C I T vs. SAMIR DIAMOND MFG. LTD.

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ITR/8/2001HC GujaratGJHC24024347200113 October 2014Author: HONOURABLE MR. JUSTICE KS JHAVERI,HONOURABLE MR. JUSTICE K.J.THAKER10 pages
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What did the High Court hold?

The High Court addressed two questions of law referred by the Tribunal. On the first question, concerning the precedence of deductions under Chapter VI-A over Section 32AB, the Court, in view of the Supreme Court's decision in Motilal Pesticides (I) Pvt. Ltd. vs. CIT, held that deduction under Section 32AB is to be given first, and subsequently, deduction under Section 80HHC (referring to the deduction claimed by the assessee) is to be given. Therefore, Question No. 1 was answered in favour of the Revenue and against the assessee. On the second question, regarding the admissibility of an unsigned audit report filed during assessment proceedings, the Court answered in favour of the assessee, relying on its own decision in CIT vs. Gujarat Oil and Allied Industries. This decision held that while the audit report being audited is mandatory, the procedural requirement of filing it along with the return is directory, and substantial compliance is sufficient. The Court reasoned that insisting on literal compliance could lead to absurdity and frustrate the beneficial purpose of the deduction provisions, especially when the report is available at the stage of assessment framing.

What were the facts?

The assessee, Samir Diamond Mfg. Ltd., engaged in diamond cutting and polishing, claimed deductions under Sections 80HHA and 80-I of the Income-tax Act. The Assessing Officer (AO) made a prima facie adjustment under Section 143(1)(a), allowing these deductions after deducting the amount allowable under Section 32AB. The assessee's rectification application under Section 154 and subsequent appeal to the CIT(A) were dismissed, upholding the AO's action. The Tribunal, in an earlier appeal concerning the Section 143(1)(a) adjustment, deleted the adjustment as it was made after the case was selected for scrutiny, but did not decide on merits. In the scrutiny assessment under Section 143(3), the AO again allowed deductions under Sections 80HHA and 80-I without deducting Section 32AB, based on prior proceedings. The assessee's appeal to the CIT(A) was dismissed. The Tribunal, in a subsequent appeal, allowed the assessee's claim, directing the AO to allow deductions under Sections 80HHA and 80-I before Section 32AB. The Revenue filed a Reference before the High Court.

What were the issues?

1. Whether on the facts and in the circumstances of the case and in law, the Hon'ble ITAT was right in holding that various deductions under Chapter VI-A with reference to gross total income as per Section 80AB would get precedence over deduction under Section 32AB admissible with reference to income chargeable under the head 'profits and gains of business or profession'? (Question of law) 2. Whether on the facts and in the circumstances of the case and in law, the Hon'ble ITAT was right in holding that an unsigned audit report filed in the course of assessment proceedings can be taken note of, even though not filed along with the return of income as required by law? (Question of mixed law and fact) Assessee's contentions (as per Tribunal's earlier order): Deductions under Sections 80HHA and 80-I are allowable on profits and gains from industrial undertakings, not on net income computed under the business head. The word 'income' in Section 80AB should be distinguished from taxable income under the business head. Deductions under Chapter VI-A are allowable with reference to net income included in gross total income. Deduction under Section 32AB is a deduction from total income itself. Relied on CIT vs. Tarun Duyog, CIT vs. H.M.T. Ltd., Asst. CIT vs. M/s. Madhu Silk Textiles, Harisona Malayalam vs. Dy. CIT, and Expo Machinery Ltd. vs. IAC. Revenue's contentions (before the High Court): Deduction under Section 32AB is to be given first, and Section 80HHC (referred to in the judgment as 80HHC instead of 80HHA/80-I in the context of the argument) deduction subsequently, as deduction is required to be made on the net income. Relied on Motilal Pesticides (I) Pvt. Ltd. vs. CIT, a Tax Appeal decision of the Gujarat High Court, and Vijay Industries vs. CIT.

Which sections of the Income-tax Act were involved?

Section 80HHA,Section 80-I,Section 32AB,Section 80AB,Section 143(1)(a),Section 154,Section 29,Section 143(3),Section 80HHC,Section 80J,Section 80J(1),Section 80J(6A)

AI-generated summary — verify with the full judgment below

Cause title — parties, addresses and appearances
O/ITR/8/2001 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD INCOME TAX REFERENCE NO. 8 of 2001 FOR APPROVAL AND SIGNATURE: HONOURABLE MR.JUSTICE KS JHAVERI and HONOURABLE MR.JUSTICE K.J.THAKER ================================================================ 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ================================================================ C I T....Applicant(s) Versus SAMIR DIAMOND MFG. LTD.....Respondent(s) ================================================================ Appearance: MRS MAUNA M BHATT, ADVOCATE for the Applicant(s) No. 1 SERVED BY RPAD - (N) for the Respondent(s) No. 1 ================================================================ CORAM: HONOURABLE MR.JUSTICE KS JHAVERI and HONOURABLE MR.JUSTICE K.J.THAKER Page 1 of 10 O/ITR/8/2001 JUDGMENT Date : 13/10/2014

ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE KS JHAVERI) By way of the present Reference, the following questions of law are referred to this Court by the Tribunal at the instance of Revenue for consideration of this Court:

“1. Whether on the facts and in the circumstances of the case and in law, the Hon’ble ITAT was right in law in holding that varius deductions under Chapter VI-A with reference to gross total income as per 80-A would get precedence over deduction u/s. 32AB admissible with reference to such `income chargeable under the head profits and gains of business or profession?’

2.

Whether on the facts and in the circumstances of the case and in law, the Hon’ble ITAT was right in holding that an unsigned audit report filed in the course of assessment proceedings can be taken note of, even though not filed along with return of income as required by law?’

2.

The facts of the case are that the assessee, a private limited company, is engaged in cutting and polishing of rough diamonds. The assessee company claimed deductions under Sections 80HHA and 80-I of the Income-tax Act (hereinafter referred to as `the Act’ for short) without deducting the amount allowable under Section 32AB of the Act. The Assessing Officer made prima facie adjustment under Section 143(1)(a) of the Act by allowing deduction under Section 80HHA and 80-I of the Act from profits of the industrial undertaking after deducting the amount allowable under Section 32AB of the Act. The assessee filed an application for rectification under Section 154 of the Act praying for deduction under Section 80HHA and 80-I of the Act without deducting the amount allowable under Section 32AB of the Act. The assessee submitted that deductions under Section 80HHA and 80-I of the Act are allowable on profits and gains from industrial undertaking and not on net income computed under the head business. It was also submitted that the word `income’ used in Section 80AB should be distinguished from taxable income computed under the business head. The Assessing Officer did not accept the assessee’s submission by placing reliance on Section 29 of the Act which provides that the income referred in Section 28 of the Act shall be computed in accordance with the provisions of Sections 30 to 34 of the Act. The Assessing Officer also referred to the provision of Section 80AB stating that it provides that the deductions under Chapter VI-A are to be worked out in accordance with the provisions of the Act. The Assessing Officer thus dismissed assessee’s application for rectification vide order passed under Section 154 dated 8.8.1991. On appeal against the order under Section 154 of the Act, the learned CIT(A) confirmed the action of the Assessing Officer vide his order dated 27.12.1991 by placing reliance on Section 29 of the Act. On second appeal, the Tribunal vide its order dated 10.9.1997 deleted the prima facie adjustment made by the Assessing Officer holding that the prima facie adjustment cannot be made after the case is selected for scrutiny. However, on merits of the case, the Tribunal did not make any observation.

3.

In the scrutiny assessment made under Section 143(3) of the Act which is subject matter of the appeal, the Assessing Officer allowed the deductions under Section 80HHA and 80-I of the Act without deducting deduction under Section 32AB of the Act on the basis of his earlier prima facie adjustment and assessee’s failure in appeal before the CIT(A).

4.

The assessee preferred appeal before the CIT(A) and reiterated his earlier submissions made in the course of proceedings under Section 154 of the Act and also before the CIT(A) in the appeal against the order under Section 154 of the Act. The learned CIT(A) accordingly dismissed assessee’s appeal following his earlier order dated 27.12.1991 pertaining to appeal against order of the Assessing Officer passed under Section 154 of the Act.

5.

In appeal, the Tribunal in paragraph No. 7 of the order in ITA No. 772/Ahd/1993 dated 27.1.1998, has observed as under: “We have considered the rival submissions and perused the facts on record. In our view, the word `income’ used in Section 80 AB should be distinguished from the word `taxable income’ under business as computed as per provisions of Sec.

29.

A plain reading of Section 80AB suggests that the various deductions mentioned in part-C of Chapter VI-A are allowable with reference to net income which is served or received by the assessee and which is included in gross total of income. If provisions of Section 80AB are not there, the assessee may claim deduction on gross profit instead of net profit. The deduction u/s. 32AB is not an expenditure but a specific deduction. In fact, deduction u/s. 32AB is the deduction from total income itself as the section opens with the words “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 or profession’ has out of such income. This also leads to the interpretation that the deduction under Chapter VI-A must be given before applying the Vs. M/s. Madhu Silk Textiles in appeal No. 1782/Ahd/1992 where it was held that the deduction under section 80HHA and 80-I are allowable before allowing deduction u/s 32AB and the decision of the Cochin Bench of the deduction under sec. 80HHA and 80-I before allowing deduction u/s. 32AB. The appeal filed by the assessee is accordingly allowed.”

6.

Further, at the time of assessment proceedings, the Assessing Officer noticed that the assessee has filed an unsigned and undated audit report in form No. 3AA along with its return of income as per Sec. 32AB(5) in support of the claim of deduction u/s. 32AB of Rs. 7,76,947/-. The assessee filed revised return along with signed audit report on 27.9.97 but before this, assessment u/s. 143(1)(a) was completed, therefore, the said deduction was not allowed by the Assessing Officer. The ld. CIT(A) had allowed the claim of the assessee holding that the appellant’s claim for deduction u/s. 80HHC and 32AB cannot be disallowed on the ground that the appellant has enclosed only the unsigned copy of the CA’s audit report along with the return of income. The ITAT has also decided the facts in favour of the assessee holding that audit report can be filed in the course of assessment proceedings as the filing of audit report along with the return of income is to mandatory. Relevant portion of the Tribunal’s order with regard to the unsigned audit report reads as under: “para 12 – The Revenue came up in appeal before the Tribunal against both the orders of the CIT(A) dated 27.12.91 (against order u/s. 154) and 27.12. 92. In the appellate order (ITA No. 793/Ahd/1992) relating to Revenue’s appeal against the order of the CIT(A) dated 27.12.91 this Tribunal vide order dated 17.4.97 held that on perusal of sec. 80HHC it is clear that it nowhere requires that audit report filed should be signed and accordingly it cannot be said that the requirement of sub- sec. (4) was not complied when the assessee filed copy of the said report along with return of income. In the said order, the Tribunal also observed that if the report was defective in any way, being not signed, the A.O. would have got the defect removed as per provisions of sub- sec. (9) of Sec. 139 but the A.O. could not disallow the claim made under the shelter of the said defect in the audit report.” The Tribunal, after hearing both sides, dismissed

the appeal filed by the Revenue. Hence the Revenue is before us by way of this Reference.

7.

We have heard learned advocate Ms. Bhatt for the applicant-Revenue. It is contended that the issue is squarely rendered relying on the decision of Hon'ble Supreme Court in In view of the decision of the Hon’ble Supreme Court in the follows: “Section 80J of the Income-tax Act, 1961, gives special deductions to new industrial undertakings and hotels, provided the conditions laid down therein are fulfilled. The benefit will be subject to the provisions of sub-section (6A) of Section 80J. The first part of sub-section (6A) lays down 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 deduction is claimed have been audited by an accountant. 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 the 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 return of income is 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 Income-tax Officer. 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 the benefit of Section 80J. Moreover, while an assessee who waits till the end of the expiry of the period and files 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, audited reports are made available by both the assessee to the Income-tax Officer. This would result in absurdity. It has also to be kept in view that by the mere non-filing of the auditors' 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. At the time of framing the assessment, the assessing authority is vested with full powers under the Civil Procedure Code, 1908, as laid down by Section 131(1) of the Act. He can also ask for production of books of account and other documents. That shows that the stage which is relevant for considering the merits of the claim of the party is the stage when the assessing authority sits down to assess income for the purpose of computing income tax after framing appropriate assessment and it is at that stage that the requirements of Section 80J(1) read with sub- section (6A) thereof can be taken into consideration. It is obvious that the main purpose and object of section 80J(1) is to give incentive and development benefit to the new industries covered by the provisions of the Act. Consequently, while considering it, care has to be taken to see that the relevant purpose underlying Section 80J is augmented and fortified and not frustrated by the construction put upon the said provision. Even assuming that another view is possible on the construction of the second part of sub-section (6A) of Section 80J, as that view is likely to frustrate the very object and purpose of the scheme underlying Section 80J(1) and would result in absurdity, the other view by which the beneficial provision of Section 80J(1) is made fully operative should be preferred. Hence, the word `shall' as employed by the Legislature in sub-section (6A) of Section 80J(1) will have to be read as `may'.”

9.

The Reference stands disposed of accordingly. (K.S. JHAVERI, J.) (K.J.THAKER, J) (pkn)

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