Commissioner of Income Tax Vs Magnum Export (P) Ltd.

D.K. Seth, J.@mdashThe following four questions have since been referred before this court u/s 256(1) of the Income Tax Act, 1961 :

"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the sale proceeds of Rs. 7,25,854 received by the assessee on the sale of the export licence represented capital receipt and was exempt from Income Tax ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the provisions of Section 28(iiia) were not applicable to the receipt of the aforesaid sum ?

(3) If the answer to the above questions are in the affirmative, whether the Tribunal was right in law in holding that the export licence had no cost of acquisition and the sale proceeds thereof were not liable to capital gains tax ?

(4) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee was entitled to the deduction u/s 80HHC in spite of the fact that the audit report in Form No. 10CC-AC required to be filed along with return of income under Sub-section (4) of Section 80HHC was filed only before the Tribunal ?"

Question No. 2 :

2. Mr. Sumit Chakravarty, learned counsel for the Revenue, in his usual fairness, has pointed out with regard to question No. 2 that Section 28(iiia) of the Income Tax Act, 1961, has no manner of application in the present case. In fact, we find from the records that the receipt, which was sought to be brought within the tax net was received out of a transfer of an export licence granted under the Export Control Order, 1977. Whereas Clause (iiia) of Section 28 relates to profit on sale of a licence granted under the Imports (Control) Order, 1955, framed under the Imports and Exports (Control) Act, 1947. Thus, as rightly contended by Mr. Chakravarty on behalf of the Revenue, the profit out of sale of the export licence granted under the Export Control Order, 1977, cannot be brought within the purview of Section 28(iiia). Therefore, this question is answered, as fairly conceded by learned counsel for the Revenue, against the Revenue in the affirmative and in favour of the assessee.

Question No. 3 :

3. Question No. 3 relates to the charging of the receipt under capital gains. Capital gains are charged u/s 45 computed in terms of Section 55 after arriving at the cost of acquisition. Till 1995, Section 45, as it stood, did not include transfer of a capital asset in the form of a licence granted under the Export Control Order, 1977. That apart, the cost of acquisition could not have been calculated within the method of computation provided thereunder since the cost of acquisition was unascertainable. We had occasion to deal with such question in Income Tax Reference No. 36 of 1998 ( Commissioner of Income Tax Vs. General Industrial Society Ltd., ) disposed of by us on March 25, 2003. Therefore, the receipt on transfer of the capital asset could not be brought within the purview of capital gains when the cost of acquisition is unascertainable. As such, as rightly contended in his usual fairness by learned counsel for the Revenue, this question is also answered in the affirmative against the Revenue and in favour of the assessee.

4. Mr. Chakravarty, learned counsel for the Revenue, has insisted on questions Nos. 1 and 4. We shall deal with question No. 1 first.

Question No. 1 :

5. Mr. Chakravarty, learned counsel for the Revenue, has attempted to point out that the receipt on transfer of the licence is an income to be included in computing the total income in view of Section 10(3) in excess of Rs. 5,000. As soon it is an income it has to be included in the income and be taxed.

6. Mr. R.K. Murarka, learned counsel for the assessee/respondent, on the other hand, has contended that Section 10(3) provides for some exception. It is not a charging section. Therefore, this cannot be applied for charging the said receipt. According to him, Section 10(3) exempts to the extent of Rs. 5,000 an income of casual or non-recurring nature. What is exempted is income, when it is casual or non-recurring. Referring to the definition of capital asset, defined in Section 2(14), he points out that the licence is a capital asset. The receipt on transfer of a capital asset is a capital receipt. It is not an income as defined in Section 2(24). In any event, the receipt on the transfer of the capital asset is not a receipt of an income of a casual nature within the meaning of Section 10(3). If the capital receipt cannot be computed to tax u/s 45 read with the computation method, an integral part of the charging section, the same cannot be charged to tax under that particular head. If it cannot be charged under that particular head, it cannot be charged under a different head. He relied on the decision in B.K. Roy Pvt. Ltd. Vs. Commissioner of Income Tax and Others, and Cadell Weaving Mill Co. P. Ltd. Vs. Commissioner of Income Tax, , in support of his above contention.

7. Income, as defined in Section 2(24), is an inclusive one. It includes profits and gains, dividend and various other items referred to therein. The receipt out of transfer of the capital asset is either profit or gain. It does not come under any other item of the definition of income as defined in Section 2(24). The income is a genus. All receipts are income and chargeable to tax according to the heads under which such receipts become chargeable. The charging heads have been distinctly specified in the Act in six different categories. An income, unless it comes under a particular head, cannot be charged. If a particular receipt resembles a particular head, then it is to be charged under that head. If it cannot be charged under that particular head it cannot be charged under any other head even under the head "Income from other sources."

8. We had occasion to hold that if a particular income chargeable under one head, cannot be computed and charged under that head, it cannot be charged under a different head or as income from other sources, in Commissioner of Income Tax Vs. General Industrial Society Ltd., -income tax Reference No. 36 of 1998 disposed of by us on March 25, 2003. In arriving at the said conclusion, we had relied on B.K. Roy Pvt. Ltd. Vs. Commissioner of Income Tax and Others, since affirmed by the Division Bench in Commissioner of Income Tax and Others Vs. B.K. Roy Pvt. Ltd., ; Commissioner of Income Tax, Madras Vs. Ajax Products Ltd. through its Liquidator, and in Nalnikant Ambalal Mody Vs. Commissioner of Income Tax, Bombay, , following the ratio laid down in Nalnikant Ambalal Mody Vs. Commissioner of Income Tax, Bombay, .

9. Section 10(3) is an exception exempting specified receipts while computing total income. The receipt, which is casual or non-recurring in nature, can be brought u/s 10(3) provided it does not fall under any other head. If such receipt falls under a particular head, then it has to be charged under that head. While charging under that head in the process of computation, it has to be considered whether it attracts any of the provisions contained in Section 10 for being exempted in computing the total income. If it comes under any of those heads, then it is liable to be exempted to the extent it provides. This provision is not a charging section and, therefore, if a receipt cannot be charged under a different head, the aid of this provision cannot be taken for charging the same under the provisions of Section 10(3) for the purpose of taxing the same. Therefore, Section 10(3) has no manner of application in such a case.

10. Admittedly, the licence satisfies the definition of "capital asset" as defined in Section 2(14). This is not in dispute. A receipt on capital assets is definitely a capital receipt chargeable as capital gains u/s 45. It cannot be treated to be an income chargeable under any other head. Even if it might be an income, this income is chargeable under a particular head depending on its characteristic being receipt on transfer of a capital asset lending the characteristic of a capital receipt. Therefore, it would be chargeable u/s 45. If it comes u/s 45, then it has to be computed in the manner provided in Section 48, which requires determination of the cost of acquisition in order to work out the gain. This receipt related to the assessment year 1989-90. Until 1995 Section 55(2) as it stood did not include any provision for computing the cost of acquisition of a licence, which fell u/s 55(2)(b). Since the cost of acquisition could not be determined, therefore, it could not be taxed. We had occasion to hold so in Commissioner of Income Tax Vs. General Industrial Society Ltd., --income tax Reference No. 36 of 1998 disposed of by us on March 25, 2003. Therefore, in the present case, the sum received on transfer of the licence, a capital asset, cannot be charged to tax as income.

11. In the circumstances, we are unable to persuade ourselves to agree with the contention of Mr. Chakraborty assisted by Mr. Sailen Dutta, learned counsel for the Revenue. We had occasion to obtain support from the decision in B.K. Roy Pvt. Ltd. Vs. Commissioner of Income Tax and Others, ; Commissioner of Income Tax, Bangalore Vs. B.C. Srinivasa Setty, , including the decisions referred to in paragraph 8 hereinbefore. We may now derive further inspiration from Cadell Weaving Mill Co. P. Ltd. Vs. Commissioner of Income Tax, , cited by Mr. Murarka to buttress our conclusion that we had occasion to reach in Commissioner of Income Tax Vs. General Industrial Society Ltd., . Question No. 1 is, therefore, answered in the affirmative, against the Revenue and in favour of the assessee.

Question No. 4 :

12. With regard to question No. 4, from page 28 of the paper book, it appears that the deduction was claimed u/s 80HHC in respect of the profits derived by the assessee from the export of such goods or merchandise in the course of its business of export out of India in computing the total income of the assessee. In order to support its claim, it had submitted an audit report as required in Sub-section (4) of Section 80HHC. Subsequently, it had claimed deduction in respect of the receipt on sale of import licence, which is otherwise taxable u/s 28(iiia). But in support of this claim, no audit report was submitted. In this background, We are now to consider question No. 4 as referred to us.

13. Sub-section (4) of Section 80HHC provides that no claim for deduction in Sub-section (1) of Section 80HHC shall be admissible unless the assessee furnishes in the prescribed form the report of the accountant as defined in the Explanation below Sub-section (2) of Section 288 certifying the deduction as having been correctly claimed on the basis of the amount of export turnover along with the return of income. Learned counsel for the Revenue had pointed out that this is mandatory. Unless the audit report is submitted along with the return, the assessee cannot claim any deduction under Sub-section (1) of Section 80HHC Therefore, the learned Tribunal was wrong in allowing the deduction.

14. Mr. Murarka, learned counsel for the assessee, on the other hand, contends that the provisions of Sub-section (4) of Section 80HHC are not mandatory but directory. According to him, it is a matter of procedure. It is only a support to the claim made by the assessee. It is not a foundation of the claim. Therefore, the context in which this provision has been incorporated does not seem to disentitle the assessee from claiming the relief unless the audit report is furnished along with the return. In support of his contention, he had relied on various decisions, to which we shall be referring at a later stage.

15. The first question to which we would like to address ourselves is with regard to the construction of Sub-section (4) of Section 80HHC in the light of the facts involved in this case. As pointed out by Mr, Murarka so far as the claim with regard to the export of goods and merchandise an audit report was furnished as it appears from page 28 of the paper book. But no audit report was furnished in respect of the receipt out of transfer of the import licence. The purpose of incorporation of Sub-section (4) was to enable the Assessing Officer to ascertain the claim for deduction on the basis of authentication by the auditor that the goods and merchandise was really exported, which is otherwise admissible only on actual basis, a situation which is difficult to determine by the Assessing Officer. But when it is a receipt out of transfer of an import licence which is also otherwise permissible for deduction u/s 80HHC, it is not necessary to prove the authenticity of the receipt since no certificate would be necessary to ascertain the addition to export turnover on account of this receipt. This amount may be included in the export turnover. But then it is not a receipt on export of any goods or merchandise. It is a receipt out of transfer of the import licence. Therefore, in such a case the construction of Sub-section (4) cannot be interpreted to mean a mandatory provision so as to negative the claim unless the audit report is furnished along with the return and that it cannot be admissible if filed before the assessment becomes final.

16. Mr. Chakravarty, learned counsel for the Revenue had pointed out that it has to be filed, even assuming but not admitting that it can be filed afterwards, before the assessment before the Assessing Officer is over in view of Section 139, Sub-section (5), or before the expiry of one year from the end of the assessment year whichever is earlier. He further contended that though notice u/s 143 was issued yet the assessee did not submit the audit report. It was submitted only at the Tribunal stage. Therefore, it cannot be relied upon.

17. The appeal and the reference to the Tribunal is the continuation of the assessment proceeding and it does not become final until the assessment is finally made by the Tribunal. Therefore, if it is filed before the decision by the Tribunal in respect of a receipt on transfer of an import licence then the relief cannot be denied provided the filing of the audit report along with the return is not mandatory.

18. That apart in Commissioner of Income Tax Vs. Shivanand Electronics, , a Division Bench had held while dealing with Section 80J(6A) that an audit report required thereunder to be filed along with the return of income was not mandatory in the context that a benefit of deduction is available u/s 80J(6A) on fulfilment of certain conditions. Those conditions may be mandatory. The requirement of filing of the report may be mandatory. But that is not so in so far as the requirement of filing it along with the return is concerned. In a given case, if the assessee failed to file such report along with the return and filed it subsequently but before completion of the assessment, it would not be fatal. In Commissioner of Income Tax Vs. Punjab Financial Corporation, it was held that filing of the audit report u/s 32AB(1), (5) along with the return is not mandatory. A part of the statute has to be construed with reference to the context. Whether a statute is mandatory or directory depends upon the intent of the Legislature and not upon the language in which the intent is clothed. The intention of the Legislature is to be ascertained not only from the phraseology of the provision but also by considering its nature, its design and the consequences that would follow from construing it one way or the other. The word "shall" in a statutory provision though generally taken in a mandatory sense, but that does not necessarily mean that in every case it shall have that effect that the statute are to be punctiliously followed and in default the proceeding would be invalid.

19. In Commissioner of Income Tax Vs. Jayant Patel, again dealing with Section 80J(6A), the Madras High Court had taken the same view. It had gone to the extent that it can be filed even at the appellate stage. In Commissioner of Income Tax Vs. Shahzedanand Charity Trust, , while dealing with Section 12A(b) the same view was taken. It was held that filing of audit report along with the return was not mandatory but directory. In Zenith Processing Mills Vs. Commissioner of Income Tax, , while dealing with Section 80J(6A) the court took the same view that filing of the audit report along with the return is not mandatory but directory since such requirement falls in the realm of procedure for furnishing evidence in support of the claim. It can be furnished at the time while allowance or disallowance is being considered by the concerned authority. This court in a Division Bench in Commissioner of Income Tax Vs. Rai Bahadur Bissesswarlal Motilal Malwasie Trust, , while dealing with sections 11 and 12A had also held that the filing of the audit report along with the return is directory and not mandatory. This construction was arrived at having regard to the provisions contained in Section 139, Sub-section (5) and Sub-section (9). The provisions contained in Sub-section (5) and Sub-section (9) of Section 139 enable the asses-see to rectify any defect in the return or the Assessing Officer to require the assessee to remove any defect in the return. Under Sub-section (5), a time limit is provided for. Whereas Sub-section (9) does not provide for any time limit, but definitely it means that it has to be done before the assessment is completed. However, it does not confer any duty on the Assessing Officer to require the assessee to remove any defect though he may point out the same to the assessee.

20. In the present case, the notice u/s 143, which was so pointed out by the Assessing Officer that admittedly the assessee did not furnish the report in respect of the claim against the receipt on transfer of the import licence until before the learned Tribunal. But then the assessment has not become final till then. Even at that stage leave may be asked for, when it is brought to the notice of the assessee for removing the defect. Be that as it may, we may not be concerned with that proposition.

21. The High Court at Calcutta in a single Bench in Murali Export House and Others Vs. Commissioner of Income Tax, , had occasion to deal with this question having regard to Section 80HHC with reference to Section 139, Sub-section (5) and Sub-section (9). In the said decision, it was held that the second part of Sub-section (4) of Section 80HHC regarding furnishing of the special audit certificate along with the return is not a mandatory provision but only a directory one. If it is found that some document required to be filed along with the return was not filed, the same may be allowed to be filed within a time specified before making any computation of the income of the assessee. The power to rectify the defective return has been clearly conferred on the Assessing Officer by sections 139(5) and 139(9) of the Act.

22. This decision has also taken note of the fact that the filing of the certificate is mandatory and it cannot claim deduction unless the certificate is filed. But the court did not subscribe to the opinion that such deduction will not be allowed if the certificate is not filed along with return. The first part of subsection (4) of Section 80HHC makes it mandatory and necessary to furnish in the prescribed form the audit report for claiming deduction. But the second part being procedural in nature, requires the assessee to submit a certificate of special audit report along with the return. This is directory in nature as it calls for substantial compliance as observed in the said decision.

23. Thus, it is clear from the various decisions of different High Courts including those of this High Court, particularly, the learned single judge of this court. We do not find any reason to differ with the same. Sub-section (4) of Section 80HHC consists of two parts. The first part requires filing of the special audit report for claiming deduction without which the deduction cannot be admissible. This part is mandatory and no deduction can be claimed without such certificate. The second part consists of the requirement that such audit report is to be filed along with the return. Filing of the report is a condition precedent for claiming deduction. Without such audit report, the deduction cannot be claimed. But when this is to be filed is purely a matter of procedure. This has nothing to do with any condition. Therefore, Sub-section (4) is mandatory in its first part, but directory in its second part. The deduction cannot be disallowed simply because the audit report was not furnished along with the return.

24. Now, the question comes whether it has to be filed before the assessment is over or it can be filed even at the stage of the Tribunal. This is dependent on the intent of the Legislature to be ascertained from the phraseology of the provision having regard to the scheme of the provision, its context, its nature, its design and the consequences that would follow and the extent to which it could be treated to be directory. The Madras High Court has taken the view that it can be filed even at the appellate stage. But it is not necessary for us to decide the said question having regard to the peculiar facts involved in this case. If it was related to the certification of the export of the goods and merchandise in its actuality which is much dependent on such certification, then it may be held to be so mandatory as to confine the same within the time limit before the assessment is complete or within the time limit provided in Section 139(1). Inasmuch as, the necessity of audit report is related to the ascertainment of the veracity of the claim against the actuality of the export having been made. It may be a little different when the veracity of the claim is not much dependent on authentication, a situation, which is not so difficult to ascertain or prove. When by legal fiction the receipt against sale of import licence is included in export turnover, then it is the receipt against the transfer of the import licence to be authenticated in the audit report. This seems to be more a formality in that sense. Having regard to such a situation, it may, therefore, not be interpreted so strictly. Therefore, in such a case filing of the audit report at the Tribunal stage would not be fatal to disentitle the claimant. But then the Tribunal has accepted the same and remitted the matter to the Assessing Officer for making the assessment. As such it cannot be overlooked that the entitlement can still be pursued on the basis of the audit report since the assessment is yet to be made and there is a scope for making such assessment relating to the entitlement to the claim.

25. Learned counsel for the Revenue had relied on a decision of this court in Income Tax Reference No. 20 of 1998 ( Commissioner of Income Tax Vs. Capital Electronics (Gariahat), ), disposed of by us on February 11, 2003. But that decision will not help us in this case, since it was in relation to Section 271B read with Section 273B relating to imposition of penalty with the concept of absolute default in compliance with Section 44AB. Section 44AB provides a stipulation of time limit for obtaining the audit report which is mandatory. But this court had no occasion to consider the question of its filing along with the return or whether the filing is mandatory or discretionary. Therefore, that decision does not come to the aid of learned counsel for the Revenue.

26. In the circumstances, we are unable to agree with the contention of learned counsel for the Revenue. We, therefore, answer question No. 4 in the affirmative and in favour of the assessee.

27. This reference, therefore, fails and is accordingly dismissed. No costs.

28. All parties are to act on a signed xerox copy of this dictated order on the usual undertaking.

R.N. Sinha, J.

29. I agree.