UN-NECESSARY LITIGATION ON PROCEDURAL ASPECTS LIKE FILING OF CLAIM OR CERTIFICATE

[CA DEV KUMAR KOTHARI]

Un-necessary litigation by revenue on procedural aspects- the ultimate aim should be to compute income and tax liability as per law.

Relevant links and references:

Commissioner of Income-tax v. Shree Rama Multi Tech Ltd. [2013 (8) TMI 381 - GUJARAT HIGH COURT]

COMMISSIONER OF INCOME TAX - I, KOLKATA Versus   M/S. HIMGIRI CASTING PVT. LTD. [ 2013 (8) TMI 382 - CALCUTTA HIGH COURT]

Commissioner of Income Tax vs. Berger Paints (India) Ltd. [2002 (2) TMI 97 - CALCUTTA High Court]

Commissioner of Income-tax v.Hardeodas Agarwalla Trust [1991 (7) TMI 22 - CALCUTTA High Court]

Himachal Pradesh State Forest Corpn. Ltd. v. Dy. CIT [1997 (5) TMI 24 - HIMACHAL PRADESH High Court ]

Complexity of tax laws is well known:

Complexity of tax laws is well known. This leads to litigation. Revenue authorities are a major cause and source of un-necessary litigation because ignoring the ultimate purpose of assessment and appeals that is correct determination of tax liability un-necessary litigation is carried on procedural aspects and even on well settled legal position.

Returned income and assessed income:

Due to complexity of law and different views prevailing there is difference between income as per return and income as per assessment order of the Assessing Officer (AO). In due course of appeals, the ultimate assessed income may be near about income as per return. As per experience of author, in case of scrutiny assessments many times income ultimately assessed is lower than income as per return because many claims which are not made in computation but are made as additional claim for consideration of authorities are allowed.

Claims not made in return:

Many times claims are not made in return due to uncertainty of law or lack of income or relevant circumstances at the time of filing of return. For example, deductions under chapter VIA cannot be made if there is loss or there is no Gross Total Income after set off of brought forwarded loss as per return of income and computation made by the assessee.

Filing of prescribed forms or certificates:

For many deductions claim is to be made supported by filing of prescribed forms duly audited or certified by Chartered Accountant (CA). The requirement may be to file the same along with the return. However, purpose of such certificates or forms is to assist the AO to get ready information in prescribed form and / or duly certified by CA.

The rules prescribing filing of prescribed forms are subordinate rules. The claim is to be allowed by the AO, only if he is satisfied that the assessee is entitled to get deduction or exemption etc. Even if a prescribed certificate is filed with the return of income, it is not necessary for the AO to allow deduction as claimed, because the AO himself has to satisfy about allowability of claim and the amount of claim allowable.

In fact, even if a prescribed form is not filed, still the AO is duty bound to allow admissible claims or deductions. This is because the AO is duty bound to allow such claims and deductions with a view to correctly determine income and tax payable by assessee. An omission to claim a deduction, which is allowable as per records available to the AO should not be a ground to deny deduction to the assessee. If the AO does not allow deductions which are eligible based on information, then it will not be proper discharge of his duties as a ‘public servant’, who is supposed to take judicial decisions in a reasonable and rational manner and without taking advantage of the ignorance of tax payer.

Therefore, even if the form is filed after filing of return or during course of assessment or appeal, the revenue should not have take it as aground to deny deduction and should not have a   grievance, if the deduction is allowed by appellate authorities.

Un-necessary litigation:

However, we find that revenue authorities make assessment in such a manner so as to create un-necessary litigation. Thanks to them for such attitude for creating jobs for tax professionals. On procedural aspects of filing of prescribed forms also litigation is not un-common.

Recent case before Gujarat High court:

In CIT v. Shree Rama Multi Tech Ltd (supra.) assessee had loss as per return of loss filed u/s 139 of I.T.Act. In a scrutiny assessment, u/s 143(3) the AO, made certain additions, and determined positive Gross Total Income.

As the return was of loss assessee could not claim deductions eligible under chapter VIA of the Act – particularly u/s 80HHC and 80-IA.

Since there was loss as per return, naturally the assessee was not required to make a claim and comply with other procedural requirement of filing certificates and prescribed forms etc.

In this case when the AO had determined Gross Total Income and had relevant information, he should have suo moto allowed deductions and for that purpose he should have called relevant details and documents so as to compute income as per law after allowing all admissible deductions. However the AO did not allow deduction.

The assessee preferred appeal before the CIT(A). Learned CIT(A) in exercise of his powers and in view of provisions governing appeals, particularly section 251, and also sections 80HHC and 80-IA, in principle, agreed with assessee that assessee is eligible for deductions, but remanded proceeding to the AO, keeping it open to Assessing Officer to examine facts and grant deduction, as available after determination of allowable amount.

Revenue was not satisfied with order of CIT(A) and preferred appeal before ITAT. The Tribunal upheld order of Commissioner (Appeals). Revenue filed appeal before the High Court.

Observations and order of the High Court:

Paragraph 3.1 to 5 are reproduced below with high lights added by author:

3.1 Having heard learned counsel for the parties, we have no reason to interfere in this respect. As already noted, the assessee raised the claim in somewhat peculiar circumstances as the assessees original return was filed disclosing loss. In that view of the matter, there would be no question of claiming any deduction either under Sections 80HHC or under Section 80-IA of the Act. Such deduction would be available only there was positive income. The Assessing Officer, while framing the assessment, made certain additions and thereby converted the return of the assessee of one of loss into the assessment order computing positive income. Only at that stage, the question of the assessee pressing for the deductions under Sections 80HHC or 80-IA of the Act arose. This would be known and available to the assessee only once the Assessing Officer passes his order. Under the circumstances, the assessee in the appeal before the Commissioner in addition to questioning the validity of the additions themselves, also raised an alternative legal contention of deductions under the said provisions.

4. To our mind, the Commissioner committed no error He only entertained such an contention but remanded ,the proceedings for verification of facts to the Assessing Officer. In the present case, the occasion to press for deduction under the said provision arose only when once the Assessing Officer passed an order of assessment.

5 . In the result, no question of law arises. Tax appeal is, therefore, dismissed.

Observations of author:

In fact assessee would know that the AO has determined Gross Total Income only when he receives order of assessment. Therefore, such claim can only be made through appeal. The CIT(A), can consider such claims and can also quantify the same and allow. However, for such determination, files of earlier years may be required. Some other information may be required which are available with the AO. Therefore, determination aspects can be done by the AO in a better manner. Therefore, in such circumstances, it is in interest of justice and also for administrative convenience that appellate authorities should pass order on principals and direct the AO to examine facts and circumstances and then quantify and allow relief. However, revenue is challenging such directions also not before ITAT buy also before High Courts. This is clear case of un-necessary litigation causing harassment of tax payers.

Some other decided cases on issue of filing prescribed forms and claims etc:

COMMISSIONER OF INCOME TAX - I, KOLKATA Versus   M/S. HIMGIRI CASTING PVT. LTD. [ 2013 (8) TMI 382 - CALCUTTA HIGH COURT]. In this case deduction u/s 80 IB was not allowed because assessee did not file report with the return but in course of assessment proceedings. CIT(A) allowed deduction , on revenues appeal Tribunal confirmed the relief and dismissed appeal of Revenue following   Commissioner of Income Tax vs. Berger Paints (India) Ltd. [2002 (2) TMI 97 - CALCUTTA High Court]. Revenue preferred appeal before High court and High Court also dismissed appeal of revenue following Berger Paints in which High Court had held as follows:

“Our interpretation merely permits the assessee to produce the said report even after the date of the filing of the return as passed; it does not wholly do away with the requirement of filing the report altogether.

The assessee having produced the necessary reports at the necessity time, the second question and both parts of it again get answered in favour of the assessee.”

Therefore in case of Himgiri Court held that “ We are as such of the opinion that there is no further question involved in this appeal. The appeal is as such dismissed. In view of the dismissal of the appeal itself, the connected application has become infructuous and the same is also dismissed.”

Commissioner of Income Tax vs. Berger Paints (India) Ltd. [2002 (2) TMI 97 - CALCUTTA High Court]. In this case the assessee filed its returns and claimed deduction under section 32AB and under section 80HHC. However, the assessing authority rejected the claim and held that since audit report supporting claim of deduction was tendered at a date much later than the filing of the return, the assessee had lost its right of claiming the benefit. On appeal, the Tribunal had allowed the assessee’s claim. The revenue preferred appeal by way of reference application. On reference the High Court observed and ruled as follows:

In the instant case, the auditing of the assessee’s claim and accounts was not in dispute, but the assessee did not file on the same date along with his return of income of the report of such audit in the prescribed form as required above. Rule 5AB of the Income-tax Rules, 1962 prescribes that the auditor must support the assessee’s claim in Form No. 3AA as given in the said rules. The case of the revenue was that since this Form from the auditor was tendered by the assessee at a date much later than the filing of the return, the assessee lost its right of claiming the benefit.

The words ‘shall not be admissible’ occurring in sub-section (5) of section 32AB are directory and not mandatory in nature. No doubt, if the auditor’s report is not available at all, a claim for deduction cannot be made by the assessee but for achievement of this, it is not necessary to interpret the above phrase as mandatory with regard to the part of the existence of the auditor’s report and only directory with regard to the part containing the time of furnishing of the report. The existence of the auditor’s report is mandatory under sub-section (1)(ii) of section 32AB. Thus, the interpretation of the said phrase occurring in sub-section (5) as directory does not do away with the compulsory requirement of producing the auditor’s report for assessment and deduction. In considering the language of section 139 and specially the part of it appearing in sub-section (9) and the Explanation thereto, the following points emerge as relevant and important.

In the Explanation to section 139(9), unless the conditions specified therein are fulfilled, the return of income is to be regarded as ‘defective’.

In section 139(9) itself, when the defect is not rectified by the assessee even after giving of time, the assessee’s return shall be treated as ‘invalid’ and it will be as if the assessee had filed no return at all. Therefore, even in the case of the return itself, the documents and papers which should accompany it, do not cause it utter and complete failure from the very inception, even if those are not annexed with the return. A chance is always given to the assessee to put the matter right before the assessment. Sub-section (5) of section 32AB should not be interpreted in a manner even more stringent than the requirement of the filing of the return itself. Furthermore in the body of section 139, sub-section (1), the return of income an assessee has to ‘furnish’; the same word ‘furnish’ is used in sub-section (5) of section 32AB. But, in Explanation ( b) to sub-section (9) of section 139 a requirement for a non-defective return is that the return is ‘accompanied by’ a statement showing the computation of tax. In sub-section (5) the same words ‘accompanied by’ are not used but only the words ‘along with’ are used. Thus, the phrase ‘accompanied by’ is more strongly indicative of a requirement of filing on the same day as the return itself than the words ‘along with’. Therefore, the Tribunal was right in allowing the assessee’s claim.

As regards claim of deduction under section 80HHC, the language employed is similar to the language of sub-section (5) of section 32AB. The word ‘shall’ is used; and the same phrase, i.e., ‘furnishing along with the return of income’, is also employed. There is no particular reason to take a different view in regard to section 80HHC than the view already taken in regard to sub-section (5) of section 32AB. The assessee having produced the necessary reports at the necessity time, deduction under section 80HHC was to be allowed.

The court referred to the following judgments:

Commissioner of Income-tax v.Hardeodas Agarwalla Trust [1991 (7) TMI 22 - CALCUTTA High Court], Himachal Pradesh State Forest Corpn. Ltd. v. Dy. CIT [1997 (5) TMI 24 - HIMACHAL PRADESH High Court ]

Commissioner of Income-tax v.Hardeodas Agarwalla Trust [1991 (7) TMI 22 - CALCUTTA High Court]

The assessee trust filed its return without the auditor’s certificate in Form No. 10B. The balance sheet and the income and expenditure account were filed along with the return. The auditor’s certificate was not furnished even at the time of hearing. The ITO completed the assessment denying exemption under section 11 on the ground that the certificate in Form No. 10B had not been filed as required by the law.

The assessee submitted two copies of the audited accounts and the report of the auditor in Form No. 10B at the hearing of the appeal before the CIT(A). The CIT(A) held that the trust had not fulfilled the conditions laid down in section 12A(b) and, consequently, its income was not entitled to exemption provided under sections 11 and 12.

The assessee preferred second appeal, and contended that the filing of the auditor’s report in Form No 10B along with the return was not mandatory but only directory. The Tribunal set aside the orders of the lower authorities and restored the matter to the file of the ITO with a direction to accept the auditor‘s report in Form No. 10B and process the assessee’s claim for exemption under sections 11 and frame a fresh assessment. Revenue being aggrieved made a reference application before the High Court. The High Court observed and held on the following lines:

1. Whether a provision is directory or mandatory has to be considered in the context in which the conditions are imposed.
2. Whether a statue is mandatory or directory depends on the intent of legislature and upon the language in which the intent is clothed.
3. The meaning and intention of 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.
4. Exemption from income-tax in respect of income derived from property held under trust or by way of voluntary contribution received from other charitable or religious trusts or institutions will be available only if the conditions mentioned in clauses (a) and (b) section 12A, are satisfied.
5. For very many reasons, the audit report may not be available before the return is filed. Rule 17B of the Income-tax Rules, 1962, lays down that the report of audit of the trust or the institution should be in Form No. 10B. The annexure to Form No. 10B requires the auditor to certify as to the application of income for charitable or religious purposes and the non-application or non-user of income or property for the benefit of the persons referred to in section 13(3).
6. The certificate is ordinarily based on the statement of the managing trustees. The balance-sheet and income and expenditure statement would necessarily contain the particulars of the application of income and non-user of income or property.
7. The certificate of the auditor only affirms the statements contained in the balance-sheet and income and expenditure statement.
8. The Assessing Officer can rely on the certificate for allowing the benefit of exemption. This is a procedural matter for the purpose of enabling the Assessing Officer to complete the assessment on the basis of the certificate of the auditor without even asking the assessee to furnish supporting documents in support of the claims and contentions made in the return based on the balance-sheet and the income and expenditure statement.
9. It is now well-settled that a procedural provision, ordinarily, should not be construed as mandatory, if the defect in the act done in pursuance of it can be cured by permitting the appropriate rectification to be carried out at a subsequent stage. Procedural laws are devised and enacted for the purpose of advancing justice.
10. It does not mean that the procedural laws should be brushed aside by the Court.
11. It depends on the facts and circumstances of a particular case as to whether a breach in the observance of any procedural law, if not excused or overlooked, would cause real and substantial injustice to the parties.
12. Having regard to the object of section 12A, it cannot be said that the Legislature intended that, even where the trust has got its accounts audited and the certificate obtained in form No 10B before the assessment is completed, merely because such report could not be filed in the course of the assessment proceedings it would deprive a trust of getting the exemption if it is otherwise entitled to it in law.
13. In the instant case, the audit report had been obtained before the assessment was completed. The ITO, before completion of the assessment, did not allow any opportunity to the assessee to furnish the audit report. The direction that the audit report should accompany the return was not mandatory as the omission to do it might be rectified by filling the report at a late stage before the assessment was completed.
14. Where an assessee, in compliance with the provisions of the Act, cures the defect in the return by filing the audit report before the completion of the assessment, the Assessing Officer cannot ignore such audit report or the return in completing the assessment.
15. The result of ignoring such return or the audit report would be denial of exemption to the trust although the income had been spent for charitable or religious purposes. This was not intended by the legislators.
16. If an assessee fails to obtain the audit report in the prescribed form before the assessment is completed, he may not, ordinarily, be entitled to get the benefit of exemption. In this case, however, the assessee was not given an opportunity to file the audit report in the prescribed form which was available with the assessee before the assessment was completed. In such a case, the appeal being a continuation of the original proceedings, the appellate authority had the power to accept the audit report and direct the Assessing Officer to redo the assessment. The appellate authority has plenary powers in disposing of an appeal and the scope of his power is coterminous and coextensive with that of the Assessing Officer. He may, therefore, consider and decide any matter arising out of the proceedings in which the order appealed against is passed. He can do what the Assessing Officer can do and direct him to do what he has failed to do.

The Tribunal was, therefore, justified in law in setting aside the orders of the Commissioner (Appeals) and in directing the ITO to accept the auditor's report in Form No. 10B and to process the assessee's claim for exemption under section 11 afresh

Observations of author:

In case of Commissioner of Income-tax v.Hardeodas Agarwalla Trust [1991 (7) TMI 22 - CALCUTTA High Court] the honorable Court has observed that “If an assessee fails to obtain the audit report in the prescribed form before the assessment is completed, he may not, ordinarily, be entitled to get the benefit of exemption”.

With respect, author submit that even if an audit report is not obtained, before completion of assessment, such report can be obtained after wards and during appellate proceedings. The CIT(A) can consider the report, and date of obtaining the report must not make difference. This is for the reason that the income is exempt or deduction is allowable due to factual circumstances which entitle assessee to exemption or deduction. The audited accounts or certificate of CA are only to help the assessee and the AO to get relevant information and data in a standard prescribed manner. Delay on part of assessee (or concerned persons) in compliance of certain procedure should not come into way in ascertainment of correct tax liability. Particularly when the relevant information is available.

In this regard one need to keep in mind that facts, figures and records about circumstances entitling an exemption or deduction are primary things for eligibility and audited accounts, or another certificates are secondary things which are derived or compiled from primary things. Therefore, existence of primary conditions are more important, procedural requirements can be complied with. Even in absence of such reports the AO can consider to allow deductions or exemption if he is satisfied with primary facts, circumstances, and records. In case of need he can ask the assessee to obtain and furnish reports.

Just like in absence of a prescribed report, the assessee cannot deny his liability, the AO should also not be allowed to deny deductions or exemptions which are allowable as per other information and records available with him.

Audited accounts, and auditors certificates even if required to be filed with the return of income must be considered as an aid or helping tool to make work of assessment easy and more authenticated. Absence of such aids or tools cannot be ground either to escape tax liability by assessee or to increase liability by the AO.