Citation Codes

Equivalent Citations

citation codes

Case Number

IT Reference No. 26 of 1990

Judges

A K Goel
R Bindal

Acts

provisions of the Indian IT Act, 1922 (11 of 1922), or this Act
INCOME TAX ACT 1961
Sub-section (2) of Section 288
FINANCE ACT 1973

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Smart Summary

Structured Summary of the Opinion — Section 80J(6A), IT Act, 1961

Factual and Procedural Background

The reference arises from this Court's direction (ITC No. 1 of 1984; order dated 24.8.1988) seeking an opinion on a question of law originating from the Income Tax Appellate Tribunal's order dated 22.8.1983 in ITA No. 429 of 1980 for assessment year 1977-78.

The assessee (a registered firm) filed its return of income belatedly on 31 August 1977 (the due date being 31 July 1977) and claimed a deduction under Section 80J of the Income Tax Act, 1961. The return was not accompanied by an audit report required by Section 80J(6A) (for assessees other than companies and co-operative societies). The Assessing Officer (AO) disallowed the Section 80J deduction on the ground that the accounts had not been audited in accordance with Section 80J(6A), and computed income by excluding the deduction (assessment order dated 19 December 1978).

The CIT(A) upheld the AO's disallowance, treating Section 80J(6A) as mandatory. On further appeal the Tribunal allowed the assessee's appeal, treating the audit-report requirement as directory and permitting the deduction because the audit report had been filed by the time the matter was before the Tribunal. The matter was referred to this Court to answer whether the Tribunal was right in holding that Section 80J(6A) is directory and in allowing the deduction on that view.

Legal Issues Presented

Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the provisions of Section 80J(6A) of the Income Tax Act, 1961, are directory and not mandatory, and in allowing the assessee's claim under Section 80J on that basis.

Arguments of the Parties

Assessing Officer / Revenue Position

The AO disallowed the deduction under Section 80J because the assessee did not get its accounts audited and did not furnish the audit report along with the return as required by Section 80J(6A). (The AO's observation is recorded verbatim in the assessment order.)
The CIT(A) agreed with this approach and held that the requirements of Section 80J(6A) are mandatory in character.

Assessee / Tribunal Position

The Tribunal took the view that Section 80J is a beneficial provision intended to encourage new industrial undertakings, and that the procedural requirement in Section 80J(6A) (furnishing the audit report with the return) is directory rather than mandatory.
On that basis the Tribunal allowed the assessee's appeal and directed computation of the deduction because the audit report had, by then, been filed (the Tribunal treated late furnishing — so long as done before assessment — as substantial compliance).

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court in this Opinion
CIT v. Jaideep Industries (Division Bench) (1989) 180 ITR 81 (P&H)	Adopted a strict view that no deduction under Section 80J could be claimed unless the accounts are audited and the audit report is furnished along with the return (i.e., treated the provision as mandatory).	This earlier Division Bench view was identified as an initial strict approach; the Court notes that this view was later overruled by the Full Bench in the context of a similar provision. The opinion records Jaideep as the stricter approach which the Full Bench declined to follow.
CIT v. Punjab Financial Corporation (Full Bench)	Interpreted a similar provision (Section 32AB(5)/(6)) and held that the procedural requirement to file the audit report with the return is not mandatory but directory; the Full Bench concurred with Gujarat and Madras High Courts and overruled the Division Bench view in Jaideep Industries.	The Court relied on the Full Bench's ratio (that the provision is directory to the extent that the audit report may be furnished before assessment) in assessing the present case and related question under Section 80J(6A). The Full Bench's approval of the directory approach guided the analysis.
CIT v. Gujarat Oil & Allied Industries (Gujarat High Court)	Held that the first part of Section 80J is mandatory but the second (procedural) part requiring submission of an audit report along with the return is directory and requires substantial compliance; specifically, the audited report must be made available to the ITO before the assessment is framed.	The Court extracted and relied on this holding to state that where the audit report is not filed with the return it may nevertheless be acceptable if furnished before the assessment is framed. Applying that principle, the Court found that in the present case the audit report was filed after assessment and hence could not cure the non-compliance.
CIT v. A.N. Arunachalam (Madras High Court)	Expressed the view that requiring the audit report to accompany the return would cause discrimination (companies are not required to do so), and emphasised that the objective is to have the audit report available to the ITO before assessment; therefore the requirement is to ensure availability before assessment rather than an inflexible time‑bar.	The Court referred to this reasoning (approved by the Full Bench) to support the conclusion that the audit report must be made available prior to framing of assessment; since in the present matter the report was filed after assessment, it could not be treated as compliance.

Court's Reasoning and Analysis

The Court began by identifying Section 80J and the specific procedural condition in Section 80J(6A): for assessees other than companies or co-operative societies, the deduction under Section 80J(1) is "not admissible unless" the accounts are audited and the audit report is furnished along with the return.

The central legal question was whether the requirement that the audit report be furnished "along with his return of income" is mandatory (failure of strict compliance defeats the deduction) or directory/substantial (non-filing with the return may be cured if the report is made available before assessment).

The Court reviewed the jurisprudential landscape:

A Division Bench (Jaideep Industries) had earlier taken a strict view treating the requirement as mandatory.
A Full Bench (CIT v. Punjab Financial Corporation), however, considered a similar statutory provision (Section 32AB(5)/(6)) and, agreeing with Gujarat and Madras High Courts, held that the procedural obligation is directory — it requires substantial compliance and the audit report must be available to the tax officer before the assessment is framed.

The Court then applied these precedents to the facts. Material chronological facts were established from the record:

The return was due by 31 July 1977 but filed on 31 August 1977.
The assessment was completed on 19 December 1978.
The audit report was dated 14 December 1978 but was filed on 18 January 1979 — i.e., after the assessment had been framed on 19 December 1978.

Drawing on the Gujarat and Madras High Court decisions (and the Full Bench's approval of those principles), the Court emphasised that the directory approach permits late filing of the audit report only so long as it is made available to the Income Tax Officer before the assessment is framed. Because, on the admitted facts, the audit report in this case was filed after the assessment had been completed, the Court concluded that the Tribunal's allowance of the deduction was not correct under the governing principles.

Holding and Implications

Holding: The reference is answered by holding that the Tribunal was not right in granting relief to the assessee where the audit report required by Section 80J(6A) was filed only after the assessment had been framed by the Assessing Officer.

Direct effect on the parties: On the facts presented, the Court concluded that the assessee cannot rely on the audit report filed after assessment to cure non-compliance with Section 80J(6A), and accordingly the Tribunal's grant of deduction on that basis was incorrect.

Broader implications: The opinion applies and follows the existing line of authority (Gujarat and Madras High Courts, approved by the Full Bench in Punjab Financial Corporation) that treats the procedural requirement of furnishing the audit report as directory only to the extent that the report is made available to the tax authorities before assessment is framed. The opinion does not purport to lay down a novel precedent beyond applying those authorities to the facts before it.

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Commissioner Of Income Tax v. Mahalaxmi Rice Factory

1. In terms of the direction given by this Court in ITC No. 1 of 1984 vide order dt. 24th Aug., 1988, the following question of law arising out of Tribunal's order dt. 22nd Aug., 1983 in ITA No. 429 of 1980, for the asst. yr. 1977-78, was referred to this Court for its opinion :

Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the provisions of Section 80J(6A) of the IT Act, 1961, are directory and not mandatory and in allowing the assessee's claim under Section 80J in that view

2. The assessee, which is a registered firm, filed its return of income on 31st Aug., 1977 declaring net income of Rs. 81,190, though, as per provisions, it was required to be filed on or before 31st July, 1977. In the return, a claim of deduction under section 80j of the it act (for short 'the act') was made. Along with the return, the assessee did not furnish any audit report. The claim of the assessee with regard to deduction under Section 80J of the Act was disallowed by the AO with the observations that

"relief under Section 80J of the Act has not been allowed as the assessee did not get its accounts audited as required under Section 80J(6A) of the Act"

, Accordingly, vide assessment order dt. 19th Dec., 1978, the income of the assessee was computed at Rs. 1,09,010, as against returned income of Rs. 81,190. The assessee went in appeal before the CIT(A), who upheld the order passed by the AO, holding that the provisions contained in Section 80J(6A) are mandatory in character.

3. Further appeal by the assessee before the Tribunal was accepted and it was held that Section 80J of the Act is a beneficial piece of legislation giving certain incentives for encouragement of certain types of new industries. It is not mandatory in nature, hence, non-compliance of the provisions will not in any way affect the right of the assessee for deduction merely because the assessee did not furnish the audit report but otherwise gave necessary particulars on which deduction under Section 80J of the Act was to be computed. Accordingly, it was directed that since the audit report had been filed by then, the deduction under Section 80J of the Act be computed in accordance with law.

4. When the case was taken up for hearing, no one appeared for either of the parties.

5. The relevant provisions of Section 80J of the Act as stood at the relevant time, are reproduced hereunder:

80J. (1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking or a ship or the business of a hotel, to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains (reduced by the deduction, if any, admissible to the assessee under Section 80HH or Section 80HHA) of so much of the amount thereof as does not exceed the amount calculated at the rate of six per cent per annum on the capital employed in the industrial undertaking or ship or business of the hotel, as the case may be, computed in the prescribed manner in respect of the previous year relevant to the assessment year (the amount calculated as aforesaid being hereafter, in this section, referred to as the relevant amount of capital employed during the previous year) :

Provided that in relation to the profits and gains derived by an assessee, being a company, from an industrial undertaking which begins to manufacture or produce articles or to operate its cold storage plant or plants after the 31st day of March, 1976, or from a ship which is first brought into use after that date, or from the business of a hotel which starts functioning after that date, the provisions of this sub-section shall have effect as if for the words 'six per cent', the words 'seven and a half per cent' had been substituted.

(2) The deduction specified in Sub-section (1) shall be allowed in computing the total income in respect of the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles or to operate its cold storage plant or plants or the ship is first brought into use or the business of the hotel starts functioning (such assessment year being hereafter, in this section, referred to as the initial assessment year) and each of the four assessment years immediately succeeding the initial assessment year:

Provided that in the case of an assessee, being a co-operative society, the provisions of this sub-section shall have effect as if for the words 'four assessment years', the words 'six assessment years' had been substituted.

(3) Where the amount of the profits and gains derived from the industrial undertaking or ship or business of the hotel, as the case may be, included in the total income (as computed without applying the provisions of section 64 and before making any deduction under Chapter VIA or Section 280-O) in respect of the previous year relevant to an assessment year commencing on or after the 1st day of April, 1967 (not being an assessment year prior to the initial assessment year or subsequent to the fourth assessment year as reckoned from the end of the initial assessment year) fall short of the relevant amount of capital employed during the previous year, the amount of such shortfall, or where there are no such profits and gains, an amount equal to the relevant amount of capital employed during the previous year (such amount, in either case, being hereafter, in this section, referred to as deficiency) shall be carried forward and set off against the profits and gains referred to in Sub-section (1) as computed after allowing the deductions, if any, admissible under section 80hh or section 80hha and the said sub-section (1) in respect of the previous year relevant to the next following assessment year and, if there are no such profits and gains for that assessment year, or where the deficiency, exceeds such profits and gains, the whole or balance of the deficiency, as the case may be, shall be set off against such profits and gains for the next following assessment year and if and so far as such deficiency cannot be wholly so set off, it shall be set off against such profits and gams assessable for the next following assessment year and so on :

Provided that--

(i) in no case shall the deficiency or any part thereof be carried forward beyond the seventh assessment year as reckoned from the end of the initial assessment year;

(ii) where there is more than one deficiency and each such deficiency relates to a different assessment year, the deficiency which relates to an earlier assessment year shall be set off under this sub-section before setting off the deficiency in relation to a later assessment year:

Provided further that in the case of an assessee being a co-operative society, the provisions of this sub-section shall have effect as if for the words 'fourth assessment year', the words 'sixth assessment year' had been substituted.

(4) This section applies to any industrial undertaking which fulfils all the following conditions, namely :

(i) it is not formed by the splitting up, or the reconstruction, of a business already in existence;

(ii) it is not formed by the transfer to a new business machinery or plant previously used for any purpose;

(iii) it manufactures or produces articles or operates one or more cold storage plant or plants, in any part of India, and has begun or begins to manufacture or produce articles or to operate such plant or plants, at any time within the period of thirty three years next following the 1st day of April, 1948, or such further period as the Central Government may, by notification in the Official Gazette, specify with reference to any particular industrial undertaking;

(iv) in a case where the industrial undertaking manufacturers or produces articles, the undertaking employs ten or more workers in a manufacturing process carried on with the aid of power, or employs twenty or more workers in a manufacturing process carried on without the aid of power:

Provided that the condition in Clause (i) shall not apply in respect of any industrial undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such industrial undertaking as is referred to in Section 33B, in the circumstances and within the period specified in that section :

Provided further that, where any building or any part thereof previously used for any purpose is transferred to the business of the industrial undertaking, the value of the building or part so transferred shall not be taken into account in computing the capital employed in the industrial undertaking.

Explanation 1--For the purpose of Clause (ii) of this sub-section, any machinery or plant which was used outside India by any person other than the assessee shall not be regarded as machinery or plant previously used for any purpose, if the following conditions are fulfilled, namely :

(a) such machinery or plant was not, at any time, previous to the date of the installation by the assessee, used in India;

(b) such machinery or plant is imported into India from any country outside India; and

(c) no deduction on account of depreciation in respect of such machinery or plant has been allowed or is allowable under the provisions of the Indian IT Act, 1922 (11 of 1922), or this Act in computing the total income of any person for any period prior to the date of the installation of the machinery or plant by the assessee.

Explanation 2.--Where in the case of an industrial undertaking, any machinery or plant or any part thereof previously used for any purpose is transferred to a new business and the total value of the machinery or plant or part so transferred does not exceed twenty per cent of the total value of the machinery or plant used in the business, then, for the purposes of Clause (ii) of this sub-section, the condition specified therein shall be deemed to have been complied with and the total value of the machinery or plant or part so transferred shall not be taken into account in computing the capital employed in the industrial undertaking.

(5) This section applies to any ship, where all the following conditions are fulfilled, namely :

(i) it is owned by an Indian company and is wholly used for the purposes of the business carried on by it;

(ii) it was not, previous to the date of its acquisition by the Indian company owned and used in Indian territorial waters by a person resident in India; and

(iii) it is brought into use by the Indian company at any time within a period of thirty-three years next following the 1st day of April, 1948.

(6) This section applies to the business of any hotel, where all the following conditions are fulfilled, namely:

(a) the business of the hotel is not formed by the splitting up, or the reconstruction, of a business already in existence or by the transfer to a new business of a building previously used as a hotel or of any machinery or plant previously used for any purpose;

(b) the business of the hotel is owned and carried on by a company registered in India with a paid-up capital of not less than five hundred thousand rupees;

(d) the hotel is for the time being approved for the purposes of this sub-section by the Central Government;

(e) the business of the hotel starts functioning on or after the 1st day of April, 1961, but before the 1st day of April, 1981.

Explanation.--Where in the case of the business of a hotel, any building, or any part thereof, previously used as a hotel, or any machinery or plant, or any part thereof, previously used for any purpose, is transferred to a new business and the total value of the building, machinery or plant or part so transferred does not exceed twenty per cent of the total value of the building, machinery or plant used in the business, then, for the purposes of Clause (a) of this sub-section, the condition specified therein shall be deemed to have been complied with and the total value of the building machinery or plant or part so transferred shall not be taken into account in computing the capital employed in the business of the hotel.

(6A) Where the assessee is a person other than a company or a co-operative society, the deduction under Sub-section (1) from profits and gains derived from an industrial undertaking shall not be admissible unless the accounts of the industrial undertaking 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.

(Emphasis, italicised in print, supplied)

6. Section 80J of the Act provides for grant of certain deduction to new industrial undertakings. One of the conditions laid down under Section 80J(6A) of the Act is that an assessee has to get his accounts audited and furnish the audit report along with returns. The primary question required to be considered by this Court is as to whether the rigors of Section 80J(6A) of the Act requiring the accounts to be audited and submissions of the audit report thereof along with returns are directory or mandatory in nature.

7. Initially a Division Bench of this Court in CIT v. Jaideep Industries (1989) 180 ITR 81 (P&H) took very strict view of the matter and held that no deduction under Section 80J of the Act could be claimed unless the accounts are audited and the report thereof furnished along with the returns. However, a somewhat similar issue came up for consideration before the Full Bench of this Court where similar provision of Section 32AB(5) of the Act was under consideration which is reproduced hereunder:

32AB(6) 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.

While considering the matter, a Full Bench of this Court in CIT v. Punjab Financial Corporation concurred with the views expressed by Gujarat High Court in CIT v. Gujarat Oil & Allied Industries and Madras High Court in CIT v. A.N. Arunachalam and held that Section 32AB(5) of the Act is not mandatory in character and overruled the view expressed by a Division Bench of this Court in Jaideep Industries' case (supra) which held that similar provisions contained in Section 80J(6A) of the Act are mandatory in character.

8. Before applying the ratio of law laid down by Full Bench of this Court in the facts and circumstances of the case, it would be necessary to refer a few relevant facts here. The return of income for the year in question was required to be filed on or before 31s July, 1977, which was filed belatedly on 31st Aug., 1977. The assessment was completed by the assessing authority on 19th Dec., 1978. The audit report dt. 14th Dec., 1978 was filed by the assessee on 18th Jan., 1979, i.e., after assessment had been framed.

9. The relevant extract from Gujarat High Court in Gujarat Oil & Allied Industries' case (supra), which was referred to and approved in the judgment of the Full Bench of this Court in Punjab Financial Corporation's case (supra) are extracted below :

In our view, the first part of Section 80J is mandatory in nature but the second part thereof which is procedural in nature and requires the assessee to submit a report of the audit along with return is merely directory in nature and it calls for only substantial compliance. The reasons are obvious. It is possible that at the time when the returns of income are filed, by some mischance or negligence of the clerk or for any other reason, even though the audited report is available, it might not have been annexed to the return and on such mistake being found out, the report may be tendered on the next day or even a few days thereafter to the ITO. If any literal compliance with the words 'assessee furnishes report along with his return of income' is insisted upon, then, in such an unforeseen contingency, the assessee would be denied benefit of Section 80J of the Act. One other illustration can be considered to highlight the position. As per Section 139(1) r/w Section 139(5) of the Act, the assessee can file return within the period permitted there under and even during the extended period or can file a revised return as per this provision, of course, after following the procedure laid down therein. If the assessee is prompt, he may file the return in time, but at that stage, for reasons beyond his control, the audit report is not ready, he files the return in time but without its being accompanied by the auditor's report while another assessee who is not prompt enough may not file the return at the first opportunity. In such a contingency, a prompt assessee who files the return in time would stand to suffer only because the auditor's report has not physically accompanied the return while another assessee who waits till the end of the expiry of the period and files the return with the report will stand to gain, as he would get the benefit of Section 80J(1) while the assessee who files the return at the first opportunity would stand to suffer though, in both the cases, at the time when the assessments are framed, the audited reports are made available by both the assessees to the ITO. This would result in absurdity. Hence, in our view, the Tribunal was right when it took the view that the second part of the provision regarding furnishing of the report of the auditor along with the return is not a mandatory provision and it requires substantial compliance in the sense that it should be made available to the ITO before the assessment is framed and, by that time, if the assessee puts his house in order, the ITO will be required to consider the case of the assessee for deductions under Section 80J(1) of the Act on the merits. It has also to be kept in view that, by the mere non-filing of the auditor's report along with the return of income, the assessee does not stand to gain anything nor does the Revenue stand to lose as even after the return is filed, it is obvious that it may take time before the ITO applies his mind to the merits of the return when he sits down to frame assessment. In fact, that is the relevant stage at which the house of the assessee should be in order. If that stage is missed, obviously, the assessee will not be entitled to the benefit of Section 80J(1) but, till that time, the return filed would be just lying in the office of the ITO awaiting disposal and the ITO, in the meantime, was not expected to apply his mind to such a pending return till he takes it up for consideration. By that time, if the report is already made available, all the procedural requirements of Sub-section (6A) can be considered to have been complied with....

(Emphasis, italicised in print, supplied)

10. Similar view was expressed by Madras High Court in A.N. Arunachalam's case (supra). The relevant part of which is extracted below :

"The opening words of sub-section (6a) of section 80J itself indicate the necessity for submitting an audit report inasmuch as the accounts of companies are audited and assessees other than companies are required to get the accounts audited for the purpose of Section 80J. In the case of companies there is no insistence on the audit report accompanying the return for obtaining relief under Section 80J. Therefore, if the section is so construed as to make the filing of the audit report along with the return mandatory, it would discriminate between companies on the one hand and other assessees on the other.

Moreover, a section of an Act should not be so construed as to make it unconstitutional. Further, there is no stipulation in the section as to the time when the audit report should be filed except that it should be filed along with the return. Since there is a provision for extending the time for filing the return, all that the assessee is required to do is to delay the filing of the return until the audit report is made available. Where the preparation of the audit report is beyond the control of the assessee, the assessee can justifiably delay the filing of the return itself so that it is accompanied by the audit report. In such an event, the ITO cannot deny the claim for relief since the purpose of the section would have been fulfilled even though the return itself is filed beyond the prescribed time. The stress laid by Section 80J(6A) is only to have the accounts audited and to make the audit report available to the ITO to make a proper assessment. Hence, the audit report can be made available before the assessment is made. The objective of Section 80J(6A) should be carried out by granting the relief rather than picking out a venial fault for denying the relief intended to be given by the statute."

(Emphasis, italicised in print, supplied)

11. A perusal of dictum of law as referred to above clearly shows that the provisions of Section 80J(6A) of the Act have been held to be directory in nature to the extent that audit report, in case not filed along with the return is not fatal for grant of deduction. However, the provisions have been held to be directory only to the extent that in case the audit report is not filed along with return, the same can be filed any time before the assessment takes place, as it is at that time when the AO applies his mind on the case. As is evident from the facts of the case, the audit report in the present case was filed on 18th Jan., 1979 after the assessment had already taken place on 19th Dec., 1978, hence, in terms of the discussions above and law laid down by the Gujarat High Court in Gujarat Oils & Allied Industries' case (supra) and Madras High Court in A.N. Arunachalam's case (supra), which has been approved by a Full Bench of this Court in Punjab Financial Corporation's case (supra), we are of the view that the Tribunal was not right in granting relief to the assessee as admittedly the audit report was filed by the assessee after the assessment had already been framed by the AO.

The reference is answered in the above terms.

Commissioner Of Income Tax v. Mahalaxmi Rice Factory

Structured Summary of the Opinion — Section 80J(6A), IT Act, 1961

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Assessing Officer / Revenue Position

Assessee / Tribunal Position

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Commissioner Of Income Tax v. Mahalaxmi Rice Factory

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