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Citation Codes
Equivalent Citations
citation codes
Case Number
Judges
  • Ajoy Nath Ray
  • Maharaj Sinha, JJ.
Acts
  • Rule 5AB of the Income Tax Rules, 1962,
  • SECTION 139 INCOME TAX ACT
  • provision of the Income Tax Act
  • INCOME TAX ACT
  • sub-section (9) of section 139
  • sub-section (2) of section 288,
  • section 139, sub-section (1),
  • sub-section (1)(ii),
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Cites
Cited by
Citation Codes
Equivalent Citations
citation codes
Case Number
Judges
  • Ajoy Nath Ray
  • Maharaj Sinha, JJ.
Acts
  • Rule 5AB of the Income Tax Rules, 1962,
  • SECTION 139 INCOME TAX ACT
  • provision of the Income Tax Act
  • INCOME TAX ACT
  • sub-section (9) of section 139
  • sub-section (2) of section 288,
  • section 139, sub-section (1),
  • sub-section (1)(ii),
See more information ...
Smart Summary

Structured Summary of the Opinion

Factual and Procedural Background

This is a tax reference originally referred by the Tribunal through the intervention of the High Court. Three questions were referred to the court, all relating to the assessment year 1988-89. The three referred questions asked whether (1) the Tribunal was justified in allowing Rs. 8,29,723 as revenue expenditure, (2) the Tribunal was justified in allowing a claim of Rs. 36.77 lakhs under section 32AB and Rs. 1,28,960 under section 80HHC of the Income Tax Act, 1961, and (3) the Tribunal was justified in deleting an addition of Rs. 35.11 lakhs made to the value of closing stock and whether the findings leading to that conclusion were unreasonable and perverse.

Material factual details stated in the opinion include that the Rs. 8,29,723 related to advertisement expenditure incurred by the assessee for two new brand products (New Luxor and Rangoli). The assessee had not treated this sum as revenue expenditure in its books but, in assessment proceedings, claimed it to be wholly revenue in nature. With respect to the second question, the assessee sought deductions under section 32AB (20% of profits as computed in audited accounts) and section 80HHC; the issue arose because the auditor's report required by sub-section (5) of section 32AB (and the analogous requirement under section 80HHC) was not filed on the same date as the return of income. The third question concerned deletion by the Tribunal of an addition of Rs. 35.11 lakhs to closing stock valuation, the sum representing Modvat/excise credit.

Legal Issues Presented

  1. Whether the Tribunal was justified in law in allowing Rs. 8,29,723 as revenue expenditure (advertisement expenditure) for the assessment year 1988-89.
  2. Whether the Tribunal was justified in law in allowing a claim of Rs. 36.77 lakhs under section 32AB and Rs. 1,28,960 under section 80HHC of the Income Tax Act, 1961, when the requisite auditor's/accountant's report was not filed along with the return on the same date.
  3. Whether the Tribunal was justified in deleting the addition of Rs. 35.11 lakhs made to the value of closing stock (representing Modvat/excise credit) and whether the Tribunal's findings were unreasonable and perverse.

Arguments of the Parties

Assessee's Arguments

  • The assessee contended that the advertisement expenditure of Rs. 8,29,723 was wholly of a revenue nature and was properly allowable as revenue expenditure, notwithstanding the fact that the assessee's books had not consistently treated it as such.
  • The assessee asserted that it was not bound by the historical accounting treatment in its own books and maintained its legal right to treat the expenditure as revenue for tax purposes.
  • For the claims under section 32AB and section 80HHC, the assessee produced the necessary auditor/accountant reports (forms) though not filed on the same date as the return; the assessee relied on the contention that the timing requirement should be treated as directory rather than mandatory so long as the report was available by the time of assessment.
  • With respect to the valuation of closing stock, the assessee (and the Tribunal) treated the Modvat/excise credit element (Rs. 35.11 lakhs) as not required to be added to stock value because the excise element would be available as credit to the businessman/assessee.

Revenue's Arguments

  • The revenue's case was that because the auditor's report (Form No. 3AA as prescribed by Rule 5AB) was tendered at a date much later than the filing of the return, the assessee lost the right to claim the deduction under section 32AB.
  • For the issue under section 80HHC the revenue relied on the express language that the report must be furnished "along with" the return, contending that late submission disentitled the assessee to the deduction.
  • Mr. Agarwalla (who argued that the third question should be answered in favour of the revenue) advanced an argument invoking section 145A of the Income Tax Act, contending (as put before the court) that the provision was declaratory of the law; the court recorded that it could not agree with that characterization and noted that this argument had not been advanced before the Tribunal.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Kedarnath Jute Mfg. Co. Ltd. v. CIT (1971) 82 ITR 363 (SC) Principle that the treatment given by an assessee in its books of account does not self-estop the assessee from claiming a different legal treatment under the revenue laws. The court relied on the passage at page 367 of this decision to answer Question 1 in favour of the assessee, holding that the assessee was entitled to treat the advertisement expenditure as revenue expenditure despite the book treatment.
CIT v. India Discount Co. Ltd. (1970) 75 ITR 191 (SC) Same principle as above regarding treatment in books not being determinative of tax entitlement. The court relied on the passage at page 195 to support the conclusion on Question 1 that the assessee could treat the advertisement expenditure as revenue expenditure irrespective of book treatment.
CIT v. Hardeodas Agarwalla Trust (1992) 198 ITR 511 (Cal) Held that an auditor's certificate required to claim benefits by a trust (language similar to sub-section (5) of section 32AB) is directory rather than mandatory; the statutory purpose is met if the auditor's report is available at the time of assessment. The court cited and relied on this Division Bench decision in holding that the words "shall not be admissible" in sub-section (5) of section 32AB are directory with respect to timing; the decision supported permitting the assessee to furnish the auditor's report after the date of filing the return but before assessment.
Himachal Pradesh State Forest Corporation Ltd. v. Dy. CIT (1998) 231 ITR 556 (HP) Decision dealing with section 139 on filing of return; in that case the Deputy Commissioner held the return invalid because correct accounts were not filed even after opportunity. The court considered this case but held it could not aid the revenue here, distinguishing it on the facts and on the statutory scheme: section 139 contains specific provisions regarding defective/invalid returns which are not to be transposed to interpret sub-section (5) of section 32AB more stringently.
Collector of Central Excise v. Dai Ichi Karkaria Ltd., AIR 1999 SC 3234 Supreme Court passage (paragraph 24) giving a model for valuation of input stock: if purchase price includes an excise element recoverable as credit, the valuation of stock can exclude that excise element. The court applied this rule to Question 3, equating the Rs. 35.11 lakhs to the excise element and holding that the assessee was justified in valuing input stock excluding that sum; accordingly the Tribunal's deletion of the addition was upheld.

Court's Reasoning and Analysis

The court addressed each referred question in sequence and anchored its reasoning on statutory language, rules, and cited precedents. The court consistently emphasized interpretation of statutory wording and the purpose behind documentary requirements.

Question 1 (Advertisement expenditure Rs. 8,29,723)

The court examined the facts that the expenditure related to two new brand products (New Luxor and Rangoli) and that the assessee had not treated the amount as revenue expenditure in its books. Relying on two Supreme Court decisions (Kedarnath Jute and India Discount), the court stated the settled law that an assessee's legal entitlement to treat a sum as revenue expenditure is not self-estopped by the accounting treatment in the assessee's own books. The court also noted the commercial characteristic of advertisement expenditure — that advertisement generally produces recurring year-to-year benefit because market memory is short — supporting treatment of such expenses as revenue rather than capital. On these bases, the court answered Question 1 in favour of the assessee.

Question 2 (Claims under section 32AB and section 80HHC)

The court parsed the statutory language. Section 32AB sub-section (1)(ii) permitted a deduction computed in the audited accounts "as computed in the accounts of the assessee audited in accordance with subsection (5)". Sub-section (5) states that the deduction "shall not be admissible unless the accounts ... have been audited ... 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." Rule 5AB requires the auditor to support the claim in Form No. 3AA.

The factual point was that the auditor's report was not filed on the same date as the return. The revenue contended that late filing deprived the assessee of the benefit. The court considered precedent (CIT v. Hardeodas Agarwalla Trust) which interpreted similar statutory wording as directory: the requirement's purpose is to secure verification of an accounting position, and that purpose would be served if the auditor's report is available at the time of assessment even if not filed on the return-filing date. The court distinguished a Himachal Pradesh decision concerning section 139 (which dealt with defective/invalid returns where core accounts were not filed) and observed that section 139's specific machinery for defective/invalid returns should not be pressed into service to make sub-section (5) of section 32AB more stringent.

The court further compared wording in different provisions: the Explanation to sub-section (9) of section 139 uses the phrase "accompanied by" (indicative of filing on the same day), whereas sub-section (5) of section 32AB uses "along with", which the court regarded as less strong on timing. Based on these textual and purposive considerations, the court held that the timing requirement in sub-section (5) is directory rather than mandatory as regards the date of furnishing; the mandatory element (existence of the auditor's report) is preserved by sub-section (1)(ii) itself. For section 80HHC, which employs similar language in sub-section (4), the court took the same view and noted that statutory rules (rule 18BBA and Form No.10CCAC) preserve the requirement of producing the accountant's report, while allowing its submission after the return-filing date but before assessment. Because the assessee produced the necessary reports in time for assessment, both parts of Question 2 were answered in favour of the assessee.

Question 3 (Deletion of Rs. 35.11 lakhs from closing stock)

The revenue (Mr. Agarwalla) urged an argument invoking section 145A, contending it was declaratory; the court rejected the characterization that section 145A is declaratory of the law and observed that amendments to the Income Tax Act normally reflect express legislative change rather than mere declaration of existing law. The court did not consider that argument persuasive (and noted it was not advanced before the Tribunal). Instead, the court referred to the Supreme Court decision in Collector of Central Excise v. Dai Ichi Karkaria Ltd. (AIR 1999 SC 3234), which in paragraph 24 provided a model for valuing input stock by excluding the excise element when that element will be available as credit to the businessman. Applying that reasoning, the court regarded the Rs. 35.11 lakhs as equivalent to the excise element that ought to be excluded from stock valuation; accordingly the Tribunal's deletion of the addition was upheld and Question 3 was answered in favour of the assessee.

Holding and Implications

Holding: All three referred questions were answered in the affirmative and in favour of the assessee. The court's core rulings are summarized as follows:

  • Question 1: The Tribunal was justified in allowing Rs. 8,29,723 as revenue expenditure (advertisement) — the assessee could treat the expenditure as revenue despite its books.
  • Question 2: The Tribunal was justified in allowing the claim of Rs. 36.77 lakhs under section 32AB and Rs. 1,28,960 under section 80HHC because the statutory requirement to furnish the auditor/accountant's report "along with" the return is directory as to timing; the essential mandatory requirement is the existence of the report and its availability by assessment.
  • Question 3: The Tribunal was justified in deleting the addition of Rs. 35.11 lakhs to the value of closing stock; the excise/Modvat element represented a credit and need not be included in valuation (as per the Supreme Court model in Dai Ichi Karkaria).

Implications:

  • Direct effect on the parties: the assessee's claims were allowed — the specified advertisement expenditure was permitted as revenue deduction; the section 32AB and section 80HHC deductions were sustained despite late filing of the auditor/accountant report so long as the report existed and was produced for assessment; the addition of Rs. 35.11 lakhs to closing stock valuation was properly deleted.
  • On statutory interpretation: the opinion treats timing requirements framed as "along with the return" in sub-section (5) of section 32AB and sub-section (4) of section 80HHC as directory rather than strictly mandatory with respect to the date of filing, while preserving the mandatory requirement that the relevant auditor/accountant's report must exist and be produced by assessment.
  • The court applied existing precedents to resolve the issues; the opinion does not state that it establishes a novel precedent beyond its application of those authorities.

Administrative note recorded in the opinion: all parties and others concerned were permitted to act on a signed xerox copy of the dictated order on the usual undertakings. The order was pronounced "open."

Show full summary ...

    Commissioner Of Income-Tax v. Berger Paints (India) Ltd. (No. 2)

    This is a tax reference which the revenue got referred by the Tribunal through the intervention of the High Court. Three questions have been referred to us, all for the assessment year 1988-89 and those three questions are as follows :

    "1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in allowing a sum of Rs. 8,29,723 as revenue expenditure ?

    2. Whether, the Tribunal was justified in law in allowing the claim of Rs. 36.77 lakhs under section 32AB and Rs. 1,28,960 under section 80HHC of the Income Tax Act, 1961 ?

    3. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in deleting the addition of Rs. 35.11 lakhs, made to the value of closing stock and whether the findings leading to the conclusion are otherwise unreasonable and perverse ?"

    2. So far as the first question is concerned, the facts found by the Tribunal are that in regard to two new brand products of the assessee, viz., New Luxor and Rangoli, the assessee incurred advertisement expenditure for the accounting year in question for the aggregate sum of Rs. 8,29,723. This expenditure, needless to say, did not constitute the entirety of the advertisement expense of the assessee for the year in question, but it is only with regard to this amount that the disputes have arisen before us.

    3. The assessee had admittedly not treated this sum as revenue expenditure in its books of account consistently. However, in the assessment proceedings, the assessee took the firm stand that this advertisement expense was wholly of a revenue nature and that they were not bound by the treatment given to these expenses in their own accounts even by their own accountants.

    4. Having considered the two Supreme Court cases of Kedarnath Jute Mfg. Co. Ltd. v. CIT (1971) 82 ITR 363 (SC) and CIT v. India Discount Co. Ltd. (1970) 75 ITR 191 (SC), we are of the opinion that the first question has to be answered in favour of the assessee. The relevant passages are at pages 367 and 195, respectively.

    5. It is now settled law that if according to the revenue laws the assessee is entitled to treat a sum as a revenue expenditure, then that legal right of the assessee is not self-estopped by the treatment given by the assessee to it in its own books of account.

    6. It is also the settled law that an advertisement expense of the nature in question here cannot compulsorily be made to be treated by the assessee as a long-term capital expenditure. On the other hand, advertisement expenses are normally to be treated as revenue expenditure since the memory of the purchasing market is short and advertisement is needed from year-to-year and cannot be made once for all in any single particular year.

    7. As regards the second question we have to point out that it is really two questions in one. The first part of the second question deals with section 32AB and is concerned with allowance of the assessee's claim of Rs. 36.77 lakhs under it. Under the said section, as per sub-section (1)(ii), a sum equal to 20 per cent of the profits of the assessee's business can be claimed "as computed in the accounts of the assessee audited in accordance with subsection (5)".

    8. The said sub-section (5) reads as follows :

    "The deduction under sub-section (1) shall not be admissible unless the accounts of the business or profession of the assessee for the previous year relevant to the assessment year for which the deduction is claimed have been audited by an accountant as defined in the Explanation below sub-section (2) of section 288 and the assessee furnishes, along with his return of income, the report of such audit in the prescribed form duly signed and verified by such accountant :

    Provided that in a case where the assessee is required by or under any other law to get his accounts audited, it shall be sufficient compliance with the provisions of this sub-section if such assessee gets the accounts of such business or profession audited under such law and furnishes the report of the audit as required under such other law and a further report in the form prescribed under this sub-section."

    9. In the instant case the auditing of the assessee's claim and accounts is not in dispute, but the assessee did not file on the same date as his return of income the report of such audit in the prescribed form as required above.

    10. Rule 5AB of the Income Tax Rules, 1962, prescribes that the auditor must support the assessee's claim in Form No. 3AA as given in the said Rules.

    11. The case of the revenue is that since this form from the auditor was tendered by the assessee at a date much later than the filing of the return, the assessee lost its right of claiming the benefit.

    12. Dr. Pal referred to several cases, although, not all were permitted to be cited by him before us. Of the cases he cited, we make mention of the case of CIT v. Hardeodas Agarwalla Trust, a Division Bench judgment of our High Court, reported at (1992) 198 ITR 511 (Cal).

    13. The court was there concerned with the auditor's certificate necessary for claiming of benefits by a trust. The language employed in another part of the Income Tax Act (see sections 11 and 12) also states like in sub-section (5) above that the assessee must furnish the auditor's report along with his return.

    14. The court held that notwithstanding the apparently mandatory words of such requirement, the requirement is in actuality a directory requirement only. The purpose of the statute is to verify the unimpeachable authenticity of a particular accounting position ; that purpose is sufficiently served if the auditor's report is available at the time of assessment. The purpose would not be served but would be defeated if even in the case of genuine assessees their claims were thrown out because the auditor's report was simply not available at the time the last date of the filing of the return had arrived.

    15. We are of the opinion that the words "shall not be admissible" occurring in sub-section (5) of section 32ab are also directory and not mandatory in nature. No doubt, if the auditor's report is not available at all, a claim for deduction cannot be made by the assessee but for achievement of this, it is not necessary to interpret the above phrase as mandatory with regard to the part of the existence of the auditor's report and only directory with regard to the part containing the time of furnishing of the report.

    The existence of the auditor's report is already mandatory under subsection (1)(ii) of section 32AB.

    Thus, the interpretation of the said phrase occurring in sub-section (5), as a directory one does not do away with the compulsory requirement of producing the auditor's report for assessment and deduction.

    Mr. Agarwalla relied on a judgment of the Himachal Pradesh High Court in the case of Himachal Pradesh State Forest Corporation Ltd. v, Dy. CIT (1998) 231 ITR 556 (HP).

    16. That case dealt with section 139 of the Income Tax Act. That is the section for the filing of the return itself. The Deputy Commissioner had ordered in that case that the assessee's return was invalid. This was done because a proper and correct manufacturing account, trading account, profit and loss account and balance-sheet were not filed by the assessee even after giving of sufficient opportunity to it.

    17. In our opinion, that case cannot help the revenue in this matter. Moreover, in considering the language of section 139 and specially the part of it appearing in sub-section (9) and the Explanation thereto, the following points emerge as relevant and important. In the Explanation to sub-section (9), unless the conditions specified therein are fulfilled, the return of income is to be regarded as "defective".

    In sub-section (9) itself, when the defect is not rectified by the assessee even after giving of time, the assessee's return shall be treated as "invalid" and it will be as if the assessee had filed no return at all.

    18. We find, therefore, that even in the case of the return itself, the documents and papers which should accompany it, do not cause its utter and complete failure from the very inception, even if those are not annexed with the return. A chance is always given to the assessee to put the matter right before the assessment. In our opinion, we should not interpret sub-section (5) of section 32ab in a manner even more stringent than the requirement of the filing of the return itself.

    19. Furthermore in the body of section 139, sub-section (1), the return of income an assessee has to "furnish" ; the same word "furnish" is used in sub-section (5) of section 32ab. But, in Explanation (b) to sub-section (9) of section 139 a requirement for a non-defective return is that the return is "accompanied by" a statement showing the computation of the tax. We note that in sub-section (5) the same words "accompanied by" are not used but only the words "along with" are used. We are of the opinion that the phrase "accompanied by" is more strongly indicative of a requirement of filing on the same day as the return itself than the words "along with". On this ground also we would opine in favour of the assessee.

    20. The second part of the second question deals with the entitlement under section 80HHC ; in fact only sub-section (4) of that section need be considered by us. The said sub-section is set out below:

    "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."

    21. The language employed here is similar to the language of sub-section (5) of section 32ab. The word "shall" is used here also; and the same phrase, i.e., furnishing along with the return of income, is also employed here. We do not see any particular reason to take a different view in regard to this sub-section than the view we have already taken in regard to sub-section (5) of section 32ab. We note that the compulsory requirement of producing the accountant's report at all, as per rule 18BBA and Form No. 10CCAC of the Income Tax Rules and Forms appended, thereto is sufficiently preserved by the Explanation below sub-section (2) of section 288. This report of the accountant has to come, as per the said section and the said Explanation. Our interpretation merely permits the assessee to produce the said report even after the date of the filing of the -return as passed ; it does not wholly do away with the requirement of filing the report altogether.

    The assessee having produced the necessary reports at the necessity time, the second question and both parts of it again get answered in favour of the assessee.

    22. As regards the third question, Mr. Agarwalla tried to argue before us that this question should be answered in favour of the revenue because of the provisions of section 145A. Faced with the situation that the said section have been introduced only in 1999 to have effect from the year 2001, Mr. Agarwalla argued that the section is declaratory of the law and did not introduce any new provision. With due respect we are wholly unable to agree. It rarely happens that a provision of the Income Tax Act is declaratory of the law. This Act is one of the most categoric branches of law and its changes are mostly to be gathered from the express words employed to further the current fiscal policy of the Government.

    This new argument of Mr. Agarwalla was not advanced before the Tribunal also.

    The Tribunal opined that in regard to the valuation of the (input) stock of the assessee, the assessee could not be compelled to add Rs. 35.11 lakhs which represented the Modvat excise credit.

    23. In regard to this question we need say no more, than refer to the case of Collector of Central Excise v. Dai Ichi Karkaria Ltd., a decision of the Supreme Court reported at AIR 1999 SC 3234. The court gave in paragraph 24 of its judgment a model wherein it clearly opined that as to the input stock the businessman, the assessee was clearly justified in taking the view that if Rs. 100 is the purchase price of the raw material and Rs. 10 is the excise element then Rs. 90 is the valuation. This is because the ten rupees the businessman will get a credit at the end. In our case the sum of Rs. 35.11 lakhs referred to in question No. 3 is the ten rupees referred to by the Supreme Court in paragraph 24 above.

    Thus, the third question also goes in favour of the assessee.

    As such all the questions are answered in the affirmative and in favour of the assessee.

    24. All parties and all others concerned to act on a signed xerox copy of this dictated order on the usual undertakings.

    OPEN

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    Comments

    Commissioner Of Income-Tax v. Berger Paints (India) Ltd. (No. 2)
    (Feb 13, 2002)