To avail the option of opting out of Section 10B a declaration must be filed on or before due date of filing of return – Supreme Court

Facts of the Case:

• The Assessee is a 100% export-oriented unit, engaged in the business of running a call center and IT enabled services.
• Assessee filed its original return of income u/s 139(1) of the Income Tax Act, 1961 (“Act”) on 31.10.2001 for Assessment Year (A.Y.) 2001-02, wherein it declared a loss of Rs.15,47,76,990/- and claimed exemption under Section 10B of the Act and therefore no loss was being carried forward.
• Thereafter Assessee filed a declaration dated 24.10.2002 before Assessing Officer (AO) for withdrawal of the exemption u/s 10B (8) of the Act, for AY 2001-02 and subsequently filed a revised return of income on 23.12.2002 where Assessee had not claimed the exemption of Section 10B and claimed the carry forward of loss under the provisions of the Act.
• AO passed an order rejected the withdrawal of claim of exemption u/s 10B(8) of the Act on the ground that such declaration was filed post the due date of furnishing of income u/s 139(1) of the Act and made additions with respect to the denial of claim of carry forward of losses. The CIT(A) upheld the order of the AO.
• Aggrieved by CIT (A), the Assessee filed an appeal before ITAT, wherein the ITAT stated that the declaration requirement under Section 10B(8) of the Act was filed by the Assessee before the due date of filing of return of income as per section 139(1) of the Act and thus allowed the Assessee’s claim to carry forward its losses.
• Herein after, the AO preferred an appeal before the High Court. However, the High Court had dismissed the said appeal by upholding 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.
• Hence issue before Hon’ble Supreme Court:
• Whether the time limit within which the declaration is to be filed is directory or mandatory in nature?

Observation And Conclusion:

Hon’ble Supreme Court Held that:

• For claiming the option under Section 10B(8) of the Act, there are twin conditions which need to be satisfied-
• Furnishing of the declaration to the AO in writing; and
• Such declaration 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.
• 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. Hence, both the conditions need to be satisfied are mandatory in nature.
• Further, a revised return can be filed when there is an omission or a wrong statement but a revised return of income cannot be filed, to withdraw the claim and subsequently claiming the carried forward or set-off of any loss. Thus, such a revised return can only substitute the original return filed u/s 139(1) of the Act but cannot transform it into a return u/s 139(3) in order to avail the benefit of carrying forward or set-off of any loss under Section 80 of the Act.
• Wherein the Assessee has provided the declaration as per section 10B(8) of the Act before submitting the revised return, it cannot be construed as compliance 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.
• Accordingly, the question of law has been answered in the favor of revenue and against the Assessee by setting aside the judgement passed by the High Court.

SW Point of View:

A strict and literal interpretation of the provisions of the Act has been made in such a case. Thus by filing of the revised return of income u/s 139(5) of the Act it does not extend the time limit for the filing of declaration required u/s 10B(8) of the Act. Benefit which is provided by virtue of sec. 139(5) of the Act is for rectification of mistakes/omissions made while filing of return of income in order to avoid/reduce the litigation burden on the Assessee and a withdrawal of claim does not constitute a mistake/omission.

Lakshay Prakash Jonwal, Direct Tax Associate, SW India