Deduction under Section 80IB allowed despite late audit report; Section 40A(3) disallowance denied to protect profits

The HC held that the assessee was entitled to claim the deduction under Section 80IB despite the audit report being filed after the return under Section 153A, as the report was submitted before the assessment order and previously filed for the relevant AY. The denial of the benefit solely due to the timing of the audit report was incorrect. Additionally, the court upheld the allowance of deductions under Section 40A(3), affirming that disallowance would increase profits and thereby affect the deduction under Section 80IB. Both issues were decided in favor of the assessee.

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Issues Involved:
1. Justification of ITAT in allowing the assessee's claim of deduction under Section 80IB on undisclosed income declared post-search.
2. Justification of ITAT in allowing the assessee's claim of deduction under Section 80IB for disallowance under Section 40A(3) on undisclosed income declared post-search.
3. Justification of ITAT in allowing the assessee's claim of deduction under Section 80IB(13) on enhanced income.

Detailed Analysis:

Issue 1: Deduction under Section 80IB on Undisclosed Income
The assessee filed a return for the assessment year 2005-06, declaring an income of Rs. 34,89,935/- after claiming a deduction of Rs. 41,83,813/- under Section 80IB. This claim was initially allowed by the Assessing Officer. However, a subsequent search revealed an undisclosed income of Rs. 5,68,80,271/-. The assessee then filed a revised return declaring an income of Rs. 94,91,330/- and claimed an enhanced deduction under Section 80IB. The Assessing Officer disallowed this claim due to the absence of an audit report with the return. The CIT Appeals and the Tribunal found that the requirement to file an audit report with the return was directory, not mandatory, and since the audit report was furnished during the assessment proceedings, the deduction was allowable. Various High Courts have held that the requirement to file an audit report with the return is directory, provided it is submitted before the assessment order is passed.

Issue 2: Deduction under Section 80IB for Disallowance under Section 40A(3)
The Assessing Officer disallowed Rs. 54,52,697/- under Section 40A(3) due to cash payments exceeding Rs. 20,000/-. The CIT Appeals and the Tribunal upheld this disallowance but observed that since this amount relates to the profits of the eligible project, it should be included in the deduction under Section 80IB. The Tribunal directed the Assessing Officer to recompute the eligible deduction under Section 80IB. The High Court found no infirmity in this view, stating that the disallowed amount under Section 40A(3) should be adjusted to the profits of the undertaking, thus entitling the assessee to the deduction under Section 80IB.

Issue 3: Deduction under Section 80IB(13) on Enhanced Income
The assessee's original return included a deduction claim under Section 80IB, which was enhanced in the revised return filed post-search. The Tribunal noted that the enhanced claim was not a new claim but was based on the additional income declared. The Tribunal held that the requirement to file an audit report with the return is directory, and since the audit report was furnished during the assessment proceedings, the enhanced claim was allowable. The High Court upheld this view, citing various High Court decisions that have consistently held the requirement to file an audit report with the return as directory, provided it is submitted before the assessment order is passed.

Conclusion:
The High Court dismissed the appeal, upholding the Tribunal's decision that the requirement to file an audit report with the return is directory and that the assessee was entitled to the deductions under Section 80IB for both the undisclosed income and the disallowed amount under Section 40A(3). The questions of law framed by the appellant were answered against the revenue and in favor of the assessee.

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