2000 (6) TMI 137 - AT - Income Tax

Summary

Issues Involved:

1. Whether the audit report was enclosed with the return of income.
2. If enclosed, what should be the quantum of deduction under section 80HHC.
3. If not enclosed, can the Assessing Officer disallow the claim under section 80HHC at the time of passing the order under section 143(1)(a).

Detailed Analysis:

1. Whether the audit report was enclosed with the return of income:

The CIT(A) examined the return and noted that the acknowledgment issued by the IT Department listed certain documents, but not the audit report. The Part V of the return had cuttings and overwritings, suggesting alterations by the assessee. The CIT(A) concluded that the audit report was not filed with the return, suspecting the assessee of trying to avoid a substantial tax liability by creating a dispute over the audit report's filing. The assessee argued that the audit report was filed and mentioned in Part V, and any alterations were made after filing. The acknowledgment slip and assessment records transfer between Jaipur and Cuttack were cited as reasons for the potential loss of the audit report. The assessee also argued that filing the audit report is directory, not mandatory, citing various case laws and CBDT Circulars.

2. If enclosed, what should be the quantum of deduction under section 80HHC:

The CIT(A) noted that the audit certificate from Anil Nagori and Associates calculated the allowable deduction under section 80HHC at Rs. 6,00,410, whereas the assessee claimed Rs. 1,07,33,971. The CIT(A) suggested that if the audit report was filed, the Assessing Officer would have restricted the deduction to Rs. 6,00,410, resulting in a higher tax liability for the assessee. The CIT(A) believed the assessee devised a scheme to avoid this liability by creating a dispute over the audit report's filing. The assessee argued that the quantum of deduction is a debatable issue and cannot be adjusted under section 143(1)(a), citing various case laws supporting the view that such adjustments are not permissible without proper verification and opportunity for the assessee to rectify defects.

3. If not enclosed, can the Assessing Officer disallow the claim under section 80HHC at the time of passing the order under section 143(1)(a):

The CIT(A) argued that even if the audit report was not filed, the issue of whether the Assessing Officer can disallow the claim under section 80HHC during prima facie adjustment under section 143(1)(a) is debatable. The CIT(A) cited various case laws and noted that in cases without fraudulent or mala fide acts, the Assessing Officer was not competent to reject the claim in the absence of an audit report. The CIT(A) referenced conflicting High Court judgments on whether the provisions of section 80HHC(4) are mandatory or directory, concluding that the issue is highly debatable and cannot be resolved through rectification under section 154. The assessee argued that the Assessing Officer should have provided an opportunity to rectify the defect under section 139(9) before making any adjustments, citing case laws supporting the view that debatable issues cannot be adjusted under section 143(1)(a).

Conclusion:

The Tribunal concluded that the assessee did file the audit report under section 80HHC(4) along with the return, supported by direct and circumstantial evidence. The Tribunal noted that the audit report indicated a deduction of Rs. 6,00,410 based on received foreign exchange, implying that the remaining proceeds were yet to be received. The Tribunal cited the Allahabad High Court judgment in Azad Tobacco Factory (P.) Ltd v. CIT, which clarified that the six-month period for receiving sale proceeds is not a limitation for claiming deduction but a condition for entitlement. The Tribunal held that the Assessing Officer was not justified in making the adjustment under section 143(1)(a) without giving the assessee an opportunity to rectify the defect. The Tribunal also emphasized that benevolent circulars from the CBDT are binding and should be applied to benefit the assessee. The Tribunal allowed the appeal in full, directing the Assessing Officer to allow the benefit under section 80HHC to the assessee.