Strict Interpretation of Exemption Provisions: Supreme Court's Ruling on Section 10B(8) of the Income Tax Act

Interpreting Section 10B(8) of the Income Tax Act: Mandatory Compliance with Time Limits for Claiming Exemption

Reported as:

2022 (7) TMI 560 - Supreme Court

Here is a detailed analysis and article covering the key issues in the judgement:

Introduction

This article analyzes a recent Supreme Court judgement that addressed a crucial issue concerning the interpretation of Section 10B(8) of the Income Tax Act, 1961 (IT Act). The case revolved around whether the requirement of furnishing a declaration u/s 10B(8) before the due date for filing the return of income is mandatory or directory in nature. The Court's decision has significant implications for assesses seeking exemption under this provision.

Arguments Presented

Revenue's Contentions

The Revenue argued that the assessee failed to comply with the twin conditions u/s 10B(8) of the IT Act, namely, furnishing a declaration to the Assessing Officer in writing and submitting the declaration before the due date for filing the original return of income. The Revenue contended that both conditions are mandatory, and non-compliance should result in the denial of exemption u/s 10B(8).

The Revenue further argued that filing a revised return u/s 139(5) of the IT Act, claiming the benefit of carrying forward losses, is impermissible when the original return did not claim such a benefit. The Revenue asserted that a revised return u/s 139(5) can only substitute the original return and cannot be used to introduce a new claim or withdraw an earlier claim.

Assessee's Contentions

The assessee, supported by the High Court's decision, contended that while furnishing the declaration u/s 10B(8) is mandatory, the time limit for filing the declaration is directory in nature. The assessee relied on the Delhi High Court's decision in Moser Baer India Limited, which held that the requirement of filing the declaration by the due date is directory.

The assessee further argued that it had a substantive statutory right u/s 10B(8) to opt out of Section 10B, and this right cannot be nullified by construing the procedural time requirement as mandatory.

Discussions and Findings of the Court

The Supreme Court, after analyzing Section 10B(8) of the IT Act, held that the language used is clear and unambiguous. For claiming the benefit u/s 10B(8), the twin conditions of furnishing the declaration to the Assessing Officer in writing and submitting the declaration before the due date for filing the original return of income u/s 139(1) are mandatory and must be complied with.

The Court rejected the assessee's argument that the time limit for filing the declaration is directory in nature, stating that both conditions are mandatory, and it cannot be said that one is mandatory while the other is directory when the wording used for both conditions is similar.

The Court further held that filing a revised return u/s 139(5) of the IT Act, claiming the benefit of carrying forward losses, is impermissible when the original return did not claim such a benefit. The revised return can only substitute the original return and cannot be used to introduce a new claim or withdraw an earlier claim.

Analysis and Decision by the Court

The Supreme Court's decision emphasizes the strict interpretation of exemption provisions in tax statutes. The Court reiterated the principle that exemption provisions must be strictly and literally complied with, and the assessee claiming exemption has to satisfy all the conditions mandated by the provision.

The Court distinguished the present case from its earlier decision in COMMISSIONER OF INCOME-TAX Versus G.M. KNITTING INDUSTRIES (P.) LTD. & AKS ALLOYS (P.) LTD. - 2015 (11) TMI 397 - SC Order., where it had held that the requirement of filing Form 3-AA for claiming additional depreciation was directory. The Court observed that Section 10B(8) is an exemption provision, which cannot be compared with claiming an additional depreciation u/s 32(1)(ii-a) of the IT Act.

The Court also rejected the assessee's reliance on decisions interpreting provisions under Chapter VIA of the IT Act, which deals with deductions, stating that the principles applicable to Chapter III (exemptions) cannot be equated with the mechanism provided for deductions in Chapter VIA.

Ultimately, the Supreme Court set aside the orders of the High Court and the Income Tax Appellate Tribunal (ITAT), holding that the assessee shall not be entitled to the benefit u/s 10B(8) of the IT Act due to non-compliance with the twin conditions mandated by the provision.

Doctrine or Legal Principle Discussed

The Supreme Court's judgement reaffirms the well-established principle that exemption provisions in tax statutes must be strictly and literally construed, and the assessee claiming exemption has to strictly comply with all the conditions mandated by the provision. The Court emphasized that exemption provisions cannot be interpreted liberally or construed as procedural requirements.

Comprehensive Summary

The Supreme Court's judgement clarifies the interpretation of Section 10B(8) of the Income Tax Act, 1961. The Court held that for claiming the benefit u/s 10B(8), the twin conditions of furnishing a declaration to the Assessing Officer in writing and submitting the declaration before the due date for filing the original return of income u/s 139(1) are mandatory and must be strictly complied with.

The Court rejected the assessee's argument that the time limit for filing the declaration is directory in nature, emphasizing that both conditions are mandatory and must be strictly construed in the context of exemption provisions. The Court also held that filing a revised return u/s 139(5) of the IT Act, claiming the benefit of carrying forward losses, is impermissible when the original return did not claim such a benefit.

The Court's decision reaffirms the principle that exemption provisions in tax statutes must be strictly and literally construed, and the assessee claiming exemption has to strictly comply with all the conditions mandated by the provision. The Court distinguished the present case from its earlier decisions interpreting provisions related to deductions, stating that the principles applicable to exemptions cannot be equated with the mechanism provided for deductions.

Ultimately, the Supreme Court set aside the orders of the High Court and the ITAT, holding that the assessee shall not be entitled to the benefit u/s 10B(8) of the IT Act due to non-compliance with the twin conditions mandated by the provision.

Full Text:

2022 (7) TMI 560 - Supreme Court