2012 (9) TMI 1049 - HC - Income Tax

Exemption u/s.11 - directing acceptance of audit report from the assessee - Held that - The question whether it is permissible to the assessee to produce the audit report at the appellate stage has already been answered by this court in CIT v. Gujarat Oil Allied Industries Ltd. 1992 (9) TMI 67 - GUJARAT HIGH COURT wherein it is held that the provision regarding furnishing of audit report along with the return has to be treated as a procedural provision. It is directory in nature and its substantial compliance would suffice. In that case the assessee had not produced the audit report along with the return of income but produced before completion of the assessment. Benefit of exemption should not be denied merely on account of delay in furnishing the same and it is permissible for the assessee to produce the audit report at a later stage either before the Income Tax Officer or before the appellate authority by showing a sufficient cause - decided in favour of assessee

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal question considered by the Court was whether the Appellate Tribunal was correct in law and on facts in directing the Assessing Officer to accept an audit report from the assessee which was not filed during the course of the original assessment proceedings, and consequently to grant exemption under section 11 of the Income-tax Act, 1961. This issue encompassed the permissibility and effect of filing an audit report belatedly at the appellate stage, and the consequent entitlement to exemption under the relevant provisions of the Act.

2. ISSUE-WISE DETAILED ANALYSIS

Issue: Permissibility of filing audit report at appellate stage and entitlement to exemption under section 11 of the Income-tax Act, 1961

Relevant legal framework and precedents: The legal provisions central to this issue were section 11 of the Income-tax Act, 1961, which provides exemption for income of certain charitable or religious trusts, and section 12A(b) read with Rule 17B of the Income Tax Rules, 1962, which mandates furnishing an audit report in Form No. 10B as a condition precedent for claiming such exemption. The procedural requirement to file the audit report along with the return of income was under scrutiny.

Two key precedents were relied upon: (i) CIT v. Gujarat Oil & Allied Industries Ltd., where the Gujarat High Court held that the requirement to furnish the audit report with the return is procedural and directory in nature, allowing substantial compliance; and (ii) CIT v. Shahzadanand Charity Trust, where the Punjab and Haryana High Court reiterated that exemption benefits should not be denied merely on account of delay in furnishing the audit report, permitting the assessee to produce it at a later stage before the Assessing Officer or appellate authority upon showing sufficient cause.

Court's interpretation and reasoning: The Court noted that the Assessing Officer had denied exemption on the ground that the audit report was not furnished during the assessment proceedings. However, the Commissioner of Income-tax (Appeals) allowed the assessee to file the audit report at the appellate stage and granted exemption under section 11. The Tribunal upheld this decision, relying on the precedents that treat the filing of the audit report as a procedural requirement that can be complied with belatedly if justified.

The Tribunal observed that the audit report was obtained prior to filing the return, but was not filed on time due to reasons supported by an affidavit. It also noted that in earlier and subsequent assessment years, the assessee had filed the audit report and obtained exemption, indicating no mala fide intent. The Court found that the delay was not deliberate and that substantial compliance had been made.

Key evidence and findings: The affidavits and conduct of the assessee in earlier and subsequent years were significant. The audit report was prepared before the return was filed, and the assessee had consistently filed audit reports in other years, demonstrating bona fide compliance. The Assessing Officer's denial of exemption was based solely on the procedural lapse of non-filing of the audit report during assessment. The appellate authorities found this to be a curable procedural defect.

Application of law to facts: Applying the principle of substantial compliance and the precedents, the Court found that the assessee's failure to file the audit report during assessment proceedings did not disentitle it from exemption under section 11. The procedural requirement was directory, and the assessee was allowed to rectify the defect at the appellate stage. The Tribunal's direction to accept the audit report and grant exemption was consistent with the legal position and facts.

Treatment of competing arguments: The Revenue contended that the audit report should have been filed during the assessment proceedings and that allowing it belatedly would undermine the statutory scheme. The Court rejected this contention, holding that the procedural nature of the requirement and the principle of substantial compliance justified acceptance of the audit report at the appellate stage. The Court emphasized that denial of exemption on mere procedural grounds without prejudice to the Revenue's interest would be unjust.

Conclusions: The Court concluded that the Tribunal and the Commissioner of Income-tax (Appeals) were justified in allowing the assessee to file the audit report at the appellate stage and granting exemption under section 11. The Revenue's appeal was devoid of merit and raised no substantial question of law.

3. SIGNIFICANT HOLDINGS

The Court preserved the following crucial legal reasoning verbatim from the Tribunal's order:

"In this case, it is not in dispute that the audit report in prescribed form was obtained prior to filing of the return on 20/12/2006; therefore, there was no reason for the assessee to keep the audit report with it in order to lose the exemption. The assessee in the earlier as well as in the subsequent assessment years filed the audit report and got the exemption. The conduct of the assessee in earlier year and subsequent years would prove that due to the facts stated above there was delay in filing the audit report and the contention of the assessee was supported by the affidavit of Mohmad Iqbal Vohra (PB-4). The learned CIT(A) on proper appreciation of the facts and material on record in the light of the decisions of the Hon'ble Punjab & Haryana High Court and the Hon'ble Calcutta High Court rightly directed the AO to accept the audit report of the assessee and grant exemption u/s. 11 of the IT Act."

Core principles established include:

• The requirement to furnish an audit report along with the return of income under section 12A(b) read with Rule 17B is procedural and directory, not mandatory and inflexible.
• Substantial compliance with the procedural requirement suffices for entitlement to exemption under section 11.
• Delay in filing the audit report can be condoned if the assessee shows sufficient cause, including at the appellate stage.
• Denial of exemption solely on procedural lapses without prejudice to the Revenue's interest is not justified.

Final determinations on the issue were that the Assessing Officer was directed to accept the audit report filed at the appellate stage and grant exemption under section 11 of the Income-tax Act, 1961. The Revenue's appeal against this direction was dismissed for lack of merit and absence of any substantial question of law.