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Income-Tax Officer v. Vxl India Ltd.
Factual and Procedural Background
The Revenue filed a Tax Appeal under Section 260A of the Income-Tax Act, 1961, challenging an Income-Tax Appellate Tribunal order that remitted the assessee's claim for deduction under Section 80HHC back to the Assessing Officer for consideration on merits. The Revenue proposed a substantial question of law about whether the Tribunal was right to restore the issue to the Assessing Officer where the assessee had not made the claim nor filed the auditor's certificate under Section 288 (note: the opinion references Section 10CCAB in one place but discusses Section 288(2) elsewhere) along with the return.
Procedurally: the appeal was admitted on 30-8-2000 and a refined substantial question was framed about whether remand was proper where the assessee did not submit the requisite accountant's report with the return but produced it during assessment proceedings. At first instance the Assessing Officer rejected the claim because the report required by sub-section (4) of Section 80HHC was not filed with the return. The CIT(A) confirmed the AO's view. The Tribunal disagreed, holding that the claim should not have been rejected on a mere technicality and remitted the matter to the AO to decide the claim in accordance with law. The Revenue then appealed to this Court.
Legal Issues Presented
- Whether the Appellate Tribunal was right in law and on facts in restoring the matter to the Assessing Officer to decide the issue of grant of deduction under Section 80HHC when the claim and the accountant's certificate were not filed along with the return of income?
- Whether the Tribunal was right in remanding the case to the Assessing Authority for considering the claim of deduction under Section 80HHC regardless of the fact that, in accordance with sub-section (4) of that Section, the assessee had not submitted the requisite report with the certification of the accountant along with the return, but produced the report during assessment proceedings?
Arguments of the Parties
Revenue's Arguments (as presented by Mrs. Mauna R. Bhatt, Standing Counsel)
- Sub-section (4) of Section 80HHC clearly stipulates that deduction under sub-section (1) shall not be admissible unless the assessee furnishes, along with the return of income in the prescribed form, the report of an accountant certifying the correctness of the deduction.
- The correctness of a claim under Section 80HHC has to be seen at the time of furnishing the return of income; the accountant's report must accompany the return.
- If the accountant's report is not filed with the return, the Assessing Officer cannot process the claim under Section 80HHC; a subsequent filing of the report during assessment cannot validate the claim.
- The Assessing Officer and the CIT(A) were correct in rejecting the claim and the Tribunal should not have remanded the matter to the Assessing Officer to consider the claim on merits.
Assessee's Arguments (as presented by Mr. Tushar P. Hemani and Mr. S.N. Soparkar)
- The assessee relied on the decision of this Court in Commissioner of Income-Tax v. Gujarat Oil and Allied Industries (1993) 201 ITR 325 and on Zenith Processing Mills v. Commissioner of Income-Tax (1996) 219 ITR 721 to argue that the auditor's report need only be available at the time the assessing authority sits down to assess income and that procedural requirements as to attachment with the return are not necessarily fatal if complied with before completion of assessment.
- The Calcutta High Court in Commissioner of Income-Tax v. Magnum Export (P) Ltd. (2003) 262 ITR 10 held that deduction cannot be disallowed merely because the audit report was not furnished with the return; the purpose of sub-section (4) is to enable the AO to verify export on the basis of auditor authentication.
- Reliance was also placed on Commissioner of Income-Tax v. Mayur Foundation (2005) 274 ITR 562 for the proposition that details must be furnished before completion of assessment and that information supplied after completion cannot be considered; thus, furnishing during assessment (but before completion) is effective.
- On this basis, the Tribunal's remand to the Assessing Officer to consider the Section 80HHC claim on merits was said to be correct.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Commissioner of Income-Tax v. Gujarat Oil and Allied Industries, (1993) 201 ITR 325 | The relevant stage for considering the merits of a deduction claim is when the assessing authority sits down to assess income; an audit report must be available at the time of assessment but need not have rigid attachment formalities frustrate the provision's object. | The Court held that the favourable construction that effectuates the object of the provision should be preferred; this authority was treated as directly applicable and controlling for allowing submission of the auditor's report during assessment (before completion). |
| Zenith Processing Mills v. Commissioner of Income-Tax, (1996) 219 ITR 721 | Distinction between substantive compliance (accounts must be audited) and procedural proof (furnishing the audit report with the return). Substantive requirement is mandatory; the requirement to attach the report with the return is directory and can be satisfied while the allowance/disallowance is being considered. | Adopted by this Court to hold that the principle applicable to Section 80J equally applies to Section 80HHC — the audit itself is mandatory but the timing of producing the auditor's certificate is procedural and not necessarily fatal if produced during assessment. |
| Commissioner of Income-Tax v. Magnum Export (P) Ltd., (2003) 262 ITR 10 (Calcutta High Court) | Held that deduction cannot be disallowed simply because the audit report was not furnished with the return; subsection's purpose is to enable AO to verify export by auditor authentication. | Relied upon by the assessee; cited as support for the proposition that non-furnishing of the auditor's report with the return does not automatically invalidate the claim if the report is produced during assessment. |
| Commissioner of Income-Tax v. Mayur Foundation, (2005) 274 ITR 562 | Examined when assessment is to be treated as complete and held that details must be furnished before completion; information supplied after completion cannot be considered. | Used to clarify that the critical time is completion of assessment — if the report is produced before assessment is complete, it can be considered; cited in support of remand to AO for consideration before completion. |
| Commissioner of Income-Tax v. Nagpur Hotel Owners' Association, (2001) 247 ITR 201 (Supreme Court) | Holding that for entitlement to statutory benefits (Section 11 context), it is mandatory to intimate particulars to the assessing authority in time; assessing authority cannot give benefit without necessary information during assessment proceedings. | Applied by this Court as supportive authority for the proposition that necessary particulars must be available to the assessing authority before completion of assessment; this supports the requirement that the auditor's report must be available before assessment completion, though not necessarily attached at filing time. |
Court's Reasoning and Analysis
The Court examined the statutory language of Section 80HHC and the authorities cited by the parties. It found that the legal principles articulated in this Court's earlier decisions in Gujarat Oil and Zenith Processing Mills are directly applicable to Section 80HHC.
The Court drew an analogy between Section 80J (considered in Gujarat Oil and Zenith) and Section 80HHC. It accepted the twofold analytical approach from Zenith: (1) the substantive requirement — that the accounts/statements be audited by an accountant (a condition precedent) — is mandatory and furnishes the foundation for claiming the allowance; and (2) the procedural requirement — that the audit report be furnished with the return in prescribed form — is evidence of that foundational compliance and falls in the realm of procedure.
Applying those principles, the Court held that while obtaining the accountant's report (audit) is a mandatory precondition, strict attachment of the report to the return at the time of filing is not an absolute precondition to the claim's consideration. What matters is that the audit report is produced and available to the assessing authority at the time it sits down to assess (i.e., before completion of assessment). The Court emphasized that construing the procedural requirement rigidly so as to defeat the object and purpose of the beneficial provision would be improper.
The Court also relied on the Supreme Court's reasoning in Nagpur Hotel Owners' Association to underline that particulars necessary for granting statutory benefits must be available to the assessing authority before completion of assessment; this supports the conclusion that the report must be produced before assessment completion, though not necessarily filed with the original return.
On this basis the Court concluded that the Tribunal was correct in holding that the Assessing Officer should not have rejected the claim on the mere technicality of non-furnishing the accountant's report with the return and was justified in remanding the matter to the Assessing Officer to consider the claim on merits.
Holding and Implications
Core Holding: The Tax Appeal is decided in favour of the assessee and against the Revenue. The Court affirmed the Tribunal's view that the Assessing Officer should consider the assessee's claim under Section 80HHC on its merits and that the mere failure to attach the accountant's report to the original return does not, by itself, justify disallowance provided the report is produced before completion of assessment.
Implications:
- The Tribunal was correct to remit the matter to the Assessing Officer to consider the Section 80HHC deduction on merits.
- The condition that the accounts be audited (i.e., obtaining the auditor's report) is mandatory; however, the timing of furnishing the auditor's certificate with the return is procedural and may be satisfied by producing the certificate during assessment proceedings before completion.
- Direct effect on the parties: the Assessing Officer must now consider the assessee's claim under Section 80HHC on its merits; the appeal is disposed of in favour of the assessee and against the Revenue, without any order as to costs.
- The Court grounded its decision on existing precedents and principles; the opinion does not purport to lay down a new, expansive precedent beyond applying and affirming the cited authorities' reasoning to Section 80HHC.
Order: Appeal disposed of in favour of the assessee; no order as to costs. (K.A. Puj, J.; Bankim N. Mehta, J.)
(Per : HONOURABLE MR.JUSTICE K.A.PUJ)
1. The revenue has filed this Tax Appeal under Section 260A of the Income-Tax Act, 1961 proposing to formulate the following substantial question of law for determination and consideration of this Court:
?SWhether, the Appellate Tribunal is right in law and on facts in restoring the matter to the Assessing Officer to decide the issue of grant of deduction under Section 80HHC when the said claim was neither made nor certificates of the auditor was filed under Section 10CCAB of the Act along with return of income???
2. This court has admitted this Tax appeal on 30-8-2000 reframing the following substantial question of law :
?SWhether, the Appellate Tribunal was right in making a remand of the case to the Assessing Authority for considering the claim of deduction u/s 80 HHC regardless of the fact that in accordance with sub-section (4) of the said Section, the assessee had not submitted the requisite report with the certification of the Accountant and the said report with the certificate was produced in the course of assessment ???
3. The facts giving rise to the present Tax Appeal are that the assessee has made claim for deduction u/s 80HHC of the Income-Tax Act during the course of assessment proceedings. No such claim was made by the Assessee at the time of filing of the return of income. It was the case of the assessee that the claim u/s 80HHC of the Act could be put up even in the assessment proceedings subsequently. The Assessing Officer held that with the plain reading of sub-section (4) of Section 80HHC makes it clear that no deduction under sub-section (1) shall be admissible unless the assessee furnished report of the Accountant as defined in sub-section along with the return of income. Keeping in view the said provisions, the Assessing Officer has rejected the claim of the assessee.
4. Being aggrieved by the said order of the Assessing Officer, the assessee preferred an appeal before the Commissioner of Income-Tax (Appeal), Rajkot. The learned CIT(A) has observed in its order that the assessee did not put up this claim in the original return but pressed this claim only during the assessment proceedings subsequent on the export reserve was created in the annual accounts, subsequently in the form of a letter dated 26-12-1989 that it should be treated as revised return. He has, therefore, confirmed the order of the Assessing Officer by observing that assessing officer has rightly pointed out that the claim will not be admissible unless the assessee files the report of an accountant along with the return of income as provided under Section 288 sub-section (1) & (2) along with Explanation thereto.
5. Being aggrieved by the said order of the CIT(A) the assessee took up the matter before the Income-Tax Appellate Tribunal, Ahmedabad and the tribunal took the view that the assessing officer should not have rejected the claim of the assessee on merely technical ground. The Tribunal, therefore, remitted the said issue back to the Assessing Officer directing him to consider the claim of the assessee in accordance with law.
6. It is in the above background of the matter, the present appeal is filed by the revenue.
7. Mrs.
Mauna R. Bhatt learned Standing Counsel appearing for the Revenue submitted that the provisions contained in section 80 HHC are very clear. Sub-section 4 of Section 80HHC of the Income-Tax Act, 1961 clearly stipulates that the deduction under sub-section (1) shall not be admissible unless the assessee furnishes in the prescribed form along with the return of income, the report of an accountant, as defined in the Explanation below sub-section (2) of Section 288, certifying that the deduction has been correctly claimed in accordance with the provisions of this section. She has, therefore, submitted that whether the assessee has correctly claimed deduction u/s 88HHC of the Act has to be seen at the time of furnishing return of income. If the report of the Accountant is not filed along with the return of income certifying that the deduction was correctly claimed, the Assessing Officer cannot process the claim u/s 80HHC of the Act. Therefore, if the assessee furnishes the report subsequently and on that basis he claims the deduction u/s 80HHC of the Act the same cannot be allowed. She has, therefore, submitted that the Assessing Officer and CIT(A) have taken correct view and the Tribunal should not have remanded the matter back to the Assessing Officer to consider the claim of the assessee on merits.
8. As against this, learned advocate Mr. Tushar P. Hemani appearing with Mr. S.N. Soparkar learned senior counsel for the assessee has submitted that the issue is squarely covered by the decision of this Court in the case of Commissioner of Income-Tax Vs. Gujarat Oil and Allied Industries, reported in (1993) 201 ITR 325. He has submitted that the said decision has been followed by this Court in subsequent decision in case of Zenith Processing Mills V/s. Commissioner of Income-Tax, reported in (1996) 219 ITR 721.
9. Mr.
Tushar Hemani has further submitted that the Calcutta High Court in the case of Commissioner of Income-Tax V/s. Magnum Export (P) Ltd., reported in (2003) 262 ITR 10 has gone one step further and held that the deduction cannot be disallowed simply because the audit report was not furnished along with the return. The purpose of incorporation of sub-section (4) was to enable the Assessing Officer to ascertain the claim for deduction on the basis of authentication by the auditor that the goods or merchandise was really exported, which is otherwise admissible only on actual basis, a situation which is difficult for the Assessing Officer to determine. While deciding the issue in favour of the assessee the Calcutta High Court has relied on the decision of this Court in the case of Zenith Processing Mills V/s. Commissioner of Income-Tax (supra). Mr. Hemani has further relied on the later decision of this Court in the case of Commissioner of Income-Tax V/s. Mayur Foundation (supra).
10. Mr.
Hemani further relied on the later decision of this Court in the case of Commissioner of Income-Tax V/s. Mayur Fondation, (2005) 274 ITR 562 wherein this Court has taken view after considering the Hon'ble Supreme Court's decision in the case of Commissioner of Income-Tax V/s. Nagpur Hotel Owners' Association, reported in (2001) 247 ITR 201 that the details have to be furnished before the completion of assessment proceedings and any information supplied subsequent to the completion of the assessment cannot be taken into consideration. The Court, therefore, was of the view that the question that arises is when can an assessment be said to be complete or till what point of time the assessment proceedings can be said to be alive. Therefore, the Court took the view that jurisdiction to entertain the new ground which the assessee claimed the benefit under Section 11(2) of the Act and adjudicate the tax liability of the assessee.
11. Based on the aforesaid decisions of this Court as well as the decisions of the Apex Court, Mr. Hemani has urged that the Tribunal has rightly decided the appeal against the revenue and in favour of the assessee and directed the assessing officer to consider the claim of the assessee under Section 80HHC of the Act on its own merits.
12. We have heard the learned counsels appearing for the Assessee and the Revenue at great length. We have gone through the orders passed by the authorities below. We have also considered the relevant statutory provisions as contained in Section 80HHC of the Act and the authorities cited before the Court. We are of the view that the issue is covered by the decision of this Court in the case of Commission of Income-Tax Vs. Gujarat Oil and Allied Industries (supra). The question for consideration before the Court in the said decision was ?SWhether, on the facts and in the circumstances of the case, the Tribunal was right 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 assessment ? While answering the said question in favour of the assessee and against the revenue, the Court took the view 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 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) read with sub-section (6A) thereof can be taken into consideration. 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 the construction put upon the said provision. The Court, therefore, took the view, that 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, the other view by which the beneficial provision of section 80J(1) is made fully operative should be preferred.
13. This very principle was reiterated by this Court in the case of Zenith Processing Mills V/s. Commissioner of Income-Tax (supra), wherein it is held that from the perusal of sub-section (6A) of section 80J of the Income-Tax Act, 1961, for claiming deduction under Section 80J, it is apparent that compliance in respect of two things is necessary. The first requirement is that the 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 the second 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. The former is the requirement which furnishes the substantial foundation for claiming the allowance and the latter is the requirement of furnishing proof that the foundation for claiming such deduction has been laid. While compliance with the former before the deduction is claimed is mandatory, so far as the manner of submitting proof of such compliance along with the return is concerned, it is directory because such requirement falls in the realm of procedure for furnishing evidence in support of the claim and can be furnished at the time while allowance or disallowance under section 80J of the Act is being considered by the concerned authority.
14. What has been stated in respect of the claim under Section 80J of the Income-Tax Act is equally applicable to one under Section 80HHC. Simply because under section 80 HHC connotes that the report of accountant in the prescribed form should be attached along with the return of income, certifying that the deduction has been correctly claimed in accordance with the provisions of this Section, it does not mean that if such report is not attached along with the return of income and it is produced before the Assessing Officer during the course of assessment proceedings, the assessee is not entitled to the deduction under Section 80HHC of the Act. To obtain the report of the Chartered Accountant is a condition precedent and it is mandatory in nature. However, non-furnishing of such report at the time of filing the return of income but at subsequent stage and in any case, before the assessment proceeding is completed, the assessee's claim for deduction under Section 80HHC of the Act cannot be disallowed.
15. This view which we are taking is duly supported by earlier two decisions of this court and we have found support from the decision of the Hon'ble Apex Court in the case of Commissioner of Income-Tax V/s. Nagpur Hotel Owners' Association, reported in (2001) 247 ITR 201, where the Hon'ble Apex Court has observed that it is abundantly clear from the wording of sub-section (2) of section 11 of the Income-Tax Act, 1961, that it is mandatory for the person claiming the benefit of Section 11 to intimate to the assessing authority the particulars required, under rule 17 in Form No.10 of the Income-Tax Rules, 1962. If during the assessment proceedings, the Assessing Officer does not have the necessary information, the question of excluding such income from assessment does not arise at all. As a matter of fact, this benefit of excluding this particular part of the income from the net of taxation arises from section 11 and is subject to the conditions specified therein. Therefore, it is necessary that the assessing authority to give the benefit of such exclusion. Even assuming that there is no valid limitation prescribed under the Act and the Rules, it is unreasonable to presume that the intimation required under Section 11 has to be furnished before the assessing authority completes the concerned assessment because such requirement is mandatory and without the particulars of this income the assessing authority cannot entertain the claim of assessee under section 11 of the Act.
16. In view of this settled legal position, we are of the view that the Tribunal was right in holding that the Assessing Officer should not have rejected the legitimate claim of the assessee on mere technical ground i.e. non-furnishing of the Chartered Accountant's report along with the return of income. The Tribunal is also right in directing the Assessing Officer to consider the claim of the assessee under Section 80HHC on its own merits.
17. We, therefore, decide this Tax Appeal in favour of the assessee and against the revenue and answer the question posed before us in affirmative.
18. This appeal is accordingly disposed off without any order as to costs.
(K.A.
Puj, J.) (Bankim N. Mehta,J.) /JVSatwara/ Top
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