Supreme Court Clarifies Mandatory Nature of Declaration for Section 10B Exemption: Principal Commissioner of Income Tax-III vs. M/s Wipro Limited (2022)

Introduction

Date of the Judgment: 11 July 2022
Citation: (2022) INSC 626
Judges: M.R. Shah, J., B.V. Nagarathna, J.
Can a company claim an exemption under Section 10B of the Income Tax Act, 1961, if it submits a declaration after the original due date for filing income tax returns? The Supreme Court recently addressed this question, clarifying the conditions for claiming such exemptions. The core issue revolved around the interpretation of Section 10B(8) of the Income Tax Act, specifically whether the requirement to furnish a declaration before the due date of filing the original return is mandatory or merely directory. The judgment was delivered by a bench of Justices M.R. Shah and B.V. Nagarathna, with Justice M.R. Shah authoring the opinion.

Case Background

M/s Wipro Limited, the respondent, is a 100% export-oriented unit engaged in running a call center and providing IT-enabled services. For the Assessment Year 2001-2002, the company filed its original return of income on October 31, 2001, declaring a loss of Rs. 15,47,76,990 and claiming exemption under Section 10B of the Income Tax Act, 1961. The company also included a note stating it was a 100% export-oriented unit and, therefore, not carrying forward any losses due to the exemption.

Subsequently, on October 24, 2002, the company submitted a declaration to the Assessing Officer (AO) stating they did not want to avail the benefit under Section 10B for the assessment year 2001-02, as per Section 10B(8) of the Income Tax Act. The company then filed a revised return on December 23, 2002, not claiming the Section 10B exemption and instead claiming a carry forward of losses.

Timeline

Course of Proceedings

The Assessing Officer (AO) rejected the company’s withdrawal of the Section 10B exemption, stating that the declaration was not furnished before the due date of filing the return (October 31, 2001). The AO disallowed the claim for carrying forward of losses under Section 72 of the Income Tax Act.

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO’s order. However, the Income Tax Appellate Tribunal (ITAT) ruled in favor of the assessee, stating that the declaration under Section 10B(8) was filed before the due date of filing the return as per Section 139(1) of the Income Tax Act. The High Court of Karnataka dismissed the Revenue’s appeal, agreeing with the ITAT’s decision.

Legal Framework

The core of the dispute lies in the interpretation of Section 10B(8) of the Income Tax Act, 1961, which states:

“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.”

This section allows an assessee to opt out of the exemption under Section 10B by submitting a declaration to the Assessing Officer before the due date for filing the return of income under Section 139(1) of the Income Tax Act. The key question is whether the time limit for submitting this declaration is mandatory or directory.

Section 139(1) of the Income Tax Act specifies the due date for filing the return of income, while Section 139(5) allows for the filing of a revised return to correct any omission or wrong statement.

Section 72 of the Income Tax Act deals with the carry forward of losses. Section 80 of the IT Act requires that an assessee claiming carry forward of loss should file a return showing the loss before the last date for submitting the return.

Arguments

Revenue’s Arguments:

• The Revenue argued that the conditions in Section 10B(8) were not met because the declaration was not filed before the due date of filing the original return. Therefore, the assessee was not entitled to carry forward losses under Section 72 of the Income Tax Act.
• The declaration under Section 10B(8) was filed after the due date for the original return, and thus, the assessee’s claim for carry forward of losses should be rejected.
• The High Court erred in considering the time limit for filing the declaration as a procedural requirement and not mandatory.
• The revised return of income under Section 139(5) could only correct omissions or mistakes, not introduce an entirely new claim, such as withdrawing a Section 10B exemption and claiming carry forward of losses.
• The assessee’s actions were an afterthought to frustrate the purpose of Section 10B by extending the period for filing the declaration beyond the specified time.
• The Revenue argued that Section 10B of the IT Act is an exemption provision and the conditions for seeking an exemption are required to be complied with strictly.
• Reliance was placed on the judgments of this Court in the case of Commissioner of Income Tax-III v. Calcutta Knitwears, Ludhiana (2014) 6 SCC 444 and Commissioner of Customs (Import), Mumbai v. Dilip Kumar and Company and others (2018) 9 SCC 1 , to argue that a taxing statute should be strictly construed and that the exemption provisions must be construed strictly and by a strict interpretation.

Assessee’s Arguments:

• The assessee argued that the requirement to submit a declaration is mandatory, but the time limit for submission is directory.
• The High Court rightly held that non-filing of the declaration within the time limit does not envisage any consequence.
• The assessee had filed the original return in time, declaring the loss, and thereby complied with Section 80 of the IT Act.
• The revised return was filed to bring to the notice of the AO the factum of exercise of option under Section 10B.
• The accountant’s certificate under Section 10B (5) is required only if the assessee claims the deduction under Section 10B.
• The case was covered by the judgment of the Supreme Court in CIT, Maharashtra v. G.M. Knitting Industries Pvt. Ltd. (2016) 12 SCC 272, which held that the requirement to file a form along with the return was directory.
• The assessee had a statutory right to opt out of Section 10B, and this right could not be nullified by construing the time limit as mandatory.
• The Delhi High Court in Moser Baer India Limited had held that the time limit was directory, and this decision was followed in other cases.
• Section 10B is a deduction provision and not an exemption provision, as held by the Supreme Court in CIT v. Yokogawa India Ltd. (2017) 2 SCC 1.

Submissions of Parties

Issues Framed by the Supreme Court

The Supreme Court framed the following issue for consideration:

1. Whether, for claiming exemption under Section 10B(8) of the IT Act, the assessee is required to fulfill the twin conditions, namely, (i) furnishing a declaration to the assessing officer in writing that the provisions of Section 10B(8) may not be made applicable to him; and (ii) the said declaration to be furnished before the due date of filing the return of income under sub-section (1) of Section 139 of the IT Act.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

Cases Relied Upon by the Court:

Legal Provisions Considered by the Court:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Supreme Court relied on Commissioner of Income Tax-III v. Calcutta Knitwears, Ludhiana (2014) 6 SCC 444 and Commissioner of Customs (Import), Mumbai v. Dilip Kumar and Company and others (2018) 9 SCC 1* to emphasize the principle that taxing statutes, especially exemption provisions, must be strictly and literally construed.
• The Court distinguished CIT, Maharashtra v. G.M. Knitting Industries Pvt. Ltd. (2016) 12 SCC 272*, stating that it dealt with a deduction provision (additional depreciation) and not an exemption provision like Section 10B(8).
• The Court distinguished the Delhi High Court’s decision in Commissioner of Income Tax, Delhi-III, New Delhi v. Moser Baer India Limited*, noting that the special leave petition against it was dismissed as withdrawn due to low tax effect, and the question of law was kept open.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the clear and unambiguous language of Section 10B(8) of the Income Tax Act, 1961. The Court emphasized that the provision explicitly requires an assessee to furnish a declaration before the due date of filing the original return to avail the exemption. The Court reasoned that both the conditions mentioned in the provision are mandatory and must be strictly complied with. The Court was also influenced by the fact that exemption provisions in tax laws must be interpreted strictly and literally.

Logical Reasoning:

The Court considered the assessee’s argument that the time limit was directory but rejected it, stating that the language of Section 10B(8) was clear and unambiguous. The Court also distinguished the case from G.M. Knitting, which dealt with a deduction provision, not an exemption provision. The Court rejected the argument that the assessee had a substantive right to opt out of Section 10B, stating that the exemption provisions must be strictly complied with.

The Supreme Court’s decision was based on a literal interpretation of the statute. The court held that the language of Section 10B(8) was clear and unambiguous, and that the twin conditions of furnishing the declaration and doing so before the due date are both mandatory. The court rejected the argument that the time limit was merely procedural, emphasizing that the provision for exemption must be strictly complied with. The court also distinguished the facts of the case from those in G.M. Knitting, stating that the latter dealt with a deduction provision and not an exemption provision. The court also noted that the special leave petition against the Delhi High Court’s decision in Moser Baer was dismissed as withdrawn, and the question of law was left open.

The Court reasoned that the assessee’s claim for exemption under Section 10B(8) was contingent on fulfilling both conditions. The Court rejected the argument that the time limit for filing the declaration was merely directory, stating that the language of the statute did not support such an interpretation. The Court also rejected the argument that the assessee had a substantive right to opt out of Section 10B, stating that the exemption provisions must be strictly complied with.

The Court emphasized that in tax law, exemption provisions must be interpreted strictly. Since the assessee did not meet the mandatory condition of filing the declaration before the due date, they were not entitled to the exemption. The court also noted that filing a revised return to claim the exemption after the due date was not permissible.

“On a plain reading of Section 10B (8) of the IT Act as it is, i.e., “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 Section 10B may not be made applicable to him, the provisions of Section 10B shall not apply to him for any of the relevant assessment years”, we note that the wording of the Section 10B (8) is very clear and unambiguous.”

“For 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 our view, both the conditions to be satisfied are mandatory. It cannot be said that one of the conditions would be mandatory and the other would be directory, where the words used for furnishing the declaration to the assessing officer and to be furnished before the due date of filing the original return of income under sub-section (1) of section 139 are same/similar.”

Key Takeaways

• For claiming exemption under Section 10B(8) of the Income Tax Act, 1961, the assessee must furnish a declaration in writing to the Assessing Officer.
• This declaration must be furnished before the due date for filing the original return of income under Section 139(1) of the Income Tax Act.
• Both conditions are mandatory and must be strictly complied with.
• Filing a revised return after the due date to claim the exemption is not permissible.
• Exemption provisions in tax laws must be interpreted strictly and literally.

Directions

The Supreme Court set aside the orders passed by the High Court and ITAT, holding that the assessee was not entitled to the benefit under Section 10B(8) of the Income Tax Act due to non-compliance with the twin conditions.

Development of Law

The ratio decidendi of this case is that for claiming the benefit under Section 10B(8) of the Income Tax Act, both conditions of furnishing the declaration and doing so before the due date of filing the original return of income are mandatory in nature. This judgment clarifies that the time limit for filing the declaration under Section 10B(8) is not merely procedural but is a mandatory condition for claiming the exemption. This is a departure from the view taken by some High Courts, which had held that the time limit was directory. This decision reinforces the principle that exemption provisions in tax laws must be strictly interpreted and complied with.

Conclusion

The Supreme Court’s judgment in Principal Commissioner of Income Tax-III vs. M/s Wipro Limited clarifies that the declaration required under Section 10B(8) of the Income Tax Act, 1961, must be submitted before the due date for filing the original return of income to claim the exemption. The Court held that both the declaration and its timely submission are mandatory requirements. This decision emphasizes the need for strict compliance with tax laws, particularly when claiming exemptions.