Citation Codes

Equivalent Citations

citation codes

Case Number

I.T.A No. 5 of 2000

Attorney(S)

For the Appellant: P. Balachandran

Judges

G. Sivarajan
K. Balakrishnan Nair, JJ.

Acts

provisions contained in sub-section (4-A) of Section 80-HHC.
provisions contained in sub-section (4-A)
Section 201(1-A) of the Income Tax Act,
Section 201(1-A) read with Section 194,
SECTION 260 INCOME TAX ACT
sub-section (4-A) of Section 80 HHC
sub-section (2) of section 288.
clause (b) of sub-section (4-A),
Section 80-J (6-A)
Section 80-HHC

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Smart Summary

Case Summary — Judgment delivered by K. Balakrishnan Nair, J.

Factual and Procedural Background

The Revenue (appellant) challenged the Income Tax Appellate Tribunal's affirmation of the first appellate authority's view that the requirement to file the certificate under sub-section (4-A) of Section 80-HHC "alongwith the return" is only directory. The respondent assessee is a cashew exporter who filed its return of income for the assessment year 1992–93 on 24.10.1992, declaring income of Rs. 60,53,360 and claiming deduction under Section 80-HHC.

The Assessing Officer disallowed part of the claimed deduction because the certificate contemplated by sub-section (4-A) of Section 80-HHC did not accompany the return. The Commissioner of Income Tax (Appeals) reversed that decision, holding that the certificate could be furnished before the final assessment order. The Revenue appealed to the Income Tax Appellate Tribunal, which dismissed the appeal. The Revenue then brought this appeal to the High Court under Section 260-A of the Income Tax Act.

Legal Issues Presented

Whether, on the facts and in the circumstances of the case and in the absence of a certificate from the Export House being filed along with the return, the assessee is entitled to the deduction under Section 80-HHC with regard to the foreign sales made?
Whether, on the facts and in the circumstances of the case and on an interpretation of sub-section (4-A) of Section 80-HHC read with 101 STC 1 and 240 ITR 463 is not the provision mandatory and does not non-compliance of the provision result in disallowance of the deduction?
Whether, on the facts and in the circumstances of the case and in the light of the Supreme Court decision in 183 ITR 1 and also in the absence of a statutory requirement like the one in sub-section (4-A) of Section 80-HHC, the Tribunal is justified in relying on 103 ITR 835 and does the same have application in the case on hand?

Arguments of the Parties

Appellant (Revenue) — primary contentions

Filed by learned Senior Counsel Shri P.K.R. Menon on behalf of the Revenue.
Contended that the requirement in sub-section (4-A) of Section 80-HHC that the supporting manufacturer's certificate be furnished "alongwith his return of income" is mandatory; non-compliance should lead to disallowance of the deduction.
Relied on the decision in Commissioner Of Income-Tax v. Dhanalakshmy Weaving Works (245 ITR 13) to support the mandatory nature of the requirement (as submitted by Revenue).
Pressed the point that the earlier Division Bench decision (interpreting a rule) could not be equated with interpretation of a provision in the Act — i.e., a distinction between the interpretation of rules and the interpretation of statutory provisions should be maintained.
Emphasised the principle that taxing statutes are to be strictly construed and that negative formulations (or "shall" language) generally indicate mandatory requirements.

Respondent (Assessee) — primary contentions

Represented by learned Counsel Shri P. Balachandran.
Contended that while the filing of the certificate required by sub-section (4-A) is mandatory in substance (i.e., the certificate must be produced to claim the deduction), the timing provision that it be filed "alongwith the return" is directory; it can be furnished any time before completion of assessment.
Relied on a Division Bench decision (Commissioner of Income Tax. Kerala v. Malayalam/Malavalam Plantations Ltd — 103 ITR 835) and other High Court decisions (Commissioner of Income Tax v. Hemsons Industries — 251 ITR 693; Commissioner of Income Tax v. Sivanand/Shivanand Electronics — 209 ITR 63) that held analogous filing requirements were directory as to timing, provided the required material was supplied before assessment completion.
Invoked the Supreme Court's decision in Peerless General Finance and Investment Company Limited v. Reserve Bank of India ((1992) 2 SCC 343) to submit that rules should be treated for constructional purposes as if they were part of the statute, undermining the Revenue's distinction between rules and statutory provisions.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Commissioner Of Income-Tax v. Dhanalakshmy Weaving Works (245 ITR 13)	Relied on by Revenue to argue that the requirement under sub-section (4-A) of Section 80-HHC should be read as mandatory.	The Court observed this decision involved interpretation of Section 201(1-A) (a different statutory context) and held that the Dhanalakshmy decision did not apply to the facts of the present case.
Commissioner of Income Tax, Kerala v. Malayalam Plantation Ltd (103 ITR 835)	The Division Bench decision was cited as holding that a requirement to file a certificate along with the return (Rule 8-A under Income Tax Rules) was directory as to time.	The Court treated this decision as supportive of the assessee's position that a similar provision (sub-section (4-A) of Section 80-HHC) is directory as to timing and relied on it, rejecting the Revenue's argument that a rule-based decision cannot be applied to an Act provision.
Commissioner of Income Tax. Kerala v. Malavalam Plantations Limited (103 ITR 835)	The opinion cites this form of the name; it is referenced for the same holding about directory character of filing alongwith return.	The Court treated the decision as supporting the directory interpretation and used it in its reasoning (see also use of Peerless to remove the rule-vs-act distinction).
Commissioner of Income Tax v. Shivanand Electronics (209 ITR 63)	Cited by the respondent as authority that filing of an audit report along with the return is not mandatory in timing terms (analogy to Section 80-J(6-A)).	The Court relied on this authority as one of several High Court decisions that supported the directory view that the timing requirement need not be strictly enforced so long as the material is filed before assessment completion.
Commissioner of Income Tax v. Sivanand Electronics (209 ITR 63)	Another form of the same citation appears in the text and is relied on for the proposition that filing the audit report need not be contemporaneous with the return.	The Court treated this decision as supportive of the directory interpretation.
Peerless General Finance and Investment Company Limited v. Reserve Bank of India ((1992) 2 SCC 343)	Stands for the proposition that rules made under a statute are to be treated as if they were in the statute for constructional purposes.	The Court relied upon para 53 of Peerless to reject the Revenue's distinction between a rule-based precedent and a statute-based argument; this justified applying the rule-case authority to interpret the statutory provision.
Peerless General Finance and Investment Co. Ltd. v. Deputy Commissioner of Income Tax (236 ITR 671)	Referenced in the opinion list of authorities relied upon by counsel (different Peerless-related citation appearing in the text).	The opinion records the citation as relied upon by the parties; the Court's analysis does not set out specific application beyond noting Peerless principles (as above).
Commissioner of Income Tax v. Hemsons Industries (251 ITR 693)	Cited as authority that filing an audit report under Section 80-HHC alongwith the return is not mandatory so long as the report is filed before completion of assessment.	The Court relied on this Andhra Pradesh High Court decision as supporting the directory interpretation of the timing requirement in sub-section (4-A).
101 STC 1	This citation is mentioned in the statement of questions of law; the opinion does not state the specific rule or principle from this citation.	The precedent is referenced in the questions framed, but the opinion does not elaborate its application.
240 ITR 463	Mentioned in the questions of law; the opinion does not describe the principle cited from this report.	Mentioned in the question framed for decision; no separate application discussed in the text.
183 ITR 1	Mentioned in the questions of law (Supreme Court decision referenced); the opinion does not set out the rule from that report in detail.	The question raised whether reliance on 103 ITR 835 was justified in light of 183 ITR 1; the Court's ultimate reasoning preferred the directory interpretation and answered questions accordingly.
State of U.P v. Babu Ram Upadhya	Quoted within the Peerless decision to support the principle that rules under a statute must be treated as if they were contained in the statute.	Referenced as part of the Peerless authority to support the Court's view that the rule/act distinction urged by Revenue was not decisive.
Commissioner of Income-Tax. Lucknow v. U.P. Co-operative Federation Ltd. ((1989) 1 SCC 747 : AIR 1989 SC 915)	Cited for the proposition that exemptions and beneficent provisions should be liberally construed (reduced strictness of construction in favour of beneficent tax exemptions).	The Court relied on this line of authority to support a liberal construction of Section 80-HHC's beneficent purpose (to encourage exports), thereby favoring a directory reading as to timing.
Gujarat Industrial Development Corporation v. Commissioner Of Income Tax ((1997) 7 SCC 17 : AIR 1997 SC 3275)	Also cited for the principle that beneficent or incentive-based exemptions should be construed liberally.	Used to support the Court's conclusion that the timing requirement should not be read as strictly mandatory where the statutory object is beneficent.
Commissioner of Income tax. Bangalore v. Shaan Finance (P) Ltd. ((1998) 3 SCC 605 : AIR 1998 SC 1372)	Cited along with other Supreme Court decisions for the proposition that exemptions with a beneficent object are to be liberally construed.	Relied upon by the Court to justify reading the timing requirement of sub-section (4-A) as directory in light of the section's incentivising purpose.

Court's Reasoning and Analysis

The Court began by referring to the text of Section 80-HHC and specifically sub-section (4-A), which states that the deduction under sub-section (1) shall not be admissible unless the supporting manufacturer furnishes, in the prescribed form alongwith his return of income, (a) an accountant's report (as defined) and (b) a certificate from the Export House or Trading House in the prescribed and verified manner. The certificate must be duly certified by the auditor auditing the Export House or Trading House.

On the facts, the supporting manufacturer's certificate had been furnished by the assessee but not alongwith the return; it was submitted before the assessment was taken up. The Revenue argued that sub-section (4-A)'s requirement to file the certificate with the return is mandatory and failure to comply precludes the deduction. The assessee argued that while the certificate itself is mandatory to substantiate the claim, the time-limit phrase "alongwith his return of income" is directory and the certificate could be furnished any time prior to completion of assessment.

The Court examined the parties' authorities. It observed that the decision in Dhanalakshmy Weaving Works (relied upon by the Revenue) arose in the context of Section 201(1-A) and the obligation to deduct tax at source — a materially different statutory context without a timing provision comparable to sub-section (4-A) — and therefore that decision was inapplicable to the present facts.

The Court considered the Division Bench decision (103 ITR 835) addressing Rule 8-A of the Income Tax Rules and noted the similarity in language: there the requirement to file a certificate for claiming the development allowance was held to be directory as to timing though mandatory in substance. The Revenue attempted to distinguish that authority on the ground that it interpreted a Rule rather than a statute; the Court rejected this distinction in light of the Supreme Court's decision in Peerless, which holds that rules made under a statute are to be treated as if they were part of the statute for constructional purposes.

The Court further relied on High Court authorities (Hemsons Industries; Sivanand/Shivanand Electronics) holding that filing the audit report or certificate alongwith the return is not mandatory in timing terms, provided the requisite document is filed before assessment is completed.

Turning to general principles of statutory construction, the Court acknowledged that taxing statutes are to be construed strictly and that the presence of the word "shall" or negative language can indicate mandatory obligations. However, it noted established authority that beneficent or incentive-based exemptions and allowances must be liberally construed to effectuate legislative purpose. Applying that line of authority (citing multiple Supreme Court decisions), and reading the statute as a whole to ascertain legislative intent (which was to encourage exports and give incentives), the Court concluded that the requirement to file the certificate "alongwith the return" is directory as to time.

The Court thus distinguished mandatory substance (the certificate must be produced to claim the deduction) from directory timing (the precise timing of filing with the return is not fatal so long as the certificate is filed before conclusion of assessment). On that basis the Court answered the posed questions against the Revenue and in favour of the assessee.

Holding and Implications

APPEAL DISMISSED.

Holding (core ruling): The Court held that the requirement in sub-section (4-A) of Section 80-HHC that the supporting manufacturer's certificate be furnished "alongwith his return of income" is only directory as to time. The filing of the declaration/certificate is mandatory in substance to claim the deduction, but the time of filing (i.e., that it must accompany the return) is directory and the certificate may be furnished any time before completion of the assessment. The Court answered Question Nos. 1 and 3 in the affirmative and Question No. 2 in the negative.

Direct implications for the parties: Because the assessee had furnished the requisite certificate before the assessment was completed, the assessee is entitled to the deduction under Section 80-HHC. The Revenue's appeal therefore fails and is dismissed.

Broader implications: The opinion does not purport to lay down an extensive new doctrine beyond resolving the appeal: it applies existing precedent and established principles of construction (including the treatment of rules as if part of the statute and the liberal construction of beneficent tax provisions) to hold that timing requirements of the sort found in sub-section (4-A) are directory. The Court did not state that it was laying down a novel precedent beyond the application of those authorities.

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The Commissioner Of Income Tax v. G. Krishnan Nair

The Judgment of the Court was delivered by

K. Balakrishnan Nair, J.:— The Revenue is the appellant. It feels aggrieved by the decision of the Income Tax Appellate Tribunal affirming the decision of the first appellate authority that the requirement to file the certificate as provided under sub-section (4-A) of Section 80-HHC along with the return is only directory. The questions of law framed for the decision of this Court are the following:—

01. Whether, on the facts and in the circumstances of the case and in the absence of a certificate from the Export House being filed along with the return, the assessee is entitled to the deduction under Section 80-HHC with regard to the foreign sales made?

02. Whether, on the facts and in the circumstances of the case and on an interpretation of sub-section (4-A) of Section 80-HHC read with 101 STC 1 and 240 ITR 463 is not the provision mandatory and does not non-compliance of the provision result in disallowance of the deduction?

03. Whether, on the facts and in the circumstances of the case and in the light of the Supreme Court decision in 183 ITR 1 and also in the absence of a statutory requirement like the one in sub-section (4-A) of Section 80-HHC, the Tribunal is justified in relying on 103 ITR 835 and does the same have application in the case on hand.”

2. The Brief facts of the case are the following:—

3. The respondent assessee is a cashew exporter. He filled the return of income for the assessment year 1992–93 on 24.10.1992 declaring an income of Rs. 60,53,360/-. He claimed deduction under Section 80-HHC. The assessing authority disallowed a portion of the deduction claimed on the ground that the certificate as contemplated under sub-section (4-A) of Section 80-HHC did not accompany the return. The copy of the order of the Assessing Officer is annexure A. But the said order was reversed by the Commissioner of Income Tax (Appeals) by annexure B order dated 26.07.1995 The first appellate authority took the view that the certificate contemplated under sub-section (4-A) of Section 80-HHC can be furnished before the final assessment order is passed. Feeling aggrieved, the Revenue moved the Income Tax Appellate Tribunal by filling an appeal. But the same was dismissed by annexure C order dated 10.09.1999 Hence this appeal to this Court under Section 260-A of the Income Tax Act.

4. We heard both sides. The learned Senior Counsel Shri. P.K.R Menon appearing for the Revenue relied on the decision reported in “Commissioner Of Income-Tax v. Dhanalakshmy Weaving Works” (245 ITR 13). The learned Counsel appearing for the respondents Shri. P. Balachandran replied on the decisions of this Court in “Commissioner of Income Tax, Kerala v. Malayalam Plantation Ltd” (103 ITR 835), “Commissioner of Income Tax v. Shivanand Electronics” (209 ITR 63), “Peerless General Finance and Investment Co. Ltd. v. Deputy Commissioner of Income Tax” (236 ITR 671) and “Commissioner of Income Tax v. Hemsons Industries” (251 ITR 693). Before going into the rival contentions, it will be beneficial to refer to the relevant statutory provisions, first. The relevant portion of Section 80-HHC reads as follows:—

(1) Where an assessee, being an Indian company or a person (other than a company) resident in India, is engaged in the business of export out of India of any goods or merchandise 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 of the profits derived by the assessee from the export of such goods merchandise.

Provided that if the assessee, being a holder of an Export House Certificate or a Trading House Certificate (hereafter in this section referred to as an Export House or a Trading House, as the case may be), issues a certificate referred to in clause (b) of sub-section (4-A), that in respect of the amount of the export turnover specified therein, the deduction under this sub-section is to be allowed to a supporting manufacturer, then the amount of deduction in the case of the assessee shall be reduced by such amount which bears to the total profits derived by the assessee from the export of trading goods, the same proportion as the amount of export turnover specified in the said certificate bears to the total export turnover of the assessee in respect of such trading goods.

(1-A) Where the assessee, being a supporting manufacturer, has during the previous year, sold goods or merchandise to any Export House or Trading House has issued a certificate under the proviso to sub-section(1), 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 of the profits derived by the assessee from the sale of goods or merchandise to the Export house or Trading House in respect of which the certificate has been issued by the Export House or Trading House.

…………………………………………………………………………………………………………………………

…………………………………………………………………………………………………………………..

(4-A) The deduction under sub-section (1) shall not be admissible unless the supporting manufacturer furnishes in the prescribed form alongwith his return of income-

(emphasis supplied)

(a) 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 on the basis of the profits of the supporting manufacturer in respect of his sale of goods or merchandise to the Export House or Trading House; and

(b) a certificate from the Export House or Trading House containing such particulars as may be prescribed and verified in the manner prescribed that in respect of the export turnover mentioned in the certificate, the Export House or Trading House has not claimed the deduction under this Section;

Provided that the certificate specified in clause (b) shall be duly certified by the auditor auditing the accounts of the Export House or Trading House under the provisions of this Act or under any other law”.

5. A reading of the above statutory provisions would show that to get the deduction contemplated under sub-section (1-A), the assessee has to file inter alia, a certificate from the Export House/Trading House containing such particulars as may be prescribed and verified in the prescribed manner that in respect of export turnover mentioned in the certificate, the Export house or Trading House has not claimed the deduction under this section. In the case at hand, it is common case that the assessee has furnished the above said certificate, but it was not furnished alongwith the return of income, but was submitted before the matter was taken up for assessment. So, the Revenue would submit that the provisions contained in sub-section (4-A) that the certificate should accompany the return, is mandatory and therefore the assessee is not entitled to get the deduction as admittedly he has filed the requisite certificate only after he filed the return of income. The respondent, on the contrary, would submit that the requirement to file the certificate, though mandatory, the time limit for filing it is only directory in nature.

6. The learned Senior Standing Counsel for the Revenue, relying on the decision in “Commissioner Of Income-Tax v. Dhanalakshmy Weaving Works” (245 ITR 13), submitted that the requirement under sub-section (4-A) of Section 80 HHC should be read as mandatory. That was a case involving interpretation of Section 201(1-A) of the Income Tax Act, which provides that if there is a failure to deduct the interest as contemplated under Section 201(1-A) read with Section 194, the said person shall be liable to pay interest for the amount deductible at the rate mentioned therein to the Revenue. The said provision casts an obligation on the person who pays the interest to another to deduct the tax on such amount. It does not deal with any time limit. So, the said decision will not apply to the facts of this case. A Division Bench of this Court in “Commissioner of Income Tax. Kerala v. Malavalam Plantations Limited” (103 ITR 835) has interpreted a similar provision and held that the same is only directory.

7. It was held therein that the requirement under Rule 8-A under the Income Tax Rules 1962 of filing a certificate for claiming the development allowance is mandatory. But, the said certificate need not necessarily be filed alongwith the return though such a requirement is there in the Rules. In other words, the requirement to file the certificate along with the return was held to be directory. The provisions of the Rule interpreted therein are identical to the provisions contained in sub-section (4-A) of Section 80-HHC. But, the learned Senior Counsel for the Revenue would submit that the Division Bench of this Court was interpreting a statutory Rule, whereas the point involved in the present case is the interpretation of a provision under the Act. So, according to the learned Senior Counsel, the said decision interpreting a Rule, though identical in nature, cannot be pressed into service to interpret a provision of the Act. The learned Counsel for the assessee rightly pointed out that the said point raised by the Revenue cannot be accepted in view of the decision of the Honourable Supreme Court in “Peerless General Finance and Investment Company Limited v. Reserve Bank of India” ((1992) 2 SCC 343). The Apex Court, in para 53 of the said decision has held as follows:—

“In State of U.P v. Babu Ram Upadhya, this Court held that rules made under a statute must be treated, for all purposes of construction or obligations, exactly as if they were in that Act and are to the same effect as if they were contained in the Act and are to be judicially noticed for all purposes of construction or obligations”.

8. The stand of the assessee that the relevant provision is directory is supported by the decision of the Andhra Pradesh High Court in “Commissioner of Income Tax v. Hemsons Industries” (251 ITR 693). It was held in that decision that the requirement of filing an audit report under Section 80-HHC alongwith the return of income is not mandatory. It was held that if the assessee files an audit report before the assessment is completed, it will be entitled to deduction. Similarly, the Bombay High Court in “Commissioner of Income Tax v. Sivanand Electronics” (209 ITR 63) has held that the filing of the audit report along with the return of income mentioned in Section 80-J (6-A) is not mandatory. It was held that the filing of the audit report is mandatory, but it need not necessarily be filed alongwith the return of income. It can be produced any time before the completion of the assessment, it was held.

9. It is no doubt, true, that taxing statures have to be interpreted strictly. It is also equally well settled that the use of the word “shall” in a provision need not necessarily make the direction contained therein mandatory. It has also been held by the Courts that even though the word “may” is used in a statutory provision, still, it may be a mandatory provision. As rightly pointed by the learned senior counsel for the Revenue, if a provision is couched in negative words, it is normally taken as mandatory. But, having regard to the context in which the negative words are used, it will be always open to the Courts to construe a particular provision as directory. The form is not conclusive, the substance has to be ascertained. It is trite law that the statute should fee read as a whole and the intention of the legislature has to be ascertained if a dispute arises whether a direction under a provision is mandatory or directory in nature. The intention of the provisions contained in sub-section (4-A) is to encourage export and to give incentive to develop export business. Though, normally strict construction is advocated with reference to taxing provisions, the Apex Court has held that when exemptions are made with a beneficent object such as to give incentive to co-operative movement or for encouraging investment in new machinery or plant, such provisions have to be liberally construed. (See the decisions of the Apex Court in Commissioner of Income Tax. Lucknow v. U.P Co-operative Federation Ltd. ((1989) 1 SCC 747 : AIR 1989 SC 915) Gujarat Industrial Development Corporation v. Commissioner Of Income Tax ((1997) 7 SCC 17 : AIR 1997 SC 3275) and Commissioner of Income tax. Bangalore v. Shaan Finance (P) Ltd., Bangalore ((1998) 3 SCC 605 : AIR 1998 SC 1372). In view of the above legal position, we are inclined to hold that the requirement of filing the declaration alongwith the return of income contemplated under sub-section (4-A) of Section 80-HHC is only directory. The filing of the declaration to claim the benefit is no doubt, mandatory. But, the time of filing the declaration is directory in nature and it can be filed at any time before the completion of the assessment. Therefore, the questions of law framed for the decision of this Court are answered against the Revenue and in favour of the assessee. In other words, question Nos. 1 and 3 are answered in the affirmative and question No. 2 in the negative. Accordingly, the appeal fails and it is dismissed.

The Commissioner Of Income Tax v. G. Krishnan Nair

Case Summary — Judgment delivered by K. Balakrishnan Nair, J.

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Appellant (Revenue) — primary contentions

Respondent (Assessee) — primary contentions

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

The Commissioner Of Income Tax v. G. Krishnan Nair

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