THE REQUIREMENT OF FILING DECLARATION UNDER SECTION 10B(8) OF THE INCOME TAX ACT, 1962 - MANDTORY OR DIRECTORY?

[Mr. M. GOVINDARAJAN]

Section 10B of the Income Tax Act, 1961 (‘Act’ for short) is a special provision in respect of a newly established 100% Export Oriented undertakings.  Section 10B(8) provides that    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 year.

The issue to be discussed in this article is as to whether the twin conditions prescribed under Section 10B)(8) is mandatory or directory.  The Supreme Court in PRINCIPAL COMMISSIONER OF INCOME TAX-III, BANGALORE AND ANOTHER VERSUS M/S WIPRO LIMITED - 2022 (7) TMI 560 - SUPREME COURT held that the twin conditions prescribed under Section 10B (8) are mandatory.

In the said case Wipro Limited (‘respondent’ for reference) is a 100% Export Oriented Unit (‘EOU’ for short).  The respondent also engaged in the business of running a call centre and IT enabled remote processing services.  The respondent filed its income tax return for the assessment year 2001 - 2002 on 31.10.2021.  In the said return the respondent declared an income of Rs.15.48 crores and claimed exemption under section 10B of the Act. In the computation sheet the respondent stated that since the respondent claimed exemption under Section 10B of the Act no loss was being carried forward.

Later on 24.10.2022 the assessee made a declaration before the Assessing Officer that it did not want to avail exemption under Section 10B of the Act for the assessment year 2001 - 2002.  Therefore the respondent filed a revised return on 23.12.2002 without claiming exemption under Section 10B of the Act, carried forward the loss. The Assessing Officer passed an order on 31.03.2004 rejecting the claim of carrying forward of the loss under section 72 of the Act on the ground that the respondent did not give its declaration before the due date  filing of the original return for assessment year 2001 - 2002 i.e., 31.10.2021.  The Assessing Officer added the carried forward loss as income of the respondent.

The respondent filed an appeal before the Commissioner of Income Tax (Appeals) against the order passed by the Assessing Officer.  The Commissioner of Income Tax upheld the order passed by the Assessing Officer.

Against the order of Commissioner of Income Tax (Appeals), the respondent filed appeal before the Income Tax Appellate Tribunal (‘ITAT’ for short).  The ITAT allowed the appeal filed by the respondent and allowed the claim of the respondent to carry forward the loss.  The Revenue filed appeal before the High Court against the order of ITAT.  The High Court dismissed the appeal of the Revenue.

Being aggrieved against the order of High Court, the Revenue filed the present appeal before the High Court.  The Revenue submitted the following before the Supreme Court-

• As per section 10B(8) of the Act the respondent is to file declaration as to non availing of exemption under this section before the due date of filing of the return under section 139(1) of the Act but the same has not been filed by the respondent.  Therefore the ITAT and High Court have committed a grave error in allowing the claim of the respondent to carry forward the loss.
• The respondent filed the original return for the assessment year 2001 - 02 on 31.10.2001 which is the original due date filing the return for the said assessment year.  The respondent filed declaration on 24.10.2002 after the due date.
• Since the respondent filed the declaration under section 10B(8) of the Act beyond the due date i.e., 31.10.2001 the respondent is not eligible to carry forward the loss.
• The ITAT has wrongly noted that the declaration has been filed before the due date.
• The High Court observed that filing declaration is only a procedural requirement.
• If the view taken by the High Court is accepted it shall nullify the provisions of section 10B (5) and (8) of the Act.
• While filing revised return the respondent did not claim the exemption under section 10B(8) of the Act which cannot be done.
• The revised return is to be filed only to remove the omission and/or correct the arithmetical error.  It cannot be filed for a new claim.
• The filing of the declaration by the respondent is only an afterthought.
• The High Court has not properly appreciated the fact that by filing a declaration subsequently and filing the revised return of income, the intent of the assessee was to frustrate the purpose of Section 10B of the IT Act and file a declaration under Section 10B (8) belatedly.
• The High Court has seriously erred in observing that the requirement of submission of declaration under Section 10B (8) is mandatory in nature, but the time limit within which the declaration is to be filed is directory in nature, as the provision does not provide for any adverse consequence for not filing of the declaration by the time limit.
• Section 10B of the IT Act is an exemption provision and the condition for seeking an exemption is required to be complied with strictly with the provision.
• A taxing statute should be strictly construed and that the machinery provisions must be so construed to effectuate the object and purpose of statute and that the exemption provisions must be construed strictly and by a strict interpretation.

The respondent submitted the following before the Supreme Court-

• The only question of law to be decided in this case is as to whether the requirement for submission of declaration under section 10B (8) before the last date of submission of return is mandatory or directory.
• The High Court has rightly observed and held that the requirement of filing a declaration is mandatory in nature, while the time limit in filing the declaration is directory in nature.
• The High Court rightly held that the time limit directory as non-filing of the declaration within the time limit does not envisage any consequence.
• Even on merits also the Revenue has no case.
• Section 10B (8) enables an assessee to exclude the applicability of the deduction under Section 10B by filing a declaration to that effect before the last date in which the return of income is required to be filed.
• Section 10B (8) specifically and unequivocally gives the assessee a statutory right to exercise his option and to decide not to avail of the benefit of section 10B (8) in a particular Assessment Year.
• The basic premise is that a substantive claim, which the assessee considers to be more beneficial, must be allowed to be made until the conclusion of assessment and the time within which any form which enables the claim should be filed, is only directory.
• Section 10B (8) itself expressly gives the assessee the right to opt out of Section 10B. This substantive statutory right cannot in law be nullified by construing the purely procedural time element requirement regarding the filing of the declaration under Section 10B (8) as mandatory.
• Section 10B(8) is a deduction provision and not an exemption provision.

The Supreme Court considered the submissions made by the Revenue, appellant and the Wipro Limited, the respondent.  The High Court analyzed the facts of the case and the orders passed by the Assessing Officer, Commissioner of Income Tax (Appeals) ITAT and High Court.  The Supreme Court observed that the respondent in its annexure to the return stated that it is a company and is a 100% export-oriented unit and entitled to claim exemption under Section 10B of the IT Act and therefore no loss is being carried forward. Along with the original return filed on 31.10.2001, the assessee also annexed a note to the computation of income clearly stating as above.  Thereafter the assessee filed the revised return of income under Section 139(5) of the Act on 23.12.2002 and filed a declaration under Section 10B (8) which admittedly was after thedue date of filing of the original return under Section 139(1), i.e.,31.10.2001.

The Supreme Court considered the submissions of the Revenue that the twin conditions under Section 10B (8) have not been complied with the respondent whereas the respondent contended that the conditions to file declaration is mandatory and the time limit to file the declaration is directory.  The Supreme Court analyzed the provisions of Section 10B (8) of the Act.  The Supreme Court observed that claiming the benefit under Section 10B (8), the twin conditions of furnishing the declaration to the assessing officer in writing and that the same must be furnished before the due date of filing the return of income under sub-section (1) of section 139 of the IT Act are required to be fulfilled and/or satisfied.  In the view of the Supreme Court both the conditions to be satisfied are mandatory.

The benefit under section 10B (8) and furnishing the declaration as required under section 10B (8) in the revised return of income which was much after the due date of filing the original return of income under section 139(1) of the IT Act, cannot mean that the assessee has complied with the condition of furnishing the declaration before the due date of filing the original return of income under section 139(1) of the Act.

The Supreme Court held that claiming the benefit under section 10B (8), both the conditions of furnishing the declaration and to file the same before the due date of filing the original return of income are mandatory in nature.  The Supreme Court held that the High Court the High Court has committed a grave error in observing and holding that the requirement of furnishing a declaration under Section 10B (8) of the IT Act is mandatory, but the time limit within which the declaration is to be filed is not mandatory but is directory.

The Supreme Court allowed the appeal filed by the Revenue.