Tax Alert - ROI Additional EY INDIA

1. 2 May 2017 EY Tax Alert Delhi High Court upholds constitutional validity of provision mandating filing of tax return within prescribed due-date to claim tax holiday Executive summary This Tax Alert summarizes a recent ruling of the High Court (HC) in the case of Nath Brothers Exim International Ltd. [1] (Taxpayer) wherein the Taxpayer challenged the constitutional validity of a provision of the Indian Tax Law (ITL) mandating timely filing of return of income (ROI) to claim profit-linked tax holiday benefit for exports and other qualifying activities. Tax Alerts cover significant tax news, developments and changes in legislation that affect Indian businesses. They act as technical summaries to keep you on top of the latest tax issues. For more information, please contact your EY advisor. Through various amendments, the ITL introduced two additional cumulative conditions for the eligibility to claim tax holiday deduction viz. (a) claim for deduction should be made in ROI and (b) ROI for the relevant tax year should be furnished within the due date prescribed in the ITL (additional conditions). Non-compliance of any of these conditions makes a taxpayer ineligible to claim tax holiday deduction for that year. For tax year 2006-07, the Taxpayer failed to furnish ROI within the prescribed time. Tax Authority denied claim for the tax holiday for breach of the additional conditions. The Taxpayer invoked Article 14 of the Constitution of India (Constitution) which guarantees right to equality to every citizen of India. According to the Taxpayer, the additional conditions imposed act as rigid barriers which do not sub-serve the object of grant of tax holiday and impede genuine claims of the taxpayers. The additional conditions are unreasonable, inequitable and arbitrary and are also in violation of Constitution since the imposition of these conditions discriminates between two sets of taxpayers placed in similar circumstances. [1][TS 164-HC-2017 (Del)]

2. However, the HC upheld the validity of the additional conditions by ruling that they are introduced to ensure timely filing of ROIs by the taxpayers, to improve tax compliance, to avoid multiplicity of tax claims and also that the additional conditions have a rational nexus with the objective for proper scrutiny of taxpayer’s ROI. The HC further held that the amendments do not curtail any taxpayer’s vested right but only impose a duty or obligation to claim deduction in a timely manner. According to the HC, the Parliament acted within its power as the classification between two sets of taxpayers in the present case (i.e. who make claims through timely ROIs and others who do not) is founded on intelligible differentia and such differentia has a rational connection with the object of proper scrutiny sought to be achieved. of India. Through jurisprudence, it is fairly settled that, Article 14 guarantees the right to equality to every citizen of India. It embodies the general principles of equality before law and prohibits unreasonable discrimination between persons. However, it does not prohibit reasonable classification of persons, objects and transactions by the Legislature for the purpose of attaining specific objects so long as such classification is based on intelligible differentia and such differentia has a rational connection with the object sought to be achieved. The Taxpayer was engaged in the business of manufacture and export of readymade garments and was eligible for the tax holiday benefit for exports. For the relevant tax year 2006-07, the Taxpayer failed to furnish ROI before the prescribed due date. Furthermore, even in the belated ROI filed, it omitted to claim tax holiday deduction. The Taxpayer put up claim for tax holiday in a subsequent revised ROI. The Tax Authority rejected the Taxpayer’s claim for tax holiday for non- compliance of additional conditions requiring putting up the claim in ROI filed on time. The First Appellate Authority also ruled against the Taxpayer. Aggrieved by the denial of tax holiday deduction, the Taxpayer appealed to the Tribunal. Pending appeal before the Tribunal, the Taxpayer filed a writ petition before the HC challenging the constitutional validity of the ITL provisions imposing additional conditions. ► Background and facts The ITL provides various tax holiday benefits for profits derived from exports and other qualifying activities subject to compliance of certain conditions. Through various amendments, the ITL introduced two additional cumulative conditions for the eligibility to claim tax holiday deduction viz. (a) claim for deduction should be made in ROI and (b) ROI for the relevant tax year should be furnished within the time prescribed in the ITL. Non-compliance of any of these conditions makes taxpayer ineligible to claim tax holiday deduction for that year. However, the ITL empowers the Central Board of Direct Taxes (CBDT) [2] to relax any requirement of the ITL and admit the claim for exemption, deduction or relief beyond the time specified in the ITL to avoid genuine hardship to the taxpayers, by passing general or specific order in this behalf. Article 14 of the Constitution provides for equality before law. According to this Article, the State shall not deny to any person equality before the law or equal protection of the laws within the territory [2]Apex tax administrative body in India ► ► ► Taxpayer’s key contentions There is no rationale behind introduction of additional conditions. The additional conditions deny a taxpayer’s legitimate deduction which is otherwise available to the taxpayer. The additional conditions act as rigid barriers which do not sub-serve the object of granting of tax holiday and impede genuine claims of the taxpayers. The additional conditions are ► ► ►

3. unreasonable, inequitable and arbitrary and are also in violation of the Constitution. Prior to amendment imposing additional conditions, the taxpayers were entitled to claim deduction at any time during the audit proceedings before the Tax Authority or even during appellate proceedings before the Appellate Authority. Deduction was granted on the rule of “substantial compliance” of important conditions and non- compliance of insignificant/procedural conditions was waived. The amendments imposing additional conditions do not take into consideration bonafide lapse in filing ROI and does not provide any remedy to avail deduction at a later stage. It is true that the CBDT has general power to condone delay but such powers are discretionary. In any case, where a ROI is not filed within the prescribed due date for bona fide reasons, such delay does not prejudice the interests of the Tax Authority. The imposition of additional conditions discriminates between two sets of taxpayers viz. the one who files ROI within the prescribed due date but does not claim the tax holiday thereunder and subsequently claim it by revising the ROI is granted the benefit of tax holiday; whereas another who fails to furnish the ROI within the prescribed due date for some reason is denied the benefit even if delay in filing ROI is of single day. The amendments deprive the taxpayer of a vested right to claim the deduction which cannot be taken away by way of an amendment. The Constitution does not permit collection of taxes in excess of what is legitimately payable by the taxpayers. Any excess collection is without the authority of law and is not permissible. The tax holiday provisions are beneficial legislations and should be interpreted liberally. Provisions which are intended for promoting the economic growth should be construed in a manner to advance the objective of the provision rather than to frustrate the same. ► Tax Authority’s key contentions Classification of the taxpayers for the purpose of legislation is permissible if the classification is founded on intelligible differentia distinguishing one group of persons from the other and such differentia has a rational connection with the object sought to be achieved. Objective of imposing additional conditions is to improve tax compliance. The provisions require timely furnishing of ROI so as to enable the Tax Authority to carry out early examination of the tax holiday claims. The tax holiday claims represent sacrifice of tax revenue for the Government and, hence, need proper scrutiny by the Tax Authority to check for their genuineness. Imposition of additional conditions for tax holiday claims is reasonable and does not restrict or qualitatively hamper the claim for tax holiday. Instead, it enables streamlining tax returns with a view to improvise efficiency in the disposal of claims. Condition for claiming deduction is linked to the timely filing of ROI. Given that the taxpayer is even otherwise obliged to file ROI in time under the ITL, it is not difficult for the taxpayer to comply with additional conditions imposed by the amendments. There is nothing arbitrary in imposing time limits for claiming tax holiday benefits. It is not correct to suggest that once a taxpayer misses to file ROI in time, the claim for tax holiday is permanently forfeited. The ITL confers CBDT with the power to relax any requirement in case where failure on the taxpayer’s part is due to circumstances beyond the taxpayer’s control and, thus, provides suitable and adequate remedy to the taxpayer. ► ► ► ► ► ► ► ► ► ► ►

4. HC’s ruling Comments The HC ruled in favor of the Tax Authority and upheld the constitutional validity of additional conditions on the following grounds: ► Additional conditions are introduced to ensure timely filing of ROIs by the taxpayers and to have greater tax compliance to avoid multiplicity of tax claims. Therefore, new conditions adding limitations to beneficial tax provisions are justified since they are introduced with a rational nexus with the object of proper scrutiny of taxpayer’s ROI and to ensure better tax compliance. ► The additional conditions merely subject the tax holiday deduction to further procedural compliance and do not frustrate the object of tax holiday deduction so as to render them constitutionally invalid. ► The taxpayers who claim the benefit of tax holiday through timely ROI and those who do not are two valid classes of taxpayers based on reasonable classification. It is open for the Legislature to prescribe different conditions in respect of taxpayers who claim tax holiday benefit just as substantive conditions attached to the eligibility to tax holiday benefit. ► The amendments do not curtail any vested right of the taxpayer but only impose a duty or obligation to claim the deduction in a timely manner. Thus, the Parliament has acted within its power while introducing additional conditions since the classification is founded on intelligible differentia distinguishing one group of persons from the other and such differentia has a rational connection with the object of proper tax scrutiny sought to be achieved. The present HC ruling upholds the constitutional validity of additional conditions to claim tax holiday deduction and validates the legislative action of denying the benefit to taxpayers who do not file timely ROIs. The ruling emphasizes that it is critical for taxpayers eligible for tax holiday deduction to, inter alia, ensure compliance of these additional conditions. A taxpayer who misses the date of filing ROI in any unfortunate circumstance will need to approach the CBDT demonstrating valid reasons to relax the requirement of additional conditions and allow it to claim the benefit of tax holiday deduction.

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