By TIOL News Service

NEW DELHI, APRIL 25, 2017: THE ISSUE BEFORE THE COURT IS - Whether insertion of Section 80A(5) and the fourth proviso to Section 10B(1), curtails any vested right of the assessee in claiming bonafide deductions under the I-T Act, and hence can be declared as violative of Article 14 of the Constitution. NO is the verdict.

Facts of the case:

The assessee is an unlisted, deemed, family-owned public limited company engaged in business of manufacture and export of readymade garments, garment made ups and silk fabric. During the A.Y 2002-03, the assessee had set up Export Oriented Unit (EOU) as an independent unit. Though the profits derived therefrom were eligible for deduction u/s 10B, however no deduction was claimed by assessee up to AY 2007-08. In the relevant assessment year, the said entity earned profits of Rs.2,43,53,757/- which were eligible to tax exemption. The assessee failed to claim deduction in the belated income tax returns filed by it on Dec 31, 2008, and only made claim for deduction u/s 10B in the subsequent revised return filed by him on Mar 26, 2010. The assessee claimed that it was precluded from filing his return within the time prescribed u/s 139(1) because: (a) there were some disputes among family members of the directors of the assessee company; and (b) due date of filing return by the assessee company was for the first time reduced by Finance Act, 2009 from 31st October following the close of the previous year to 30th September following. Accordingly, for AY 2008-09, the return was due on Sep 30, 2009 instead of the earlier due date of Oct 31, 2009, a fact the assessee claimed it was unaware of. The ACIT considered the assessee's claim of deduction u/s 10B and passed an order denying the said deduction. An appeal was preferred against that order of the CIT(A), however it was pending before the ITAT Delhi. Bound by the plain language of Section 80A (5) and fourth proviso to Section 10B (1) of the Act, the assessee preferred the present petition.

On appeal, the HC held that,

++ as is evident from the factual discussion and the submission of parties, the assessee challenges the validity of two provisions of the Income Tax Act i.e., Section 80A (5) (inserted by the 2006 amendment) and the fourth Proviso to Section 10B(1) (inserted by the 2003 amendment), as violative of Article 14 of the Constitution of India. In effect both provisions preclude assessees from claiming deductions with respect to any profits and gains in an EOU if it fails to file a return of income claiming such deductions, within the time stipulated u/s 139(1). The assessee argues that in case of any bona fide reason preventing any given assessee from filing return of income within time, there is no recourse given under any provision of the Act by which a deduction can be claimed at a later stage. The revenue contests this and says that if there is a bona fide lapse in filing within the time, an assessee has recourse to Section 119(2) which enables the Board to extend time for filing return u/s 139(1) if it so deems fit. The assessee's contention is that the Board's power u/s 119(2) is merely discretionary. The next argument of assessee is with regard to Circular No. 14(SL-35) of 1955 issued by the CBSE, which allows filing of a belated claim of depreciation when no claim for such depreciation has been made in the return of income. The court had held, in Mahendra Mills case, that "....the circular mposes merely a duty on the officers of the department to assist a taxpayer in every reasonable way, particularly in the matter of claiming and securing reliefs. The Officer is required no more than to assist the assessee. It does not place any mandatory duty on the officer to allow depreciation if the assessee does not wish to claim that...." Furthermore, this court notices that the assessee is silent about Circular No. 29D (XIX – 14) of 1965, which states that: "....where the required particulars have not been furnished by the assessee and no claim for depreciation has been made in the return, the Income Tax Officer should estimate the income without allowing depreciation...." Read cumulatively, both circulars empower an AO to reject any depreciation claim made at a belated date when the same has not been claimed with the return;

++ the assessee argues that there was no rationale behind insertion of the impugned provisions in the statute as before their insertion an assessee was allowed to claim deduction of profits and gains at any time before completion of assessment. However, as was argued, with merit, by the revenue, Section 10B(1) of the Act, gives numerous benefits to the assessees and the fourth proviso does nothing but requires compliance of the time line provided in Section 139(1) for claiming the benefit of Section 10B(1). It was added so as to ensure timely returns of income being filed and greater tax compliance. As far as Section 80A (5) was concerned, it was added to prevent multiplicity of claims of deductions with respect to the same transactions, under the Act. The insertion of the impugned provisions does not curtail any vested rights that the assessee had, but only imposes upon them a duty, an obligation to claim deductions in a timely manner and in the return so filed. The right to claim such deductions still vests in the assessees who are eligible for it. The other perspective in such cases is that the impugned provisions are interwoven into the mechanism which Parliament found appropriate to create for the purpose of claiming deductions. In such cases, (unlike in cases where no such benefits are sought) the assessee has to necessarily claim the benefit while filing a return within the time, u/s 139 (1). These provisions are rather like limitation periods, which are statutes of repose. Challenges to such provisions which merely enable the channeling of benefits (such as deductions in the present case) as per se arbitrary or discriminatory can seldom succeed. The Court is also unpersuaded by the assessee's contention that the impugned provisions fail to pass muster under the classification test, as to be valid under Article 14 of the Constitution of India. This argument overlooks the fact that those claiming benefits of deduction and those who are not, although no doubt both taxpayers, are clearly apart. Therefore, provision of special limitation in such cases is justified and has a rational nexus with the object which Parliament wished to achieve, i.e. to segregate the returns of assessees in such cases, for proper scrutiny.

(See 2017-TIOL-790-HC-DEL-IT)