1. This is an appeal against the order of the Commissioner passed under Section 263 of the Income-tax Act, 1961 ('the Act'), holding that the relief allowed by the ITO to the assessee under Section 80J of the Act was erroneous and prejudicial to the interests of revenue and, therefore, setting aside the assessment for the assessment year 1977-78 and directing the ITO to recompute the income as per law.
2. The appellant is a partnership firm carrying on business in running a rice mill at Gadarpur, in the interior of Nainital district. In its assessment for 1977-78, for the previous year ended on 1-10-1976, the appellant had claimed deduction under Section 80J. While completing the assessment, the ITO had allowed a deduction of Rs. 23,034 under Section 80J in the following words : Full facts have been given in A.Y. 76-77. The assessee has filed the audited report from C.A., Shri R.C. Tandon, Bareilly. The opening balance of partners are as under : 3. The Commissioner, Lucknow, considered this order to be erroneous and prejudicial to the interests of revenue on the ground that the audited accounts and report were not filed along with the return by the assessee as required by Section 80J(6A). He, therefore, called upon the assessee to show cause against his proposed action under Section 263.
The assessee submitted its objections in writing and contended that the ITO had rightly allowed the deduction under Section 80J as the assessee had filed audited accounts along with the prescribed report before the assessment was completed. The learned counsel relied on the decision of the Madhya Pradesh High Court in the case of Kamalchand v. ITO [1981] 128 ITR 290.
4. The Commissioner rejected the above objections of the appellant as untenable. He held that the provisions contained in Section 80J(6A) were quite lucid and were absolute and that in order to avail the privilege of statutory deduction under Section 80J, there was a statutory obligation on the part of the assessee to get his accounts audited by a chartered accountant and to furnish the report of such audit in the prescribed form duly signed and verified by such accountant along with the return of income. He held that the assessee had erred on this score, since the audited accounts and report were not submitted by the assessee along with its return of income. He distinguished the decision of the Madhya Pradesh High Court in Kamalchand (supra) as inapplicable to the facts of the present case.
He, therefore, held that the relief allowed under Section 80J by the ITO was erroneous and prejudicial to the interests of the revenue and, therefore, set aside the assessment for the assessment year 1977-78 with the direction to the ITO to recompute the income as per law.
Aggrieved by this order of the Commissioner, the appellant has preferred the present appeal to the Tribunal.
5. I have heard Shri O.P. Sapra, the learned counsel for the appellant, and Shri T.C. Khullar, the learned departmental representative, and carefully considered their submissions in the light of the materials placed before me. In my view, the order of the Commissioner is clearly unsustainable. It is no doubt true that on 29-8-1977 when the appellant filed its return of income, it did not file the audit report along with its return of income as required under Section 80J(6A) which was inserted by the Finance Act, 1975, with effect from 1-4-1976. But at the same time, it is clear from the assessment order dated 7-12-1979 that the assessee had filed the audit report prescribed in Form No. 10D under Rule 18C of the Income-tax Rules, 1962, together with the audited balance sheet and accounts dated 24-7-1978 before the ITO in the course of the assessment proceedings and that they were scrutinised by the ITO before completing the assessment on 7-12-1979. It cannot be disputed that the ITO had allowed the assessee's claim under Section 80J only after scrutinising the said audit report of R.C. Tandon & Co., Chartered Accountants, Bareilly. It is also not the case of the revenue that the ITO had committed any error in computing the relief lawfully due to the appellant under Section 80J. The only objection of the Commissioner in his order under Section 263 is that the assessee had not filed the audit report in Form No. 10D along with the return of income filed on 29-8-1977. (Emphasis supplied by me) (6A) 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 to 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.
This is a new provision of law which was introduced by the Finance Act, 1975, with effect from 1-4-1976. All assessees, other than a company or a co-operative society, who derived income, profits and gains from a new industrial undertaking, should comply with the requirements of this subsection in order to be eligible for the deduction under Section 80J(1). The first condition is that the accounts of the new industrial undertaking for the previous year relevant to the assessment year for which the deduction is claimed, should have been audited by a chartered accountant. The second condition is that the assessee should also furnish with his return of income the report of such audit in the prescribed form duly signed and verified by such chartered accountant.
The question for our consideration is whether the filing of such an audit report in Form No. 10D, duly audited and verified and signed by the chartered accountant on 24-7-1978 and submitted to the ITO in the course of the assessment proceedings, in the present case was sufficient compliance with the provisions of Section 80J(6A). This will depend upon the meaning to be attached to the term "along with his return of income" in the last limb of Section 80J(6A).
7. In this connection, Shri Sapra, the learned counsel for the appellant, invited my attention to the assessee's written objections dated 5-12-1981 wherein the assessee had explained that it was carrying on business in a small town where there was neither a tax adviser nor a chartered accountant, that it had to depend upon the advocates and chartered accountants who lived far from Gadarpur and was, thus, deprived of timely information. The assessee further explained that it had tried to contact in time its chartered accountant at Bareilly but unfortunately could not take an appointment from him due to his absence from office for one reason or the other. This was explained to be the main cause for the late audit of accounts. As the return of income had to be filed in June 1977 and as the assessee was already late in filing its return of income, it was considered proper that the return should not be delayed further and that, therefore, it filed its return of income without the audit report. It was also submitted that there was no dispute that the assessee-firm was a new industrial undertaking which was entitled to the relief under Section 80J and that the late submission of the audit report was only a technical mistake. It was further submitted that looking into all these facts of the case the ITO had entertained the audit report which was submitted to him before the completion of the assessment. The assessee had also referred to Kamalchand (supra), a decision of the Madhya Pradesh High Court, and also to the decision of the Patna High Court in CIT v. Sitaram Bhagwandas [1976] 102 ITR 560. The learned counsel for the appellant, Shri Sapra, conceded before me that the first decision in Kamalchand's case (supra) was inapplicable to the facts of the present case. He, however, relied on the decision of the Patna High Court in Sitaram Bhagwandas's case (supra) where, while construing a similar term in Clause (ii) of the proviso to Section 184(7) of the Act as it stood before 1-4-1971, their Lordships of the Patna High Court held as follows : Having regard to the spirit and substance of the provisions regarding registration of firms in Section 184(7) of the Income-tax Act, 1961, it is clear that the term 'along with its return of income' (as it stood before April 1, 1971) is merely directory and not mandatory. The law must be so construed as to not make it in any way illogical or ridiculous. All that the Legislature intended was that the return should be duly filed and that the declaration should be duly made and both the documents should be before the assessing authority at the time when he is applying his mind to the assessment of any particular firm. If he is then satisfied that the return had been duly filed and that there has been no change in the constitution of the firm and no change in the shares of the partners and the firm was registered during the previous year, then the necessary advantage of renewal conferred by Sub-section (7) of Section 184 must undoubtedly follow to the assessee-firm. The declaration could not be held to be invalid for the reason that it was not filed along with the return.(p. 561) Their Lordships have relied on the decision of the Supreme Court in Lakshmiratan Engg. Works Ltd. v. CST [1968] 21 STC 155 (SC) and of the Allahabad High Court in Chatarbhaj Chogalal v. CIT [1956] 30 ITR 22.
8. Shri Sapra also relied on the latest ruling of the Allahabad High Court, taking a similar view in Addl. CIT v. Murlidhar Mathura Prasad [1979] 118 ITR 392. In this case their Lordships of the Allahabad High Court have followed the decision of the Patna High Court, referred to above, and applied the decisions of the Supreme Court and the Allahabad High Court, referred to above, and held as follows : The essence of Section 184(7) of the IT Act, 1961 is that once registration has been granted to a firm, it is to have effect for every subsequent year in case there has been no change in the constitution of the firm or in the shares of its partners. The other requirements are merely to evidence this fact. The requirement that a firm shall furnish a declaration in Form No. 12 is merely to prove the facts in a particular way. The requirement that the declaration shall be filed along with the return of income is a procedural requirement. The legislative intent appears to be that while dealing with the assessment of a firm the ITO should have clear-cut evidence that the essential fact that there has been no change in the constitution of the firm or in the shares of the partners, has been proved satisfactorily in the required manner. Hence, the procedural requirements are to be treated as directory. If there is some defect in the declaration form, the assessee is to be given an opportunity for rectifying it under Section 185(2). It cannot be ignored or rejected straightaway. Similarly, the requirement that the declaration should be filed along with the return is directory. A firm has four years to file a return under Section 139(4) or a revised return under Section 139(5) and it could validly file the declaration in Form No. 12 along with such return and it is entitled to continuation of registration. It does not then stand to reason that an assessee who is prompt and files a return before the time prescribed under Sub-section (1) or Sub-section (2) of Section 139 should suffer merely because the declaration was not filed physically along with it. The Taxation Laws (Amendment) Act, 1970 which came into force on 1st April, 1971 has repealed and re-enacted Section 184(7) and now the requirement that the declaration should accompany the return has been given up. However, a definite time limit has been fixed for the filing of the declaration. This is another indication that prior to the amendment there was no specific time limit and the declaration could be filed up to the time of assessment.(p. 392) 9. In my view, these two decisions of the Allahabad and Patna High Courts fully support the contentions of the assessee in the present case. The assessee had also offered a valid explanation for the delay in getting its accounts audited and in submitting the audit report in Form No. 10D before the ITO along with its return of income. In my view, this provision is an enabling provision and should not be construed in a narrow and technical manner, if an assessee has complied with all the requirements of law and is also entitled to the deduction under Section 80J. As pointed out by the Hon'ble Allahabad High Court the view taken by the Commissioner is a pure technicality. I, therefore, respectfully follow the decisions of the Allahabad High Court and the Patna High Court, referred to above, and hold that the requirement that audit report should be filed along with the return of income by an assessee in Section 80J(6A) is only directory. I further hold that there was sufficient and proper compliance with the provisions of Section 80J(6A) in the present case and that the ITO had rightly accepted and allowed the assessee's claim for deduction under Section 80J(1). I do not find anything erroneous and prejudicial to the interests of the revenue in the order of the ITO which called for interference by the Commissioner under Section 263. In this view of the matter, I cancel the order passed by the Commissioner under Section 263 and restore the assessment order passed by the ITO.