EXEMPTION UNDER SECTION 10B (8) OF INCOME TAX ACT, 1961

[Mr. M. GOVINDARAJAN]

Exemption to 100% EoU

Section 10B of the Income Tax Act, 1961 (‘Act’ for short) allows deduction of such profits and gains as are derived by a 100% export-oriented undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee.  No deduction under this section shall be allowed to an assessee who does not furnish a return of his income on or before the due date specified under sub-section (1) of section 139.

This section applies to any undertaking which fulfils all the following conditions-

• it manufactures or produces any articles or things or computer software;
•  it is not formed by the splitting up, or the reconstruction, of a business already in existence;
• it is not formed by the transfer to a new business of machinery or plant previously used for any purpose.

The deduction under this section shall not be admissible for any assessment year beginning on or after the 1st day of April, 2001, unless the assessee furnishes in the prescribed form, along with the return of income, the report of an accountant, certifying that the deduction has been correctly claimed in accordance with the provisions of this section.

Sub-section (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.

Issue

The issue to be discussed in the remaining part of the article is as to whether for claiming exemption under Section 10B (8) of the Act, the assessee is required to fulfill the twin conditions-

• furnishing a declaration to the assessing officer in writing that the provisions of Section 10B (8) may not be made applicable to him; and
• 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 Act,

with reference to decided case law as discussed below:

In PRINCIPAL COMMISSIONER OF INCOME TAX-III, BANGALORE AND ANOTHER VERSUS M/S WIPRO LIMITED [2022 (7) TMI 560 - SUPREME COURT] – decided on 11.07.2022, the assessee is a 100% export-oriented unit.  The assessee is engaged in the business of running a call centre and IT Enabled and Remote Processing Services.  The assessee filed its income tax return for the assessment year 2001- 02 declaring a loss of Rs.15.47 crores on 31.10.2001.  The assessee claimed exemption under section 10B of the Act, since it is a 100% Export Oriented Unit and therefore no loss is being carried forwarded by the assessee.  Later the assessee field a declaration on 24.10.2002 before the Assessing Officer stating that the assessee does not want to avail the benefit under Section 10B of the Act for A.Y. 2001-02 as per Section 10B (8) of the Act.  Therefore the assessee filed a revised return on 23.12.2002.  In the revised return the assessee did not claim exemption under section 10B of the Act and opted to carry forward the losses under section 72 of the Act.

The Assessing Officer rejected the claim of the assessee for withdrawing the exemption under section 10B of the Act for the reason that the assessee did not file declaration in writing before the due date of filing of return i.e., 31.10.2001.  Thereby, the Assessing Officer made the addition in respect of denial of claim of carrying forward of losses under Section 72 of the Act.  Being aggrieved against the order of the Assessing Officer the assessee filed an appeal before the Commissioner of Income Tax (Appeals) who upheld the order of the Assessing Officer on 19.01.2009.

The Income Tax Appellate Tribunal (‘ITAT’ for short), on the file of appeal filed by the assessee, allowed the appeal of the assessee on 25.11.2016.  The High Court also dismissed the appeal filed by the Revenue against the order of ITAT.  Therefore the Revenue filed the present appeal before the Supreme Court.

The Revenue submitted the following before the Supreme Court-

• As the declaration required under Section 10B (8) of the Act, was filed beyond the due date of filing of return and hence the assessee was not entitled to carry forward of losses under Section 72 of the Act.
• The ITAT has wrongly noted that the declaration under Section 10B (8) of the Act was filed before the due date.
•  The High Court has erred in observing that the requirement under Section 10B (8) of the Act is a procedural requirement.
• The High Court has not properly appreciated the consequences of not filing the declaration within the time as required under Section 10B (5) and non-compliance of Sections 10B (5) and 10B (8) of the Act.
•  If the view taken by the High Court is accepted, in that case, it shall nullify the provisions of Sections 10B (5) and 10B (8) of the Act.
• The revised return of income can be filed under Section 139(5) of the Act only to remove the omission and mistake and/or correct the arithmetical error.
• The revised return of income cannot be filed for altogether a new claim such as carrying forward the losses.
• It is an afterthought the assessee filed a declaration as required under Section 10B (5) belatedly and after the due date mentioned in Section 10B (5) and claimed carry forward of losses under Section 72 of the Act, withdrawing its claim for deduction under Section 10B of the Act. 
• 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. 

Considering the above points, the Revenue prayed the Supreme Court to allow the appeal filed by the Revenue.

The assessee submitted the following before the Supreme Court-

• The only question of law which arises in the present case is with regard to the interpretation of Section 10B (8) of the Act, viz., whether the requirement of submission of the declaration before the last date for submission of the return is mandatory or directory.
• On a true interpretation of Section 10B (5) and Section 10B (8)  of the Act, 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.
• 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 requirement of filing the declaration by the time limit directory as non-filing of the declaration within the time limit does not envisage any consequence.
• Section 80 of the Act only requires that an assessee claiming carry forward of loss should file a return showing the loss before the last date for submitting the return. 
• In the instant case the assessee filed the original return in time declaring the loss and thereby complied with Section 80 of the  Act.
• The assessee filed a revised return only to bring to the notice of the Assessing Officer the factum of exercise of option under Section 10B. 
• The loss set out in Section 10B certificate remained exactly the same after withdrawal of the claim made under Section 10B and the assessee making the claim for carry forward of loss.
• There was no claim for any deduction under Section 10B (1) at any time.
• 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.
• 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.

The assessee prayed the Supreme Court to dismiss the appeal considering the above contentions.

The Supreme Court considered the issue to be decided in this appeal is as to whether, for claiming exemption under Section 10B (8) of the Act, the assessee is required to fulfill the twin conditions, namely,-

• furnishing a declaration to the assessing officer in writing that the provisions of Section 10B (8) may not be made applicable to him; and
• 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 Act.

The Supreme Court observed that the High Court as well as the ITAT have observed and held that for claiming the so-called exemption relief under Section 10B (8) of the Act, furnishing the declaration to the assessing officer is mandatory but furnishing the same before the due date of filing the original return of income is directory. The Supreme Court analyzed the provisions of Section 10B (8) of the Act.  The Supreme Court noted 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 Act are required to be fulfilled and/or satisfied. 

The Supreme Court was of the view that 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 subsection (1) of section 139 are same/similar.  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 an assessee.

The Supreme Court held that the assessee 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. It is not permission to file a revised return under Section 139(5) of the Act and take a contrary stand and/or claiming the exemption, which was specifically not claimed earlier while filing the original return of income is not permissible.   For 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 for claiming the benefit under Section 10B (8) of the Act, the twin conditions of furnishing a declaration before the assessing officer and that too before the due date of filing the original return of income under section 139(1) are to be satisfied and both are mandatorily to be complied with. The orders passed by the High Court as well as ITAT taking a contrary view are hereby set aside and it is held that the assessee shall not be entitled to the benefit under Section 10B (8) of the Act on noncompliance of the twin conditions as provided under Section 10B (8) of the Act, as observed hereinabove.

The Supreme Court allowed the appeal.