ITR is invalid if no application made for condonation of delay for rectifying errors : GUJARAT HC

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(Last Updated On: August 6, 2018)

The assessee had not furnished the audit report previously. The assessee’s return was required to be accompanied by the report of the audit as referred to in section 44AB of the Act. This was clearly not done. The Assessing Officer was within his rights to raise this defect in the return and seek its rectification. The assessee failed to rectify or even failed to make out grounds why the same was not done earlier. Discretion of the Assessing Officer under the proviso to sub-section(9) to condone delay is wide enough and could be exercised even without a formal application by the assessee for such purpose. However, the onus would be on the assessee to at-least lay down sufficient grounds before the Assessing Officer to enable him to exercise such discretion. The record shows that the assessee made no such attempt. The Tribunal committed no error in confirming the view of the revenue authorities. This question is answered against the assessee.

HIGH COURT OF GUJARAT

Hytaisun Magnetics Ltd.

v.

Joint Commissioner of Income-tax

AKIL KURESHI AND B.N. KARIA, JJ.

TAX APPEAL NOS. 437 OF 2007
R/TAX APPEAL NO. 668 OF 2007

MARCH  13, 2018

S.N. Divatia for the Petitioner. Mrs. Mauna M. Bhatt for the Respondent.

JUDGMENT

Akil Kureshi, J. – This appeal has been admitted for consideration of the following substantial questions of law :

“(1)Whether on the facts and in the circumstances of the case, Income-tax Appellate Tribunal was right in law in confirming that the original return filed on 28.11.1997 for A.Y. 1997-98 was invalid return u/s. 139(9) of the Income Tax Act, 1961?
(2)Whether on the facts and circumstances of the case, the Income tax Appellate Tribunal was right in law in holding that the excise duty of Rs.1,25,44,398/- tantamount to income of the appellant for AY 1997-98?”

2. Brief facts are as under. The appellant is a company registered under the Companies Act and is engaged in manufacturing of excisable goods. For the assessment year 1997-1998, the assessee had filed return of income on 28.11.1997 describing it as a provisional return, declaring total loss of Rs.24.69 crores (rounded off) along with provisional balance sheet and Profit and Loss account. Since the report was not accompanied by audit report, the Assessing Officer issued a notice dated 27.1.2000 calling upon the assessee to state why the incomplete report furnished by the assessee should not be considered as invalid and consequently, why the return filed the assessee should not be treated as invalid return.

3. In response to the show cause notice, the assessee replied on 9.2.2000 stating that the return was filed in the prescribed format and the same cannot be treated as invalid. It was contended that by the time return was filed, accounts of the company were not ready and the company may be required to revise the same. It was contended that consequently revised statement of income was also filed which may be considered while completing the assessment. The Assessing Officer however, did not accept the explanation of the assessee. He was of the opinion that the return was filed by the assessee without accompanying completed audit report and its accounts and, therefore, must be treated as invalid return.

4. On 9.3.2000, the assessee furnished the revised computation of its loss at 23.83 crores (rounded off). This was accompanied by an audit report.

5. This issue ultimately reached the Income Tax Appellate Tribunal (“the Tribunal” for short). The Tribunal was of the opinion that in terms of sub-section (9) of section 139, the return of the assessee was defective. The Assessing Officer had given time to rectify the defect which was not done within the time permitted, upon which, the Assessing Officer was authorised to treat the return as invalid. The Tribunal noted that the assessee presented the audit report only on 9.3.2000 along with what the assessee described was a revised return which was beyond the time permitted for such purpose. The Tribunal also noted that under proviso to sub-section(9) of section 139, the Assessing Officer would have the power to condone the delay in removing the defects. However, at no stage before the Assessing Officer, before the CIT (Appeals) or before the Tribunal also, any attempt was made by the assessee to seek such a condonation. The Tribunal thus rejected the assessee’s appeal on this score. This has given rise to the first question of law.

6. Section 44AB of the Act makes the requirement of compulsory audit in given circumstances mentioned therein. It is not in dispute that the assessee is covered under such provision and therefore, in terms of section 44AB of the Act, had to get its accounts audited by the accountant before the specified date and furnish the same by such date. Section 139 of the Act pertains to return of income. Sub-section(9) of section 139 provides that where the Assessing Officer considers that the return of income filed by the assessee is defective, he may intimate the defect to the assessee and give him an opportunity to rectify the defect within a period of fifteen days from the date of such intimation or within such further period, on an application made in this behalf, the Assessing Officer may grant; if such defect is not rectified within such period or extended period, then notwithstanding anything contained in any other provision of the Act, the return shall be treated as an invalid return and the provisions of the Act would apply as if the assessee had failed to furnish the return. Proviso to sub-section(9) of section 139 provides that where the assessee rectifies the defect after the expiry of initial period or the extended period, but before the assessment is made, the Assessing Officer may condone the delay and treat the return as a valid return. Explanation to sub-section(9) provides that for the purpose of the said sub-section, return of income shall be regarded as defective unless all the conditions are fulfilled as contained in clauses (a) to (f).

7. Few things emerge from this provision. Firstly, if the Assessing Officer finds any defect in the return, he would notify the same to the assessee granting him time for removing the defect. If the defect is not removed within such time or extended time, the return would be treated as invalid and as a consequence thereof, it would be a situation where the assessee has not filed any return at all. Under the proviso to sub-section(9), the Assessing Officer has discretion to condone the delay in rectifying the defect, if the same is done before the assessment is made. Explanation to sub-section(9) lists various conditions for a valid return. Clause (bb) thereof reads as under :

“(bb) the return is accompanied by the report of the audit referred to in section 44AB, or, where the report has been furnished prior to the furnishing of the return, by a copy of such report together with proof of furnishing the report”

8. Prior to its substitution by the Finance Act 1995 with effect from 1.7.1995, this clause (bb) read as under :

“(bb) the return is accompanied by the report of the audit obtained under section 44AB.”

9. It can thus be seen that prior to its substitution by the present clause (bb), the requirement was that the return should be accompanied by the report of the audit obtained under section 44AB. Now this requirement is somewhat expanded. First portion of clause(bb) retains the same requirement as in the original when it provides that return is accompanied by the report of the audit referred to in section 44AB. Later portion of this clause is a new addition providing in the alternative where the report has been furnished prior to furnishing of the return, by a copy of such report together with proof of furnishing the report. In the current form clause(bb) itself comes in two parts. The return would have to be accompanied by report of the audit under section 44AB. However, where the report has already been furnished prior to furnishing of the return, the requirement of the assessee would be to file a copy of such report together with proof of furnishing of the report along with the return.

10. Admittedly, the assessee had not furnished the audit report previously. The assessee’s return was required to be accompanied by the report of the audit as referred to in section 44AB of the Act. This was clearly not done. The Assessing Officer was within his rights to raise this defect in the return and seek its rectification. The assessee failed to rectify or even failed to make out grounds why the same was not done earlier. Discretion of the Assessing Officer under the proviso to sub-section(9) to condone delay is wide enough and could be exercised even without a formal application by the assessee for such purpose. However, the onus would be on the assessee to at-least lay down sufficient grounds before the Assessing Officer to enable him to exercise such discretion. The record shows that the assessee made no such attempt. The Tribunal committed no error in confirming the view of the revenue authorities. This question is answered against the assessee.

11. The Assessing Officer after declaring that the return was invalid proceeded to frame best judgment assessment. In the process, he noticed that the assessee had made unrecorded purchases for a total consideration of Rs.5.01 crores (rounded off) during the year under consideration. He estimated the excise duty of such purchases at Rs.1.25 crores (rounded off). To the total of two i.e. Rs.6.26 crores (rounded off), he estimated the assessee’s profit at the rate of 10% and added Rs.62.65 lacs (rounded off) by way of additional income. He also added excise duty of Rs. 1.25 crores which the assessee had evaded to come to total addition of Rs.1.88 crores.

12. The Tribunal gave partial relief to the assessee by applying 10% profit rate on the basic unrecorded purchases of Rs. 5.01 crores eliminating the excise duty component therefrom. However, the Tribunal did not make any change insofar as the addition of entire excise duty evasion by way of income in the hands of the assessee observing inter-alia that no cogent material was brought on record by the assessee to prove that it had not recovered excise duty from the parties to whom the material was sold. Resultantly, the Tribunal confirmed the addition of Rs. 1.75 crores.

13. This decision of the Tribunal has given rise to second question of law being framed. Having heard the learned counsel for the parties and having perused the documents on record, we may record that the factum of outside book purchases of Rs. 5.01 crores is not in dispute before us. As noted, the Tribunal had deleted the excise duty component from the estimate of the assessee’s general profit. Counsel for the assessee however, strongly opposed the addition of entire excise duty component by way of assessee’s additional undisclosed income.

14. Two things are fairly well settled. Firstly, even in case of clandestine sales or purchases of goods, the Courts approve not entire amount necessarily but the profit element embedded therein unless of-course, it can be shown that the sales or purchases were totally bogus and therefore, would have the propensity to suppress the assessee’s disclosed income. Second in such clandestine sales, the profit element is likely to be somewhat higher than the disclosed sales. Essentially, it would be a question of estimation permitting certain degree of leeway to the Assessing Officer and consequently to the Tribunal. When the assessee evades payment of excise duty, undoubtedly, the same would be an additional element of profit on the product as compared to the one which has suffered the excise duty. This excise duty component which should have gone to the State exchequer would be an additional margin which may be shared by the purchaser and seller. In a given case, therefore, the assessee’s contention that entire addition of excise duty element was not justified, may require closer examination. However, going by the total addition and the turnover through such clandestine sales, we do not find any reason to disturb the Tribunal’s ultimate conclusions. Subject to above observations, this question is also decided against the Revenue.

15. Now we come to the Revenue’s appeal in which the following substantial questions of law have been framed.

“[A] Whether the Appellate Tribunal is right in law and on facts in directing the assessing officer to exclude the excise duty from the unaccounted purchases worked out by the assessing officer and estimate the profit @ 10% on unrecorded purchase?

[B] Whether the appellate tribunal is right in law and facts in deleting addition u.s. 69 of the Act of Rs.51,02,500/- made in respect of initial investment in unaccounted transactions?

[C] Whether the Appellate Tribunal is right in law and on facts in directing the assessing officer to reduce the addition of Rs.1,44,50,000/- by Rs.87,77,934/- being ½ of Rs.1,77,55,864/- on the ground that profit earned on sales consideration would have been routed in the business for making unaccounted purchases and thereby reducing the addition made by the assessing officer in respect of investment in the peak credits, invoking provisions of Sec. 69 of the Act?”

16. Question no.1 is part of the assessee’s question No.1 above, which we have already examined and upheld the view of the Tribunal. Revenue however, contends that the Tribunal committed an error in deleting the excise duty component from the assessee’s general profits. We do not find any merit in this contention. The question is therefore, answered against the Revenue.

17. Second issue pertains to deletion of Rs.51.02 lacs made by the Assessing Officer under section 139 of the Act. Facts on record would show that such purchases did not arise during the year under consideration. The Tribunal therefore, rightly deleted the addition in the present year. This question is also therefore, decided against the Revenue.

18. Third question concerns reduction of addition of Rs. 1.44 crores (rounded off) by half. The Assessing Officer had made addition to such sum by way of assessee’s investment in unaccounted purchases. The assessee contended all through out that the peak credit theory should be applied and part of the purchases have been made by the assessee from its rolling profit from unaccounted sales. Revenue however, contended that the income would be generated only towards the end of the year and therefore, no part of such undisclosed income could have been generated for making purchases, thus effectively opposing the assessee’s peak credit theory. The Tribunal did not accept the Revenue’s stand in its entirety and held that income would continue to be generated through out the year and not at the end of the year alone. In absence of any other evidence, the Tribunal split the year in two parts for generation of such income and therefore believed that at-least 50% of the purchases would have been made through assessee’s income for the same year and thereby slashed the addition by half. The view of the Tribunal requires no interference. Proper cogent reasons have been given. This question is also decided against the Revenue.

19. In the result, both the tax appeals are dismissed.

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