2002 (9) TMI 261 - AT - Income Tax

Summary

Issues Involved:
1. Withdrawal of the claim under section 80HHD by the CIT.
2. Validity and compliance of the auditor's report under section 80HHD(6).
3. Procedural versus substantive requirements for claiming deductions.
4. CIT's power under section 263 to revise the assessment order.
5. Opportunity to rectify defects in the auditor's report.

Issue-wise Detailed Analysis:

1. Withdrawal of the claim under section 80HHD by the CIT:
The CIT withdrew the assessee's claim under section 80HHD for the assessment year 1991-92, citing that the auditor's report did not verify the receipts in convertible foreign exchange. The CIT deemed the order of the Assessing Officer (AO) as erroneous and prejudicial to the interest of revenue, leading to the issuance of a notice under section 263.

2. Validity and compliance of the auditor's report under section 80HHD(6):
The auditor's report submitted by the assessee was qualified with remarks indicating that the receipts in convertible foreign exchange were certified by the management and not verified by the auditors. The CIT interpreted that the absence of proper verification by the auditors meant the mandatory condition under section 80HHD(6) was not fulfilled. The CIT emphasized that the term "certificate" implies a formal document attesting the fact with proper verification and application of mind.

3. Procedural versus substantive requirements for claiming deductions:
The assessee's counsel argued that the provisions for furnishing the audit report under section 80HHD(6) are procedural and directory, not mandatory. They cited various judicial precedents to support the contention that such reports can be filed during assessment proceedings or before appellate authorities. They also argued that incentive provisions should be construed liberally to achieve the statute's objective, citing Supreme Court judgments.

4. CIT's power under section 263 to revise the assessment order:
The CIT exercised its power under section 263, asserting that the AO's acceptance of the auditor's report without proper verification rendered the assessment order erroneous and prejudicial to the interest of revenue. The CIT relied on judicial precedents to argue that conditions specified in tax provisions must be strictly construed, especially when the legislature uses mandatory language like "shall."

5. Opportunity to rectify defects in the auditor's report:
The assessee contended that even if the auditor's report was defective, the AO should have invoked section 139(9) to allow the assessee to rectify the defect. The assessee also provided a fresh auditor's report dated 27-10-1995, which slightly reduced the claim amount, indicating substantial correctness of the original claim. The Tribunal agreed that the CIT should have provided an opportunity to rectify the defect rather than withdrawing the claim outright.

Conclusion:
The Tribunal concluded that the provisions of section 80HHD(6), while mandatory, should be liberally construed. The Tribunal held that if the auditor's report is defective, the assessee should be given an opportunity to rectify it. The Tribunal set aside the CIT's order and restored the matter to the AO to adjudicate afresh in light of the fresh auditor's report. The appeal of the assessee was allowed to the extent of providing an opportunity to rectify the defect in the auditor's report.