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Whether the requirement of submission of Audit Report, Forms, and Declarations etc. (Form 10B, Form 9, Form 10CCB etc.) for availing exemptions or deductions, is Mandatory in nature or Directory in nature.

Update on 21.07.2022 : CBDT condones delay in submitting Form 9A Form 10, Form No. 10B & 10BB

PCIT Vs Wipro Limited (Supreme Court of India) Appeal Number : Civil Appeal No. 1449 of 2022 Date of Judgment: 11/07/2022

The Hon’ble Supreme Court has reversed the obtaining legal position as to whether the requirement of submission of Audit Report, Forms, and Declarations etc. (Form 10B, Form 9, Form 10CCB etc.) for availing exemptions or deductions, is mandatory in nature or directory in nature.

Reversing the judgement of the Karnataka High Court Dated. – November 30, 2020 in the case of the same assessee it held that for claiming the benefit under Section 10B (8) of the IT 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.

It stated that the exemption provisions are to be strictly and literally complied with and the same cannot be construed as procedural requirement.

Let us first understand the rules for claiming exemptions from the tax and then discuss the given case law.

Under the Income Tax Act 1961 many Exemptions & Deductions are provided to eligible assessees provided they fulfil the conditions attached to these exemptions & deductions and one of such condition is the requirement of furnishing certain forms/declarations as prescribed by the Rules and a default on it may result in denial of the exemptions & Deductions even as the provisions of law may not provide for any adverse consequence for not filing of these forms. However, the condition for seeking an exemption is required to be complied with strictly with the provision.

The stand of the Revenue on exemptions & deductions is consistent i.e. 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. (Calcutta Knitwears, Ludhiana (2014) 6 SCC 444 and Dilip Kumar and Company and others (2018) 9 SCC 1.)

While the stand of the assessee before the courts is that the requirement of filing Forms is mandatory in nature, the time limit of filing the Form/Declaration is directory in nature because non filing of the forms before the prescribed due dates does not envisage any adverse consequence. The substantive statutory right cannot in law be nullified by construing the purely procedural time element requirement regarding the filing of the declaration as mandatory.

Strict literal interpretation of law for availing Exemption Before proceeding further, we may notice some of the principles of interpretation of the statutes (including strict interpretation of exemption laws/Notification). These are:

1) The question as to whether a statute is mandatory or directory depends upon the intent of the Legislature and not upon the language in which the intent is clothed. The, meaning and intention of the Legislature must govern, and these are to be ascertained, not only from the phraseology of the provision, but also by considering its nature, its design, and the consequences which would follow from construing it one way or the other-(Crawford on Statutory Construction)

2) The use of the word “shall” in a statutory provision, though generally taken in a mandatory sense, does not necessarily mean that in every case it shall have that effect, that is to say, that unless the words of the statute are punctiliously followed, the proceeding or the outcome of the proceeding, would be invalid. On the other hand, it is not always correct to say that where the word ‘may” has been used, the statute is only permissible or directory in the sense that non-compliance with those provisions will not render the proceedings invalid-(State of U. P. v. Manbodhan Lal Srivastava, AIR 1957 SC 912).

3) All the parts of a statute or sections must be construed together and every clause of a section should be construed with reference to the context and other clauses thereof so that the construction put to be on a particular provision makes consistent enactment of the whole statute. This would be more so if a literal construction of a particular clause leads to manifestly absurd and anomalous results which could not have been intended by the Legislature.

4) The principle that a fiscal statute should be construed strictly is applicable only to taxing provisions such as a charging provision or a provision imposing penalty and not to those parts of the statute which contain machinery provisions-(CIT v. National Taj Traders [1980] 121 ITR 535 (SC).

5) “The principle in favour of a strict literal approach … simply means that in a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used.”(The Cape Brandy Syndicate v. Inland Revenue Commissioners [1921] )

6) “To adhere as closely as possible to the literal meaning of the words used, is a cardinal rule from which if we depart we launch into a sea of difficulties which it is not easy to fathom.” That is to say, once the literal rule is departed, then any number of interpretations can be put to a statutory provision, each Judge having a free play to put his own interpretation as he likes. This would be destructive of the edifice of fiscal legislations which impose economic duties and sanctions. (Lord Granworth in Grundy v. Pinniger, (1852)

7) In taxing statutes, even if the literal interpretation results in hardship or inconvenience, it has to be followed (P. Singh’s Principles of Statutory Interpretations.)

8) This Apex Court has held that hardship or inconvenience cannot alter the meaning of the language employed by the legislature if such meaning is clear and apparent. Hence departure from the literal rule should only be done in very rare cases, and ordinarily there should be judicial restraint to do so. (CIT v. Keshab Chandra Mandal, AIR 1950 SC 265

9) “It is for the Parliament to specify, and to do so, in my opinion, as far as language will permit, with unambiguous clarity, the circumstances which will attract an obligation on the part of the citizen to pay tax. The function of the court is to interpret and apply the language in which the Parliament has specified those circumstances. The court is to do so by determining the meaning of the words employed by the Parliament according to the intention of the Parliament which is discoverable from the language used by the Parliament. It is not for the court to mould or to attempt to mould the language of the statute so as to produce some result which it might be thought the Parliament may have intended to achieve, though not expressed in the actual language employed.”(The Australian High Court in Federal Commissioner of Taxation v. Westraders Pty Ltd, (1980) 144 CLR 55)

10) In a taxing statute if the language is unambiguous, departing from the literal approach ‘may lead judges to put their own ideas of justice or social policy in place of the words of the statute’.( In Cooper Brookes (Wollongong) Pty Ltd v. Federal Commissioner of Taxation (1981) 147 CLR 297)

11) The court unequivocally favoured the principle that taxation legislation should be subject to a strict literal interpretation and opined that such an approach was supported by ‘common sense’. ( In Hepples v. FCT, (1991) 173 CLR 492, the High Court of Australia)

12) In this case the court observed that a court should not be over zealous in searching ambiguities or obscurities in words which are plain.( This Court in Tata Consultancy Services v. State of Andhra Pradesh)

13) The SC again explained that the language employed in a statute is the determinative factor of the legislative intent. The legislature is presumed to have made no mistake. The presumption is that it intended to say what it has said. Assuming there is a defect or an omission in the words used by the legislature, the Court cannot correct or make up the deficiency. Where the legislative intent is clear from the language, the Court should give effect to it ( In Prakash Nath Khanna v. C.I.T., 2004 (9) SCC 686)

14) The literal rule of interpretation really means that there should be no interpretation. In other words, we should read the statute as it is, without distorting or twisting its language.( In B. Premanand and Ors.v. Mohan Koikal and Ors., (2011)4 SCC 266)

15) The literal rule of interpretation simply means that we mean what we say and we say what we mean. If we do not follow the literal rule of interpretation, social life will become impossible, and we will not understand each other. Hence, the meaning of the literal rule of interpretation is simply that we mean what we say and we say what we mean.”

16) Thus, the language of a taxing statute should ordinarily be read understood in the sense in which it is harmonious with the object of the statute to effectuate the legislative animation. A taxing statute should be strictly construed; common sense approach, equity, logic, ethics and morality have no role to play. Nothing is to be read in, nothing is to be implied; one can only look fairly at the language used and nothing more and nothing less. (Raja Jagadambika Pratap Narain Singh v. C.B.D.T., [1975] 100 ITR 698(SC))

17) It is also trite that while interpreting a machinery provision, the courts would interpret a provision in such a way that it would give meaning to the charging provisions and that the machinery provisions are liberally construed by the courts. (In Mahim Patram Private Ltd. v. Union of India (UOI) and Ors., (2007) 3 SCC 668 )

18) “A taxing statute indisputably is to be strictly construed. It is, however, also well settled that the machinery provisions for calculating the tax or the procedure for its calculation are to be construed by ordinary rule of construction. Whereas a liability has been imposed on a dealer by the charging section, it is well-settled that the court would construe the statute in such a manner so as to make the machinery workable.

19) ..The question which fell for consideration before this Court was construction of the machinery provisions vis-à-vis the charging provisions. Schedule appended to the Motor Vehicles Act is not machinery provision. It is a part of the charging provision. By giving a plain meaning to the Schedule appended to the Act, the machinery provision does not become unworkable. It did not prevent the clear intention of the legislature from being defeated. It can be given an appropriate meaning.” [1963] 1 ITR 48(SC) and Ispat Industries Ltd. v. Commissioner of Customs, Mumbai, 2006(202) ELT561(SC).In Gursahai Saigal

20) “It is well-known that when a statute levies a tax it does so by inserting a charging section by which a liability is created or fixed and then proceeds to provide the machinery to make the liability effective. It, therefore, provides the machinery for the assessment of the liability already fixed by the charging section, and then provides the mode for the recovery and collection of tax, including penal provisions meant to deal with defaulters. … Ordinarily the charging section which fixes the liability is strictly construed but that rule of strict construction is not extended to the machinery provisions which are construed like any other statute. The machinery provisions must, no doubt, be so construed as would effectuate the object and purpose of the statute and not defeat the same. (Whitney v. Commissioners of Inland Revenue 1926 A C 37, CIT v. Mahaliram Ramjidas (1940) 8 ITR 442 , Indian United Mills Ltd. v. Commissioner of Excess Profit s Tax, Bombay, [1955] 27 ITR 20(SC) and Gursahai Saigal v. CIT, Punjab, [1963] 1 ITR 48(SC).”

21) It is the duty of the court while interpreting the machinery provisions of a taxing statute to give effect to its manifest purpose. Wherever the intention to impose liability is clear, the Courts ought not to be hesitant in espousing a commonsense interpretation to the machinery provisions so that the charge does not fail. The machinery provisions must, no doubt, be so construed as would effectuate the object and purpose of the statute and not defeat the same.

22) Ambiguity in a taxing statute-Interpretation

a) The judiciary in India and outside India have time and again held that it is the law that any ambiguity in a taxing statute should enure to the benefit of the assessee, but any ambiguity in the exemption clause of exemption notification must be conferred in favour of revenue – and such exemption should be allowed to be availed only to those assesses who demonstrate that a case for exemption squarely falls within the parameters enumerated in the notification and that the claimants satisfy all the conditions precedent for availing exemption.

b) Every taxing statue including, charging, computation and exemption clause (at the threshold stage) should be interpreted strictly. Further, in case of ambiguity in a charging provisions, the benefit must necessarily go in favour of assessee, but the same is not true for an exemption notification wherein the benefit of ambiguity must be strictly interpreted in favour of the Revenue.

c) When there is ambiguity in exemption notification which is subject to strict interpretation, the benefit of such ambiguity cannot be claimed by the assessee and it must be interpreted in favour of the revenue (Supreme Court July 30, 2018)

With the above legal position obtaining in India & outside India, let us consider some situations wherein the condition of filing audit report alongwith the return of income was considered as Directory only.

Filing of Form No. 10-D

Shivanand Electronics Bom. High Court September 3, 1993:-

The deduction u/s section 80J (6A) is subject to filing of audit report in Form No. 10-D. The assessee did not file Form 10-D within the prescribed time. It deduction is subject to two conditions:

i) In so far as the first condition of “audit” is concerned, on the face of it, is mandatory, i.e., unless the accounts are audited by an accountant as defined in this sub-section, no deduction under sub-section (1) would be admissible.

ii) The second condition requires the assessee to furnish such audit report in the prescribed form “along with the return of income”.

Held: If one of the two conditions is found to be mandatory and the other directory, strict compliance with the mandatory requirement would amount to compliance with the provision notwithstanding the non-compliance with the directory requirement in the particular manner or form or within the specified time, provided, however, that there is substantial compliance therewith. Therefore, the requirement of filing the report “along with the return” is directory and if the assessee submits such report even after filing of the return but before completion of the assessment, the Income-tax Officer may accept the same if he is satisfied that there was sufficient cause for non-filing of the same along with the return.

Investment Allowance : Section 32AB(5) :Form No. 3AA

Punjab And Haryana High Court:- December 4, 2001

The law must be so construed as to not make it in any way illogical or ridiculous. All that the Legislature intended was that the return should be duly filed and that the declaration should be duly made and both the documents should be before the assessing authority at the time when he is applying his mind to the assessment of any particular firm. The declaration could not be held to be invalid for the reason that it was not filed along with the return.”

Therefore, the second part of the provision regarding furnishing of the report of the auditor along with the return is not a mandatory provision and it requires substantial compliance in the sense that it should be made available to the Income-tax Officer before the assessment is framed. It has also to be kept in view that, by the mere non-filing of the auditor’s report along with the return of income, the assessee does not stand to gain anything nor does the Revenue stand to lose as even after the return is filed.

Supreme Court of India - Unsettling the Settled Legal Position

Filing of Form No. 10B- Section 11- Charitable Trusts

Calcutta High Court: July 24, 1991:-

The assessee filed a return for the assessment year in question without the auditor’s certificate in Form No. 10B and the AO completed the assessment denying exemption under section 11 of the Income-tax Act, on the ground that the certificate in Form No. 10B had not been filed as required by the law.

Held: A procedural provision, ordinarily, should not be construed as mandatory, if the defect in the act done in pursuance of it can be cured by permitting the appropriate rectification to be carried out at a subsequent stage.

The procedural requirement that a particular document should be accompanied by another must be treated as directory. The Form 10B only affirms the statements contained in the balance-sheet and income and expenditure statement. The Assessing Officer can rely on the certificate for allowing the benefit of exemption. Thus, even where the trust has got its accounts audited and the certificate obtained in Form No. 10B before the assessment is completed, merely because such report could not be filed in the course of the assessment proceedings, it would deprive a trust of getting the exemption if it is otherwise entitled to it in law. The direction that the audit report should accompany the return is not mandatory as the omission to do it may be rectified by filing the report at a later stage before the assessment is completed.

Withdrawal of Claim for depreciation by filing Revised Return:-

Andhra Pradesh High Court- March 7, 1994:-

The assessee filed a return showing loss and later, filed a revised return withdrawing the claim for depreciation, showing reduced loss. The motivation for the assessee to withdraw the claim for deduction of depreciation is only to get a set-off of the business loss of the earlier year.

Held: Under section 139(5), a revised return could be filed if there is an omission or a wrong statement. In the original return, the profit and loss account containing the provision for depreciation has been filed. In the circumstances, it cannot be said that there was any wrong statement in the original return which could enable the assessee to file a revised return under section 139(5). The current depreciation is a first charge on the profit as held by the Supreme Court in Mother India Refrigeration Industries P. Ltd.’s case [1985] 155 ITR 711 and that charge cannot be ignored by withholding the particulars u/s 34 so as to avail of the setting off the earlier year’s loss which lapses by the prescribed period of limitation.

Therefore, the assessee cannot withdraw the claim for depreciation allowance when particulars are available in accordance with section 34 only for the purpose of setting off of the loss of the earlier years.

Section 80HHC -Form No. 10CCAC: Export Business-

Calcutta High Court: August 30, 1995

The assessee was eligible to deduction u/s 80HHC in respect of profit of business being exclusively from export business. However, the additional separate audit certificate as indicated in Form No. 10CCAC was omitted to be enclosed with the return although the audit was carried out and certificate in Form No. 10CCAC was also made out and handed over by the auditor to the firm. The AO declined the deduction on the ground that the audit certificates as required to be filed with the return under section 80HHC of the Act were not filed with the return of income.

Held: It is mandatory that the deductions under this sub-section shall not be admissible unless the assessee furnishes in the prescribed form the special audit certificate of an accountant before the order is passed and if the special audit certificate is filed later, there will be substantial compliance of the requirement as contained in section 80HHC of the Act.

Therefore, if proof in support of the claim is not furnished by the assessee then for lack of proof no disallowance or adjustment can be unilaterally made. The only option which is open to the Assessing Officer in such a case is to require the assessee to furnish the proof. It is not the law that in support of a claim made in the return for deduction or non-taxability of a receipt the proof must be filed along with the return. The stage of furnishing of the proof is reached as and when the proof is demanded by the Assessing Officer at a notice under section 143(2) of the Income-tax Act. But he cannot unilaterally make a disallowance by seeking to invoke the provisions of the first proviso to section 143(1)(a) of the Act.

Section 32AB section 80HHC: Form No. 3AA

Calcutta High Court: – February 13, 2002.

The assessee did not file the form on the same date as his return of income as prescribed by Rule 5AB that the auditor must support the assessee’s claim’ in Form No. 3AA.

Held: The words “shall not be admissible” occurring in sub-section (5) of section 32AB are also directory and not mandatory in nature with regard to the part containing the time of furnishing of the report.

In the body of section 139(1), and the return of income an assessee has to “fumish”; the same word “furnish” is used in section 32AB(5). But, in Explanation to section 139(9) a requirement for a non-defective return is that the return is “accompanied by” a statement showing the computation of the tax. We note that in sub-section (5) the same words “accompanied by” are not used but only the words “along with” are used. The phrase “accompanied by” is more strongly indicative of a requirement of filing on the same day as the return itself than the words “along with”. On this ground also we would opine in favour of the assessee.

We note that the compulsory requirement of producing the accountant’s report, as per rule 18BBA and Form No. 10CCAC and Forms appended thereto has to come, but the assessee can produce the said report even after the date of the filing of the return,  it does not wholly do away with the requirement of filing the report altogether.

Section 80HHC. Form No. 10CCAB

Punjab and Haryana High Court. – January 13, 2005

The assessee is an exporter entitled to deduction in terms of section 80HHC of the Income-tax Act, 1961 but it was denied on the ground that it had not filed audit report in Form No. 10CCAB with the return. The other conditions which are required to be fulfilled to claim deduction under section 80HHC are not in dispute

The cash incentives were not taxable as per judicial scenario regarding the taxability of cash incentives, the assessee was justified in claiming such receipts as exempt and  after claiming exemption for cash incentives the income was nil and therefore no deduction was required to be claimed and as such there was no need for filing Form 10CCAB. Hence for bona fide reasons the audit report was not filed.

However, later the cash incentives were held to be non-exempt and as such the assessee filed revised return and attached form 10CCAB with the return. Under such circumstances the AO was directed to allow deduction u/s 80HHC.

The use of the word ‘shall’ in a statutory provision, though generally taken in a mandatory sense, does not necessarily mean that in every case it shall have that effect, that is to say, unless the words of the statute are punctiliously followed, the proceeding or the outcome of the proceeding would be invalid. On the other hand, it is not always correct to say that where the word “may” has been used, the statute is only permissive or directory in the sense that non-compliance with those provisions will not render the proceedings invalid.”

Section 80IA, Form 10CCB

Madras High Court. – December 22, 2014

Deduction u/s 80IA – Whether on the facts and in the circumstances of the case the Tribunal was right in allowing the deduction especially when the assessee has not filed audit report in Form 10CCB along with the return nor before the date of completion of the assessment?

An identical issue was considered by this Court in Commissioner of Income Tax v. AKS Alloys (P) Ltd., (2012) 18 Taxmann.com 25 (Mad), wherein this Court after referring to a number of judicial precedents held that filing of audit report along with the return was not mandatory, but directory, and that if the audit report was filed at any time before the framing of assessment, the requirement of the provisions of the Act should be held to have been met.

Similarly, in Commissioner of Income Tax v. Jayant Patel, (2001) 117 Taxman 707 (Mad.), wherein the audit report was produced only before the appellate authority, this Court, while holding that the filing of audit report along with the return is directory and not mandatory, observed that the appellate authority has also the powers of the original authority and it is open to the appellate authority to direct the Assessing Officer to receive the audit report or to direct him to consider the audit report filed before the appellate authority on merits or to consider the report himself.

In view of the well-settled principles uniformly held in the decisions cited supra, we have no hesitation to hold that the filing of the audit report along with the return, as contemplated under section 32AB(5) of the Act, is only directory and not mandatory. From the above, it is apparent that the consistent view of this High Court is that filing of audit report along with the return is only directory and not mandatory.

In the following cases the belated filing of Forms like Form 9, Form 10, and Form 10B etc. were directed by the courts to be accepted by the AO- Assessment of Charitable Trusts – Section 11- on the grounds or for the reasons as follows:-

a) Submission of form no. 10 the Act will have to be any time before the assessment proceedings are completed.(Madras High Court: 26 July, 2019)

b) Even if the Form No.10 is filed during the re-assessment proceedings, the benefit of accumulation under Section 11(2)of the Act is available. (Bombay High Court April 2017)

c) The appellate proceedings before the Commissioner of Income Tax are a continuation of the assessment and, therefore, late filing of Form No. 10 would not disable the assessee from benefits of section 11.(Bombay High Court 01-04-2015)

d) The provision regarding furnishing of audit report with the return has to be treated as a procedural proviso. It is directory in nature and its substantial compliance would suffice.(1993) 201 ITR 325 (Gujarat)

e) It is permissible for the assessee to produce the audit report at a later stage either before the Income Tax Officer or before the appellate authority by assigning sufficient cause. (Gujarat High Court December 22, 2020)

f) It was held that even at the stage of appeal, the assessment proceedings could be said to be pending and as such, the Form could be furnished even at the stage of appeal. (Gujarat High Court October 2012)

g) The conclusion was that the requirement of filing Form10 at the time of assessment was only directory and it would suffice if the same were filed even thereafter so long as relevant information in support of the claim of accumulation was furnished by the assessee even at the time of assessment. (Delhi High Court [2005] 278 ITR 260)

h) Form No.10 should be submitted before framing of the assessment order. That apart, as long as the entitlement of the assessee regarding setting-apart of the accumulated profit is not doubted, no addition can be made on the pretext that Form No.10 was filed belatedly. (Rajasthan High Court January 7, 2019)

i) The appellate proceedings before the Commissioner of Income Tax are a continuation of the assessment and, therefore, late filing of these documents would notdisable the assessee from benefits of section 11.(Bombay High Court  [2015] 378 ITR 103 (Bom)

j) The provision regarding furnishing of audit report with the return has to be treated as a procedural proviso. It is directory in nature and its substantial compliance would suffice. (Gujarat High Court 22-12-20)

k) Appeal is a continuous proceeding, it cannot be said that the CIT (Appeals) had no authority to accept Revised Form No.10 nor can it be said that Revised Form No.10 could not at all be considered for allowing the claim made under Section 11(2) of the Act even if submitted belatedly.(Karnataka High Court [2017] 394 ITR 236)

l) The requirement to prescribe the time-limit is only directory and not mandatory. Non-compliance within the stipulated time should not disentitle an assessee from the exemption to which he is otherwise entitled. (Rajasthan High Court, January 7, 2019).

m) The CBDT realized the unjust, arbitrariness of this provision and also realized that it is incomprehensible that the entire exempt income will become taxable just because a Form was not filed in time and since then it is issuing circulars directing the A.O. not to collect tax in this regard.(The Institution of Civil Engineers Society-ITAT Chandigarh 30-07-21)

n) The CBDT has issued Circular No. 7/2018 dated 20/12/2018 and Circular No. 6/2020 dated 19/02/2020 which provided for Condonation of delay under section 119(2)(b) of the Income-tax Act, 1961 in filing of form no. 10 and form no. 9A which authorized the Commissioners of Income-tax (Exemptions) u/s 119(2)(b) of the Act, to admit such belated applications for condonation of delay in filing Return of Income and decide on merit. Thus the fact that CBDT was authorised to issue Circulars for condonation of delay in filing Form No. 10B, 10 & 9A proves that filing of such form is only a procedural condition and not a substantive condition of law.

Thus, from a study of the above decisions of the Supreme Court and various High courts, it can be concluded as under:

1) Even at the stage of appeal, the assessment proceedings could be said to be pending and as such, the details in Forms could be furnished even at the stage of appeal.

2) As long as the entitlement of the assessee regarding the exemption or deduction is not doubted, no addition can be made on the pretext that prescribed Form was filed belatedly.

3) Provision regarding furnishing of audit report in prescribed Form with the return has to be treated as a procedural proviso. It is directory in nature and its substantial compliance would suffice.

4) Prescribed Form can also be submitted during the appellate proceedings before the CITA

Supreme Court Of India: – Unsettling the settled legal position

PCIT Vs Wipro Limited (Supreme Court of India) Appeal Number : Civil Appeal No. 1449 of 2022 Date of Judgment: 11/07/2022

However, the Hon’ble Supreme Court reversed the obtaining legal position in this respect. It stated that the exemption provisions are to be strictly and literally complied with and the same cannot be construed as procedural requirement. It held that for claiming the benefit under Section 10B (8) of the IT 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 short question which was posed for consideration of this Court is, whether, for claiming exemption under Section 10B (8) of the IT Act, the assessee is required to fulfil 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.

As per the well settled judicial precedents of the Hon’ble courts it can be stated that condition (i) i.e. furnishing a declaration to the assessing officer in writing as per the provisions of Section 10B (8) is mandatory. Non filing of this declaration is very fatal to the availment of the exemption u/s 10B(8).

The same courts have given their judgements on condition (ii) i.e. 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 and stated that this condition (ii) is just directory.

In summary, it may be submitted that the courts in India are of the opinion that wherever a condition is prescribed for availment of any exemption/deduction as per any exemption Notification, then that condition is to be treated as “Mandatory”, non-compliance of which would be fatal to the availment of the exemption e.g. submission of Audit Report in prescribed Form.

However, the Hon’ble Supreme Court has chosen to take a U-turn from the above stated position in the case of M/s Wipro Limited …Respondent decided on July 11, 2022. The SC reversed the judgement of Karnataka High Court Dated. – November 30, 2020 in the case of the same assessee.

The Hon’ble SC 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 IT Act are required to be fulfilled and/or satisfied. 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.

Even claiming benefit under section 10B (8) and furnishing the declaration as required under section 10B (8) in the revised return of income which was much after the due date of filing the original return of income under section 139(1) of the IT Act, cannot mean that the assessee has complied 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.

It was finally held that for claiming the benefit under Section 10B (8) of the IT 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.

Some more relevant case Laws on this subject of whether a particular condition attached to some exemption notification is Mandatory or Directory

1) The procedural law is always to be construed and applied in a manner so as to make it a handmaid of justice, and it cannot be treated as a substantive provision so as to defeat the rights of the parties. Sub-section (5) of section 185 no doubt provides that the application for registration shall be accompanied by the original instrument evidencing the partnership. The provision is, however, directory or, in any case, even if mandatory, is capable of being waived. Legislative intent conferring a right of condonation is an indication in that direction. Hence an application for registration of a firm which is not accompanied by an instrument evidencing the partnership cannot be treated as invalid. (Gujarat High Court in Billimora Engineering Mart v. CIT [1985] 156 ITR 153).

2) The Income-tax Officer rejected the assessee’s claim for exemption under section 11(1)(a) of the Act on the ground that it had failed to comply with the provisions of section 12A(b) and the accounts were not audited by the time the original return was filed. The Income-tax Officer further held that the assessee was not entitled to file a revised return since it had filed the original return under section 139(4A).

Held: A return filed under sub-section (4A) of section 139 should be treated as a return under sub-section (1). It was further held that when a return is filed under subsection (4A), it has to be accompanied by an auditor’s report. Since the original return filed by the assessee was not accompanied by an auditor’s report, there was a clear omission in that return. Therefore, the assessee was entitled to file a revised return under section 139(5) and claim the exemption. (Allahabad High Court in the case of CIT v. Sri Baldeo Maharaj Trust [1983] 142 ITR 584)

3) The procedural requirements hence are to be treated as directory. If there is some defect in the declaration form, the assessee is to be given an opportunity of rectifying it (section 185(2)). It cannot be ignored or rejected straightaway. Similarly, the requirement that the declaration should be, filed along with the return of income is directory, because the Income-tax Officer is enabled to assess the firm provided the return is filed by the time he makes the assessment. (Allahabad High Court in the case of Addl. CIT v. Murlidhar Mathura Prasad [1979] 118 ITR 392)

4) If the audit report is not filed with the return, the return becomes defective and then Income-tax Officer should give an opportunity to the assessee to submit the audit report to rectify the defect before completion of the assessment. Where an assessee, in compliance with the provisions of the Act, cures the defect in the return by filing the audit report before the completion of the assessment, the Assessing Officer cannot ignore such audit report or the return in completing the assessment. [1992] 195 ITR 825 (Cal))

5) The purpose of the statute is to verify the unimpeachable authenticity of a particular accounting position; that purpose is sufficiently served if the auditor’s report is available at the time of assessment. The purpose would not be served but would be defeated if even in the case of genuine assessees their claims were thrown out because the auditor’s report was simply not available at the time the last date of the filing of the return had arrived. [1992] 198 ITR 511.(Cal HC)

6) If audit report is filed before the completion of assessment, it would not be fatal to the claim of the assessee. Of course this relaxation cannot be claimed as a matter of right by the assessee, except only in genuine and bona fide cases. In the case before us, there is no reason to doubt the bona fides of the assessee in claiming the deduction and hence the reason for not allowing the claim, is not justifiable. We, therefore, direct that the assessee be given deduction under section 80HHC.” (Shivanand Electronics [1994] 209 ITR 63 (Bom))

7) It was held that while sub-section (1) of section 32AB was mandatory, sub-section (5) thereof was not mandatory and the assessee’s claim for deduction cannot be rejected only on the ground of non-filing of audit report along with the return. The requirement of filing the duly audited report along with the return cannot be treated as mandatory and the assessee cannot be deprived of the benefit of deduction if the same is filed before the finalisation of the assessment. (CIT v. Punjab Financial Corporation [2002] 254 ITR 6 (P & H)).

8) To make section 32AB(5) of the Act constitutionally valid, the only alternative or workable solution is that the audit report should be made available before the assessment is made : (vide K. P. Varghese v. ITO [1981] 131 ITR 597 (SC) and followed in CIT v. A. N. Arunachalam [1994] 208 ITR 481 (Mad));

9) It is, therefore, specifically held that sub-section (5) of section 32AB is not mandatory and the Assessing Officer has discretion to entertain the audit report, even though it has not been filed with the return and give benefit of the deduction to the assessee in terms of section 32AB(1). The Full Bench, while so holding that the filing of the audit report is not mandatory, has observed that the question as to whether a statute is mandatory or directory depends upon the intent of the Legislature and not upon the language in which the intent is clothed. The meaning and intention of the Legislature must govern not only from the phraseology of the provision, but also by considering its nature, its design and the consequences, which should follow from construing it one way or the other.

10) The Full Bench of the Punjab and Haryana Court in Punjab Financial Corporations case [2002] 254 ITR 6 has thus arrived at the conclusion that filing of audit report is directory, but not mandatory, based on the rule of interpretation, with reference to the fiscal statute in the matter of imposing penalty, formulated by the apex court, in State of U.P. v. Manbodhan Lal Srivastava, AIR 1957 SC 912, wherein it has been held that the principle that a fiscal statute should be construed strictly is applicable only to taxing provisions such as a charging provision or a provision imposing penalty, and not to those parts of the statute which contain machinery provisions.

11) The requirement that the audit report should be filed along with the return is not mandatory and the audit report could be filed even after submission of the return, but before framing of the assessment and the same could be construed as a sufficient compliance with the condition contemplated under section 80J(6A);

However the Hon’ble SC held that the requirement that Form 3-AA should be submitted along with return was only directory and that therefore even though the Form had been submitted long after the filing of the return, the assessee was entitled to claim additional depreciation under Section 32(1)(ii-a) of the IT Act. Thus, the requirement that the Form should be submitted by a certain deadline is directory, though the submission of the Form itself may be regarded as mandatory. It is submitted that 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. (SC)

12) The Hon’ble SC also specifically approved the judgment of the Bombay High Court in the case of Commissioner of Income Tax v. Shivanand Electronics ((1994) 209 ITR 63). That judgment dealt with an assessee’s claim for deduction under Section 80HHC. Section 80HHC specifically prohibited the grant of deduction under Section 80HHC unless the stipulated audit report was filed along with the return of income. The assessee filed the required audit report long after the return but the deduction was allowed. The Bombay High Court held that while the filing of the audit report was mandatory, the requirement that it should be filed along with the return was only directory, notwithstanding the peremptory language of the prohibition in Section 80HHC (5).

13) In the case of CIT v. Rana Polycot Ltd. 2011 SCC the Hon’ble SC held that the exemption provided u/s 10B that while the submission of the declaration u/s 10B(8) is mandatory, the requirement that it should be submitted before the due date of return is only directory and Section 10B deduction could not be disallowed if the declaration was filed before the assessment was made.

14) The requirement of filing the audit report “along with the return of income” is directory and if the assessee complies with the same before completion of the assessment and offers a satisfactory explanation for his failure to submit the same in time, the Income-tax Officer may consider the same and examine the claim of the assessee for deduction under section 80J on the basis of such report.

15) In Murali Export House v. CIT [1999] 238 ITR 257, it was held that the first part of sub-section (4) of section 80HHC of the Act makes it mandatory to an assessee to furnish in a prescribed form the report of the accountant certifying that the deduction was correctly claimed in accordance with the provisions of section 80HHC(4) of the Act. But the second part thereof in my view is procedural in nature and requires the assessee to submit a certificate of the special audit report along with the return. It is merely directory in nature as it calls for substantial compliance as observed hereinbefore.

16) In CIT v. Devradhan Madhavlal Genda Trust [1998] 230 ITR 714, a Division Bench of the Madhya Pradesh High Court held that filing of the audit report in Form No. 10B along with the return of income was not mandatory for the purpose of seeking exemption under section 11 of the Act.

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2 Comments

  1. MANZOOR AHMED BAKHSHI says:

    I agree with the comments of Mr D K Kothari CA that the decision of the Supreme court does not upset the settled position of law on some of the exemptions provisions discussed in the above article.Supreme court in the case of CIT V/S Sun Edngineering P 992 Supp 1 SCR 732 a held as under:-

    “It is not proper to regard a word, a clause or a sentence occurring in a judgment of the Supreme Court, divorced from its context, as containing a full exposition of the law on a question when the question did not even fall to be answered in that judgment ”
    Since the issue as to whether filing of certain forms such as form no 10B. (A etc is mandatory or procedural did not fall for consideration of the Supreme Court therefore it cannot be said that earlier judgments on provisions of law other that section 10B have been overruled,
    The Department is confusing section 10B with form 10B and calming that judgment applied to filing of form 10B as well

  2. ca dev kumar kothari says:

    Let us understand the situation before the SC. The issue was not to avail exemption u.s. 10B which is for income and assesses was already entitled for the exemption. In the particular year assesse might have suffered loss (or lower profits) and assesse might have option to take exemption in some other year instead. Therefore, assesse choose to opt out from exemption. In a way for withdrawal of exemption S.10B (8) provided as option by filing declaration within due date u.s 139.1. Effect of this declaration will be that in case of loss, it will not be denied , due to exemption availed , and loss will be carried forwarded. Therefore, in such situation option to avail benefit of loss require declaration to be filed within due date and loss be claimed by way of a Return filed within time allowed us. 139.1 which is equal to time allowed u.s.139.3 for claiming loss to be c/f. I think this was the basis concept in minds of their lordships.
    It was not for availing exemption us 10B but was to forgo exemption us 10B.
    learning is that always file such declarations well before last date and follow procedural law strictly. Who knows what will be view taken in a new case even by their lordships of SC , because after all judges are also human being and thinking goes on changing even in the same mind and when new minds are working, result may change.

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