Rajesh Balia, J.:— Heard learned counsel for the parties.

2. The substantial question of law which arises for consideration in this case as suggested by the appellant is as under:—

“Whether on the facts and circumstances of the case, the ITAT was right in holding that filling of the audit report under Section 32AB(5) during the assessment proceedings and not along with the return of income would satisfy the requirements of the aforesaid section?

3. The brief facts of the case are that the respondent-Assessee had submitted his return declaring total income of Rs. 4,67,010/-. In the return, the assessee had claimed a relief under Section 32AB of the Act of 1961 in respect of Rs. 1,00,000/- deposited by him with Development Bank during the previous year relevant to the assessment year 1988-1989. The assessee's income consisted of profit and gains of his profession. The accounts of the assessee were audited on 25.9.1988 prior to filing of the return. The return as noticed above was filed on 2.2.1989 However, the said audit report was not furnished along with the return but was furnished later on during the course of assessment proceedings. As the audit report has not been submitted along with the return, the assessee was disallowed the claim to deduction of Rs. 1,00,000/- deposited in Development Bank.

4. On appeal, the CIT (Appeals) relying on the decision in CIT v. Malayam Plantations ((1976) 103 ITR 835) which was rendered while considering like provisions under Section 32A regarding deductions in respect of profit and gains from the business of tea and other decisions of the Tribunal, allowed the claim of the assessee for deduction under Section 32AB in respect of deposits made in Development Bank by holding that analogy of the cases under Section 80J and 33A of the Act of 1961 shows that filing of audit report along with the report has been held to be directory and not mandatory and the benefit was allowed even if the report was filed subsequently.

5. Aggrieved with the aforesaid order, the Assistant Commissioner has preferred appeal before the Tribunal and the Tribunal had affirmed the order of the CIT (Appeals), hence, this appeal under Section 260A of the Income tax Act, 1961.

6. Section 32AB had been inserted in Income tax Act, 1961 vide Finance act, 1966 w.e.f 1.4.1987 and the benefit extended under the said provisions was restricted upto the assessment year 1990-1991 and w.e.f 1.4.1991 it has been withdrawn, by inserting second proviso to sub-section (1) and (5) of Section 32AB laid down the procedure for claiming the deduction under Section 32AB which reads as under:—

“Sec. 32AB(1) Subject to the other provisions of this section, where an assessee, whose total income includes income chargeable to tax under the head “Profits and gains of business of profession”, has, out of such income,—

(a) deposited any amount in an account (hereinafter in this section referred to as deposit account) maintained by him with the Development Bank before the expiry of six months from the end of the previous year of before furnishing he return of his income, whichever is earlier; or

(b) utilised any amount during the previous year for the purchase of any new ship, new aircraft, new machinery or plant, without depositing any amount in the deposit account under clause (a),

in accordance with, and for the purposes specified in, a scheme (hereinafter in this section referred to as the scheme) to be framed by the Central Government or if the assessee is carrying on the business of growing and manufacturing tea in India, to be approved in this behalf by the Tea Board, the assessee shall be allowed a deduction (such deduction being allowed before the loss, if any, brought forward from earlier years is set off under Section 72:] of—

(i) a sum equal to the amount, or the aggregate of the amount, so deposited and any amount so utilised; or

(ii) a sum equal to twenty per cent of the profit of business or profession as computed in the accounts of the assessee audited in accordance with sub-section (5),

whichever is less:

[Provided that where such assessee is a firm, or any association of person or any body of individuals, the deduction under this section shall not be allowed in the computation of the income of any partner, or as the case may be, any member of such firm, association of persons or body of individuals:]

[Provided further that no such deduction shall be allowed in relation to the assessment year commencing on the 1st day of April, 1991, or any subsequent assessment year.]

(2) ….

(3) ….

(4) ….

(5) The deduction under sub-sec. (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 sub business or profession audited under such law and furnishes the report of the audit as required under such other 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.

7. These provisions under Section 32AB are paramateria with the provisions relating to certain benefits extended to assessees under Section 80 and 80H HC of the Income Tax Act. For the present purposes primary requirement of Sec. 32AB (1) is (i) that total income of assessee must include income chargeable under head profit and gains of business or profession. (ii) That the amount must be deposited in deposit accounts maintained for this purpose in a Development Bank and (iii) such amount must be deposited before six months from the end of previous year or before filing return. With alternative to above deposit, utilisation in terms of clause (b) of Sec. 32AB, is not the present concern. The respondent-assessee had fulfilled all these conditions is not in dispute. Procedural requirement is that deduction is not admissible until the accounts of the assessee claiming such deduction of the previous year relevant to assessment year in question are audited and report of such auditor is furnished along with return.

8. The assessee has fulfilled the first condition that accounts of the previous year relevant to Assessment year 1988-1989 were audited as required prior to filing of return.

9. The last condition remained to be filled viz., that the report of such audit to be annexed with return but was furnished during the course of proceedings. The claim to deduction was disallowed for this breach by the Assessing Officer. Whether the last of condition viz., filing of audit report is mandatory in the sense that mere submission of audit report later on during the course of enquiry renders the claim void ab initio or requirement being procedural is only directory in nature and compliance in substance will be sufficient compliance? In other words where there is any distinction between the nature of substantive condition, procedural condition and technical condition.

10. The distinction between the prescription of substantive condition and a procedural and technical part of condition to avail tax exemption was succinctly stated by the Supreme Court in Mangalore Chemicals & Fertilizers Ltd. v. Deputy Commissioner of Commercial taxes (1992 Supp (1) SCC 21 : AIR 1992 S.C 152). The contention was raised before the Supreme Court that a condition statutorily provided for availing a benefit must be held substantive in all cases and non-compliance of statutory condition must result in forfeiture of exemption. The Court repelled this contention and explained;

“There is a fallacy in the emphasis of this argument. The consequence which Shri Narasimha Murthy suggests should flow from the non-compliance would, indeed, be the result if the condition was a substantive one and one fundamental to the policy underlying the exemption. Its stringency and mandatory nature must be justified by the purpose intended to be served. The mere fact that it is statutory does not mater one way or the other. There are conditions and conditions. Some may be substantive, mandatory and based on considerations of policy and some others may merely belong to the area of procedure. It will be erroneous to attach equal importance to the non-observance of all conditions irrespective of the purpose they were intended to serve.”

11. The Court approved the following principle stated by Francis Bennion in his “Statutory Interpretation”:—

“Unnecessary technicality; Modern courts seek to cut down technicalities attendant upon a statutory procedure where these can not be shown to be necessary to the fulfillment of the purposes of the legislation.”

12. The judgment of the High Court was reversed on the ground that view taken by the High Court does not acknowledge the essential distinction between what was a matter of form and what was one of substance.

13. A like principle was enunciated by the Supreme Court in case of Krishna Kumar Mediratta v. Phulchand Agarwala ((1977) 2 SCC 5), while considering the case under Mineral Concessions Rules, 1960, where the question was about the validity of entertaining the application accompanied with fees.

14. The High Court upheld the contention about incompetency of such application to be entertained while setting aside the order of Central Government. Reversing the judgment of High Court, the Supreme Court said:—

“On the other hand, we find that the High Court itself committed an error, which seems to us to be very apparent, in holding that an application, which had only to be accompanied by the fee would be considered validly filed on the date on which it was made only if proper fee had been tendered with it when it was filed. A right and reasonable procedure looks to substance rather than form of a transaction in order to determine its nature. The statute and the rules made thereunder would have said so if the application itself was to be deemed to be void ab initio for noncompliance with a particular technical requirement if that was the intention behind them.”

15. In coming to this conclusion, the Court said:—

“..the use of word “shall” in imposing a duty is not conclusive on the question whether the duty imposed is mandatory or directory. Moreover, that question was only incidentally involved here. It is the breach of every mandatory duty in performing a prescribed act that could make an action totally ineffective or void ab initio. The filing of application is one thing and completion of some annexed duty, which is legally separable, is another unless a statute or a rule provides otherwise.”

16. We may notice here that while a substantive part of the provision of Section 32-AB requires the deposit of sum in development bank that accounts of assessee, who claims deduction in respect of such deposits, must be audited. As a proof of fact that accounts have been audited before filing the return, the return is required to be submitted along with the auditors certificate that all accounts have been audited. The requirement of submitting proof of fact that accounts have been audited is for only one purpose namely to ensure that accounts have been audited before claim to deduction under Section 32-AB is laid before the I.T.O for consideration. Therefore, substance of the requirement is deposit of amount in development bank and the accounts containing such entry to be audited. The mode of submitting proof of auditing of accounts falls in the realm of technical procedure which, if not filed along with the return, is always to be asked by the Tribunal to furnish before the claim to deduction is allowed. It is akin to completing some deficiency or removing defect in an application that has been filed in incomplete state. it brooks an opportunity to cure the defects before it is dealt with adversely.

17. In the present case, it is not in dispute and apparent that accounts were audited before return was submitted. In the return, a claim was made. But on account of some lapse auditor's certificate could not be attached with it but same was produced later on. If the distinction pointed out by the court between the substantive part of the condition and procedural and technical part of condition required to be fulfilled by statute is kept in sight, we have no hesitation in coming to the conclusion that requirement of submitting proof of accounts having been audited along with the return is not mandatory and such proof can be submitted during the course of proceeding when it is pointed to the assessee that such proof of fact that accounts have been audited has not been produced along with the return, in case accounts have actually been audited prior to filing of the return and claim can be made in accordance with the provisions of the Act. What is essential is accounts to be audited certifying that deposit of requisite amount in the development bank has been made as envisaged under sub-section (1) of Section 32-AB. The judgments of different High Courts as well shall presently notice are founded on the same principle fortifying us in our view noticed by us above.

18. The matter has received attention of the Court under the relevant provisions of the Income Tax Act underlying like conditions for getting accounts audited and filing auditors report along with the return for the purpose of claiming benefit of such deduction/concession.

19. The consistent view which prevailed with the different High Courts except a Division Bench decision of Punjab and Hariyana High Court in Commissioner Of Income-Tax v. Jaideep Industries. ((1989) 180 ITR 81 (P&H)), which too has subsequently been overruled by a Full Bench of the same High Court in CIT v. Punjab Financial Corporation ((P&H) or (F.B), (2002) 254 ITR 6), is that provisions relating to filing of audit report along with the return is a part of procedure for producing evidence in respect of the fact that claim to deduction is founded on audited accounts, while getting the accounts audited before filing returns claiming such relief has been held to be substantive condition and mandatory. Submitting the proof of accounts being part of procedural requirement, compliance of substantive provision has been held to be directory.

20. The provisions requiring the filing of audit report along with the return has been held to be directory and not mandatory.

21. A Full Bench decision of Kerala High Court in CIT, Kerala v. Malayalam Plantations Ltd. ((1976) 103 ITR 835) concerns with the claim of assessee to higher development allowance under Section 33A of the Income tax Act, 1961 which inter alia required the assessee, which was a plantation company owning Tea, Coffee estates, that in order to avail the benefit of development allowance under Section 33A, it was required to furnish certificate from the Tea Board in form No. 5 and statement of particulars in form No. 5A to the Income Tax Officer along with his return of income for the previous year for which deduction has been claimed.

22. In the like circumstances, as arising before us, the Income Tax Tribunal, Kochin has referred the question “whether on the facts and circumstances, Tribunal was right in holding that in order to entitle to claim development allowance provided in Section 33A of the Income tax Act, 1961, it is not mandatory within the meaning of rule 8A(d) of the Income Tax Rules, 1962 that the assessee should furnish to the Income Tax Officer, the certificate from the Tea Board in the prescribed form along with the report of audit for the year in which allowance is claimed?” The Tribunal has held in favour of the assessee and against the Revenue, that strict requirement of filing of certificate was not mandatory.

23. The Full Bench after referring to well recognised principle when the expression “shall” have to be read mandatory and when it has to read directory as the expression “may”, opined that the examination of the provision, therefore, must be with a view to ascertain the intent of the legislature where the provision of a statute arises for consideration and that of the rule making authority when it is a rule that calls for consideration. The grant of development allowance is provided by Section 33A of the Act. Such allowance is provided by Section 33A of the Act. Such allowance is to be granted to persons who had developed tea estates in the manner provided in the Section. That is subject to certain conditions prescribed. The conditions mentioned in Rule 8A indicate that the object of the provision is to ensure that the assessee has really developed the tea estate by planting tea bushes as contemplated in Section 33A. It may not be possible for the Income Tax Officer to examine every case of a claim in detail and evidently the provision for certificate from the Tea Board is envisaged as evidence of the petitioner's entitlement to the development allowance. If the object of the provision is to secure the benefit of the development allowance provided under Section 33A on proof of the circumstances justifying such allowance and the certificate is a material to prove such a case, it goes without saying that it appears to be unreasonable to think that this claim for allowance should not be forfeited by the production of the certificate otherwise than along with the return.

24. A Bench decision of the Gujarat High Court in CIT v. Gujrat Oil and Allied Industries ((1993) 201 I.T.R 325) while considering sub-section (6A) of Section 80J envisages special deduction in the case of newly established undertaking. Sub-section (6A) requires the assessee in order to claim deduction must get his accounts audited and auditor's report evidencing that all the accounts have been audited is to be filed along with the return of the income. In the case before the Gujarat High Court, the assessee has not submitted the audit report along with the return and the Assessing Officer had allowed the deduction under Section 80J without noticing this fact. The CIT acting under Section 263 of the Income Tax Act was of the opinion that in absence of such auditors' report, allowance of deduction under Section 80J was erroneous and prejudicial to the interest of the Revenue and, therefore, it required Income Tax Officer to make additions by disallowing the claim of the assessed under Section 80J. During the course of proceedings under Section 263, assessee produced auditor's report about his audited accounts. The Court addressing to this controversy said that:—

“It is of course true that this benefit will be subject to what is provided by sub-section (6A). When we turn to the first part of sub-section (6A), we find that there is a mandate to the assessing authority that the deductions under sub-section (1) from profits and gains shall not be admissible unless the accounts for the previous year relevant to the assessment year for which the deduction is claimed have been audited by an accountant. That part of the provision obviously refers to the stage where the assessing authority sits down to apply its mind on the returned figures with a view to finding out whether the deductions contemplated by sub-section (1) of Section 80J are admissible or not and at that stage, the assessing authority has to find out whether the account of the concerned industrial undertaking claiming such deduction so far as the previous year relevant to the assessment year is concerned are audited or not and such audit has to be done by an accountant as defined by the Explanation to sub-section (2) of Section 288 of the Act. It cannot, therefore, be gainsaid and it was not disputed by any of the parties that this part of the provision is mandatory in nature. It becomes obvious that when the assessment is being framed by the Income-tax Officer, the assessee, i.e, the concerned industrial undertaking must be able to show to the Income-tax Officer that the relevant accounts for the previous year have been already audited by a competent accountant as defined in the Explanation below sub-section (2) of Section 288 of the Act. It is not in dispute that this part of the provision was complied with by the assessee as, by the time the assessment was framed on September 18, 1979, the audited accounts and report of the qualified accountant were available with the Income-tax Officer as they were already filed at least about six months back by March 7, 1979. But the dispute centres round the second part of sub-section (5A) of Section 80J. The assessee, while he filed the returns on June 29, 1976 had not furnished along with the return, the audit report of the accountant for the relevant period and such a report along with audited accounts came to be filed later on but before the assessment was completed. The Income-tax Officer and the Appellate Assistant Commissioner took the view that, therefore, the requirement contained in the second part of Section 80J, sub-section (6A) were not complied with by the assessee as the report was not furnished along with the return of income but subsequent to the filing of the return. It is only on this ground that they denied the benefit of Section 80J of the Act to the assessee. The Tribunal took a contrary view on a close scrutiny of sub-section (6A) of Section 80J of the Act. 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 the 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 reasons, 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 Income-tax Officer. If any literal compliance with the word “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……

…… 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 Income-tax Officer before the assessment is framed and, by that time, if the assessee’ puts his house in order, the Income-tax Officer 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 Income-tax Officer applies his mind to the merits of the return when he sits down to frame the assessment. In fact, that is the relevant stage at which he 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)……

25. The aforesaid ratio in our view, enunciate the scope of sub-section (5) of Section 32AB also which provision is couched in the like manner in which sub-section (6A) of Section 80J has been framed.

26. It may not be out of place to mention here that in coming to this conclusion, the Gujarat High Court has applied the principle enunciated earlier by Patna High Court in CIT v. Sitaram Bhagwandas ((1976) 102 ITR 560 (Patna)) and Allahabad High Court in Addl. Commissioner Of Income-Tax v. Murlidhar Mathura Prasad. ((1979) 118 ITR 392 (All)).

27. Undoubtedly, the Division Bench of Punjab & Hariyana High Court in Commissioner Of Income-Tax v. Jaideep Industries. ((1989) 180 ITR 81 (P&H)), has struck a different note by taking a different view but the same view has not been adhered to by the same court in its Full Bench decision in ITO v. Novelty Garments (256 ITR 688) in which the judgment of the Division Bench has been overruled.

28. A Division Bench of the Gujarat High Court in later decision in Zenith Processing Mills v. Commissioner of Income Tax (219 ITR 721) has reached the same conclusion following its earlier decision in CIT v. Gujarat Oil and Allied Industries ((1993) 201 ITR 325 (Guj)). The Division Bench has further reasoned that it is an inherent part of Section 143(3) that where the Assessing Officer is not inclined to accept the return submitted by the assessee and if he wants to modify the assessment from the return, a show cause notice is required to be given to the assessee. Giving of this opportunity will include opportunity to erase procedural defect, if any, which is directory in nature. If we examine the matter from that point of view we are satisfied that in the present case, the claim made by the assessee though not admissible for want of he auditor's report on record, yet the same was allowed under a mistake by he Assessing Officer leaving no opportunity to the assessee to complete the requirements. The condition of non-fulfillment of he requirement under sub-section (6A) was made known to the assessee during the proceedings under Section 263 although the assessee asked for an opportunity to produce the auditor's report to fulfill the requirements under Section 80J(6A). The Commissioner of Income-tax ought to have afforded an opportunity to the assessee to furnish that proof and then examine the admissibility of the claim in the light of the proof furnished.

29. The Court stated the principle as under:—

“From a perusal of sub-section (6A), it is apparent that compliance with two things is necessary. The first requirement is that the statement of accounts for the previous year relevant to the assessment year for which deduction is claimed must have been audited by an accountant and the second part is that the assessee must furnish along with his return of income the report of such audit in the prescribed from duly signed and verified by such accountant. It can be stated without fear of contradiction that the former is the requirement which furnishes substantial foundation for claiming allowance and the latter is the requirement of furnishing proof that foundation for claiming such deduction has been laid. In our opinion, while compliance with the former before the deduction is claimed is mandatory and so far as manner of submitting proof of such compliance of filing along with the return is concerned, is directory because such requirement falls in the realm of procedure for furnishing evidence in support of the claim and which can be furnished at the time while allowance or dis-allowance under Section 80J is being considered by the concerned authority.”

30. The ratio of all these decisions is primarily founded on the well known principle of interpretation of statutes that while the substantive provisions of taxing law are subjected to the rule of interpretation, the machinery rules are not subjected to such direct principles. In this connection, the reference may be made to the Supreme Court decision in CIT v. National Taj Traders ((1980) 121 ITR 535), wherein the Supreme Court has stated that:—

“It is well settled that the principle that the fiscal statute should be construed strictly is applicable only to taxing provisions such as a charging provision or a provision imposing penalty and not to those parts of the statute which contain machinery provisions and by no stretch could S. 33B be regarded as a charging provision.”

31. From the aforesaid, two principles which can be culled out with reference to Section 32AB (5) can be stated thus, that from the perusal of sub-section (5) of Section 32AB of the Income tax Act, 1961 for claiming deduction under Section 32AB, it is apparent that compliance of Section 2 is necessary. The first requirement is that the statement of accounts for the previous year relevant to the assessment year for which deduction is claimed may have been audited and second is that the assessee must furnish along with the return of his income the report of such audit in prescribed form as a proof of accounts. Further the audit forms substantive foundation for claiming allowance and such foundation must exist at the time of filing reference viz., the accounts must have been audited before claiming deduction in a return, and in the absence of which, such deduction cannot be claimed. Compliance of the aforesaid requirement is mandatory before deduction is claimed. So far as such compliance along with return is concerned, it is directory and this procedural compliance can be made as such during the course of assessment proceedings. As in the present case indisputably the accounts had been audited on 25.9.1988 much before the return of income claiming deduction was filed on 2.2.1989, the claim of the assessee to deduction in respect of deposit made with development Bank was rightly allowed by the Tribunal.

32. As a result of aforesaid discussion, we do not find any force in this appeal and the appeal is hereby dismissed.