The Hon’ble Supreme Court (“SC”) recently in the case of Principal Commissioner of Income Tax-III, Bangalore and another Vs. M/s Wipro Limited[1] refused to allow the assessee i.e. Wipro Limited (“Assessee”), a 100% export oriented unit, to carry forward its losses under Section 72 of Income Tax Act, 1961 (“IT Act”) due to its failure to withdraw deduction (which was regarded as exemption) under Section 10B of IT Act within the prescribed timeline.
Section 10B of the IT Act provides deduction from profits derived by an export-oriented undertaking from export of articles or things and computer software for ten consecutive assessment years. As a matter of general rule, such income tax provisions do not permit carry forward of losses in a particular year when an assessee already avails a deduction under IT Act, for instance under Section 10B, unless such deduction is surrendered by an assessee. The present controversy has arisen because the relevant clause i.e. Section 10B(8) requires that the deduction may be withdrawn by an assessee through filing of a declaration with the tax authorities to such effect in a prescribed form before the due date for filing return of income (“ROI/ return”).
The Hon’ble SC, in the present case, has taken a hard stand and reversed the findings of the Hon’ble High Court (“HC”) of Karnataka which had earlier allowed carry forward of such losses. The Hon’ble SC held that the requirement of filing a declaration within a timeline is “mandatory” in nature as per the language of the provision. It reiterated the age-old principle that a taxing statute should be read as it is and held that the exemption / deduction provisions should be “strictly” and “literally” complied with and, therefore, a strict interpretation should be adopted. The Hon’ble SC held that in the instant case, a literal interpretation of the relevant provision should be done and held that the following twin conditions are mandatory:
- a declaration (“Declaration”) needs to be filed with the Assessing Officer (“AO”) to withdraw Section 10B exemption for relevant year, and
- such Declaration needs to be filed in writing before the due date of filing ROI under Section 139(1) of IT Act.
Background in Brief
The Assessee i.e. Wipro Ltd. furnished its original return along with its computation of income and a note clearly stating that the company is a 100% export-oriented unit, entitled to claim deduction under Section 10B of the IT Act and no loss is being carried forward. Thereafter, the Assessee filed a Declaration with the AO clarifying that it does not want to avail the benefit under Section 10B as per the option available under Section 10B(8) of the IT Act. The Assessee subsequently filed its revised return without claiming deduction under Section 10B of the IT Act and claiming carry forward of losses under Section 10B of IT Act read with Section 72 of IT Act.
The Hon’ble SC in the present case refused to allow carry forward of such losses by holding that the Assessee’s withdrawal of deduction (which was referred as exemption) under Section 10B was not in compliance with the applicable law and hence, not valid.
Mandatory Vs. declaratory requirement
The Assessee primarily contended that filing of Declaration within the prescribed timeline is merely “directory” and not “mandatory” as per settled principles of law. It relied on judicial precedents contending that while filing of an audit report is “mandatory”, the stipulation as to the deadline of filing is mostly “directory” despite the language suggesting that it is mandatory. The Assessee relied on the decision of Commissioner of Income-Tax v. Rana Polycot Ltd.[2] wherein the Hon’ble Punjab & Haryana HC held that exemption under Section 10B of IT Act may be withdrawn even after the due date of filing ROI by an assessee. A few other HC decisions relied on by the Assessee are as under:
- in context of filing of an audit report with the ROI under Section 32AB of IT Act for availing deduction in CIT v. Punjab Financial Corporation (P&H HC)[3] and CIT v. Ramani Relators (P) Ltd.(Madras HC)[4]
- in context of filing of an audit report under Section 80J and Section 80-I of IT Act in Commissioner of Income Tax v. Shivanand Electronics (Bombay HC)[5] and CIT v. Panama Chemical Works (M.P. HC) [6], respectively.
However, it goes without saying that any rulings of the Hon’ble HC only have persuasive value since they are not binding on the Hon’ble SC. The Assessee also relied on an earlier decision of the Hon’ble SC in the case of Commissioner of Income Tax Vs. G.M. Knitting Industries (P.) Ltd. and Ors.[7]wherein the Court had allowed a belated declaration for claiming additional depreciation under Section 32(1)(iia) of IT Act filed during the course of assessment proceedings and it was held as valid and additional depreciation was granted.
However, the Hon’ble SC refused to accept such rationale in the present case and held that Section 10B being an exemption provision within a taxation statute, a strict interpretation is warranted. The Hon’ble SC has set aside other arguments or rulings merely by drawing a distinction between a provision granting deduction versus an exemption provision and held that rulings applicable in case of grant of a deduction will not apply in case of an exemption provision. It also distinguished its own ruling in the case of G.M. Knitting Industries (P.) Ltd. and Ors. (supra) by stating that Section 10B(8) being an exemption provision cannot be compared with Section 32(1)(iia) of IT Act for additional depreciation.
The Hon’ble SC also rejected the legal argument that a purely procedural requirement should not be construed as being mandatory in nature and categorically stated that an exemption provision should be given a strict interpretation. It may be noted that in Commissioner of Income Tax-III vs. Calcutta Knitwears, Ludhiana[8], the Hon’ble SC had held that the foremost principle of interpretation is the rule of strict interpretation. Further, in Commissioner of Customs (Import), Mumbai v. Dilip Kumar and Company and Ors.[9] the Hon’ble SC had held that an exemption clause should be interpreted strictly.
Scope of a revised return
As per Section 80 of the IT Act, filing of a ROI prior to the due date of filing return is necessary to be eligible for carry forward of losses. The tax authorities also pointed out that since the scope of a revised return under Section 139(5) of IT Act was quite restrictive, such as to remove an omission or a mistake, a fresh claim of carry forward of losses ideally cannot be made as it is.
It appears that the Hon’ble SC preferred to have a hyper technical view and held that the revised return filed by Assessee under Section 139(5) of IT Act would only substitute the original return under Section 139(1) and would not be regarded as a ROI under Section 139(3) of IT Act. The Hon’ble SC remained reticent on the issue of claim for carry forward of losses in revised return i.e. whether it could be considered as a “fresh” claim in this particular case. Instead, the Court relied on the general principle that a revision of ROI should be possible in case of an “error” or “omission” on the part of an assessee but not for carry forward of losses. In Principal Commissioner of Income-tax-1 vs. Babubhai Ramanbhai Patel[10], the Hon’ble Gujarat HC had allowed claim for carry forward of losses vide revised return filed under Section 139(5) by observing that holding otherwise would limit the scope of a revised return whereas the Hon’ble Kerala HC took a contrary view in the case of Commissioner of Income-tax, Thiruvananthapuram vs. Kerala State Construction Corporation Ltd.[11]. However, such decisions did not form part of the present ruling in case of Wipro Ltd. (supra) since the Hon’ble SC did not deal with this controversy.
Exemption vs Deduction
The Hon’ble SC held that Chapter III provisions for “Incomes which do not form part of total income” and Chapter VIA provisions on “Deductions” operate in different realms altogether and, therefore, the decisions on various deductions under Chapter VI-A shall not apply on an exemption provision. The Hon’ble SC has laid much weightage to the nomenclature of the Chapter Headings and not to the specific section itself since the operative part of Section 10B talks about deduction and not exemption.
Significant takeaways
It must be noted that in the instant case, the Hon’ble SC has taken certain positions without providing specific rationale and clarifications and thus, may subject the instant case to further review and challenge by the taxpayers. Some of these issues have been briefly discussed below:
- Assessee sought to withdraw the deduction and not avail it: A slight procedural leeway seems logical where an assessee does not seek to avail a deduction, rather seeks to withdraw from it. It has been held by the judiciary that unlike a taxing statute, any ambiguity in a deduction clause of any deduction provision should be construed in favor of the tax authorities. Whereas the instant case is on a slightly better footing as the Assessee was desirous to withdraw its entitlement to a deduction, but unfortunately the tax authorities were adamant to not allow it by resorting to a strict interpretation to obstruct the carry forward of losses.
- No undue advantage sought to be obtained by Assessee: Mere strict language of a provision should not be a hindrance to advance the cause of justice where there is no malice or deliberate attempt to misuse the law and no adverse consequences caused due to delay. The losses sought to be carried forward were duly reflected in original return of the Assessee. The carry forward of losses was claimed in revised return prior to completion of assessment and could have been allowed subject to verification of such losses during the course of the assessment. The deduction was sought to be withdrawn in view of losses suffered by the Assessee and not because it sought to derive any undue advantage or had mala fide intentions behind withdrawal of deduction.
- True intent and purpose of the relevant clause: Under the law, an option was provided to claim or not to claim a benefit and the decision to withdraw the exemption was a substantive right given to an assessee and mere delay should not defeat such rights. Several judicial precedents have held the timeline for making a procedural filing to be directory in nature, but such decisions have either been summarily rejected or not considered.
- Whether it is an exemption or deduction have not been appropriately considered: While the Assessee had raised this point clearly in its submissions, the Hon’ble SC seems to have decided on the incorrect appreciation of facts. While the Assessee relied on the language of Section 10B to contend that it is a deduction provision and not an exemption provision, the Hon’ble SC merely referred to the Chapter Headline and claimed that it is an exemption provision. However, it must be noted that as per the basic principles of statutory interpretation, Chapter Headlines should not be relied upon, instead the substantive text of the relevant provisions should decide the legislative intent. The Hon’ble SC seems to have banked a lot on this analysis and in case this aspect were to be reversed, the ultimate decision might have been different.
The taxpayer may pick up this aspect subsequently.
It has been held by the Hon’ble Courts in multiple instances that rules or procedure are hand-maid of justice and not its mistress. The judiciary had always tried to prevent a gross miscarriage of justice where a mere technicality is involved and there is no mala fide intent of the taxpayer. It appears that the Hon’ble SC in the present case has preferred to adopt a conservative approach. It may be noted that while deduction available under Section 10B of IT Act was discontinued from AY 2012-13 onwards, the principles enunciated by the Hon’ble SC could still have widespread ramifications as it is likely to be widely resorted to by the tax authorities to deny tax benefits claimed by the taxpayers. Hence, taxpayers are required to be extremely careful while claiming any benefit or else, they may experience significant adverse tax positions.
For further information, please contact:
S.R. Patnaik, Partner, Cyril Amarchand Mangaldas
sr.patnaik@cyrilshroff.com
[1] Civil Appeal No. 1449 of 2022 (arising out of SLP(Civil) No. 7620/2021)
[3] [2002] 254 ITR 6 (P&H), ILR 2002 (1) P&H 438
[4] 2014 SCC Online Mad. 12717, T.C.(A).No.730 of 2014
[5] (1994) 209 ITR 63
[7] Civil Appeal Nos. 10782 of 2013 and 4048 of 2014
[10] TAX APPEAL NO. 493 OF 2017, [2017] 84 taxmann.com 32 (Gujarat)
[11] IT Appeal No. 237 of 2012, [2019] 110 taxmann.com 300 (Kerala)
