Option of assessee to avail or not to avail exemption or deduction.

[Uma Kothari]

GENERAL:

 In some provisions relating to exemption or a deduction we find that option is given to assessee to avail exemption or deduction in any given year or years, as per prescribed provisions. For example section 10A & 10B provides for Tax exemption to certain units in free trade zones and 100% export oriented units for certain period. Detailed provisions as to eligibility, period of exemption, procedure to be followed etc are provided. There is also a provision in the nature of option to the assessee not to opt for exemption for any  of the relevant years by filing a declaration. The scope of this write up is limited only in respect of assessee option to waive exemption for any year.

In some sections under the Chapter VIA, we find that in some cases deduction is allowable during certain number of consecutive years. For example, in case of some sub-section of  section 80 IB. Thus in such a case the assessee has to opt for the consecutive years in which he want to avail deduction and in other years he can file declaration for not availing deduction. 

The waiver of exemption is only when there is such an option is specifically provided. In case of certain other income which are exempt under section 10 in the sense that they do not form part of income at all , such option cannot be exercised. Fro example, in case of income from agricultural which is exempt u/s 10, the assessee cannot waive exemption. In case the assessee has suffered loss, he cannot claim that the exemption should not be applied to him qua agricultural loss. This is because there is no such option given in relation to exemption u/s 10 (1).

OPTION FOR NOT AVAILING EXEMPTION OR DEDUCTION:

In section 10A (8)  and  10B (8) ,we find on filing a  declaration the assessee can opt out the exemption. In declaration he has to declare that  the provisions of the relevant section - section 10A or 10 B , as the case may be, may not be applied to him for any of the relevant assessment year. Both the sub-sections are on similar lines, having the same language, which is, reproduced below:-

Sub-section (8) of Section 10A &  sub-section (8) of Section 10B:

"(8) Notwithstanding anything contained in the foregoing provisions of this section, where the assessee, before the due date for furnishing the return of income under sub-section (1) of section 139, furnishes to the Assessing Officer a declaration in writing that the provisions of this section may not be made applicable to him, the provisions of this section shall not apply to him for any of the relevant assessment years."

AN analysis of the above sub- section shows that:

(a) A written declaration is to be filed before the due date for furnishing of the return, This means that this is an annual exercise.

(b) the assessee has to declare that the provisions of the section may not be applied to him, 

(c) on filing of such declaration the provisions of the section shall not apply to him for any of the relevant previous years.

Each assessment year is a separate unit of assessment therefore, the declaration has to be filed in respect of any particular year and not for a block of years or  the initial year of exemption.

The exemption to eligible unit  is automatic on satisfaction of conditions. However, the assessee has an option to waive such exemption for any year by filing a declaration.

For example if the assessee has chosen to avail exemption in the first year but he wants to waive the exemption in 2^nd (second) year he can file declaration before the due date for filing of the return for the second year. Again suppose in the 3^{rd (third)} year the assessee want to avail exemption he will not file declaration for 3^rd year and therefore he will avail the exemption. Again say if the assessee has availed exemption for 3^rd to 5^th  ( third to fifth) years, and want to waive  exemption in sixth year, he will have to file a declaration for the sixth year before the due date to file the return for the sixth year. 

When waiver is desirable:

The assessee shall waive exemption only if it is beneficial to him. The benefit can only be derived if the assessee has suffered business loss or there remains unabsorbed depreciation or other allowances. The loss may not be carried forward, if the exemption is availed. Therefore, only in such cases would  only the assessee may file a declaration that provisions of section 10A or 10B my not be applied to him for any year so that the loss , unabsorbed depreciation and other allowances can be set off against any other income for the year or business income of subsequent years etc. Thus, the provisions of exemption as well as waiver of exemption both are intended to provide a relief to the assessee. Hence the need to interpret the provisions in a manner to serve the purpose for which the provisions have been intended. 

In new projects and particularly in capital intensive projects, there would be large amount of depreciation allowable under the Act in initial years. The depreciation gradually declines. In initial year there will be lesser revenue due to lower volume and lower price realization. After the business has gained goodwill and captured market share, profitability will increase. Therefore, cumulative effect of high amortization during initial years on account of depreciation and other amortizations and lower volume and price realization, a businessman can very well expect that in initial years taxable profit will be low, and in later years profitability will improve. Therefore, in initial year he may forgo the exemption and avail exemption in later eligible period. For example, suppose if exemption is allowed in any ten consecutive years out of fifteen years., then during initial few years, assessee may declare not to avail exemption or deduction and offer income from eligible unit to tax or claim carry forward of loss and depreciation etc.  

'ANY OF THE RELEVANT ASSESSMENT YEARS':

In sub-sections (8)  of section 10A and 10B ,  contradictory words used are `any' and 'years'. The word `any' in the context can only be considered as 'one' or some  but  definitely not all. So far the use of plural of the word year is concerned, one can easily understand it as a year or some of the  years being the year or years for which the assessee has filed declaration and  opted  not to avail of exemption. We may also rely on the provisions of section 13(2) of the General Clauses Act, 1897, the relevant and effective part of which reads as follows:

Gender and number.--

13. In all Central Acts and Regulations, unless there is anything repugnant in the subject or context,--   

(2) words in the singular shall include the plural, and vice versa.

Therefore, it can be said ,without any doubt that the words "any of …years" as  used in sub-section (8) can mean a single year - when the assessee has filed a declaration for one year only  and it will have a plural meaning only when the assessee has filed declaration of more than one years.

Furthermore, the expression 'any of the relevant assessment years' as  used in the sub-section (8) , together with the requirement of filing declaration before the due date, clearly  imply that the declaration shall be applicable only for the particular assessment year for which a declaration has been filed and not to all of the relevant Assessment Years - that is whole of the tax holiday period. Therefore, the assessee has an option to forgo exemption in any of the year by filing declaration for that year and not all the years. Suppose the assessee has filed declaration for the first year of the tax holiday period, he will have to file declaration for the second year separately if he wants to waive the tax exemption. If no declaration is filed for the second year, the exemption provision shall be applicable and the loss if any for the second year may not be carried forward.

Meaning full interpretation is desired:

The meaning of the expression as discussed above that is ' the year for which declaration  is filed', is  meaningful and serves the  purpose of allowing  statutory tax exemption and not allowing it, if and only if, the assessee has opted not to avail the exemption for any year.

Absurdity must be avoided:

If the view that  filing of declaration in any year will lead to withdrawal of exemption for all of the relevant years is applied , we find totally absurd results, for example:

Suppose an assessee has availed exemption for the first to eighth years, filed return of income claiming exemption u/s 10A or 10B for profits from eligible  business, assessments have been  completed including regular assessment under section 143(3) for some of the years. Now if the assessee wants to waive exemption  for the ninth year, he files a declaration before the due date. It is clear that exemption provision shall not apply for the ninth year and not to all of the relevant years of tax holiday. If the view that exemption shall not apply to all of the relevant years then the result would be that income earned during 1^st to 8^th years should also be taxable. The assessee or the Revenue can never intend this.

Different legislative intention would require different language:

 Had the intention be to waive exemption or deny it for all the years, then possibly requirement would have been to file declaration at the beginning of the tax holiday period, and the language used in  sub-section (8) would have been on the following lines:

 "Notwithstanding anything contained in the foregoing provisions of this section, where the assessee, before the due date for furnishing the return of income under sub-section (1) of section 139, for the initial year of the relevant years , furnishes to the Assessing Officer a declaration in writing that  the provisions of this section may not be made applicable to him for all the relevant previous years, the provisions of this section shall not apply to him for all of the relevant assessment years."

Had the intention be to waive exemption or deny for all of the subsequent  years, then possibly requirement would have been to file declaration before due date for any year after the first year, and the language used in  sub-section (8) would have been  on the following lines:

"Notwithstanding anything contained in the foregoing provisions of this section, where the assessee, before the due date for furnishing the return of income under sub-section (1) of section 139, for any of the relevant previous years furnishes to the Assessing Officer a declaration in writing that  the provisions of this section may not be made applicable to him for the specified year and all subsequent years, the provisions of this section  shall not apply to him for all of the relevant assessment years beginning from the year for which the declaration has been filed for the first time" 

Thus, in view of the  use  of words "any of the relevant previous years, " they means any of the relevant previous year or years for which the assessee has furnished the declaration. There appears no ambiguity in this regard.

NO PRESCRIBED PROCEDURE:

There is no prescribed procedure or form for making a declaration. The assessee may make a declaration in simple language that the provision of the section may not be applied to him for any year.

DRAFT DECLARATION FORM TO THE Assessing Officer

As noted earlier there is no prescribed declaration form. Therefore, declaration can be made in a letterform conveying the intention of the assessee that he does not want to avail of the exemption for any year. The declaration can be on the following lines to be on safe side :

Name, address, and PAN of the assessee:

Name of unit for which exemption is waived:

To,

The Assessing Officer,

……            

Sub: declaration under sub-section (8) of 10A/ 10B for the assessment year …

I/We, having a unit located in ….. free trade zone / a 100% Export Oriented Unit that  has been granted approval by the concerned authorities and is  eligible for exemption under section 10A  / 10B of the Income Tax Act, 1961. However, in view of sub-section (8) to Section 10A / 10B  I / we declare that the provisions of section 10A / 10B may not be applied to me/us for the Assessment Year …., for which the due date u/s 139(1) for filing of the return is ….., and we are making declaration before the due date. And therefore the loss suffered by the unit may be allowed to be setoff and/ or carried forward.

We may mention that by this declaration we are opting not to avail exemption only for the assessment year ….., and it will not affect our rights for the exemption already  availed in earlier years and for the subsequent years.

In case any specified declaration is to be filed in prescribed form, if any,  kindly provide me/us the same because as per our information there is no prescribed form. Furthermore, technical defect, if any, in this declaration may kindly be condoned and I/we may be permitted to file a revised declaration form  or to  remove technical defect, if any, as the case may be.

Thanking you,

Yours faithfully,

 For Assessee"

 What if the Assessing Officer takes the view to withdraw exemption for all years?

Suppose the A.O. takes view that once declaration is filed, the exemption will not be available for any of the relevant previous years (the entire tax holiday period). The view taken by the A.O. will be totally wrong and he will have no jurisdiction to assessee income of earlier years which has been exempted and also income of any subsequent years for which assessee has not filed any declaration. The remedy available to assessee would be:

(a) to challenge the jurisdiction of the A.O. by way of writ petition before the High Court. This appears to be the best, timely, effective and practical remedy. Although alternative remedy may be by way of appeal or revision petition, however, those would be time consuming and not effective one. In case the writ petition is not admitted, leave may be obtained to pursue other remedies;  

(b) to withdraw the declaration filed so that to avail exemption.

Can declaration be withdrawn?:

As per the provision of sub-section (8) the language to be used in the declaration is " may not be made applicable to me…," therefore a possible view is that the assessee may have an option to withdraw the declaration. This is also because a declaration filed by the assessee cannot be used against him to jeopardize his privileges already availed of or which he may avail in the future under law. A privilege granted cannot be withdrawn on action of the assessee, except to the extent intended by the assessee.

Therefore, the assessee may withdraw the declaration, in case the Assessing Officer intend to apply the declaration  in a manner so as to deny exemption for  all of the relevant previous years ( the entire tax holiday period). However, in that case the assessee may loose the benefit of set off and / or carry forward of the loss.

Relevant Rulings:

In C. I. T v. Tamil Nadu Jai Bharath Mills Ltd [2006] 287 ITR 512 (Mad) it was held that the assessee has a right to withdraw exemption for any year by filing declaration. It was further held that the assessee has also right to withdraw application for exemption u/s 10B. The court held as follows:

 "Section 10B(8) which opens with a non obstante clause, clearly confers a right on the assessee to declare that the provisions of the Act may not be made applicable to the assessee, provided such a declaration is given on or before the due date for furnishing the return under section 139(1) of the Act.  It was therefore, open to the assessee, notwithstanding the fact that the assessee had exercised the option to have section 10B made applicable, to withdraw that option, provided such withdrawal was made on or before the due date for filing the return.

This court in the assessee's own case in Tax Case No.302 of 2001 held that in this case, the withdrawal was made along with the return which return had been filed before the expiry of the due date.  Hence, applying the ratio laid down by this court in the abovesaid decision, we do not see any question of law much less a substantial question of law that arises for consideration.  Accordingly, both the appeals stand dismissed.  Consequently, T.C.M.P. No.1347 of 2005 is also dismissed."

Moser Baer India Ltd V JCIT (2007) 108 ITD 80 (Delhi):

In this case tribunal while interpreting the word 'any' used under sub-sections (3) ( and (7)  { now renumbered as (8)}of S. 10B held that 'any' will mean 'one or more out of several years', 'any' cannot be read as all years.. Therefore, the assessee could file declaration for any year to the effect that benefit of exemption should not apply to particular year. It has also been held that filing of declaration is directory and not mandatory. It will be sufficient compliance if declaration is file during assessment proceedings.

The Tribunal held that where the assessee filed a declaration under section 10B(7) before the A.O. withdrawing exemption claimed under section 10B and claimed that income of floppy unit be computed as per other provisions of the Act, the A.O. could not thrust exemption provided under section 10B upon the assessee.