CIT v. Gupta Fabs

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The Tax Publishers2005 TaxPub(DT) 1211 (P&H-HC) : (2005) 004 (I) ITCL 0130 : (2005) 274 ITR 0620 CIT v. Gupta Fabs () INCOME TAX --Deduction under section 80HHC----CONDITION PRECEDENTFiling of audit report alongwith return--The assessee was an exporter. During the year 1997-98, it received incentives and duty draw-backs amounting to Rs. 3,24,083 on exports. In the return filed for the assessment year 1998-99, the assessee claimed exemption to the extent of Rs. 2,08,802 in lieu of incentives and duty draw-backs received in the previous financial year and showed the assessable income as nil. In the computation of total income attached with the return of income a note was put by the assessee to the effect that though it is eligible for deduction under section 80HHC, the same is not being claimed as the total income had been reduced to nil due to cash incentive and duty drawback. On assessment, these incentives were added bank and the income turned to a positive figure. The assessee claimed deduction under section 80HHC, thereafter. The AO rejected the assessee s claim for deduction in terms of section 80HHC, on the ground that it had not filed audit report in Form No. 10CCAB with the return. The Tribunal granted relief to the assessee by making observations that the department desired that the assessee should have done a thing which it bona fidely believed was not required to be done. It cannot be disputed that whether cash incentives were taxable or not was indeed a debatable issue and several judicial pronouncements were in favour of the assessee. In view of this judicial scenario regarding taxability of cash incentives, the assessee was justified in claiming such receipts as exempt. As a result of such claim, the assessee s income was reduced to nil which disentitled it from claiming deduction under section 80HHC and hence for bona fide reasons the audit report was not filed. This fact was also evident from the note appearing in the computation of income. No sooner the income turned into a positive figure on the ground of inclusion of cash incentives, the assessee filed the mandatory audit report and claimed deduction under section 80HHC. Held: Filing of audit report alongwith return of income is not mandatory and if it had been filed before completion of assessment, the assessee was entitled to relief under section 80HHC. Income Tax Act, 1961 s.80HHC CIT v. Gupta Fabs In the Punjab And Haryana High Court G. S. Singhvi And Jasbir Singh JJ. Income Tax Reference No. 47 of 1998 13 January 2005. Counsel : Rajesh Bindal, for the Commissioner None appeared, for the Assessee. JUDGMENT G.S. Singhvi J. On an application filed by the CIT(A), Rohtak, the Income Tax Appellate Tribunal, Delhi Bench 'B', New Delhi (hereinafter referred to as , 'the Tribunal'), has referred the following question of law for the opinion of this court : 'Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was justified to direct the assessing officer to allow deduction under section 80HHC of the Income Tax Act, 1961, to the assessee when the mandatory condition of filing of audit report along with the return of income, for the purpose of deduction under section 80HHC was not satisfied, and when the jurisdictional High Court decision in the case of CIT v. Jaideep Industries (1989) 180 ITR 81 (P&H) was available which was contrary to the view taken ?' The assessee is an exporter. During the year 1997-98, it received incentives and duty draw-backs amounting to Rs. 3,24,083 on exports. In the return filed for the assessment year 1998-99, the assessee claimed exemption to the extent of Rs. 2,08,802 in lieu of incentives and duty draw-backs received in the previous financial year and showed the assessable income as nil. In the computation of total income attached with the return of income a note was also put to the effect that though the assessee is eligible for deduction under section 80HHC, the same is not being claimed as the total income has been reduced to nil. The assessing officer rejected the assessee's claim for deduction in terms of section 80HHC of the Income Tax Act, 1961 (hereinafter referred to as , 'the Act'), on the ground that it had not filed audit report in Form No. 10CCAB with the return. The CIT(A), Karnal (hereinafter referred to as , 'the CIT(A)'), confirmed the order of the assessing officer and dismissed the appeal filed by the assessee. On further appeal, the Tribunal granted relief to the assessee by making the following observations : 'As regards the alternative ground, the only reason for disallowance of the assessee's claim under section 80HHC is that no audit report as required under that section was filed by the assessee. The other conditions which are required to be fulfilled to claim deduction under section 80HHC are not in dispute. It is difficult for us to agree with the contentions of the department. The department desires that the assessee should have done a thing which it bona fidely believed was not required to be done. It cannot be disputed that whether cash incentives were taxable or not was indeed a debatable issue and many judicial pronouncements were in favour of the assessee. In view of this judicial scenario regarding the taxability of cash incentives, the assessee was justified in claiming such receipts as exempt. As a result of such claim, the assessee's income was reduced to nil which disentitled it to claim deduction under section 80HHC and hence for bona fide reasons the audit report was not filed. This fact is also evident from the note appearing in the computation of income. No sooner the income turned into a positive figure on the ground of inclusive of cash incentives, the assessee filed the mandatory audit report and claimed deduction under section 80HHC. In the case in CIT v. Shivanand Electronics (1994) 209 ITR 63 (Bom), it has been held that if audit report is filed before the completion of assessment, it would not be fatal to the claim of the assessee. Of course this relaxation cannot be claimed as a matter of right by the assessee, except only in genuine and bona fide cases. In the case before us, there is no reason to doubt the bona fides of the assessee in claiming the deduction and hence the reason for not allowing the claim, is not justifiable. We, therefore, direct that the assessee be given deduction under section 80HHC.' We have heard Shri Rajesh Bindal. It appears from the frame of the question that the Tribunal made reference to this court because it felt that order dated 25-10-1996, passed on the assessee's appeal was not in consonance with the law laid down by the jurisdictional High Court in CIT v. Jaideep Industries (supra). At the hearing, Shri Rajesh Bindal fairly stated that the decision of the Division Bench in CIT v. Jaideep Industries (supra) has been overruled by the Full Bench in CIT v. Punjab Financial Corporation (2002) 254 ITR 6 (P & H). We have carefully studied the last mentioned judgment. The Full Bench interpreted section 32AB(1) and (5) of the Act and held that while sub-section (1) of section 32AB was mandatory, sub-section (5) thereof was not mandatory and the assessee's claim for deduction cannot be rejected only on the ground of non-filing of audit report along with the return. The relevant extracts of that judgment are reproduced below (headnote) : 'The conditions embodied in sub-section (1) of section 32-AB of the Income Tax Act, 1961, the fulfilment of which entitles the assessee to claim deduction on the basis of Investment Deposit Account are mandatory, because the substratum of the claim of deduction is the deposit of the amount in the account maintained by the assessee with the Development Bank or utilisation thereof for purchase of new ship, new aircraft or new machinery or plant, and, therefore, unless the conditions embodied in sub-section (1) are satisfied the assessee cannot claim deduction. However, this is not true of sub-section (5) which only provides for filing the report of audit prepared by the accountant as defined in the Explanation below section 288(2) along with the return. The assessee's claim for deduction under section 32-AB(1)(a) does not depend on the submission of the audit report along with the return but on deposit of the amount in the account maintained by him with the Development Bank before the expiry of six months from the end of the previous year or before furnishing the return of income, whichever is earlier. The requirement of filing the duly audited report along with the return cannot be treated as mandatory and the assessee cannot be deprived of the benefit of deduction if the same is filed before the finalisation of the assessment. Sub-section (5) of section 32-AB is not mandatory and the assessing officer has discretion to entertain the audit report, even though it has not been filed with the return, and give benefit of the deduction to the assessee in terms of section 32AB(1).... The question as to 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 meaning and intention of the legislature must govern, and these are to be ascertained not only from the phraseology of the provision but also by considering its nature, its design, and the consequences which would follow from construing it one way or the other. The use of the word 'shall' in a statutory provision, though generally taken in a mandatory sense, does not necessarily mean that in every case it shall have that effect, that is to say, unless the words of the statute are punctiliously followed, the proceeding or the outcome of the proceeding would be invalid. On the other hand, it is not always correct to say that where the word 'may' has been used, the statute is only permissive or directory in the sense that non-compliance with those provisions will not render the proceedings invalid.' Since the provisions of section 80HHC of the Act are substantially similar to section 32AB(5), we have no hesitation to hold that the Tribunal did not commit any error by granting relief to the assessee. In the result, the question referred by the Tribunal is answered against the revenue and in favour of the assessee. The reference is disposed of in the manner indicated above. OPEN SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2005 TaxPub(DT) 1211 (P&H-HC) : (2005) 004 (I) ITCL 0130 : (2005) 274 ITR 0620

CIT v. Gupta Fabs ()

INCOME TAX

--Deduction under section 80HHC----CONDITION PRECEDENTFiling of audit report alongwith return--The assessee was an exporter. During the year 1997-98, it received incentives and duty draw-backs amounting to Rs. 3,24,083 on exports. In the return filed for the assessment year 1998-99, the assessee claimed exemption to the extent of Rs. 2,08,802 in lieu of incentives and duty draw-backs received in the previous financial year and showed the assessable income as nil. In the computation of total income attached with the return of income a note was put by the assessee to the effect that though it is eligible for deduction under section 80HHC, the same is not being claimed as the total income had been reduced to nil due to cash incentive and duty drawback. On assessment, these incentives were added bank and the income turned to a positive figure. The assessee claimed deduction under section 80HHC, thereafter. The AO rejected the assessee s claim for deduction in terms of section 80HHC, on the ground that it had not filed audit report in Form No. 10CCAB with the return. The Tribunal granted relief to the assessee by making observations that the department desired that the assessee should have done a thing which it bona fidely believed was not required to be done. It cannot be disputed that whether cash incentives were taxable or not was indeed a debatable issue and several judicial pronouncements were in favour of the assessee. In view of this judicial scenario regarding taxability of cash incentives, the assessee was justified in claiming such receipts as exempt. As a result of such claim, the assessee s income was reduced to nil which disentitled it from claiming deduction under section 80HHC and hence for bona fide reasons the audit report was not filed. This fact was also evident from the note appearing in the computation of income. No sooner the income turned into a positive figure on the ground of inclusion of cash incentives, the assessee filed the mandatory audit report and claimed deduction under section 80HHC. Held: Filing of audit report alongwith return of income is not mandatory and if it had been filed before completion of assessment, the assessee was entitled to relief under section 80HHC.

Income Tax Act, 1961 s.80HHC

In the Punjab And Haryana High Court G. S. Singhvi And Jasbir Singh JJ.

Income Tax Reference No. 47 of 1998 13 January 2005.

Counsel : Rajesh Bindal, for the Commissioner None appeared, for the Assessee.

JUDGMENT

G.S. Singhvi J.

On an application filed by the CIT(A), Rohtak, the Income Tax Appellate Tribunal, Delhi Bench 'B', New Delhi (hereinafter referred to as , 'the Tribunal'), has referred the following question of law for the opinion of this court :

'Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was justified to direct the assessing officer to allow deduction under section 80HHC of the Income Tax Act, 1961, to the assessee when the mandatory condition of filing of audit report along with the return of income, for the purpose of deduction under section 80HHC was not satisfied, and when the jurisdictional High Court decision in the case of CIT v. Jaideep Industries (1989) 180 ITR 81 (P&H) was available which was contrary to the view taken ?'

The assessee is an exporter. During the year 1997-98, it received incentives and duty draw-backs amounting to Rs. 3,24,083 on exports. In the return filed for the assessment year 1998-99, the assessee claimed exemption to the extent of Rs. 2,08,802 in lieu of incentives and duty draw-backs received in the previous financial year and showed the assessable income as nil. In the computation of total income attached with the return of income a note was also put to the effect that though the assessee is eligible for deduction under section 80HHC, the same is not being claimed as the total income has been reduced to nil. The assessing officer rejected the assessee's claim for deduction in terms of section 80HHC of the Income Tax Act, 1961 (hereinafter referred to as , 'the Act'), on the ground that it had not filed audit report in Form No. 10CCAB with the return. The CIT(A), Karnal (hereinafter referred to as , 'the CIT(A)'), confirmed the order of the assessing officer and dismissed the appeal filed by the assessee. On further appeal, the Tribunal granted relief to the assessee by making the following observations :

'As regards the alternative ground, the only reason for disallowance of the assessee's claim under section 80HHC is that no audit report as required under that section was filed by the assessee. The other conditions which are required to be fulfilled to claim deduction under section 80HHC are not in dispute. It is difficult for us to agree with the contentions of the department. The department desires that the assessee should have done a thing which it bona fidely believed was not required to be done. It cannot be disputed that whether cash incentives were taxable or not was indeed a debatable issue and many judicial pronouncements were in favour of the assessee. In view of this judicial scenario regarding the taxability of cash incentives, the assessee was justified in claiming such receipts as exempt. As a result of such claim, the assessee's income was reduced to nil which disentitled it to claim deduction under section 80HHC and hence for bona fide reasons the audit report was not filed. This fact is also evident from the note appearing in the computation of income. No sooner the income turned into a positive figure on the ground of inclusive of cash incentives, the assessee filed the mandatory audit report and claimed deduction under section 80HHC. In the case in CIT v. Shivanand Electronics (1994) 209 ITR 63 (Bom), it has been held that if audit report is filed before the completion of assessment, it would not be fatal to the claim of the assessee. Of course this relaxation cannot be claimed as a matter of right by the assessee, except only in genuine and bona fide cases. In the case before us, there is no reason to doubt the bona fides of the assessee in claiming the deduction and hence the reason for not allowing the claim, is not justifiable. We, therefore, direct that the assessee be given deduction under section 80HHC.'

We have heard Shri Rajesh Bindal. It appears from the frame of the question that the Tribunal made reference to this court because it felt that order dated 25-10-1996, passed on the assessee's appeal was not in consonance with the law laid down by the jurisdictional High Court in CIT v. Jaideep Industries (supra).

At the hearing, Shri Rajesh Bindal fairly stated that the decision of the Division Bench in CIT v. Jaideep Industries (supra) has been overruled by the Full Bench in CIT v. Punjab Financial Corporation (2002) 254 ITR 6 (P & H).

We have carefully studied the last mentioned judgment. The Full Bench interpreted section 32AB(1) and (5) of the Act and held that while sub-section (1) of section 32AB was mandatory, sub-section (5) thereof was not mandatory and the assessee's claim for deduction cannot be rejected only on the ground of non-filing of audit report along with the return. The relevant extracts of that judgment are reproduced below (headnote) :

'The conditions embodied in sub-section (1) of section 32-AB of the Income Tax Act, 1961, the fulfilment of which entitles the assessee to claim deduction on the basis of Investment Deposit Account are mandatory, because the substratum of the claim of deduction is the deposit of the amount in the account maintained by the assessee with the Development Bank or utilisation thereof for purchase of new ship, new aircraft or new machinery or plant, and, therefore, unless the conditions embodied in sub-section (1) are satisfied the assessee cannot claim deduction. However, this is not true of sub-section (5) which only provides for filing the report of audit prepared by the accountant as defined in the Explanation below section 288(2) along with the return. The assessee's claim for deduction under section 32-AB(1)(a) does not depend on the submission of the audit report along with the return but on deposit of the amount in the account maintained by him with the Development Bank before the expiry of six months from the end of the previous year or before furnishing the return of income, whichever is earlier. The requirement of filing the duly audited report along with the return cannot be treated as mandatory and the assessee cannot be deprived of the benefit of deduction if the same is filed before the finalisation of the assessment.

Sub-section (5) of section 32-AB is not mandatory and the assessing officer has discretion to entertain the audit report, even though it has not been filed with the return, and give benefit of the deduction to the assessee in terms of section 32AB(1)....

The question as to 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 meaning and intention of the legislature must govern, and these are to be ascertained not only from the phraseology of the provision but also by considering its nature, its design, and the consequences which would follow from construing it one way or the other.

The use of the word 'shall' in a statutory provision, though generally taken in a mandatory sense, does not necessarily mean that in every case it shall have that effect, that is to say, unless the words of the statute are punctiliously followed, the proceeding or the outcome of the proceeding would be invalid. On the other hand, it is not always correct to say that where the word 'may' has been used, the statute is only permissive or directory in the sense that non-compliance with those provisions will not render the proceedings invalid.'

Since the provisions of section 80HHC of the Act are substantially similar to section 32AB(5), we have no hesitation to hold that the Tribunal did not commit any error by granting relief to the assessee.

In the result, the question referred by the Tribunal is answered against the revenue and in favour of the assessee.

The reference is disposed of in the manner indicated above.

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