned authority.

This Court in the case of CIT vs. Gujarat Oil & Allied Industries (1993) 201 ITR 325 (Guj) had an occasion to consider the very same provision. The Court held the provision [of furnishing the auditor's report in the prescribed form along with the return] to be directory adopting the view of the Allahabad High Court in Addl. CIT vs. Muralidhar Mathura Prasad (1979) 118 ITR 392 (All) and the Patna High Court in the case of CIT vs. Sitaram Bhagwandas (1976) 102 ITR 560 (Pat) in interpreting the phrase 'along with' appearing in s. 184(7). The Court opined that merely because the auditor's report has not physically accompanied the return, it cannot be said that it cannot be produced for merits for deciding the claim of deduction under s. 80J(1) of the Act when the ITO sits down for framing the assessment on merits. It is the only stage at which all the requirements of s. 80J(1) of the Act r/w sub-s. (6A) thereof are to be ascertained. 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 procedural provision, directory in nature, and substantial compliance should suffice.

3. In view of the aforesaid discussion, question No. 2 referred to above is to be answered in the negative by holding that provision of s. 80J(6A) to the extent it requires furnishing of auditor's report in the prescribed form along with the return is directory in nature and not mandatory.

4. Coming to the first question, we are of the opinion that as provision of furnishing of report in the prescribed form is held to be directory, the assessee can be permitted to produce such report at a later stage when question for disallowance arise during the course of the proceedings in a given case, it will depend upon the facts and circumstances of each case and, therefore, the assessee may be permitted to produce such report, if it has not been produced earlier.

5. The learned advocate for the Revenue vehemently contended that on the basis of the observations made in Gujarat Oil & Allied Industries (supra) that compliance of furnishing of auditor's report in the prescribed form has to be complied before the assessment is completed and the assessee cannot claim deductions under s. 80J by producing the report later on. We are unable to sustain his contention. In the Gujarat Oil & Allied Industries (supra) the question about non-furnishing of 'proof of the accounts being audited' was not furnished along with the return in support of the claim. However, during the course of the proceedings when the ITO was considering the claim, he disallowed the assessee's request for furnishing the auditor's report in the prescribed form at that stage and the claim was disallowed. It was in these circumstances the claim for disallowance was being considered by the ITO. The ITO had made it known, that he is not to allow deduction under s. 80J unless a certificate is accompanied with the form and assessee having known for no reasons for said disallowance has promptly submitted report which was not submitted earlier. It is in these circumstances, that observations were made that a report should be made available to the ITO. We may notice that it has been held by this Court with which we agree that requirement of furnishing auditor's report is in the realm of furnishing proof about the fact that accounts have been audited and substantial compliance of this provision has been held to be sufficient compliance. During the course of assessment the assessee has furnished accounts stamped with auditor's seal as noticed above which were treated by the assessee as well as the AO to be sufficient compliance of giving proof of the fact that accounts have, in fact, been audited and on that basis the assessment was framed. It was only during the course of proceedings before the CIT under s. 263 that question was considered whether document furnished by the assessee amounts to sufficient compliance of furnishing such proof or not and that having been negatived the occasion arose to furnish the proof which according to the CIT was wanting in declaration that the accounts have been duly audited which is required by sub-s. (6A) of s. 80J and if the assessee requires production of evidence before the allowance made by the ITO under s. 80J was withdrawn, in our opinion that would have been sufficient compliance with the requirement and the assessee ought not to have been visited with the disallowance or withdrawal of the allowance already made without affording opportunity to do so. It may be noted that in a given case assessee's return having a claim of deduction under s. 80J may be accepted by the ITO without holding an inquiry, though it may not have been accompanied with proof of accounts being audited in the manner prescribed. The question of furnishing proof of such audited accounts in the prescribed form at later stage arises only when the matter is being actively considered for disallowance by the concerned authority. If the assessee does not offer to furnish proof even at the stage when it is pointed out to him that requirements of law are not fulfilled to sustain the claim made by him and he fails to fulfil the requirements of law at that stage, it can be said that the assessee had failed to rectify the defect at earlier opportunity offered to him.

It is inherent part of s. 143(3) that where the AO is not inclined to accept the return submitted by the assessee and if he wants to modify the assessment from the return a show cause notice is required to be given to the assessee. Giving of this opportunity will include opportunity to rectify procedural defect, if any, which are directory in nature. If we examine the matter from that point of view we are satisfied that in the present case, the claim made by the assessee was, though not admissible for want of auditor's report on record yet the same was allowed under a mistake by the AO leaving no opportunity to the assessee to complete the requirements. The condition of non-fulfilment of requirement under sub-s. (6A) was made known to the assessee during the proceedings under s. 263 although the assessee asked for an opportunity to produce the auditor's report to fulfil the requirement under s. 80J(6A) the CIT ought to have afforded an opportunity to the assessee to furnish that proof and then examined the admissibility of the claim in the light of the proof furnished.

As a result of the aforesaid discussion we answer the question No. 1 also in the negative i.e. in favour of the assessee and against the Revenue.