- Bookmark
- Share
- CaseIQ
Commissioner Of Income-Tax v. Magnum Export (P) Ltd.
Structured Summary of the Opinion
Factual and Procedural Background
The Court considered a referral under section 256(1) of the Income-tax Act, 1961, comprising four questions concerning tax treatment of Rs. 7,25,854 received by the assessee on the sale/transfer of an export licence granted under the Export Control Order, 1977. The issues referred address whether the sale proceeds were a capital receipt exempt from income-tax, whether section 28(iiia) applied, whether the export licence had a cost of acquisition for capital gains purposes, and whether the assessee was entitled to deduction under section 80HHC despite filing the audit report in Form No. 10CC-AC only before the Tribunal. The Tribunal had earlier made findings favourable to the assessee; the Revenue referred questions to this court.
Legal Issues Presented
- Whether the sale proceeds (Rs. 7,25,854) received on sale of the export licence represented capital receipt and were exempt from income-tax?
- Whether the provisions of section 28(iiia) were applicable to the receipt from sale of the export licence?
- If the above are answered in the affirmative, whether the Tribunal was right in holding that the export licence had no cost of acquisition and the sale proceeds were not liable to capital gains tax?
- Whether the assessee was entitled to deduction under section 80HHC despite filing the audit report (Form No. 10CC-AC) only before the Tribunal and not along with the return?
Arguments of the Parties
Revenue's Arguments (as represented in the opinion)
- With respect to Question No. 2, the Revenue initially argued applicability of section 28(iiia), but conceded that section 28(iiia) has no application because it relates to licences under the Imports (Control) Order, 1955, while the receipt here arises from an export licence under the Export Control Order, 1977.
- For Question No. 1, Revenue contended the receipt on transfer of the licence was an income to be included under section 10(3) in excess of Rs. 5,000; since it was income it should be included in total income and taxed.
- With respect to Question No. 4, Revenue submitted that the audit report required by section 80HHC(4) is mandatory to be filed along with the return and, if not filed with the return, the claim for deduction cannot be allowed. Revenue further argued any such audit report must be filed before completion of assessment (relying on section 139(5) and time limits).
Assessee's Arguments (as represented in the opinion)
- Regarding Question No. 1, the assessee contended section 10(3) is not a charging provision but an exemption; the receipt on transfer of a licence is a capital receipt because the licence is a "capital asset" under section 2(14). The sale proceeds are therefore capital receipt and not income under section 2(24); alternatively, the receipt is not a casual/non-recurring income within section 10(3).
- The assessee further argued that if a capital receipt cannot be computed under section 45 read with computation provisions (including determination of cost of acquisition), it cannot be charged under another head (e.g., "Income from other sources").
- On Question No. 4, the assessee contended that sub-section (4) of section 80HHC is directory as to filing the audit report along with the return (i.e., the timing) and that the report is a procedural support to the claim rather than the foundational condition; therefore filing before the Tribunal should be permissible.
- The assessee also relied on precedents (cited in the opinion) holding that filing of prescribed audit reports "along with the return" is directory and not fatal if filed later (subject to the particular context and nature of the evidence to be authenticated).
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| B.K. Roy Pvt. Ltd. v. CIT, [1995] 211 ITR 500 (Cal) | Principle that if a particular income chargeable under one head cannot be computed and charged under that head, it cannot be charged under any other head. | The court relied on this decision to support the conclusion that the receipt could not be recharacterised under another head when it could not be taxed as capital gains under section 45/section 55 computation. |
| CIT v. B.K. Roy Pvt. Ltd., [2001] 248 ITR 245 (Cal) | Affirmation of the principle in B.K. Roy Pvt. Ltd. (as cited). | Mentioned as an affirmation of the principle relied upon in the court's reasoning about head-specific charging rules. |
| Commissioner of Income-Tax v. General Industrial Society Ltd., [2003] 262 ITR 1 (Cal) | Held that receipt on transfer of a licence (capital asset) could not be brought within capital gains when cost of acquisition was unascertainable; addresses computation under sections 45 and 55. | The court treated this decision as directly on point and followed it to conclude that the sale proceeds could not be taxed as capital gains because cost of acquisition was unascertainable. |
| Commissioner of Income Tax, Madras v. The Ajax Products Limited, [1965] 55 ITR 741 (SC) | Authority cited among earlier decisions on charging income under proper heads and related principles. | Cited as supporting precedent in the court's cluster of authorities establishing the head-specific charging principle. |
| Commissioner of Income-Tax v. Justice R.M. Datta, [1989] 180 ITR 86 (Cal) | Authority cited in relation to principles about charging income under proper heads. | Followed among the authorities relied on to support the court's legal proposition about head-specific charging and computation. |
| Nalinikant Ambalal Mody v. S.A.L. Narayan Row, CIT, [1966] 61 ITR 428 (SC) | Ratio regarding the correct head under which receipts must be charged (as cited). | Followed as foundational Supreme Court authority underpinning the court's approach to classification and charging of receipts. |
| Cadell Weaving Mill Co. Pvt. Ltd. v. CIT, [2001] 249 ITR 265 (Bom) | Authority cited by the assessee to buttress the conclusion reached in General Industrial Society Ltd. | Cited by the court as further support for its conclusion on non-chargeability of the sale proceeds as taxable income/capital gains when cost cannot be ascertained. |
| CIT v. B.C. Srinivasa Setty, [1981] 128 ITR 294 (SC) | Authority cited in support of the court's conclusions (context: charging under proper head). | Cited as part of the body of authority relied upon in reasoning about head-specific taxation. |
| CIT v. Shivanand Electronics, [1994] 209 ITR 63 (Bom) | Held that filing an audit report "along with the return" is not mandatory in the sense that failure to file with the return may be remedied if filed subsequently before completion of assessment; treats timing requirement as directory in context of section 80J(6A). | Adopted as persuasive authority for the proposition that the timing requirement for filing audit reports may be directory rather than mandatory; used in analysis of section 80HHC(4). |
| CIT v. Punjab Financial Corporation, [2002] 254 ITR 6 (P&H) | Held filing of audit report under section 32AB(1), (5) with the return is not mandatory; statutory time limits and context determine mandatory/directory nature. | Relied on to support the court's construction that whether filing is mandatory depends on legislative intent and context; used in analyzing section 80HHC(4). |
| Commissioner of Income-Tax v. Jayant Patel, [2001] 248 ITR 199 | Dealt with section 80J(6A) and held similarly that audit report filing requirement is directory; may be filed even at appellate stage (as cited). | Referred to as part of consistent judicial approach treating timing of audit report filing as directory in appropriate contexts. |
| CIT v. Shahzedanand Charity Trust, [1997] 228 ITR 292 (P&H) | Held filing of audit report along with the return under section 12A(b) is directory and not mandatory. | Used to buttress the court's conclusion that timing may be directory and substantial compliance suffices in the relevant statutory context. |
| Zenith Processing Mills v. CIT, [1996] 219 ITR 721 (Guj) | Held filing of the audit report along with the return is directory and falls within procedural requirements for furnishing evidence in support of a claim. | Used to support the court's view that the requirement to file the audit report "along with the return" is procedural and may be satisfied later under certain circumstances. |
| Commissioner of Income-Tax v. Rai Bahadur Bissesswarlal Motilal Malwasie Trust, [1992] 195 ITR 825 | Held filing of audit/reporting documents along with the return is directory in relation to sections 11 and 12A. | Adopted as part of the jurisprudence that timing requirements may be directory; cited in construing section 80HHC(4). |
| Murali Export House & Ors. v. Commissioner of Income Tax, [1999] 238 ITR 257 (Cal) | Held that the requirement to furnish a special audit certificate along with the return (second part of s.80HHC(4)) is directory; the certificate may be filed within a time specified before making any computation of income. | Explicitly relied upon as a directly relevant decision construing section 80HHC with reference to sections 139(5) and 139(9); the court did not differ from this view. |
| Commissioner Of Income-Tax v. Capital Electronics (Gariahat), [2003] 261 ITR 4 | Decision relating to section 271B read with section 273B and section 44AB (penalty for default); dealt with mandatory time limits for obtaining audit reports for penalty provisions. | The court observed this decision did not assist the Revenue on the present question because it dealt with absolute default under penalty provisions and not the timing of filing audit reports for claim of deduction under section 80HHC. |
Court's Reasoning and Analysis
The Court addressed each referred question in turn, applying statutory text, definitions and prior authority as follows:
Question No. 2 (Applicability of section 28(iiia))
The Court accepted the Revenue's concession that section 28(iiia) does not apply. It reasoned that clause (iiia) of section 28 pertains to profit on sale of a licence granted under the Imports (Control) Order, 1955 (framed under the Imports and Exports (Control) Act, 1947), whereas the present receipt arose from the transfer of an export licence granted under the Export Control Order, 1977. Consequently, section 28(iiia) could not be invoked to tax the receipt from sale of an export licence. The question was therefore answered in the assessee's favour.
Question No. 3 (Chargeability as capital gains / cost of acquisition)
The Court examined the charging provisions for capital gains (section 45) and computation methods (section 55). It noted that until 1995 section 45 did not include transfer of a licence granted under the Export Control Order, 1977, and that the cost of acquisition in this context was unascertainable under the then-applicable statutory method. The Court relied on its prior decision in Commissioner of Income-Tax v. General Industrial Society Ltd. ([2003] 262 ITR 1 (Cal)) for the proposition that when the cost of acquisition is unascertainable the receipt on transfer of the capital asset could not be brought within the purview of capital gains. Applying that reasoning, the Court concluded the receipt could not be charged to capital gains tax.
Question No. 1 (Whether sale proceeds were capital receipt / taxable under section 10(3))
The Court analyzed statutory definitions: "capital asset" under section 2(14) and "income" under section 2(24). It observed that the licence met the definition of a capital asset and that a receipt on the transfer of a capital asset is a capital receipt, chargeable as capital gains under section 45. The Court set out the general rule that receipts must be taxed under the head they properly fall into, and that if a receipt comes under a particular head (here, capital gains) it cannot be taxed under a different head such as "Income from other sources." On the Revenue's contention invoking section 10(3), the Court explained that section 10(3) is an exemption provision, not a charging provision; it only exempts certain casual or non-recurring receipts provided they do not fall under any other charging head. Because the receipt at issue is characteristic of a capital receipt, it would, in principle, be charged under section 45. However, applying the analysis under Question No. 3 (including the prior decision that cost of acquisition was unascertainable), the Court concluded the amount could not be taxed as capital gains. Accordingly, the Court answered Question No. 1 in favour of the assessee.
Question No. 4 (Entitlement to deduction under section 80HHC despite timing of audit report)
The Court analyzed sub-section (4) of section 80HHC and distinguished two parts: (1) the mandatory requirement that an audit report/certificate in the prescribed form be furnished in order to claim the deduction, and (2) the direction that it be filed "along with the return." The Court held the first part (existence of the audit report as a prerequisite to claiming deduction) is mandatory; without the audit report the deduction cannot be claimed. The second part—filing it along with the return—was treated as procedural and directory rather than a substantive condition precedent that would automatically bar the claim if the report is not filed with the return. The Court surveyed multiple High Court and other decisions (including CIT v. Shivanand Electronics; CIT v. Punjab Financial Corporation; Jayant Patel; Shahzedanand Charity Trust; Zenith Processing Mills; Rai Bahadur B.B.M. Malwasie Trust; and Murali Export House) to support the view that timing requirements for filing audit reports are to be construed in context and may be directory, allowing filing later, at least before completion of assessment or in appropriate circumstances.
Applying these principles to the facts, the Court noted that the audit report in respect of the receipt on transfer of the import licence had been filed before the Tribunal and that the assessment was not finally concluded (the Tribunal remitted the matter to the Assessing Officer). Given that the filing requirement as to timing was directory in the relevant circumstances and that the substantive requirement (existence of the audit report) was satisfied, the Court held the assessee was entitled to the deduction under section 80HHC.
Holding and Implications
Holding: The Court answered each referred question in the assessee's favour (i.e., against the Revenue). It concluded that:
- The receipt on sale of the export licence represented a capital receipt and section 28(iiia) did not apply;
- The receipt could not be charged as capital gains because the cost of acquisition was unascertainable under the law applicable for the relevant assessment year;
- The assessee was entitled to deduction under section 80HHC despite having filed the audit report only before the Tribunal (the Court treated the timing requirement of filing "along with the return" as directory in the present circumstances).
Direct consequence: The reference was dismissed in favour of the assessee and against the Revenue; the Tribunal's favourable conclusions for the assessee were upheld to the extent recorded in this opinion. The Court ordered that there be no costs and that parties may act on a signed xerox copy of the dictated order on the usual undertaking.
Implications beyond the parties: The opinion applies existing authorities and construing statutes in light of their context; it does not state that a novel or broader precedent is being laid down beyond its application to the referred questions.
This structured summary strictly reflects the content of the provided opinion. No facts or legal propositions beyond what is contained in that opinion have been added.
D.K Seth, J.:— The following four questions have since been referred before this court under section 256(1) of the Income-tax Act, 1961:
“(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the sale proceeds of Rs. 7,25,854 received by the assessee on the sale of the export licence represented capital receipt and was exempt from income-tax?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the provisions of section 28(iiia) were not applicable to the receipt of the aforesaid sum?
(3) If the answer to the above questions are in the affirmative, whether the Tribunal was right in law in holding that the export licence had no cost of acquisition and the sale proceeds thereof were not liable to capital gains tax?
(4) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee was entitled to the deduction under section 80HHC in spite of the fact that the audit report in Form No. 10CC-AC required to be filed along with return of income under sub-section (4) of section 80HHC was filed only before the Tribunal?”
Question No. 2:
2. Mr. Sumit Chakravarty, learned counsel for the Revenue, in his usual fairness, has pointed out with regard to question No. 2 that section 28(iiia) of the Income-tax Act, 1961, has no manner of application in the present case. In fact, we find from the records that the receipt, which was sought to be brought within the tax net was received out of a transfer of an export licence granted under the Export Control Order, 1977. Whereas clause (iiia) of section 28 relates to profit on sale of a licence granted under the Imports (Control) Order, 1955, framed under the Imports and Exports (Control) Act, 1947. Thus, as rightly contended by Mr. Chakravarty on behalf of the Revenue, the profit out of sale of the export licence granted under the Export Control Order, 1977, cannot be brought within the purview of section 28(iiia). Therefore, this question is answered, as fairly conceded by learned counsel for the Revenue, against the Revenue in the affirmative and in favour of the assessee.
Question No. 3:
3. Question No. 3 relates to the charging of the receipt under capital gains. Capital gains are charged under section 45 computed in terms of section 55 after arriving at the cost of acquisition. Till 1995, section 45, as it stood, did not include transfer of a capital asset in the form of a licence granted under the Export Control Order, 1977. That apart, the cost of acquisition could not have been calculated within the method of computation provided thereunder since the cost of acquisition was unascertainable. We had occasion to deal with such question in Income-tax Reference No. 36 of 1998 (Commissioner Of Income-Tax v. General Industrial Society Ltd., [2003] 262 ITR 1 (Cal)] disposed of by us on March 25, 2003. Therefore, the receipt on transfer of the capital asset could not be brought within the purview of capital gains when the cost of acquisition is unascertainable. As such, as rightly contended in his usual fairness by learned counsel for the Revenue, this question is also answered in the affirmative against the Revenue and in favour of the assessee. Mr. Chakravarty, learned counsel for the Revenue, has insisted on questions Nos. 1 and 4. We shall deal with question No. 1 first.
Question No. 1:
4. Mr. Chakravarty, learned counsel for the Revenue, has attempted to point out that the receipt on transfer of the licence is an income to be included in computing the total income in view of section 10(3) in excess of Rs. 5,000. As soon it is an income it has to be included in the income and be taxed.
5. Mr. R.K Murarka, learned counsel for the assessee/respondent, on the other hand, has contended that section 10(3) provides for some exception. It is not a charging section. Therefore, this cannot be applied for charging the said receipt. According to him, section 10(3) exempts to the extent of Rs. 5,000 an income of casual or non-recurring nature. What is exempted is income, when it is casual or non-recurring. Referring to the definition of capital asset, defined in section 2(14), he points out that the licence is a capital asset. The receipt on transfer of a capital asset is a capital receipt. It is not an income as defined in section 2(24). In any event, the receipt on the transfer of the capital asset is not a receipt of an income of a casual nature within the meaning of section 10(3). If the capital receipt cannot be computed to tax under section 45 read with the computation method, an integral part of the charging section, the same cannot be charged to tax under that particular head. If it cannot be charged under that particular head, it cannot be charged under a different head. He relied on the decision in B.K Roy Pvt. Ltd. v. CIT, [1995] 211 ITR 500 (Cal) and Cadell Weaving Mill Co. P. Ltd. v. CIT, [2001] 249 ITR 265 (Bom), in support of his above contention.
6. Income, as defined in section 2(24), is an inclusive one. It includes profits and gains, dividend and various other items referred to therein. The receipt out of transfer of the capital asset is either profit or gain. It does not come under any other item of the definition of income as defined in section 2(24). The income is a genus. All receipts are income and chargeable to tax according to the heads under which such receipts become chargeable. The charging heads have been distinctly specified in the Act in six different categories. An income, unless it comes under a particular head, cannot be charged. If a particular receipt resembles a particular head, then it is to be charged under that head. If it cannot be charged under that particular head it cannot be charged under any other head even under the head “Income from other sources.”
7. We had occasion to hold that if a particular income chargeable under one head, cannot be computed and charged under that head, it Cannot be charged under a different head or as income from other sources, in Commissioner Of Income-Tax v. General Industrial Society Ltd., [2003] 262 ITR 1 (Cal)—Income-tax Reference No. 36 of 1998 disposed of by us on March 25, 2003. In arriving at the said conclusion, we had relied on B.K Roy Pvt. Ltd. v. CIT, [1995] 211 ITR 500 (Cal) since affirmed by the Division Bench in CIT v. B.K Roy Pvt. Ltd., [2001] 248 ITR 245 (Cal); Commissioner Of Income Tax, Madras v. The Ajax Products Limited, [1965] 55 ITR 741 (SC) and in Commissioner Of Income-Tax v. Justice R.M Datta., [1989] 180 ITR 86 (Cal), following the ratio laid down in Nalinikant Ambalal Mody v. S.A.L Narayan Row, CIT, [1966] 61 ITR 428 (SC).
8. Section 10(3) is an exception exempting specified receipts while computing total income. The receipt, which is casual or non-recurring in nature, can be brought under section 10(3) provided it does not fall under any other head. If such receipt falls under a particular head, then it has to be charged under that head. While charging under that head in the process of computation, it has to be considered whether it attracts any of the provisions contained in section 10 for being exempted in computing the total income. If it comes under any of those heads, then it is liable to be exempted to the extent it provides. This provision is not a charging section and, therefore, if a receipt cannot be charged under a different head, the aid of this provision cannot be taken for charging the same under the provisions of section 10(3) for the purpose of taxing the same. Therefore, section 10(3) has no manner of application in such a case.
9. Admittedly, the licence satisfies the definition of “capital asset” as defined in section 2(14). This is not in dispute. A receipt on capital assets is definitely a capital receipt chargeable as capital gains under section 45. It cannot be treated to be an income chargeable under any other head. Even if it might be an income, this income is chargeable under a particular head depending on its characteristic being receipt on transfer of a capital asset lending the characteristic of a capital receipt. Therefore, it would be chargeable under section 45.
10. If it comes under section 45, then it has to be computed in the manner provided in section 48, which requires determination of the cost of acquisition in order to work out the gain. This receipt related to the assessment year 1989-90. Until 1995 section 55(2) as it stood did not include any provision for computing the cost of acquisition of a licence, which fell under section 55(2)(b). Since the cost of acquisition could not be determined, therefore, it could not be taxed. We had occasion to hold so in Commissioner Of Income-Tax v. General Industrial Society Ltd., [2003] 262 ITR 1 (Cal)—Income-tax Reference No. 36 of 1998 disposed of by us on March 25, 2003. Therefore, in the present case, the sum received on transfer of the licence, a capital asset, cannot be charged to tax as income.
11. In the circumstances, we are unable to persuade ourselves to agree with the contention of Mr. Chakraborty assisted by Mr. Sailen Dutta, learned counsel for the Revenue. We had occasion to obtain support from the decision in B.K Roy Pvt. Ltd. v. CIT, [1995] 211 ITR 500 (Cal); Cit v. B.C Srinivasa Setty., [1981] 128 ITR 294 (SC), including the decisions referred to in paragraph 8 hereinbefore. We may now derive further inspiration from Cadell Weaving Mill Co. Pvt. Ltd. v. CIT, [2001] 249 ITR 265 (Bom), cited by Mr. Murarka to buttress our conclusion that we had occasion to reach in Commissioner Of Income-Tax v. General Industrial Society Ltd., [2003] 262 ITR 1 (Cal). Question No. 1 is, therefore, answered in the affirmative, against the Revenue and in favour of the assessee.
Question No. 4:
12. With regard to question No. 4, from page 28 of the paper book, it appears that the deduction was claimed under section 80HHC in respect of the profits derived by the assessee from the export of such goods or merchandise in the course of its business of export out of India in computing the total income of the assessee. In order to support its claim, it had submitted an audit report as required in sub-section (4) of section 80HHC. Subsequently, it had claimed deduction in respect of the receipt on sale of import licence, which is otherwise taxable under section 28(iiia). But in support of this claim, no audit report was submitted. In this background, we are now to consider question No. 4 as referred to us.
13. Sub-section (4) of section 80HHC provides that no claim for deduction in sub-section (1) of section 80HHC shall be admissible unless the assessee furnishes in the prescribed form the report of the accountant as defined in the Explanation below sub-section (2) of section 288 certifying the deduction as having been correctly claimed on the basis of the amount of export turnover along with the return of income. Learned counsel for the Revenue had pointed out that this is mandatory. Unless the audit report is submitted along with the return, the assessee cannot claim any deduction under sub-section (1) of section 80HHC. Therefore, the learned Tribunal was wrong in allowing the deduction.
14. Mr. Murarka, learned counsel for the assessee, on the other hand, contends that the provisions of sub-section (4) of section 80HHC are not mandatory but directory. According to him, it is a matter of procedure. It is only a support to the claim made by the assessee. It is not a foundation of the claim. Therefore, the context in which this provision has been incorporated does not seem to disentitle the assessee from claiming the relief unless the audit report is furnished along with the return. In support of his contention, he had relied on various decisions, to which we shall be referring at a later stage.
15. The first question to which we would like to address ourselves is with regard to the construction of sub-section (4) of section 80HHC in the light of the facts involved in this case. As pointed out by Mr. Murarka so far as the claim with regard to the export of goods and merchandise an audit report was furnished as it appears from page 28 of the paper book. But no audit report was furnished in respect of the receipt out of transfer of the import licence. 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 and merchandise was really exported, which is otherwise admissible only on actual basis, a situation which is difficult to determine by the Assessing Officer. But when it is a receipt out of transfer of an import licence which is also otherwise permissible for deduction under section 80HHC, it is not necessary to prove the authenticity of the receipt since no certificate would be necessary to ascertain the addition to export turnover on account of this receipt. This amount may be included in the export turnover. But then it is not a receipt on export of any goods or merchandise. It is a receipt out of transfer of the import licence. Therefore, in such a case the construction of sub-section (4) cannot be interpreted to mean a mandatory provision so as to negative the claim unless the audit report is furnished along with the return and that it cannot be admissible if filed before the assessment becomes final.
16. Mr. Chakravarty, learned counsel for the Revenue had pointed out that it has to be filed, even assuming but not admitting that it can be filed afterwards, before the assessment before the Assessing Officer is over in view of section 139, sub-section (5), or before the expiry of one year from the end of the assessment year whichever is earlier. He further contended that though notice under section 143 was issued yet the assessee did not submit the audit report. It was submitted only at the Tribunal stage. Therefore, it cannot be relied upon.
17. The appeal and the reference to the Tribunal is the continuation of the assessment proceeding and it does not become final until the assessment is finally made by the Tribunal. Therefore, if it is filed before the decision by the Tribunal in respect of a receipt on transfer of an import licence then the relief cannot be denied provided the filing of the audit report along with the return is not mandatory.
18. That apart in CIT v. Shivanand Electronics, [1994] 209 ITR 63 (Bom), a Division Bench had held while dealing with section 80J(6A) that an audit report required thereunder to be filed along with the return of income was not mandatory in the context that a benefit of deduction is available under section 80J(6A) on fulfilment of certain conditions. Those conditions may be mandatory. The requirement of filing of the report may be mandatory. But that is not so in so far as the requirement of filing it along with the return is concerned. In a given case, if the assessee failed to file such report along with the return and filed it subsequently but before completion of the assessment, it would not be fatal. In CIT v. Punjab Financial Corporation, [2002] 254 ITR 6 (P&H) [FB], it was held that filing of the audit report under section 32AB(1), (5) along with the return is not mandatory. A part of the statute has to be construed with reference to the context. Whether a statute is mandatory or directory depends upon the intent of the Legislature and not upon the language in which the intent is clothed. The intention of the Legislature is to be ascertained not only from the phraseology of the provision but also by considering its nature, its design and the consequences that would follow from construing it one way or the other. The word “shall” in a statutory provision though generally taken in a mandatory sense, but that does not necessarily mean that in every case it shall have that effect that the statute are to be punctiliously followed and in default the proceeding would be invalid.
19. In Commissioner Of Income-Tax v. Jayant Patel, [2001] 248 ITR 199 again dealing with section 80J(6A), the Madras High Court had taken the same view. It had gone to the extent that it can be filed even at the appellate stage. In CIT v. Shahzedanand Charity Trust, [1997] 228 ITR 292 (P&H), while dealing with section 12A(b) the same view was taken. It was held that filing of audit report along with the return was not mandatory but directory. In Zenith Processing Mills v. CIT, [1996] 219 ITR 721 (Guj), while dealing with section 80J(6A) the court took the same view that filing of the audit report along with the return is not mandatory but directory since such requirement falls in the realm of procedure for furnishing evidence in support of the claim. It can be furnished at the time while allowance or disallowance is being considered by the concerned authority. This court in a Division Bench in Commissioner Of Income-Tax v. Rai Bahadur Bissesswarlal Motilal Malwasie Trust., [1992] 195 ITR 825, while dealing with sections 11 and 12A had also held that the filing of the audit report along with the return is directory and not mandatory. This construction was arrived at having regard to the provisions contained in section 139, sub-section (5) and sub-section (9). The provisions contained in sub-section (5) and sub-section (9) of section 139 enable the assessee to rectify any defect in the return or the Assessing Officer to require the assessee to remove any defect in the return. Under sub-section (5), a time limit is provided for. Whereas sub-section (9) does not provide for any time limit, but definitely it means that it has to be done before the assessment is completed. However, it does not confer any duty on the Assessing Officer to require the assessee to remove any defect though he may point out the same to the assessee.
20. In the present case, the notice under section 143, which was so pointed out by the Assessing Officer that admittedly the assessee did not furnish the report in respect of the claim against the receipt on transfer of the import licence until before the learned Tribunal. But then the assessment has not become final till then. Even at that stage leave may be asked for, when it is brought to the notice of the assessee for removing the defect. Be that as it may, we may not be concerned with that proposition.
21. The High Court at Calcutta in a single Bench in Murali Export House & Ors.… v. Commissioner Of Income Tax…, [1999] 238 ITR 257, had occasion to deal with this question having regard to section 80HHC with reference to section 139, sub-section (5) and sub-section (9). In the said decision, it was held that the second part of sub-section (4) of section 80HHC regarding furnishing of the special audit certificate along with the return is not a mandatory provision but only a directory one. If it is found that some document required to be filed along with the return was not filed, the same may be allowed to be filed within a time specified before making any computation of the income of the assessee. The power to rectify the defective return has been clearly conferred on the Assessing Officer by sections 139(5) and 139(9) of the Act.
22. This decision has also taken note of the fact that the filing of the certificate is mandatory and it cannot claim deduction unless the certificate is filed. But the court did not subscribe to the opinion that such deduction will not be allowed if the certificate is not filed along with return. The first part of subsection (4) of section 80HHC makes it mandatory and necessary to furnish in the prescribed form the audit report for claiming deduction. But the second part being procedural in nature, requires the assessee to submit a certificate of special audit report along with the return. This is directory in nature as it calls for substantial compliance as observed in the said decision.
23. Thus, it is clear from the various decisions of different High Courts including those of this High Court, particularly, the learned single judge of this court. We do not find any reason to differ with the same. Sub-section (4) of section 80HHC consists of two parts. The first part requires filing of the special audit report for claiming deduction without which the deduction cannot be admissible. This part is mandatory and no deduction can be claimed without such certificate. The second part consists of the requirement that such audit report is to be filed along with the return. Filing of the report is a condition precedent for claiming deduction. Without such audit report, the deduction cannot be claimed. But when this is to be filed is purely a matter of procedure. This has nothing to do with any condition. Therefore, sub-section (4) is mandatory in its first part, but directory in its second part. The deduc-tion cannot be disallowed simply because the audit report was not furnished along with the return.
24. Now, the question comes whether it has to be filed before the assessment is over or it can be filed even at the stage of the Tribunal. This is dependent on the intent of the Legislature to be ascertained from the phraseology of the provision having regard to the scheme of the provision, its context, its nature, its design and the consequences that would follow and the extent to which it could be treated to be directory. The Madras High Court has taken the view that it can be filed even at the appellate stage. But it is not necessary for us to decide the said question having regard to the peculiar facts involved in this case. If it was related to the certification of the export of the goods and merchandise in its actuality which is much dependent on such certification, then it may be held to be so mandatory as to confine the same within the time limit before the assessment is complete or within the time limit provided in section 139(1). Inasmuch as, the necessity of audit report is related to the ascertainment of the veracity of the claim against the actuality of the export having been made. It may be a little different when the veracity of the claim is not much dependent on authentication, a situation, which is not so difficult to ascertain or prove. When by legal fiction the receipt against sale of import licence is included in export turnover, then it is the receipt against the transfer of the import licence to be authenticated in the audit report. This seems to be more a formality in that sense. Having regard to such a situation, it may, therefore, not be interpreted so strictly. Therefore, in such a case filing of the audit report at the Tribunal stage would not be fatal to disentitle the claimant. But then the Tribunal has accepted the same and remitted the matter to the Assessing Officer for making the assessment. As such it cannot be overlooked that the entitlement can still be pursued on the basis of the audit report since the assessment is yet to be made and there is a scope for making such assessment relating to the entitlement to the claim.
25. Learned counsel for the Revenue had relied on a decision of this court in Income-tax Reference No. 20 of 1998 (Commissioner Of Income-Tax v. Capital Electronics (Gariahat)), [2003] 261 ITR 4), disposed of by us on February 11, 2003. But that decision will not help us in this case, since it was in relation to section 271B read with section 273B relating to imposition of penalty with the concept of absolute default in compliance with section 44AB. Section 44AB provides a stipulation of time limit for obtaining the audit report which is mandatory. But this court had no occasion to consider the question of its filing along with the return or whether the filing is mandatory or discretionary. Therefore, that decision does not come to the aid of learned counsel for the Revenue.
26. In the circumstances, we are unable to agree with the contention of learned counsel for the Revenue. We, therefore, answer question No. 4 in the affirmative and in favour of the assessee.
27. This reference, therefore, fails and is accordingly dismissed.
28. No costs. All parties are to act on a signed xerox copy of this dictated order on the usual undertaking.
R.N Slnha, J.:— I agree.
Alert