I.T.A No. 257 of 2009

Decided on November 2, 2010

The Judgment of the Court was delivered by

C.N Ramachandran Nair, J.:— This is an appeal filed by the Revenue challenging the order of the Tribunal confirming the first appellate authority's order which declared the assessment as time-barred under section 153 of the Income-tax Act and hence invalid. In this case the income returned by the assessee was Rs. 76,84,450 whereas the income assessed by the Assessing Officer after getting the accounts audited by the auditor appointed by the Department was Rs. 6,02,07,350 and so much so the tax dispute is above the limit that entitles the Department to file the appeal under instruction issued by the Central Board of Direct Taxes.

2. We have heard the senior counsel Sri P.K.R Menon appearing for the appellant-Revenue and Sri P. Balakrishnan, advocate appearing for the respondent-assessee.

3. The facts leading to the controversy are the following. The return filed by the assessee for the assessment year 1995-96 was processed under section 143(1)(a) of the Act and intimation was forwarded to the assessee. Thereafter, assessment was taken as a scrutiny assessment and notice was issued to the assessee under section 143(2) of the Act. The developments subsequent to service of intimation under section 143(1)(a) with corresponding dates are given hereunder, which are relevant for deciding the issue.

(1) Date of issue of assessment notice under section 143(2) March 19, 1996. (2) Date on which auditor was appointed by the Assessing Officer under section 142(2A) after obtaining approval from the Commissioner September 9, 1997. (3) Time granted by the Assessing Officer to the assessee to produce auditor's report December 31, 1997.

(4) Date on which the chartered accountant appointed by the Department requested for extension of time for completion of auditing and for filing report December 24, 1997. (5) Date on which the officer after obtaining approval from the Commissioner extended the time for completion of auditing and for filing report in terms of his request January 29, 1998. (6) Time extended by the Assessing Officer for filing the audit report up to February 15, 1998. (7) Date on which the assessee filed the audit report prepared by the auditor appointed by the Assessing Officer February 17, 1998. (8) Date on which assessment was finally completed September 3, 1998. (9) Time available for completion of assessment under Explanation 1(iii) to section 153(3) September 7, 1998.

4. The contention raised by the assessee that found acceptance with the first appellate authority and the Tribunal is that assessment to be valid should have been completed within two years from the end of the previous year as required under section 153(1)(a) and the extension of time available under clause (iii) of Explanation 1 to section 153(3) as amended by the Finance (No. 2) Act of 1996 is only the time granted by the Assessing Officer to the assessee to furnish audited accounts under section 142(2A) which is from the date the Assessing Officer appointed the auditor till the last date granted to the assessee to furnish the audit report. In fact, prior to the amendment by the Finance (No. 2) Act of 1996, clause (iii) of Explanation 1 to section 153(3) specifies the period of extension of time available for assessment as from the date of direction for auditing issued by the Assessing Officer till the actual date on which the assessee furnished the audit report. This was however amended by the Finance (No. 2) Act, 1996 by restricting extension of time only up to the date the assessee was required or granted time to furnish the audit report. In other words, after the amendment, the extended period of limitation will not be available if the assessee furnishes the audit report beyond the date granted by the officer for furnishing it. There is a controversy as to whether the amended provisions introduced by the Finance (No. 2) Act of 1996, with effect from April 1, 1996 is applicable for the assessment year 1995-96 which is the year of assessment involved in this case. However, we do not propose to consider this issue because, going by the meaning we assign to section 142(2A) and (2C), we feel the assessment is not time-barred even if the amended provisions are applied for considering the validity of assessment for the year 1995-96. The provisions of section 142(2A) and (2C), the scope and meaning of which will decide the issue, are extracted hereunder for easy reference.

“142. (2A) If, at any stage of the proceedings before him, the Assessing Officer, having regard to the nature and complexity of the accounts of the assessee and the interests of the Revenue, is of the opinion that it is necessary so to do, he may, with the previous approval of the Chief Commissioner or Commissioner, direct the assessee to get the accounts audited by an accountant, as defined in the Explanation below sub-section (2) of section 288, nominated by the Chief Commissioner or Commissioner in this behalf and to furnish a report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed and such other particulars as the Assessing Officer may require…

(2C) Every report under sub-section (2A) shall be furnished by the assessee to the Assessing Officer within such period as may be specified by the Assessing Officer:

Provided that the Assessing Officer may, on an application made in this behalf by the assessee and for any good and sufficient reason, extend the said period by such further period or periods as he thinks fit; so, however, that the aggregate of the period originally fixed and the period or periods so extended shall, not, in any case, exceed one hundred and eighty days from the date on which the direction under sub-section (2A) is received by the assessee.”

5. The contention of the Revenue is that the Assessing Officer is free to extend the time for furnishing the audit report on application by the auditor without the involvement of the assessee. The counsel for the assessee contended that the proviso to section 142(2C) authorises the officer to extend the time for completion of audit and for filing report only on the request by the assessee and the assessee has in fact not applied for extension of time for furnishing the audit report and so much so, limitation has to be reckoned by excluding only the time originally granted by the Assessing Officer for producing the audit report and the time extended by the Assessing Officer on auditor's request cannot be taken. Admittedly, the time originally granted for furnishing the audit report is from September 9, 1997 to December 31, 1997 which covers 114 days. However, if the extension of time for audit granted by the Assessing Officer on the request of the auditor is also reckoned, the time granted up to February 15, 1998 covers 160 days and if the extension of time granted by the officer on the auditor's request is valid then the Assessing Officer gets time up to September 7, 1998 to complete the assessment and since the assessment was in fact completed on September 3, 1998, it is perfectly valid.

6. After hearing both sides and after going through the above provisions of the section, what we find is that sub-section (2A) of section 142 authorises the Assessing Officer with the previous approval of the Chief Commissioner or Commissioner to direct the assessee to get the accounts audited by an accountant nominated by the Chief Commissioner or Commissioner, as the case may be. Even though this provision only says that audit report to be called for should be in the prescribed form, this provision does not prescribe the Assessing Officer's power to fix time to complete audit and furnish the report. However, sub-section (2C) authorises the Assessing Officer to fix the time within which the audit report should be furnished by the assessee from the auditor appointed by the Department under clause (2A). The proviso to sub-section (2C) authorises the Assessing Officer to extend the time for producing the audit report on application made by the assessee and if the Assessing Officer finds that the assessee has established good and sufficient reason for getting the time extended for furnishing the audit report, he should extend the time. Based on this proviso, the contention raised by the assessee's counsel, which was the contention raised before the first appellate authority as well as the Tribunal is that, once time is fixed by the Assessing Officer for the assessee to produce audit report prepared by the auditor appointed by the Department under sub-section (2A), extension of time can be granted only on request by the assessee. Since the assessee did not apply for extension of time and since extension of time in this case was applied for only by the auditor, the extension of time granted by the Assessing Officer though after obtaining approval from the Commissioner is not in terms of the proviso to sub-section (2C) and so much so, the extension of time so granted by the officer cannot be reckoned for the purpose of extending the limitation for assessment available under clause (iii) of Explanation 1 of section 153(3) of the Act, is the contention of the assessee. The first appellate authority as well as the Tribunal completely agreed with the contention of the assessee because, according to them, the extension of time for filing audit report can be granted only on an application by the assessee which means that the Assessing Officer has no power to grant extension of time suo motu or on request by the auditor. We are unable to agree with this contention of the assessee which found acceptance with the first appellate authority as well as the Tribunal. In our view the scheme of audit by the auditor appointed by the Department under the provisions applies as follows. The Assessing Officer has under sub-section (2C) the authority to fix the time for the assessee to get the accounts audited and produce the auditor's report from the auditor appointed by him under section 142(2A). Necessarily the Assessing Officer has to fix the time after consultation with the chartered accountant because only the latter knows what time he requires for completing the audit entrusted to him. However, it may so happen that the chartered accountant, for many reasons, may not be able to complete the audit or prepare the report within the time granted by the Assessing Officer and it is absolutely within his powers to request for extension of time from the Assessing Officer for completion of audit and for filing report. If the officer is convinced, he is free to extend the time initially granted under sub-section (2C). In this case, admittedly, within the time originally granted by the Assessing Officer for completion of audit and for filing report, the auditor requested the officer on December 24, 1997 for further time up to February 15, 1998 and the Assessing Officer, after getting approval from the Commissioner granted time in terms of the request of the auditor. We do not think there is any need to involve the assessee at this stage because, the Assessing Officer, who has the authority to fix the time for submission of audit report under sub-section (2C) has the inherent authority to extend the time on request by the auditor if he finds that the auditor's request is reasonable and justified. It is pertinent to note that the Legislature has carefully avoided fixing any statutory time for filing audit report by the auditor appointed under section 142(2A) and when discretion to fix time is conferred on the officer under sub-section (2C), it obviously means that he should fix the time in consultation with the auditor and by taking into consideration all reasonable suggestions from the auditor. If the powers of the officer to fix time for filing audit report under sub-section (2C) were not left flexible or elastic, the very scheme of section 142(2A) would be frustrated and defeated, if the auditor fails to finish the work within the time originally granted by the officer under sub-section (2C). The proviso to sub-section (2C) entitles the assessee to apply for extension of time for reasons obviously attributable to him and it is for him to produce good and sufficient reason before the Assessing Officer along with application for extension of time for getting the audit done and for producing the audit report. It may so happen that the assessee or his employee may turn sick or may need more time to produce the entire books of account or to answer queries of the auditor to complete the auditing and for producing the audit report within the time originally granted by the Assessing Officer. In that event, the assessee can legitimately approach the Assessing Officer with a request for extension of time for furnishing the audit report. However, the proviso specifically authorising the assessee to apply for and obtain extension of time from the officer for furnishing audit report does not mean that the Assessing Officer lacks the authority under sub-section (2C) to extend the time on the request from the chartered accountant. In our view, since auditing has to be done by the auditor appointed under sub-section (2A) of section 142, the convenience of the auditor is what matters and if the auditor approaches with a request for extension of time the Assessing Officer is bound to consider the same and grant extension of time, if he is satisfied that the request is bona fide. In fact, if the auditor drags his feet and unreasonably delays the report, the officer can extend the time for furnishing report suo motu and approach the Commissioner or Chief Commissioner for appointing a substituted auditor by following the procedure under section 142(2A). While considering the powers to the Assessing Officer under sub-section (2C), it is worthwhile to note the observation of the Supreme Court in the decision reported in Balwant Singh v. Jagdish Singh, (2010) 8 SCC 685, 698 wherein the Supreme Court held as follows:

“It must be kept in mind that whenever a law is enacted by the Legislature, it is intended to be enforced in its proper perspective. It is an equally settled principle of law that the provisions of a statute, including every word, have to be given full effect, keeping the legislative intent in mind, in order to ensure that the projected object is achieved. In other words, no provisions can be treated to have been enacted purposelessly.”

7. From the above we conclude that the authority of the Assessing Officer to specify the period for the assessee to furnish the audit report under subsection (2C) includes the authority to refix the period, whether by extending or by reducing it and it can be done suo motu or on the request from the auditor. The proviso specifically confers right on the assessee for his own reasons to request for extension of time originally granted by the Assessing Officer which also the officer has to consider and grant if the assessee establishes sufficient reason. In this case the audit report was filed on February 17, 1998 and the time extended by the Assessing Officer for furnishing audit report was only up to February 15, 1998. Therefore, the Assessing Officer is entitled to reckon the time only up to February 15, 1998 for extending limitation in terms of the amended provisions of clause (iii) of Explanation 1 to section 153(3) for completing the assessment and not upto February 17, 1998, which is the actual date on which audit report was furnished by the assessee. Even by reckoning the extended period of limitation upto the date extended by the Assessing Officer to furnish the audit report, that is February 15, 1998, the Assessing Officer gets a total extension of 160 days beyond the time provided under section 153(1) of the Act for completing the assessment that is up to September 7, 1998, whereas the assessment was completed on September 3, 1998. We, therefore, hold that the order of the first appellate authority and that of the Tribunal holding that the assessment is time barred is liable to be vacated and we do so. Accordingly, we allow the appeal by setting aside the orders of the Tribunal and that of the first appellate authority and restore the appeal to the first appellate authority for decision on the merits.