ORDER
K. C. Singhal, J.M.
1. This appeal by the assesses is against the order of CIT under Section 263 withdrawing the claim of the assessee under Section 80HHD pertaining to asst. yr. 1991-92.
2. Brief facts giving rise to this appeal are these: The assessee is a company deriving its income from hotel business. In the year under consideration, the assessee claimed deduction of Rs. 35,12,869 under Section 80HHD as per the certificate of the auditors filed in Form 10CCAD dt. 30th Dec., 1991. Such claim was allowed by the AO while completing the assessment under Section 143(3). Subsequently, the assessment record was examined by the CIT in the course of which it was found that the auditors’ report was subject to the following remarks:
“Receipts in convertible foreign exchange from the provision of the services to foreign tourists is as certified by the management and not verified by us”.
In view of the above remarks, the CIT was of the view that the receipts in convertible foreign exchange had not been verified by the auditors and accordingly, condition envisaged by Sub-section (6) of Section 80HHD was not fulfilled and consequently, the claim of the assessee was not admissible. He, therefore, formed the view that order of AO was erroneous and pre-judicial to the interest of Revenue. Hence, notice under Section 263 was issued to the assessee.
3. In the course of hearing before the CIT also, the auditors stated that receipts in convertible foreign exchange had not been verified by them and they had relied on the figures certified by the management. However, the auditors furnished a fresh report dt. 27th Oct., 1995, according to which, the claim allowable was Rs. 34,25,995 as against Rs. 35,12,869 claimed by the assessee in the return on the basis of the original audit report dt. 30th Dec., 1991.
4. After hearing the assessee, the CIT was of the view that in order to claim deduction under Section 80HHD, the report should contain a certificate to the effect, “that the deduction has been correctly claimed by the assessee”. He referred to the Concise Oxford Dictionary for the meaning of the word “certificate”. According to this dictionary, the word “certificate” means, ” a formal document attesting the fact”. Further, the word “attest” means, “to certify the validity”, On the basis of such meaning of the words, he was of the view that there should be a proper verification of the fact with due application of mind prior to the attestation of the validity of a fact. Accordingly, it was held by him that in the absence of application of mind by the auditors and proper verification, the alleged certificate could not be considered as a certificate envisaged by Sub-section (6) of Section 80HHD. Since the condition under Sub-section (6) of Section 80HHD was not fulfilled, the CIT held that the order of AO was erroneous and pre-judicial to the interest of Revenue as the claim of the assessee was not admissible. Accordingly, he withdrew the claim of the assessee. Aggrieved by the same, the assessee has preferred this appeal before the Tribunal.
5. The learned counsel for the assessee has assailed the order of the CIT by raising various submissions. Firstly, it was contended by him that provisions for furnishing of the audit report along with the return under Sub-section (6) of Section 80HHD, being procedural in nature are directory provisions and, therefore, such report can be filed either in the course of assessment proceedings or before the appellate or higher authority. In this connection, he relied on various decisions of High Courts, namely, CIT us, Gujarat Oil & Allied Industries (1993) 201 ITR 325 (Guj), Zenith Processing Mills v. CIT (1996) 219 ITR 721 (Guj), CIT v. A.N. Arunachalam (1994) 208 ITR 481 (Mad), CIT v. Shivanand Electronics (1994) 209 ITR 63 (Bom), CIT v. Punjab Financial Corporation (2002) 254 ITR 6 (P&H)(FB), CIT v. Berger Paints (India) Ltd. (2002) 254 ITR 503 (Cal), CIT v. Shri Devradhan Madhav Lal Genda Trust (1998) 230 ITR 714 (MP), CIT v. Sita Ram Bhagwan Das (1976)’102 ITR 560 (All) and the decision of the Tribunal in the case of Associated Stone Industries v. Dy. CIT (1999) 64 TTJ (Jp) 708 : (1999) 68 TTD 312 (Jp) for the proposition that provisions of Sub-section (6) of Section 80HHD are directory. He also relied on the decision of Gujarat High Court in the case of Ramdev Exports v. CIT (2001) 251 ITR 873 (Guj) the decision of Allahabad High Court in the case of Subhash Chandra Sarvesh Kumar v. CIT (1981) 132 ITR 619 (All) for the proposition that the claim of the deduction could be allowed for the first time before the CIT under Section 264. He relied on the decision of J&K High Court in the case of CIT v. Trehan Enterprises (2001) 248 ITR 333 (J&K) and the decision of Madras High Court in the case of CIT v. Jayant Patel (2001) 248 ITR 199 (Mad) for the proposition that such audit report could be filed even before the appellate authorities.
5.1 Proceeding further, it was submitted by him that incentive provisions of the statute should be construed liberally so as to achieve the object of the statute. In support of this proposition, he relied on Supreme Court judgment in the case of Bajaj Tempo Ltd. v. CIT (1992) 196 ITR 188 (SC). It was submitted that principle of strict construction of the statute is applicable only to those taxing provisions which are charging provisions and such interpretation is not applicable to the machinery provisions. Reliance was placed on the Supreme Court judgment in the case of CIT v. National Taj Traders (1980) 121 ITR 535 (SC) and in the case of Mangalore Chemicals & Fertilizers Ltd. AIR 1992 SC 152. It was also submitted that if the strict construction of the statute leads to an absurd result not intended by the legislature or if it defeats the manifest object and the purpose of the statute then such construction has to be avoided. Reliance was placed on the two judgments of Supreme Court, namely, CIT v. J.H. Gotla (1985) 156 ITR 323 (SC) and Goodyear India Ltd. and Ors. v. State of Haryana and Anr. (1991) 188 ITR 403 (SC).
5.2 Proceeding further, he submitted that even if there was any defect in the audit report, then the AO should have invoked the provisions of Section 139(9) and allowed opportunity to the assessee for removing the defect. For this proposition, he relied on the decision of Kerala High Court in the case of Seeyan Plywoods v. ITO (1999) 238 ITR 395 (Ker). It was further submitted that the CIT, being quasi judicial authority, should have considered the issue with unbiased mind and in accordance with principle of natural justice. Reliance was placed on two decisions of Supreme Court in the case of Sirpur Paper Mills Ltd. v. CWT (1970) 77 ITR 6 (SC) and in the case of Dwarka Nath v. ITO and Anr. (1965) 57 ITR 349 (SC). He also relied on the decision of Supreme Court in the case of CIT v. Shree Manjunathesware and Packing Products and Camphor Works (1998) 231 ITR 53 (SC) for the proposition that CIT was entitled to take into account the new material which may come in his possession as a result of enquiry. He also relied on the decision of Tribunal in the case of ITO v. Mehul J. Sidhani (2001) 117 Taxman (Mag) 18 for the submission that the claim of the assessee could not be denied for the mistake of the auditors. It was further submitted that the AO must allow benefit/exemption/deduction to the assesses even where the assessee fails to make such claim due to ignorance of law. For this proposition, he relied on two Supreme Court judgments, namely, CIT v. Mahalaxmi Sugar Mills Co. Ltd. (1986) 160 ITR 920 (SO and CIT v. Mahalaxmi Textile Mills Ltd (1967) 66 ITR 710 (SC).
5.3 In view of the above submissions, it was prayed that the claim of the assessee be allowed on the basis of fresh audit report dt. 27th Oct., 1995.
6. On the other hand, the learned CIT Departmental Representative has supported the order of CIT(A) by making various submissions. Firstly, it was submitted that Sub-section (6) of Section 80HHD provides a condition precedent for allowing the deduction and the legislature has used the words “shall not be admissible”. This shows the intention of the legislature to the effect that no deduction can be allowed unless the conditions specified therein are fulfilled. He referred to the decision of Supreme Court in the case of CIT v. Nagpur Hotel Owners’ Association (2001) 247 ITR 201 (SC) for the proposition that such provisions are to be construed strictly and the exemption/deduction cannot be allowed if the condition precedent is not fulfilled. He also referred to the decision of jurisdictional High Court in the case of CIT v. Prem Nath Motors (P) Ltd (2002) 253 ITR 705 (Del) and the decision of Supreme Court in the case of CIT v. Anjum M.H. Ghaswala and Ors. (2001) 252 ITR 1 (SC) for the proposition that the provisions are to be construed strictly where the legislature has used the word “shall”. Alternatively, it was contended by her that even presuming that filing of the report was directory, still the first requirement of obtaining auditors’ report certifying the correctness of the claim of the assessee is mandatory even according to the decisions cited by the learned counsel for the assessee. Further, all the decisions cited by assessee’s counsel suggest that if the assessee fails to file the report along with the return then such report must be filed before the completion of assessment proceedings and, therefore, the question of filing a fresh report after the completion of assessment does not arise and the CIT was, therefore, justified in not entertaining such report in the course of proceeding under Section 263. She also relied on the decision of Supreme Court in the case of Smt. Tawlata Shyam and Ors. v. CIT (1977) 108 ITR 345 (SC) for the proposition that where the provisions are unambiguous then nothing can be added to or subtracted from the language used by the legislature. The aspect of the hardship is not relevant. For this proposition, she relied on the decision of Supreme Court reported as Federation of Andhra Pradesh Chambers of Commerce & Industry and Ors. v. State of Andhra Pradesh and Ors.
6.1 Proceeding further, it was submitted by her that provisions of Sub-section (6) of Section 80HHD arc somewhat different from the provisions considered by various High Courts. Under this sub-section, the auditors have to certify that the claim made by the assessee is correct and for that purpose, the auditors have to examine the material relevant for the deduction and apply its mind before certifying such fact. She drew our attention to the auditors’ report dt. 30 Dec., 1991 appearing at pp. 12 to 14 of the paper book to point out that the report of the auditor is qualified. According to her, the auditors’ report states that such report is subject to and read with remarks in paras 5.1 to 5.7 of the annexures. She drew our attention to para 5.2 wherein it has been stated that receipts in convertible foreign exchange from provision of services to the foreign tourists was as certified by the management and not verified by the auditors. Then she drew the attention to para 5.5 wherein it has been stated that figures of sales-tax and expenditure tax are not rightly ascertainable. Finally, she drew our attention to para 5.7 wherein it has been stated that figures mentioned in paras 2 and 4 are provisional. In view of these facts, it was submitted by her that the so-called audit report cannot be said to the effect that the correctness of the claim of the assessee was certified by them. Since there was no application of mind by the auditors, the so-called audit report was non est report and, therefore, the claim of the assessee was rightly rejected by the CIT.
7. Rival submissions of the parties, the material placed before us and the case laws referred to have been considered carefully. The question for consideration is whether the CIT, in exercise of its powers under Section 263, was justified in holding that the report of the auditor furnished by the assessee along with return was not the report as contemplated by the mandatory provisions of Sub-section (6) of Section 80HHD and consequently, the assessee was not entitled to deduction under the aforesaid section. The answer to this question centers around the interpretation of such section.
8. It is well-settled principle of law that where the provisions of statute are unambiguous then its natural and plain meaning should be adopted and nothing can be added to or subtracted from such provisions. Reference can be made to the judgement of Hon’ble Supreme Court in the case of Smt. Tarulata Shyam (supra). It is also well-settled principle of interpretation that the incentive provisions should be interpreted liberally in the manner so as to achieve the object of the legislation and not in the manner which may defeat such objects. Reference can be made to the judgment of Hon’ble Supreme Court in the case of Bajaj Tempo (supra). However, where the deduction to be allowed is based on the fulfillment of certain condition then rule of strict interpretation has to be applied. These rules of interpretation have been reconciled by the Hon’ble Supreme Court in the case of Wood Papers Ltd. AIR 1999 SC 2049 wherein it has been held as under:
“When the question is whether a subject falls in the notification or in the exemption clause, it being in nature of exception, is to be construed strictly and against the subject but once ambiguity or doubt about applicability is lifted and the subject falls in the notification then full play should be given to it and it calls for a wider and liberal construction.”
9. The provisions of Section 80HHD have been gone through by us carefully. The basic conditions for allowing the deduction are mentioned in Sub-section (1) and there is no dispute between the parties that conditions mentioned in Sub-section (1) are fulfilled and accordingly, the assessee is entitled to such deduction. The only objection of the CIT is that the auditors’ certificate dt. 30th Dec., 1991 was not in conformity with the mandatory provisions of Sub-section (6) which provides that deduction under Sub-section (1) shall not be admissible unless the assessee furnishes along with the return the report of the auditor certifying the correctness of the claim of the assessee under Sub-section (1). These provisions have been made to facilitate the AO in completing the assessment without spending much time in ascertaining the assessee’s claim. These are the machinery provisions though the compliance of the same are mandatory. A distinction has to be made between the conditions which are the foundation for making the claim and the conditions which are provided to facilitate the assessment. The former is substantive condition without the fulfillment of which deduction cannot be allowed and, therefore, strict rule of interpretation is to be applied. However, the latter is procedural or machinery one and, therefore, the provisions regarding such conditions should be construed liberally. This view is also fortified by the Supreme Court judgment in the case of Bajaj Tempo (supra) wherein it has been held as under:
“A provision in a taxing statute granting incentives for promoting growth and development should be construed liberally and since a provision for promoting economic growth has to be interpreted liberally, the restriction on it too has to be construed so as to advance the objective of the provision and not to frustrate it.”
In view of the above discussion, we are of the view that the provisions of Sub-section (6). though compliance is mandatory, should be liberally construed, If so construed, then we are of the view that if such report is found to be defective then, considering the principle of natural justice, an opportunity should be afforded to the assessee to remove such defect.
10. It is not the case of the Revenue that the report of the auditor was not filed along with the return. Therefore, the provisions of Sub-section (6) were substantially complied with. However, the report of the auditors appears to be defective in the sense that auditors had issued the report without properly verifying the record of the assessee but on that account, the claim of the assessee cannot be rejected, which is otherwise allowable, without affording an opportunity to the assessee to rectify the defect. However, in the present case, the report of the auditor furnished by the assessee along with the return was accepted by the AO. Had the defect been pointed out in the assessment proceedings, then assessee would have removed such defect. Therefore, if such report is subsequently found to be defective by the CIT under Section 263 then, in our opinion, he should have allowed an opportunity to the assessee to rectify the defect.
11. In the present case, the assessee had assigned the job to its auditors to verify the claim under Section 80HHD and issue the required certificate. Nowhere in the certificate, it has been stated that the required information or material was not supplied by the assessee. On the contrary, the report clearly states that they had obtained all the information and explanation which to the best of knowledge and belief were necessary for obtaining the profits of the assessee derived from the provisions of service to the foreign tourists. However, the report has been qualified by the auditors by stating that the figures were not verified by them. The possibility of not verifying the details cannot be ruled out for want of time on the part of the auditors due to heavy pressure of the audit work of various parties. There is nothing on the record on the basis of which it can be said that negligence, if any, was attributable to assessee. The assessee cannot be denied deduction on account of any lapse on the part of the auditors. The report was duly furnished with the return and thereby, the provisions of Sub-section (6) were complied with by the assessee. If there is any defect in such report, the AO should allow an opportunity to the assessee to remove such defect in the course of assessment proceedings. On the contrary, the AO accepted the claim of the assessee. In such a situation, if the CIT found the report defective, then, in our considered opinion, instead of withdrawing the claim, an opportunity should have been provided to the assessee to remove the defect. On the contrary, we find that assessee on its own removed the defect by producing the fresh report dt. 27th Dec., 1995 wherein the claim of the assessee was nominally reduced from Rs. 35,12,869 to Rs. 34,25,955. This shows that the claim of the assessee was substantially correct. Accordingly, we are of the view that CIT was not justified in withdrawing the claim. The order of the CIT is, therefore, set aside and the matter is restored to the file of AO who shall adjudicate upon the matter afresh in the light of fresh certificate filed by the assessee before the CIT. In this process, the AO may, if necessary, examine the material on the basis of which the fresh report was issued by the auditors.
12. In the result, appeal of the assessee is allowed pro tanto.
