Commissioner of Income Tax vs Popular Automobiles

C.N. Ramachandran Nair, J.—This is an appeal filed by the Revenue challenging the order of the Tribunal confirming the first appellate

authority''s order which declared the assessment as time-barred u/s 153 of the IT Act and hence invalid. In this case the income returned by the

Assessee was Rs. 76,84,450 whereas the income assessed by the AO after getting the accounts audited by the auditor appointed by the

Department was Rs. 6,02,07,350 and so much so the tax dispute is above the limit that entitles the Department to file the appeal under instruction

issued by the CBDT. We have heard the senior counsel Sri P.K.R. Menon appearing for the Appellant Revenue and Sri P. Balakrishnan,

advocate appearing for the Respondent Assessee.

The facts leading to the controversy are the following. The return filed by the Assessee for the asst. yr. 1995-96 was processed u/s 143(1)(a) of

the Act and intimation was forwarded to the Assessee. Thereafter, assessment was taken as a scrutiny assessment and notice was issued to the

Assessee u/s 143(2) of the Act. The developments subsequent to service of intimation u/s 143(1)(a) with corresponding dates are given hereunder,

which are relevant for deciding the issue.

(1) Date of issue of assessment notice under 19-3-1996.

Section. 143(2)

(2) Date on which auditor was appointed by the 9-9-1997.

AO u/s 142(2A) after obtaining approval from the

CIT

(3) Time granted by the AO to the Assessee to 31-12-1997.

produce auditor''s report

(4) Date on which the chartered accountant 24-12-1997.

appointed by the Department requested for

extension of time for completion of auditing and for

filing report

(5) Date on which the officer after obtaining

approval from the CIT extended the time for

completion of auditing and for filing

report in terms of his request 29-1-1998.

(6) Time extended by the AO for filing the audit upto 15-2 1998.

report

(7) Date on which the Assessee filed the audit

report prepared

by the auditor appointed by the AO 17-2-1998.

(8) Date on which assessment was finally 3-9-1998.

completed

(9) Time available for completion of assessment 7-9-1998.

under Expln. (iii) to Section 153(3)

The contention raised by the Assessee that found acceptance with the first appellate authority and the Tribunal is that assessment to be valid

should have been completed within two years from the end of the previous year as required u/s 153(1)(a) and the extension of time available under

Clause (iii) of Expln. 1 to Section 153(3) as amended by Finance (No. 2) Act of 1996 is only the time granted by the AO to the Assessee to

furnish audited accounts u/s 142(2A) which is from the date the AO appointed the auditor till the last date granted to the Assessee to furnish the

audit report. In fact, prior to the amendment by Finance (No. 2) Act of 1996, Clause (iii) of Expln. 1 to Section 153(3) specifies the period of

extension of time available for assessment as from the date of direction for auditing issued by the AO till the actual date on which the Assessee

furnished the audit report. This was however amended by Finance (No. 2) Act, 1996 by restricting extension of time only upto the date the

Assessee was required or granted time to furnish the audit report. In other words, after the amendment, the extended period of limitation will not

be available if the Assessee furnishes the audit report beyond the date granted by the officer for furnishing it. There is a controversy as to whether

the amended provisions introduced with effect from the Finance (No. 2) Act of 1996 w.e.f. 1st April, 1996 is applicable for the asst. yr. 1995-96

which is the year of assessment involved in this case. However, we do not propose to consider this issue because, going by the meaning we assign

to Sections 142(2A) and (2C), we feel the assessment is not time-barred even if the amended provisions are applied for considering the validity of

assessment for the year 1995-96. The provisions of Sections 142(2A) and (2C), the scope and meaning of which will decide the issue, are

extracted hereunder for easy reference.

142(2''A)--If, at any stage of the proceedings before him, the AO, having regard to the nature and complexity of the accounts of the Assessee and

the interests of the Revenue, is of the opinion that it is necessary so to do, he may, with the previous approval of the Chief CIT or CIT, direct the

Assessee to get the accounts audited by an accountant, as defined in the Explanation below Sub-section (2) of Section 288, nominated by the

Chief CIT or CIT in this behalf and to furnish a report of such audit in the prescribed form duly signed and verified by such accountant and setting

forth such particulars as may be prescribed and such other particulars as the AO may require.

(2b)...

(2C) Every report under Sub-section (2A) shall be furnished by the Assessee to the AO within such period as may be specified by the AO:

Provided that the AO may, on an application made in this behalf by the Assessee and for any good and sufficient reason, extend the said period by

such further period or periods as he thinks fit; so, however, that the aggregate of the period originally fixed and the period or periods so extended

shall not, in any case, exceed one hundred and eighty days from the date on which the direction under Sub-section (2A) is received by the

Assessee.

The contention of the Revenue is that the AO is free to extend the time for furnishing the audit report on application by the auditor without the

involvement of the Assessee. The counsel for the Assessee contended that proviso to Section 142(2C) authorises the officer to extend the time for

completion of audit and for filing report only on the request by the Assessee and Assessee has in fact not applied for extension of time for

furnishing the audit report and so much so, limitation has to be reckoned by excluding only the time originally granted by the AO for producing the

audit report and the time extended by the AO on auditor''s request cannot be taken. Admittedly, the time originally granted for furnishing the audit

report is from 9th Sept., 1997 to 31st Dec, 1997 which covers 114 days. However, if the extension of time for audit granted by the AO on the

request of the auditor is also reckoned, the time granted up to 15th Feb., 1998 covers 160 days and if the extension of time granted by the officer

on auditor''s request is valid then the AO gets time upto 7th Sept., 1998 to complete the assessment and since the assessment was in fact

completed on 3rd Sept., 1998, it is perfectly valid.

After hearing both sides and after going through the above provisions of the section, what we find is that Sub-section (2A) of Section 142

authorises the AO with the previous approval of the Chief CIT or CIT to direct the Assessee to get the accounts audited by an accountant

nominated by the Chief CIT or CIT, as the case may be. Even though this provision only says that audit report to be called for should be in the

prescribed form, this provision does not prescribe the AO''s power to fix time to complete audit and furnish the report. However, Sub-section

(2C) authorises the AO to fix the time within which the audit report should be furnished by the Assessee from the auditor appointed by the

Department under Clause 2A. Proviso to Sub-section (2C) authorises the AO to extend the time for producing the audit report on application

made by the Assessee and if the AO finds that the Assessee has established good and sufficient reason for getting the time extended for furnishing

the audit report, he should extend the time. Based on this proviso, the contention raised by the Assessee''s counsel, which was the contention

raised before the first appellate authority as well as the Tribunal is that, once time is fixed by the AO for the Assessee to produce audit report

prepared by the auditor appointed by the Department under Sub-section (2A), extension of time can be granted only on request by the Assessee.

Since Assessee did not apply for extension of time and since extension of time in this case was applied for only by the auditor, the extension of time

granted by the AO though after obtaining approval from the CIT is not in terms of proviso to Sub-section (2C) and so much so, the extension of

time so granted by the officer cannot be reckoned for the purpose of extending the limitation for assessment available under Clause. (iii) of Expln. 1

of Section 153(3) of the Act, is the contention of the Assessee. The first appellate authority as well as the Tribunal completely agreed with the

contention of the Assessee because, according to them, the extension of time for filing audit report can be granted only on an application by the

Assessee which means that the AO has no power to grant extension of time suo motu or on request by the auditor. We are unable to agree with

this contention of the Assessee which found acceptance with the first appellate authority as well as the Tribunal. In our view the scheme of audit by

the auditor appointed by the Department under the provisions apply as follows. The AO has under Sub-section (2C) the authority to fix the time

for the Assessee to get the accounts audited and produce the auditor''s report from the auditor appointed by him u/s 142(2A). Necessarily the AO

has to fix the time after consultation with the chartered accountant because only the latter knows what time he requires for completing the audit

entrusted to him. However, it may so happen that, the chartered accountant, for many reasons, may not be able to complete the audit or prepare

the report within the time granted by the AO and it is absolutely within his powers to request for extension of time from the AO for completion of

audit and for filing report. If the officer is convinced, he is free to extend the time initially granted under Sub-section (2C). In this case, admittedly,

within the time originally granted by the AO for completion of audit and for filing report, the auditor requested the officer on 24th Dec, 1997 for

further time upto 15th Feb., 1998 and the AO, after getting approval from the CIT granted time in terms of the request of the auditor. We do not

think there is any need to involve the Assessee at this stage because, the AO, who has the authority to fix the time for submission of audit report

under subs. (2C) has the inherent authority to extend the time on request by the auditor if he finds that the auditor''s request is reasonable and

justified. It is pertinent to note that the legislature has carefully avoided fixing any statutory time for filing audit report by the auditor appointed u/s

142(2A) and when discretion to fix time is conferred on the officer under Sub-section (2C), it obviously means that he should fix the time in

consultation with the auditor and by taking into consideration all reasonable suggestions from the auditor. If the powers of the officer to fix time for

filing audit report under Sub-section (2C) was not left flexible or elastic, the very scheme of Section 142(2A) would be frustrated and defeated, if

the auditor fails to finish the work within the time originally granted by the officer under Sub-section (2C). The proviso to Sub-section (2C) entitles

the Assessee to apply for extension of time for reasons obviously attributable to him and it is for him to produce good and sufficient reason before

the AO along with application for extension of time for getting audit done and for producing audit report. It may so happen that the Assessee or his

employee may turn sick or may need more time to produce the entire books of accounts or to answer queries of the auditor to complete the

auditing and for producing the audit report within the time originally granted by the AO. In that event, the Assessee can legitimately approach the

AO with a request for extension of time for furnishing the audit report. However, the proviso specifically authorising the Assessee to apply for and

obtain extension of time from the officer for furnishing audit report does not mean that the AO lacks the authority under Sub-section (2C) to extend

the time on the request from the chartered accountant. In our view, since auditing has to be done by the auditor appointed under Sub-section (2A)

of Section 142, the convenience of the auditor is what matters and if the auditor approaches with a request for extension of time the AO is bound

to consider the same and grant extension of time, if he is satisfied that the request is bona fide. In fact, if the auditor drags his feet and unreasonably

delays the report, the officer can extend the time for furnishing report suo motu and approach the CIT or Chief CIT for appointing a substituted

auditor by following the procedure u/s 142(2A). While considering the powers to the AO under Sub-section (2C), it is worthwhile to note the

observation of the Supreme Court in the decision reported in Balwant Singh (Dead) Vs. Jagdish Singh and Others, wherein the Supreme Court

held as follows:

It must be kept in mind that whenever a law is enacted by the legislature, it is intended to be enforced in its proper perspective. It is an equally

settled principle of law that the provisions of a statute, including very word, have to be given full effect, keeping the legislative intent in mind, in

order to ensure that the projected object is achieved. In other words, no provisions can be treated to have been enacted purposelessly.

From the above we conclude that the authority of the AO to specify the period for the Assessee to furnish the audit report under Sub-section

(2C) includes the authority to refix the period, whether by extending or by reducing it and it can be done suo motu or on the request from the

auditor. The proviso specifically confers right on the Assessee for his own reasons to request for extension of time originally granted by the AO

which also the officer has to consider and grant if the Assessee establishes sufficient reason. In this case the audit report was filed on excluded from

the period for which interest is payable. Where any question arises as to the period to be excluded, it shall be decided by the Chief CIT or CIT

whose decision shall be final. Though as per the said provision, it is the Chief CIT or the CIT to decide as to which portion shall be excluded, it

goes without saying that in so deciding, the question as to whether the delay is attributable on the part of the Assessee or the AO, has necessarily

to be considered. The conclusion that it is for the AO to decide whether the delay is attributable on the part of the Assessee or on the AO and

what has been left to be decided by the Chief CIT or the CIT as the case may be is only to be rejected as opposed to the very object of

conferring the judgment on the higher authority. Before the AO when a question arises as to whether the delay is attributable on the part of the

Assessee or the AO, he himself cannot decide the same, since he will be deciding on his own case. The legislature, in the circumstances, conferred

exclusive jurisdiction on a higher authority, namely, the Chief CIT or the CIT to decide the same. In this regard, it has to be seen that Sub-section

(2) of Section 244A of the Act, though says that the delay so attributable shall be excluded from the period to be decided by the Chief CIT or the

CIT, the question as to which period should be excluded and which period should be included will necessarily depend on the finding as to whether

the delay is attributable on whose part. So, it has to be held that whenever a question arises as to whether there is a delay attributable on the part

of the Assessee or the AO, in terms of Section 244A(2) it has to be decided by the Chief CIT or the CIT, as the case may be. That has been

decided in this case. The net result of the proceedings u/s 154 earlier initiated against the Assessee as a matter of fact, would be completed in the

sense that once he noticed that he could not have passed an order completing the assessment without deciding this issue and without referring the

same to the Chief CIT, he would have only cancelled the assessment and then, after obtaining the decision from the Chief CIT or the CIT, he could

have incorporated the same and completed the assessment. The same has been done by virtue of Ext. P13 by the AO. If so, we do not find any

good ground to interfere with the judgment under appeal. Accordingly the appeal is dismissed. However, no order as to costs.