ORDER
Krishan Swarup, A.M.
This is an appeal by the assessed against the order of the Commissioner (Appeals) XX, New Delhi, dated 12-7-1996, for the assessment year 1993-94.
1.2 Out of grounds at Sr. Nos. 1 to 4, reproduced below, relating to one single issue, namely, marking the assessment in the status of 'AOP' instead of 'firm', the ground at Sr. No. 1 is the main ground. Other three are in the nature of arguments to support the first ground.
'(1) That the learned Commissioner (Appeals) has erred both in law and on facts in upholding the `status' adopted by the learned assessing officer while framing the assessment of the assessed as that of AOP. On the facts of instant case, the learned Commissioner (Appeals) ought to have held that the assessed is liable to be assessed as firm.
(2) That the learned Commissioner (Appeals) has failed to appreciate that the assessed is a firm carrying on business since last several years and it is evidenced by deed of partnership, which deed of partnership was filed along with the return of income and a certified copy thereof was also filed during the course of assessment proceedings.
(3) That merely because the certified copy of deed of partnership was not furnished along with the return of income by itself, could not constitute a valid ground for making an assessment in the status of AOP though undisputedly, certified copy of the partnership deed was filed in the course of assessment proceedings.
(4) That the learned Commissioner (Appeals) has failed to appreciate that the provisions of section 184(2) cannot be regarded as mandatory and absolute in nature so as to disentitle the claim of firm, if merely the certified copy of the deed of partnership was not filed along with the return.'
2. Facts concerning the matter, to be stated succinctly, are that in terms of a partnership deed dated 2-4-1992, a firm, constituted by nine partners, came into existence with effect from 1-4-1992. Its first previous year ended on 31-3-1993. It filed its return for the assessment year 1993-94 on 30-11-1993 along with a photocopy of the partnership deed. Since copy of the instrument of partnership deed was not a 'certified copy', as was required to be filed in terms of sub-section (2) of section 184 read with Explanationn thereto, the assessing officer required the assessed to show cause why its status should not be taken as association of persons. The plea of the assessed that filing of the deed of partnership along with the return was not a mandatory requirement, in support of which it referred to certain judicial decisions, did not find favor with the assessing officer. He held that there being an express provision in section 184(2) for filing of a certified copy of the partnership deed along with the return, it was a mandatory requirement for assessment as 'firm'. He passed an order under section 185 of the Act and by concluding as under, assessed the assessed in the status of an association of persons.
'Sections 184 and 185 have been introduced with effect from 1-4-1993 and for assessment as a 'firm', it is necessary that a certified copies of partnership deed is filed along with the return of income of the firm of the previous year relevant to the assessment commencing on or after the first day of the April, 1993 in respect of which assessment as a firm is first sought. Since the return of income was not accompanied by a certified copy of partnership deed as per the provisions under section 184(2), the assessed cannot be assessed as a firm as such, It is being assessed for assessment year 1993-94 in the same manner as a association of persons under section 18 5 of Income Tax Act, 1961. '
3. In appeal before the learned Commissioner (Appeals), the assessed reiterated the plea taken before the assessing officer and relying inter alia, on the ratio of the Bombay High Court decision in the case of CIT v. Shivanand Electronics : [1994]209ITR63(Bom) submitted that the requirement of furnishing a document along with the return, was not mandatory but merely directory and if the certified copy of the partnership deed is furnished before the assessing officer during the course of assessment proceedings, it should be held that requirement of section 184(2) is satisfied. It was stressed that the assessed had produced certified copy of the instrument of partnership during the course of assessment proceedings. The learned Commissioner (Appeals), after referring to words 'shall accompany', appearing in sub-section (2), of section 184, held that it was mandatory to file the certified copy of the instrument of partnership along with the return itself. since this had not been done, he upheld the assessing officer's action in taking the assessor's status as that of an association of persons. The assessed is aggrieved.
3.2 Before us, the learned counsel for the assessee, while referring to the facts of the case, firstly submitted that it was not in dispute that an uncertified copy of the partnership deed was filed along with the return and that a certified copy had been furnished before the assessing officer during the course of assessment proceedings, copies placed at pp. 27 to 34 of the paper-book. He then drew our attention to the written submission made before the learned Commissioner (Appeals), copy placed at pp. 64-71 of the paper book. The arguments taken in the grounds of appeal were reiterated, Our attention was invited to the decision of the Tribunal, Delhi Bench 'D' in the case of Mrs. Sudha Sharma v. Income Tax Officer , rendered in the context of section 80HHC of the Act, holding that filing of accountant's certificate along with the return though statutory, belongs to the area of procedure and hence that condition for the grant of exemption could not be so strictly construed so as to reject the assessor's legitimate claim. Certain other decisions of the Tribunal Benches, expressing similar view in the context of filing of audit report in terms of provisions of section 32AB etc., were also referred to. About the use of the word 'shall' in section 184(2) of the Act, the learned counsel submitted that merely because of this expression it cannot be held that the relevant requirement was mandatory. Relying on the Calcutta High Court decision in the case of CIT v. R.B.B. Motilal Malwasie Trust : [1992]195ITR825(Cal) , it was submitted that having regard to the nature of the provisions and their object, the direction given in section 184(2) of the Act, falls in the area of procedure and hence directory. Strong reliance was placed on the test laid down in the decision of the Bombay High Court in the case of CIT v. Shivanand Electronics (supra), rendered with reference to the provisions of section 80J(6A), for deciding the question whether a statute is mandatory or directory. It was stressed that by the Finance Act, 1992, a totally new scheme and procedure for assessment of firms were introduced for the first time from assessment year 1993-94 and in the very first year, assessed could not appreciate the implications of the new provisions. It was contended that extreme injustice will result, without furthering the object of the provisions of section 184, if for a mere inadvertent and innocent mistake of filing a plain copy, instead of a certified copy of the partnership deed, benefit of assessment as a firm is refused to the assessee.
3.3. The alternative plea of the learned counsel was that no notice having been given by the assessing officer for filing a return in the status of association of persons assessment in that status on the return filed in the status of 'firm' was bad in law. In support of this contention reliance was placed on the Rajasthan High Court decision in the case of CWT v. Ridhkaran & Ors. .
4. The learned Departmental Representative while strongly relying on the order of the learned Commissioner (Appeals), submitted that in effect the plea of the assessed was that the word 'shall' used in section 184(2) is to be read as 'may' but there is no legal justification for such construction. It was urged that if the argument of the assessed was to be accepted, the express requirement of filing a certified copy along with the return will become meaningless. The learned Departmental Representative also submitted that the judicial decisions referred to by the assessed were in the context of provisions relating to 'deductions' or 'exemption' which are to be liberally construed whereas the registration provisions require strict compliance. He submitted that the case of the assessed was clearly hit by the provisions of section 185 of the Income Tax Act.
5. We have given our utmost consideration to the facts and circumstances of the case, the material to which our attention was invited and the rival submissions. There are several provisions in the Income Tax Act providing for filing of certain documents or evidence 'along with return', as is in effect the requirement of section 184(2) of the Income Tax Act. On the question whether a statute is mandatory or directory, the Bombay High Court in the case of Shivanand Electronics (supra) relied upon by the assessee, has laid down a very important proposition. It would be relevant to extract below the headnote of the decision at pp. 63 and 64 :
'It is well settled that the question 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 intent of the legislature has also to be gathered not merely from the words used by the legislature but from a variety of other circumstances and conditions. One of the tests often adopted is to ascertain whether the object of the legislature will be defeated or furthered by holding it directory. If the object of the enactment will be defeated by holding it directory, it should be construed as mandatory whereas if by holding it mandatory, serious general inconvenience will be created to innocent persons without very much furthering the object of the enactment, it should be construed as directory. A balance has to be struck between the inconvenience of rigidly adhering to the requirements and the convenience of sometimes departing from its terms. Where two or more requirements are lumped together at one place in the provision, it would have to be decided which of the conditions is mandatory and which is directory. If one of the two conditions is found to be mandatory and another directory, strict compliance with the mandatory requirement would amount to compliance with the provision notwithstanding the non-compliance with the directory requirement in the particular manner or form or within the specified time, provided, however, that there is substantial compliance therewith. It is not possible to lay down any rule of universal application to decide such controversy. It will not to be decided in each case by looking at the subject-matter, the importance of the provisions that has not been strictly complied with and the relation of that provision to the general object intended to be secured by the Act.'
5.2. It would, thereforee, be relevant to analyze the provisions of section 184 on the touchstone of the above legal proposition. The Finance Act, 1992, introduced a new scheme of assessment of firms from assessment year 1993-94. The provision that existed before this amendment were contained in Chapter XVI captioned as 'special provisions applicable to firms'. These were divided under three sub-heads-A. Assessment of firms, B. Registration of firm, and C. Changes in constitution, succession and dissolution. As a result of the amendment, the provisions of sections 182 and 183 contained in sub-head A were deleted and those contained in sub-head B were captioned as 'assessment as a firm', of course those contained in sub-head C continued to exist with some modification. In short, the sub-head for sections 184 and 185 which was 'registration of firm' was replaced by the sub-head 'Assessment as a firm'. This had become necessary because by the amended provisions, the distinction between a registered and unregistered firm as per the pre-amended provisions, had been removed. As per the amended provision of section 184, the requisite conditions for assessment as a firm are as under :
(i) The partnership is evidenced by an instrument section 184(1)(i). This condition is identical with the condition as prescribed in pre-1993 section 184(1)(i).
(ii) The individual shares of the partners are specified in the instrument section 184(1)(ii). This condition is a reproduction of section 184(1)(ii) of pre- 1993 section.
(iii) A certified copy of the instrument of partnership shall accompany the return of income of the firm of the previous year relevant to the assessment year 1993-94 or any subsequent assessment year, in respect of which assessment as a firm is first sought section 184(2)
Thereafter, assessment as a firm will be continued to be made so long as constitution of the firm remains unchanged. Whenever there is a change in the constitution of a firm, a copy of the new partnership instrument has to be similarly filed.
For the above purpose, the copy of the instrument of partnership shall be certified in writing by all the partners not being minors or, where the return is made after the dissolution of the firm, by all persons (not being minors) who were partners in the firm immediately before its dissolution and by the legal representative of any such partner who is deceased (Explanation to section 184(2)1. Where a firm does not comply with the provisions of section 184 for any assessment year, as per provisions of section 185, the firm shall be assessed for that assessment year in the same manner as an association of persons.
6. In the context of pre-1993 provisions by which a firm was to be treated as registered or unregistered, there is a plethora of judicial decisions to hold that the benefit of registration was to be conferred only if the firm strictly conformed to the provisions of sections 184 and 185 of the Act and that substantial compliance with the requirements of the law would not suffice. thereforee, when an order was to be made by the assessing officer registering the firm, the matter passed out of the realm of procedural law into one of substantive law because certain rights were conferred on a registered firm, so far as assessment was concerned. However, after the amendment the position is totally changed inasmuch as the assessment is to be made either as a firm or as an association of persons. The requisite conditions for assessment as a firm have already been set out above. The conditions at (i) and (ii) above go to the very root of adoption of status as a firm. If these conditions are not satisfied the object of the legislature in granting status as firm would be defeated and, thereforee, these are mandatory conditions. Insofar as condition at (iii) above is concerned, filing a certified copy of the instrument, is on the face of it a mandatory condition because without that it cannot be verified that the condition at (i) is really satisfied. The short question for consideration now is whether filing of the certified copy of the instrument along with the return of income or its accompanying the return is also a mandatory condition- In this connection we would firstly point out that the object of filing a certified copy appears to be to verify the existence of the partnership with the partners, shares specified therein. This document is relevant for the purposes of assessment as a firm. thereforee, in our considered opinion, if the certified copy of the instrument is available before the assessing officer when he sits down for framing the assessment on merits, the object of the legislature is achieved because it is at that stage that the compliance of the requirements of section 184(2) is to be ascertained. If that was so, the requirement of the certified copy accompanying the return does not seem to be of such a compelling nature that it may lead to denial of the status of a firm in cases where compliance of the requirement of the provision is made before the completion of the assessment and the 'uncertified' and 'certified' copies are found to be identical. Doing so would be taking a too technical view of the legal requirement.
6.2. It is well settled that in interpreting the law, one of the factors to be taken into account is the purpose for which the law has been laid down. The words of a statute take their colour from the object behind it. The object of section 184(2) is to ensure that only the properly constituted firms are assessed as firm and as long as this objective is fulfillled before the assessment is finalised, the purpose of the statute is served. In State of Tamil Nadu v. Kodai Kanal Motor Union (P) Ltd. : [1986]2SCR927 , the Supreme Court has observed that the statutes must have some purpose or object whose imaginative discovery is judicial craftsmanship. Courts need not always cling to the literalness and should seek to endeavor to avoid an unjust or absurd result. Hence, in our considered opinion, denying the status of firm to the appellant in the present case, merely on the ground that the certified copy of the partnership deed was not enclosed with the return, though given later at the time of assessment, would be unjustified.
6.3. The issue needs to be examined from the angle of the interpretation of the word 'shall' on which considerable emphasis has been laid by the Commissioner (Appeals). This issue raises the question of construction of mandatory or directory provisions.
The Supreme Court in the case of State of Uttar Pradesh v. Babu Ram Upadhya : 1961CriLJ773 , had occasion to consider the directory or mandatory nature of a statutory provision by applying certain tests. K. Subba Rao, J, (as he then was) speaking for the majority, held as follows (headnote) :
'When a statute used the word 'shall', prima facie it is mandatory but the court may ascertain the real intention of the legislature by carefully attending to the whole scope of the statute. For ascertaining the real intention of the legislature, the court may consider, inter alia, the nature and the design of the statute, and the consequences which could flow from construing it one way or the other, the impact of other provisions whereby the necessity of complying with the provisions in question is avoided, the circumstances that the statute provides for a contingency of the non-compliance with the provisions, the fact that the non-compliance with the provisions is or is not visited by some penalty, the serious or trivial consequences that flow there from, and, above all, whether the object of the legislation will be defeated or furthered. '
In other words, one of the crucial tests to determine whether a particular statutory requirement is mandatory or directory is that the court has to see whether any penal consequences will follow by the non-compliance with a particular statutory requirement. If no penal consequences are indicated, then it would be safe to infer that the statutory requirement was directory and not obligatory or compulsory.
The mere use of the word 'shall' does not make the provision mandatory. In R.B. Sugar Co. v. Rampur Municipality : [1965]1SCR970 , the Supreme Court has observed :
'The purpose for which the provision has been made and its nature, the intention of the legislature in making the provision, the serious general inconvenience or injustice to persons resulting from whether the provision is read one way or the other, the relation of the particular provision to other provisions dealing with the same subject and other considerations which may arise on the facts of a particular case including the language of the provision have all to be taken into account in arriving at the conclusion whether a particular provision is mandatory or directory.'
6.4. No doubt, the word used in section 184(2) is 'shall' accompany the return but as has been observed in the decisions referred to above and held by the Calcutta High Court in the case reported in : [1992]195ITR825(Cal) (supra), relied upon by the assessee, the construction of the expression 'shall' depend on the particular provision in which the direction is given and the consequences that would flow from the infringement of the direction, etc. In our considered opinion, the provisions of section 184(2) when considered as a whole, clearly show that the expression can be construed as 'may'. In this connection we would like to point out that many a times even when the word 'may' is used in a provision, it can be construed as 'shall'. One such example is the provision of section 16A of the Wealth Tax Act which provides that for the purpose of making an assessment, the Wealth Tax Officer may refer the valuation of any asset to a Valuation Officer. Since the section specifies certain category of cases in which reference for valuation is to be made, it has been judicially held that in respect of such specified category of cases it is a mandatory requirement to refer the valuation of any asset to the Valuation Officer and it is not open to the Wealth Tax Officer to decide the question of valuation on its own, despite the fact that the word used is 'may'. Thus, the two expressions are interchangeable, depending upon certain factors.
6.5. The matter can be considered from another angle also. Section 182 merely provides for filing the certified copy along with the return. The time for filing the return is not, thereforee, much significant as was the case in respect of Form No. 12, which as per provisions of section 184(7), (as they existed before the amendment by Finance Act, 1992) was required to be furnished before the expiry of the time allowed under section 139(1) for furnishing the return of income. There exist in the Income Tax Act certain other provisions also for which date of filing the return under section 139(1) is relevant. In such cases a definite time is prescribed, which is not so under the provisions of section 184(2) of the Act. It follows that an assessed can file a certified copy of the partnership deed even along with the revised return of income under section 139(5), because 184 does not place any restriction on submission of the said certified copy along with a return of income under section 139(4) or 139(5). If an assessed does so, it can be said to have complied with the provisions of section 184(2). Incidentally, this view finds support from the decision of the Tribunal. Delhi Bench (SMC) in the case of Income Tax Officer v. D. M. Enterprises . Further, as has been held by the Calcutta High Court in the case of Motilal Malwasie Trust (supra), documents placed on record with or even without covering letter, with the intention to remove only omission or wrong in the return cannot be ignored simply because a revised return was not furnished unless it is shown that the purpose of the Act is not satisfied.
7. In the present case, it is not disputed that the return filed by the assessed was accompanied by an uncertified photostat copy of the instrument of partnership and a certified copy was made available at the time of assessment. In view of the foregoing discussion we hold that the provision about the certified copy of the instrument accompanying the return of income is directory in nature and its substantial compliance, as is there is assessor's case, would suffice for assessment of the assessed as a firm. Accordingly, we direct the assessing officer to assess the assessed as a 'firm'.
8. In view of the above finding, the alternative plea of the assessed remains only of an academic interest. We would, however, point out that there is no force in this plea because as per the provisions of section 185, the assessment has to be completed in the status of association of persons if the required conditions are not satisfied and, thereforee, there would be no legal necessity for the assessing officer to issue any notice to file the return in the status of association of persons. Of course, natural justice may require issue of a show-cause notice which had been issued by the assessing officer in the present case. the judicial decision relied upon by the assessed in this behalf is of no assistance to it.
9. The ground at Sr. No. 5 reads as under :
'That the learned Commissioner (Appeals) has erred in sustaining the disallowance of expenditure incurred by the assessed being the payments made to partners (which income has been assessed otherwise too) in the hands of partners aggregating to Rs. 9,03,503. '
10. The facts are that the assessment of the assessed having been made in the status of an association of persons, in view of section 40(ba) of the Act, the assessing officer, had disallowed deduction in respect of payment, aggregating Rs. 9,03,503, made to the members by way of salary, bonus, interest and commission, In view of his decision on the dispute relating to 'status', the learned Commissioner (Appeals) upheld the action of the assessing officer.
11. Both the parties were heard. They admitted that the issue is consequential to the first issue. In view of our direction in para 7 above, to assess the assessed as a firm, provisions of section 40(ba) are not attracted. The disallowance in deleted.
12. The grounds at Sr. Nos. 6 and 7 challenge the sustenance of following disallowances:
(i) 1/3rd out of repairs of cars
48,978
(ii) 1/3rd out of depreciation on cars
46,979
(iii) 1/3rd out of telephone expenses
65,730
(iv) Unpaid bonus under section
3,75,298
13. Debit of Rs. 3,87,453 to the profit & loss a/c on account of running and maintenance of motor cars consisted of Rs. 2,41,019 for running and Rs. 1,46,932 for repairs. For the personal use of vehicles, the assessed had itself added back 1/3rd of the running expenditure. The assessing officer further disallowed 1/3rd of the repair expenditure, in a sum of Rs. 46,979 with the remarks as in last year. Also, 1/3rd of depreciation, in a sum of Rs. 46,979, was disallowed for personal use of vehicles. The learned Commissioner (Appeals) confirmed the disallowances.
13.2. The learned counsel for the assessed admitted that similar disallowances made in last year were accepted. It was, however, submitted that the disallowances are uncalled for and, in any case, excessive. The learned Departmental Representative while relying on the orders of the assessing officer and Commissioner (Appeals), submitted that by itself adding back 1/3rd of the running expenditure, the assessed has admitted personal use of vehicles. In the circumstances, it was pleaded that the claim for repair expenses and depreciation cannot be treated differently.
14. On consideration of the facts and circumstances of the case, we do not find any infirmity in the order of the learned Commissioner (Appeals) on this issue.
15. 1/3rd of the total telephone expenditure of Rs. 1,95,391 amounting to Rs. 65,103 was disallowed by the assessing officer for personal use with the remarks 'as per last year'. The learned Commissioner (Appeals) reduced the disallowance to 1/5th of the claim (to this extent, the ground of appeal is incorrect).
15.2. The learned counsel drew our attention to the following break-up of the expenditure, as per details contained in p. 36 of the paper-book :
Rs.
(a) Telephone installed at the office premises and manager's residence
1,42,055
(b) Telephone installed at partners premises
53,336
1,95,391
It was pleaded that there was no justification for making any disallowance out of item at (a) above and at best a token disallowance could be made only out of expenses at (b) above. The learned Departmental Representative relied on the order of the learned Commissioner (Appeals).
16. On consideration of the facts in entirety, while we are not inclined to agree with the assessed that there is no element of non-business use in respect of telephones installed at the office premises and manager's residence, we consider it reasonable to make a disallowance of 1/10th of such expenditure of section 1,42,055 at (a), above. As regards expenses at (b) above, the disallowance of 1.5th ordered by the learned Commissioner (Appeals) is neither excessive nor unreasonable.
17. The ground at (iv) above was not pressed for hearing.
18. In the result, the appeal is partly allowed.