Commissioner of Income Tax vs A.N. Arunachalam

Rangarajan J.

The facts leading to the case are as follows :

The assessee is a registered firm of five partners, engaged in the business of powerloom cloth. In the return filed on June 28, 1977, the assessee

claimed relief u/s 80J. However, the return was not accompanied by an audit report and certificate, which were filed only on July 23, 1977. Even

though the audit report and certificate were before the Income Tax Officer when he made the assessment on November 26, 1977, he denied the

relief on the ground that the return was not accompanied by the audit report as required by section 80J(6A) of the Act. This was confirmed on

appeal. In the further appeal, the Appellate Tribunal came to the conclusion that the requirement of the section 80J(6A) was only directory and as

long as the audit report was available before the assessment was made, the assessee could not be denied the deduction. At the instance of the

Revenue, the following questions have been referred :

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in law in holding that the assessee is entitled to

the relief u/s 80J of the Act, even though the report and certificate were not filed along with the return of income ?

(ii) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in law in holding that the provisions of section

80J(6A) are not mandatory but only directory in nature ?

Before us, learned counsel for the Revenue relied on the provisions of section 80J(6A) of the Income Tax Act, which is as follows :

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.

Stress was laid upon the provision that the deduction shall not be admissible unless the accounts were audited and the assessee furnished along

with the return, the report of such audit. Reliance was also placed on the decision of the Punjab and Haryana High Court in Commissioner of

Income Tax Vs. Jaideep Industries, to contend that the provision was mandatory and, therefore, the Tribunal was not right in granting the relief,

when the report had been furnished along with the return. On the other hand, it has been contended by learned counsel for the assessee that the

Gujarat High Court has taken a different view in Commissioner of Income Tax Vs. Gujarat Oil and Allied Industries, and even in respect of similar

provisions of section 184(7), before it was amended to relieve its harshness, there was difference of opinion as to whether a return should be

accompanied by the declaration for getting registration, as between the Madras High Court in Halima Fancy Stores Vs. Commissioner of Income

Tax, and the Allahabad High Court in Addl. Commissioner of Income Tax Vs. Murlidhar Mathura Prasad, . It was pointed out that the Patna High

Court also has taken a similar view in Commissioner of Income Tax Vs. Sitaram Bhagwandas, . It was submitted that the provisions of section

80J(6A) should not be construed as to frustrate that objective.

On a consideration of the submissions of both sides, we are inclined to take the same view as the Gujarat High Court, which has differed from

the Punjab and Haryana High Court. The opening words of sub-section (6A) themselves indicate the necessity for submitting an audit report

inasmuch as the accounts of companies are audited and assessees other than companies were required to get the accounts audited for the purpose

of section 80J. Admittedly, in the case of companies, there is no insistence on the audit report accompanying the return for the purpose of obtaining

the relief u/s 80J. Therefore, if the present 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. It has been held by the Supreme Court in K.P. Varghese Vs.

Income Tax Officer, Ernakulam and Another, that a section of the Act should not be so construed as to make it unconstitutional. Secondly, there is

no stipulation 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 was required to do was to delay the filing of the return until the audit report was made

available. As the Tribunal has observed, the preparation of the audit report was beyond the control of the assessee and hence the assessee could

justifiably delay the filing of the return itself so that it is accompanied by the audit report. In such an event, the Income Tax Officer could not deny

the deduction since the purpose of the section would have been fulfilled even though the return itself was filed beyond the prescribed time. For

instance, in the present case, if the assessee had filed the return with the audit report on October 21, 1977, the relief could not have been denied

whereas it is sought to be denied only because he filed the return on June 29, 1977, and filed the audit report later on October 21, 1977, when it

was made available. The section cannot also be construed to give such an incongruous result. As far as we can see, the stress laid by this provision

was only to have the accounts audited and to make the audit report available for the Income Tax Officer to make a proper assessment. Hence, the

audit report was to be available before the assessment was made. We agree with the view of the Gujarat High Court that the objective of the

section should be carried out by granting the relief rather than pick out a venial fault for denying the relief, intended to be given by the statute. In

coming to this conclusion, we have in mind also the principles stated by the Supreme Court in The Director of Inspection of Income Tax

(Investigation), New Delhi and Another Vs. Pooran Mal and Sons and Another, , which are as follows (headnote) :

It is not every provision of a taxing statute that will fall under the rule of strict interpretation. The question whether a certain provision of law is

directory does not fall to be decided on different standards because it is found in a taxing statute. There is no rule that every provision in a taxing

statute is mandatory. The strict construction that a citizen does not become liable to tax unless he comes within the specific words of a statute is a

different proposition. That a person cannot be taxed on the principle of estoppel does not admit of much argument.

We, therefore, agree with the view of the Tribunal that the provisions of section 80J(6A) of the Income Tax Act were not mandatory and we

answer the questions in the affirmative and against the Revenue, with costs. Counsel fee Rs. 500.