Citation Codes

Equivalent Citations

citation codes

Case Number

Income-tax Reference No. 26 of 1990

Judges

Ajit K. Sengupta
Shyamal Kumar Sen, JJ.

Acts

section 12A and that the provisions of sub-sections (5) and (9) of section 139
(Income-tax Payers) Act, 1974 (38 of 1974).12.
section 256(2) of the Income-tax Act, 1961,
section 256(1) of the Income-tax Act, 1961,
sub-section (5) of section 139
provisions of sub-section (5)
FINANCE ACT 1988
INCOME TAX ACT

See more information ...

Smart Summary

Summary of the Opinion delivered by Ajit K. Sengupta, J. (with concurrence of Shyamal Kumar Sen, J.)

Factual and Procedural Background

This reference under section 256(1) of the Income-tax Act, 1961 concerns the assessment year 1984-85 and a registered charitable trust (the assessee).

Key factual and procedural events, as recorded in the opinion:

The assessee, a charitable trust registered with the Commissioner of Income-tax, filed a return for the assessment year 1984-85 in September 1984. The opinion contains two references to the date of filing the original return: one paragraph states the return was filed on September 17, 1984, while other paragraphs refer to the return filed on September 27, 1984. The opinion treats the return filed in September 1984 as the return under section 139(1).
The return declared a deficit (paragraph 2 records a deficit of Rs. 1,61,452) and was not accompanied by audited accounts and the audit report in Form No. 10B as required by section 12A of the Income-tax Act.
An audit report dated November 12, 1984 existed, and the audit report in the prescribed form was filed by the assessee on March 6, 1987, before completion of the assessment.
The Income-tax Officer (ITO), while completing the assessment (order dated March 31, 1987), refused to allow exemption under section 11 on the ground that the audit report in Form No. 10B was not filed "along with the return", and computed taxable income at Rs. 11,24,430.
The assessee appealed to the Commissioner of Income-tax (Appeals) (CIT(A)), contending that the audit report was filed before completion of assessment and that the defect should have been allowed to be rectified under section 139(9) or by revision under section 139(5). The CIT(A) upheld the denial of exemption on the basis that section 12A(b) was mandatory.
The assessee further appealed to the Income-tax Appellate Tribunal (Tribunal). The Tribunal held that filing the audit report on March 6, 1987 removed the omission/defect in the return and that no mala fides were alleged; it concluded the authorities below were not correct in denying exemption under section 11.
The following question was referred to the High Court: whether, having regard to sections 12A, 139(5), 139(9), 292B and the scheme of the Act, the Tribunal was right in law in holding that the lower authorities were not correct in denying exemption under section 11 for AY 1984-85.

Legal Issues Presented

Whether the Tribunal was right in law in holding that the lower authorities were incorrect in denying exemption under section 11 to the assessee for assessment year 1984-85, having regard to the provisions of sections 12A, 139(5), 139(9), 292B and the scheme of the Income-tax Act as a whole.
Whether the requirement in section 12A(b) that the auditor's report in Form No. 10B be furnished "along with the return" is mandatory (such that belated filing before completion of assessment cannot cure the defect) or directory (such that the audit report filed before completion of assessment can be accepted and the defect cured).
Whether the filing of the audit report on March 6, 1987 (before completion of assessment) could be treated as removal/rectification of an omission or wrong in the return either under section 139(5) (revised return) or under the rectification procedure contemplated by section 139(9), and whether the Assessing Officer had power to accept or condone such belated filing.

Arguments of the Parties

Assessee's Arguments

The audit report in Form No. 10B, though not filed with the original return, was filed before completion of the assessment (on March 6, 1987) and thereby cured the defect in the original return.
Such rectification falls within the scope of sections 139(5) and 139(9) of the Act — either as a revised return under section 139(5) or as rectification of a defective return under section 139(9).
The denial of exemption was a highly technical approach by the revenue; there was no mala fide or any case showing that delay defeated the object of the Act.
Even if not strictly within those sub-sections, the Income-tax Officer had power to condone the delay and accept the audit report filed before assessment completion.

Revenue's Arguments

The provisions of section 12A are mandatory: the audit report in Form No. 10B must be filed "along with the return" and absence thereof disentitles the trust to exemption under sections 11 and 12.
Filing the audit report on March 6, 1987 did not amount to furnishing a revised return under section 139(5) and the defect of not filing the audit report "along with the return" was not covered by section 139(9) as then in force.

Table of Precedents Cited

The opinion mentions a decision of the Gujarat High Court in a similar case and that the Department's special leave petition against that decision was dismissed by the Supreme Court on August 18, 1989. No specific case names or citations are provided in the opinion.

Precedent	Rule or Principle Cited For	Application by the Court
Unspecified Gujarat High Court decision (similar case); Special Leave Petition dismissed by the Supreme Court on August 18, 1989 (no case name provided)	Illustrative support for the proposition that belated filing of audit report in a similar case was not treated as disentitling the trust to exemption; indicates a judicial tendency to accept a non‑technical approach in such cases.	The Court noted the Tribunal's recording of this Gujarat High Court decision and the dismissal of the Department's SLP as corroborative of the Tribunal's approach; the High Court's handling was cited in support of the lenient construction adopted in the present case.

Court's Reasoning and Analysis

The court's analysis proceeded in a step-wise manner, applying statutory construction principles and examining related provisions of the Income-tax Act to determine whether denial of exemption was justified:

Recognition of the statutory condition: Section 12A requires that the accounts of a trust be audited and the auditor's report in Form No. 10B be furnished "along with the return" as a condition for sections 11 and 12 to apply. A literal reading would support the Revenue's position that non-filing of the report with the return is fatal.
Principle of construing "shall": The court explained that the term "shall" is not invariably mandatory; its construction depends on context, consequences, and legislative intent. A strict literal construction of section 12A was therefore not automatically appropriate.
Contextual examination of related provisions: The court considered sections 139(5) (revised return) and 139(9) (power to intimate and get defects rectified) and concluded these provisions show that the statute envisages the removal or rectification of omissions or wrong statements in a return during the assessment process.
Function of section 139(5): The court observed that had the assessee furnished a revised return within the time allowed by section 139(5) (attaching the audit report), the exemption could not have been denied. The court regarded the substantive effect of filing the audit report before completion of assessment as equivalent to curing the omission.
Scope of section 139(9) and its Explanation: Although the Explanation to section 139(9) enumerated certain defects (e.g., annexures, computation of tax, proofs of TDS/advance tax), the court held these illustrative rather than exhaustive. The subsequent amendment by the Finance Act, 1988 (introducing a clause requiring the return be accompanied by audit report under section 44AB) was cited to show the evolution and enlarging of the concept of rectifiable defects.
Assessing Officer's powers: The court held that the Assessing Officer possesses the power under section 143 and related provisions to ask the assessee to remove defects in the return (other than those that render the return invalid) and to accept material placed on record in the course of assessment to cure omissions.
Substance over form — purposive interpretation: The court emphasized that if the act of placing the audit report on record before completion of assessment achieves the object of the statute (accurate reflection of income and proper assessment), that act should not be negated merely because a formal revised return under section 139(5) was not filed. To ignore such filings would lead to absurd results and defeat legislative purpose.
Administrative guidance: The court relied on a Board circular dated February 9, 1978, which recognized that in cases of delay beyond the assessee's control, exemption should not be denied merely for late furnishing of the auditor's report, and directed that the ITO should record reasons for acceptance of a belated audit report. The court treated this as supportive of a non‑technical approach.
Absence of mala fide and lack of prejudice: The Tribunal had found, and the court accepted, that there was no allegation of mala fides and no case was made out that the delay defeated the object of the Act.
Conclusion from synthesis: On the combined reading of sections 12A, 139(5), 139(9), the Explanation to section 139(9) as it stood at the time, the later legislative amendment, and the Board circular, the court concluded that the Assessing Officer and the CIT(A) erred in taking a hyper‑technical approach and denying the exemption where the defect was cured by filing the audit report before completion of assessment.

Holding and Implications

Holding: The court answered the referred question in the affirmative and in favour of the assessee — it held that the Tribunal was right in law in concluding that the lower authorities were not correct in denying exemption under section 11 for the assessment year 1984-85.

Implications (direct effect):

The denial of exemption by the Income-tax Officer and the Commissioner of Income-tax (Appeals) was set aside with respect to the ground that the audit report was not filed "along with the return", because the defect was cured by filing the audit report before completion of the assessment.
The assessee's claim to exemption under section 11 for AY 1984-85 stands sustained by this decision; the Tribunal's holding was affirmed by the High Court.

The opinion does not, on its face, elaborate broader doctrinal consequences beyond the resolution of the reference; the court relied on statutory construction, the enabling provisions for revision and rectification (sections 139(5) and 139(9)), a Board circular, and the absence of prejudice to hold that a belated audit report filed before completion of assessment can cure the defect of non-filing "along with the return".

There will be no order as to costs (as recorded in the opinion).

Judgment delivered by Ajit K. Sengupta, J.; Shyamal Kumar Sen, J. concurred.

Show full summary ...

Commissioner Of Income-Tax v. Rai Bahadur Bissesswarlal Motilal Malwasie Trust.

The Judgment of the Court was delivered by

Ajit K. Sengupta, J.:— This reference under section 256(1) of the Income-tax Act, 1961, relates to the assessment year 1984-85.

2. The assessee, admittedly, is a charitable trust registered with the Commissioner of Income-tax. For the assessment year 1984-85, the assessee filed its return on September 17, 1984, declaring a deficit of Rs. 1,61,452. The return so filed was not accompanied by audited accounts and audit report in Form No. 10B as required under section 12A of the Act. The audit report dated November 12, 1984 was, however, filed by the assessee in the prescribed form on March 6, 1987, before the completion of the assessment. The Income-tax Officer, while completing the assessment, refused to allow the benefit of exemption under section 11 of the Act to the assessee on the ground that audit report in Form No. 10B was not filed “along with the return”. He computed the taxable income of the assessee at Rs. 11,24,430 as per assessment order dated March 31, 1987. Certain other objections raised by the Income-tax Officer are no more relevant as these were not upheld by the Commissioner of Income-tax (Appeals). Being aggrieved, the assessee challenged the above order before the Commissioner of Income-tax (Appeals) and contended that, as the audit report was filed before the completion of the assessment, there was sufficient compliance with the requirement of section 12A(b) of the Act. The assessee also contended that there was a defect in the return filed by the assessee and that, therefore, the Income-tax Officer should have allowed opportunity to the assessee to rectify the defect under section 139(9) of the Act. The Commissioner of Income-tax (Appeals) did not find force in the contentions raised by the assessee. According to him, the assessee violated the mandatory provisions of section 12A(b) of the Act and, therefore, was not entitled to exemption under section 11 of the Act. He ordered accordingly.

3. The assessee, ultimately, brought the issue before the Tribunal and contended that the authorities below refused to grant exemption to the assessee on highly technical grounds. It was contended that the original return filed on September 27, 1984, had a defect inasmuch as the audit report in Form No. 10B was not filed. The above defect was rectified by filing the audit report in the prescribed form before completion of the assessment and, therefore, in the light of the provisions of sections 139(5) and 139(9) of the Act, the assessee was entitled to exemption under section 11 of the Act. Even otherwise, the Income-tax Officer had powers to condone the delay. The Revenue, on the other hand, maintained that the provisions of section 12A were mandatory and as the assessee had not submitted the audit report along with the return, it was not entitled to the exemption. The Revenue also maintained that filing of the audit report on March 6, 1987, did not tantamount to revising the original return in terms of section 139(5) of the Act and that the defect in not filing the audit report “along with the return” was not covered under the provisions of section 139(9) of the Act.

4. The Tribunal held that the lower authorities took a highly technical view of the matter. The assessee, by filing the audit report on March 6, 1987, purporting to act under section 139(5) of the Act, removed the omission or defect which existed in the return furnished on September 17, 1984. No mala fides were alleged and no case was made out to show that the delay in getting the accounts audited and in filing the report in Form No. 10B defeated the object of the Act. Thus, in the circumstances of the case, the Tribunal concluded that the authorities below were not correct in denying exemption under section 11 of the Act to the assessee.

5. On these facts, the following question has been referred to this court:

“Whether, on the facts and in the circumstances of the case and having regard to the provisions of sections 12A, 139(5), 139(9), 292B and the scheme of the Income-tax Act as a whole, the Tribunal was right in law in holding that the lower authorities were not correct in denying exemption under section 11 to the assessee for the assessment year 1984-85?”

6. Admittedly, the assessee is a charitable trust and is registered with the Commissioner of Income-tax. It was not disputed that the assessee, for the past several years, was treated as a charitable institution and granted exemption under section 11 of the Act. The assessee has been denied the benefit of exemption under section 11 as the audit report in Form No. 10B was not filed along with the return and the filing of the said report later on March 6, 1987, did riot satisfy the condition stated in section 12A. The denial of the exemption is supported on the ground that the provisions of section 12A are mandatory. There is no doubt that section 12A specifically states that the provisions of sections 11 and 12 shall not apply in relation to income of any trust if conditions stated therein are not fulfilled and, in the conditions, it is provided that the accounts of the trust should be audited and the report of the auditor (in Form No. 10B) should be furnished “along with the return”. If section 12A is read in isolation and the rule of strict and literal construction is applied, the approach of the Revenue in this case has to be held as correct. But we see no justification for applying the rule of strict construction or for considering the provisions of section 12A in isolation.

7. Under certain circumstances, the expression “shall”, in its ordinary significance, is mandatory and the court shall,—ordinarily, give that interpretation to that term unless an inconvenient consequence follows or such interpretation is found to be at variance with the intent of the Legislature, to be collected from other parts of the Act. The construction of the said expression depends on the provisions of a particular Act, the setting in which the direction is given, the consequences that would flow from the infringement of the direction and such other considerations.

8. Having regard to the other provisions of the Act regarding filing of the return or revised return or rectifying the defects in the return, we are of the opinion that the provisions of section 12A are directory in the sense that the Assessing Officer is not powerless to allow an assessee to file the audit report, if not filed along with the return, any time before the completion of the assessment. One has to look at the purpose of the provisions. One has to construe the provision to ensure coherence and consistency to avoid undesirable consequences. Where the audit report was made ready after the return was filed, there was no reason why such audit report should not be allowed to be filed before the completion of the assessment. At this stage, we may also mention that the assessee made an application dated June 18, 1984, seeking extension of time up to September 30, 1984, as audit of relevant papers and statements was not completed and was likely to take more time. The said application was not rejected and it can safely be presumed that extension sought up to September 30, 1984, was granted. The return submitted on September 27, 1984, has to be treated as a return under section 139(1). On completion of audit, the assessee furnished the report in Form No. 10B on March 6, 1987, purporting to act under section 139(5) of the Act. By filing the said report, the assessee definitely removed an omission or defect existing in the return furnished on September 27, 1984. No mala fides have been alleged. No case has been made out that the delay in getting the accounts audited and in filing of the report in Form No. 10B defeated any object of the Act or the assessee's action was in substance not in conformity with the intent and purpose of the Act.

9. In our view, the income-tax authorities fell into error in denying the claim of exemption under section 11 of the Act. It was not disputed, as we have already indicated, that the assessee, for the past several years, was treated as a charitable institution and granted exemption under section 11 of the Act.

10. As we have said, the only ground on which the exemption was denied to the assessee-trust under section 11 of the Act is that the return was not accompanied by the audit report. Section 139(5) of the Act provides that, if any person, having furnished a return, discovers any omission or any wrong statement therein, he may furnish a revised return at any time before the expiry of one year from the end of the relevant assessment year or before the completion of the assessment, whichever is earlier. The assessee in this case could have filed a revised return annexing a copy of the audit report. Had the assessee-trust done so, the exemption under section 11 of the Act could not have been denied to it by the Income-tax Officer.

11. Section 139(9) of the Act is also relevant in this context. It provides that, where the Assessing Officer considers that the return of income furnished by the assessee is defective, he may intimate the defect to the assessee giving him an opportunity to rectify the defect within a period of 15 days from the date of such intimation or within such further period which, on an application made in this behalf, the Assessing Officer may, in his discretion, allow and if the defect is not rectified within the said period of 15 days or, as the case may be, the further period so allowed, then, notwithstanding anything contained in any other provision of this Act, the return shall be treated as an invalid return and the provisions of this Act shall apply as if the assessee had failed to furnish the return.

Explanation to section 139(9), as it stood at the material time, inter alia, provided as follows:

“Explanation.— For the purposes of this sub-section, a return of income shall be regarded as defective unless all the following conditions are fulfilled, namely:

(a) the annexures, statements and columns in the return of income relating to computation of income chargeable under each head of income, computation of gross total income and total income have been duly filled in;

(b) the return is accompanied by a statement showing the computation of the tax payable on the basis of the return;

(i) the tax, if any, claimed to have been deducted at source and the advance tax and tax on self-assessment, if any, claimed to have been paid;

(ii) the amount of compulsory deposit, if any, claimed to have been made under the Compulsory Deposit Scheme (Income-tax Payers) Act, 1974 (38 of 1974)”.

12. It was contended that the provisions of sub-section (5) were not applicable as the assessee did not furnish the report in Form No. 10B on March 6, 1987, with a revised return and non-filing of the above audit report was not a defect covered under the categories specified in the Explanation to section 139(9). This approach again disregarded the intent and purpose of the provisions and the scheme of the enactment as a whole. In our opinion, the defects specified in section 139(9) are only illustrative and not exhaustive. This fact will be apparent from the amendment made by the Finance Act, 1988, with effect from April 1, 1989, whereby clause (bb) was inserted which reads as follows:

“the return is accompanied by the report of the audit obtained under section 44AB.”

13. Of course, the Assessing Officer cannot ignore the specified defects and must get them rectified but to contend that only the defects specified can be got rectified and no other defects would be putting unnecessary restrictions on the power of the Assessing Officer leading to inconvenient consequences and absurd results not intended by the Legislature. We do not see any such fetters on the powers of the Assessing Officer under section 143. The Assessing Officer has power to ask the assessee to remove all defects in the return other than the defects making the return invalid.

14. The view of the lower authorities that the audit report submitted on March 6, 1987, not being filed with the revised return did not satisfy the condition in section 12A and that the provisions of sub-sections (5) and (9) of section 139 were not applicable cannot be sustained. The object of both the sub-sections, in our view, is to get removed and rectified all defects and omissions in the return filed, whether discovered by the assessee or by the Assessing Officer. Both the provisions are enabling provisions inserted to facilitate reflection of correct income in the return and assessment thereof. These provisions can be simultaneously applied. Take for illustration the case of an assessee submitting a valid return but without proof of tax deducted at source which, for several reasons, was not available at the time of submission of the return. The said proof is later given to the Assessing Officer and is placed on record. It would be absurd to contend that credit for tax deducted would be given if the proof was asked for by the Assessing Officer in terms of section 139(9) but not in a case where the assessee had placed the proof without filing a revised return under section 139(9). This would defeat the intent and purpose of the enactment. If the object of sub-section (5) of section 139 is to rectify a wrong or omission in the return, then any act through which such rectification is carried can be treated as revising the return if, in substance and in effect, the purpose of the Act is achieved and is not defeated. Thus, documents placed on record with or without covering letters with the intention to remove any omission or wrong in the return or record cannot be ignored simply because the revised return was not furnished unless it is shown that the purpose of the Act is not satisfied.

15. In our view, therefore, the Assessing Officer ought to have given the assessee an opportunity to submit the audit report as the return was defective inasmuch as the audit report was not filed along with the return. In this case, as we have already noticed, the said defect was rectified by the assessee by filing an audit report in the prescribed form before the completion of the assessment. The income-tax authorities took a hyper-technical view of this matter. Where the assessee has complied with the provisions of the Act in the course of the assessment proceedings by curing the defect in the return by filing an audit report, the Income-tax Officer cannot ignore such audit report or the return in completing the assessment.

16. In our judgment, both the Income-tax Officer and the Commissioner of Income-tax (Appeals) misconstrued the provisions of the Act in holding that the assessee could not file the audit report after the return had been filed before the completion of the assessment. In this connection, our attention has been drawn to a circular of the Board dated February 9, 1978, which provides as follows:

“Charitable trust-Requirement of filing audit report in Form 10B-Section 12A(b)-Instructions regarding.— The Board have considered whether the requirement under section 12A(b) of filing audit report ‘along with the return of income’ is mandatory so as to disentitle the trust from claiming exemption under sections 11 and 12 in case of omission to furnish such report in the prescribed form along with the return.

Normally, it should be possible for a charitable or religious trust or institution to file the auditor's report along with the return of total income, where such trust or institution claims exemption under sections 11 and 12. However, in cases where for reasons beyond the control of the assessee some delay has occurred in filing the said report the exemption as available to such trust under sections 11 and 12 may not be denied merely on account of delay in furnishing the auditor's report and the Income-tax Officer should record reasons for accepting a belated audit report.

(1/1148-CBDT F. No. 267/482/77-IT (Part) dated February 9, 1978-CBDT Bulletin Tech. XXIII/582.)”.

17. We may also take note of the fact which has been recorded by the Tribunal that the Gujarat High Court, in a similar case, declined to call for a reference under section 256(2) of the Income-tax Act, 1961, against the decision of the Tribunal. The Department moved the Supreme Court by a special leave petition which was dismissed on August 18, 1989.

18. For the foregoing reasons, we answer the question in this reference in the affirmative and in favour of the assessee. There will be no order as to costs.

Shyamal Kumar Sen, J.:— I agree.

Commissioner Of Income-Tax v. Rai Bahadur Bissesswarlal Motilal Malwasie Trust.

Summary of the Opinion delivered by Ajit K. Sengupta, J. (with concurrence of Shyamal Kumar Sen, J.)

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Assessee's Arguments

Revenue's Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Commissioner Of Income-Tax v. Rai Bahadur Bissesswarlal Motilal Malwasie Trust.

Comments