Direct Tax Alert - Requirement of filing declaration under section 10B before due date is mandatory

BACKGROUND

Section 10B of the Income-tax Act, 1961 (IT Act) is a special provision allowing a 100% deduction of profits and gains derived by newly established 100% Export Oriented Undertakings (EOU) subject to fulfilment of specified conditions. As per Section 10B(8) of the IT Act, the taxpayer is required to furnish a declaration to the tax officer in writing before the due date of furnishing tax return under section 139(1) of the IT Act that the provisions of this section shall not be made applicable to it. Whether the requirement of furnishing declaration before the due date is mandatory or directory in nature is a matter which have been raised before the judicial authorities.

Recently, the Supreme Court¹ have examined this issue. We, at BDO in India, have summarized the ruling of the Supreme Court and provided our comments on the impact of this decision hereunder:

FACTS OF THE CASE

Taxpayer, a 100% EOU, is engaged in the business of running a call centre and IT enabled and remote processing services. For the year under consideration, the taxpayer had tax loss in the original return which was not carried forward owing to exemption under section 10B of the IT Act. Along with its original tax return, the taxpayer annexed a note stating that stating that it is a 100% EOU and entitled to exemption under section 10B of the IT Act and therefore no loss is being carried forward. Almost a year after filing original tax return, the taxpayer filed revised tax return and claimed carry forward of losses. It also filed a declaration that it is not availing the benefit under section 10B of the IT Act. However, the tax officer opined that as the declaration in writing was not furnished before the due date of filing original tax return, exemption under section 10B of the IT Act cannot be withdrawn. Accordingly, it denied the carry forward of losses. While the First-Appellate Authority upheld the Tax Officer’s order, Bangalore Tax Tribunal granted relief to the Taxpayer. Karnataka High Court dismissed the appeal filed by the Tax Authority. Hence, Tax Authority filed appeal before the Supreme Court.      

SUPREME COURT RULING

The question for consideration before the Supreme Court was whether for non-availing of exemption under section 10B of the IT Act, the taxpayer is required to fulfil following twin conditions or not:

• Furnishing a written declaration to the tax officer that the provisions of section 10B(8) of the IT Act may not be made applicable to him; and
• The said declaration to be furnished before the due date of filing original tax return

The Supreme Court held that the requirement of furnishing declaration is mandatory in nature and thereby upheld the Tax Officer’s order. While coming to this conclusion, it made following observations:

• The wording of the section 10B(8) of the IT Act is very clear and unambiguous. For claiming benefit under section 10B(8) of the IT Act, twin conditions are required to be fulfilled mandatorily. It cannot be said that one of the conditions would be mandatory and the other would be a directory, where the words used for furnishing the declaration to the tax officer and to be furnished before the due date of filing the original return under section 139(1) of the IT Act are same/similar. Further, it cannot be disputed that in a taxing statute the provisions are to be read as they are and they are to be literally construed, more particularly in a case of exemption sought by the taxpayer.
• The taxpayer filed its original return under section 139(1) and not under section 139(3). Therefore, the Tax Authority is right in submitting that the revised return filed by the taxpayer under section 139(5) can only substitute its original return under Section 139(1) and cannot transform it into a return under Section 139(3), in order to avail the benefit of carrying forward or set-off of any loss under section 80 of the IT Act. The taxpayer can file a revised return in a case where there is an omission or a wrong statement. But a revised return of income, under Section 139(5) cannot be filed, to withdraw the claim and subsequently claiming the carried forward or setoff of any loss.
• Filing a revised tax return under section 139(5) of the IT Act and taking a contrary stand and/ or claiming the exemption, which was specifically not claimed earlier while filing the original tax return is not permissible.
• The significance of filing a declaration under section 10B(8) of the IT Act can be said to be co-terminus with filing of tax return under section 139(1) of the IT Act, as a check has been put in place by virtue of section 10B(5) of the IT Act to verify the correctness of claim of deduction at the time of filing tax return. If a taxpayer claims an exemption under the IT Act by virtue of section 10B of the IT Act, then the correctness of claim has already been verified under section 10B(5) of the IT Act. Therefore, if the claim is withdrawn post the filing of tax return, the accountant’s report under section 10B(5) of the IT Act would become falsified and nullified.
• The reliance placed by taxpayer in the case of G.M. Knitting Industries Pvt. Ltd² can be factually distinguished. Section 10B(8) of the IT Act is an exemption provision which cannot be compared with claiming an additional depreciation under section 32(1)(iia) of the IT Act. Chapter III and Chapter VIA of the IT Act operate in different realms and principles of Chapter III, which deals with “incomes which do not form part of total income”, cannot be equated with mechanism provided for deductions in Chapter VIA, which deals with “deductions to be made in computing total income”. Thus, none of the decisions relied upon by the taxpayer on interpretation of Chapter VIA shall be applicable while considering the claim under section 10B(8) of the IT Act.
• Exemption provisions are to be strictly and literally complied with and the same cannot be construed as procedural requirement. Thus, taxpayer’s contention that it had a substantive statutory right to opt out of section 10B of the IT Act is devoid of substance.  
• Further, Special Leave Petition in the case of CIT, Delhi III vs. Moser Baer India Limited³ was dismissed because of low tax effect. However, the question of law therein was substantially kept open. Hence, the same could not be held against tax authorities.

BDO COMMENTS

Supreme Court has laid to rest the controversy revolving around the nature of requirement of filing declaration before due date – mandatory or directory. While this decision is rendered in the context of section 10B of the IT Act, it could have an impact to all the situations / sections which requires submission of declaration / form for claiming the concession rate / rebate / tax credit (for e.g. requirement of furnishing Form 67 – there are judicial pronouncement wherein it has been held that this requirement is directory in nature. Please click here to read our alert). While coming to such conclusion, the Hon’ble Apex Court has held that Section 10B is an “exemption” provision and hence, has to be strictly construed. However, it may be noted that in the case of Yokogawa India, the Apex Court held that section 10B is a “deduction” provision. Further, the SC has made an important observation that revised tax return can be filed where there is an omission or wrong statement and not to withdraw the claim. It also observed that the revised return can only substitute original return and cannot transform it into loss return (covered by section 139(3) of the IT Act). One needs to evaluate the impact of this decision to situation where the taxpayer has filed original tax return offering income and the same is  later on revised to show loss.