AUGUST 26 , 2020

By CA Lukose Joseph & CA Anil P Nair

SHOULD we file our Income Tax Returns on latest notified due date? If yes, why and what happens if there is a delay in filing Returns due to genuine reasons? What if even the grace period allowed with penalty is also exhausted and return was not yet filed due to sufficient causes?

The foremost place and importance of filing due Return of Income by the given due dates need not be emphasized in compliance requirements under The Income Tax Act, 1961.

The said "Due Dates" as per Explanation 2 to Section 139(1) can be summarized in a Table below: (Changes applicable due to COVID-19 is ignored)

*Assessment Year

With effect from Assessment year 2020-21, Specified persons, that is persons who (a) has deposited more than 1 crore in current accounts of one or more banks (b) incurred more than 2 lakh for foreign travel(c) consumed electricity for more than one lakh rupees or (d) fulfills other conditions as may be prescribed also has to file return within due date.

As all are aware, in case of delay in filing, it takes away many of the exemptions/deductions/allowances under the Income Tax Act. However Section 119 empowers Central Board of Direct Taxes to issue order for proper administration of the act generally or specifically for the proper and efficient collection of revenue. The section enables CBDT to authorizes it's subordinate officers to condone such delay and admit an application or claim for any exemption, deduction, refund or any other relief under this Act after the expiry of the period specified by or under this Act for making such application or claim and deal with the same on merits in accordance with law.

Circular 9/2015 [F.NO.312/22/2015-OT], DATED 9-6-2015

There has been an instruction under the mentioned Section 119 to subordinate authorities by the Board for condoning delay in filing refund claim and claim of carry forward losses as per a Circular 9/2015 [F.NO.312/22/2015-OT], DATED 9-6-2015 up to six years from the end of the assessment year for which such application/claim is made. The powers for condonation from above circular are:

The Principal Commissioners of IT/Commissioners of IT:

Up to Rs 10 Lakhs

The Principal Chief Commissioners of IT / Chief Commissioners of IT :

Rs.10 Lakhs to Rs.50 Lakhs

Central Board of Direct Taxes -

Above Rs 50 Lakhs

Moreover be informed that CBDT has now issued necessary instructions to Income Tax Authorities to condone delay in filing ITR in genuine cases.

Circular No 02/2020 dated January 03, 2020

The above circular clarifies that CBDT has already authorized The Commissioners of Income tax to admit belated audit report in Form No 10B in respect of A Y 2016-17 and A Y 2017-18 where such Forms are filed after the expiry of time allowed under the relevant provisions of the Act vide Circular No. 10/ 2019 dated 22rd May, 2019  and   Circular No. 28/2019 dated 27th September, 2019   both issued vide F No. 197/55/2018-ITA-I

In addition to above CBDT clarified by Circular No.02/2020 that where there is delay of upto 365 days in filing such Forms for A Y 2018-19 or for any subsequent Years, the Commissioners of Income tax are hereby authorized to admit such belated applications of condonation of delay u/s 119(2) of the Act and decide on merits. The Assessee should have been prevented by reasonable cause from filing of applications within such stipulated time.

Let us check when and how this section and circulars come to the rescue of tax payers.

1. Loss Returns

Please note that filing Returns on Due date is a must to claim carry forward of losses. If the business or other entity has a loss which it expects to carry forward in accounts for due adjustment with expected future surpluses, filing of Income Tax Return and claiming such loss for carry forward is a must. (Provision in Section 139 (3) is reproduced in Box 1 below).

2. Refund cases

In refund cases, refund will not be allowed if return is not filed before the end of the relevant assessment year.

3. Claiming Deductions

Section 80AC prescribes to claim deductions under some Sections under Part C of Chapter VIA. That is for deductions under Sections 80H, 80HH, 80HHA, 80HHB, 80HHBA, 80HHC, 80HHD, 80HHE, 80HHF, 80I, 80IA, 80IAB, 80IAC, 80IB, 80IBA, 80IC, 80ID, 80IE, 80IIA, 80IC, 80ID, 80IE, 80JJA, 80JJAA, 80LA, 80O, 80P, 80Q, 80QQA, 80QQB, 80R, 80RR, 80RRA and 80RRB, timely filing of Income Tax Return is necessary. Section 80AC is given in Box 2 below.

In Respect of above Sections deductions will not be permitted if Income Tax Return is not filed within the time permitted U/s. 139(1) of Income Tax Act, 1961 for Assessment Year 2018-19 onwards.

4. Exemptions to Charitable Organizations

The Income Tax Act, 1961 provides for exemption from tax for income of religious and charitable organizations subject to fulfilling certain conditions. Section 12A (1) is very specific that the provisions of  Section 11  and  Section 12  shall not apply in relation to the income of any trust or institution unless the given conditions are fulfilled. 

The Finance Act, 2017 has w.e.f. 1-4-2018 inserted a new condition clause (ba) in Section 12 A(1).

"(ba) the person in receipt of the income has furnished the return of income for the previous year in accordance with the provisions of sub-section (4A) of  section 139, within the time allowed under that section."

Where the total income of the charitable or religious trust before allowing exemption under sections 11 and 12 exceeds the maximum amounts which is not chargeable to tax it is required to file a return in Form ITR-7 before the date specified. The due date specified under Section 139 is October 31, every year where the trust is required to get its accounts audited under any provision of the Act and July 31, in other cases. In case return is not filed by prescribed date then benefit of accumulation u/s 11(2) will not be available.

In effect, unless the Institution file its return of income by specified dates given from time to time for each Assessment Year, the Institution could forfeit immunity from taxation and may be assessed as AOP and put to tax at maximum marginal rate.

The Trust or Institution may not be able to carry forward loss for adjustment against future income in case of loss in a year and it fails to furnish Return on time. The Managements of Trusts and Institutions have to rise to the occasion and put their record keeping straight to overcome this possibility.

Many cases, thanks to authorities' apathy the Section 119 may not come to the rescue of taxpayers as such. Let us check whether the judiciary will come to the rescue of assessee.

Legal Decisions

The objectives behind empowering the CBDT to issue circulars under Section 119 of the Income Tax Act, 1961, have been highlighted in UCO Bank (UCO Bank, Calcutta vs Commissioner of Income-Tax, West Bengal) - 2002-TIOL-697-SC-IT-LB wherein the Apex Court has stated:

What is the status of these circulars?  Section 119(1)  of the Income-tax Act, 1961 provides that, "The Central Board of Direct Taxes may, from time to time, issue such orders, instructions and directions to other income-tax authorities as it may deem fit for the proper administration of this Act and such authorities and all other persons employed in the execution of this Act shall observe and follow such orders, instructions and directions of the Board. Provided that no such orders, instructions or directions shall be issued (a) so as to require any income-tax authority to make a particular assessment or to dispose of a particular case in a particular manner; or (b) so as to interfere with the discretion of the Appellate Assistant Commissioner in the exercise of his appellate functions". Under sub-section (2) of  Section 119, without prejudice to the generality of the Board's power set out in sub-section (1), a specific power is given to the Board for the purpose of proper and efficient management of the work of assessment and collection of revenue to issue from time to time general or special orders in respect of any class of incomes or class of cases setting forth directions or instructions, not being prejudicial to assessees, as the guidelines, principles or procedures to be followed in the work relating to assessment. Such instructions may be by way of relaxation of any of the provisions of the sections specified there or otherwise. The Board thus has power, inter alia, to tone down the rigor of the law and ensure a fair enforcement of its provisions, by issuing circulars in exercise of its statutory powers under  Section 119  of the Income-tax Act which are binding on the authorities in the administration of the Act. Under  Section 119(2) (a), however, the circulars as contemplated therein cannot be adverse to the assessee. Thus, the authority which wields the power for its own advantage under the Act is given the right to forego the advantage when required to wield it in a manner it considers just by relaxing the rigor of the law or in other permissible manners as laid down in  Section 119. The power is given for the purpose of just, proper and efficient management of the work of assessment and in public interest. It is a beneficial power given to the Board for proper administration of fiscal law so that undue hardship may not be caused to the assessee and the fiscal laws may be correctly applied. Hard cases which can be properly categorized as belonging to a class, can thus be given the benefit of relaxation of law by issuing circulars binding on the taxing authorities.

'The power is given for the purpose of just, proper and efficient management of the work of assessment and in public interest. It is a beneficial power given to the Board for proper administration of fiscal law so that undue hardship may not be caused to the assessee and the fiscal laws may be correctly applied. ( emphasis supplied )

Thus, the purposes behind the issuance of circulars bring to light their supplementary character, suggesting that the extent to which this power shall be utilized by administrative authorities must be confined to the objectives stated in relevant statutes.

In the case of Pala Marketing Co-Op. Society Limited vs. Union of India (UOI) And Ors. 2007, the honorable Kerala High Court took the view that there were sufficient causes and genuine hardship to the assessee by way of past losses and delay in Audit for condonation of delay in filing returns. The genuine hardship contemplated under  Section 119(2)  obviously is financial hardship caused to the assessee if delay is not condoned

The Karnataka High Court allowed the writ petition in Smt Vishalakshi w/o Anantharam Bangalore Vs The Commissioner of Income Tax, Bangalore - 2010-TIOL-270-HC-KAR-IT and held that Revenue needs to apply mind to the reasons leading to delay before it rejects application for condonation of delay for filing revised return beyond due date.

Supreme Court decision on filing of revised return of income by an amalgamated company beyond the prescribed time limit

Supreme Court upholds validity of a revised return of income filed (in paper form) beyond the prescribed time limit in the Indian Income-tax Act, 1961, by an amalgamated company pursuant to amalgamation of another company into itself. This would be for filing a revised return of income without obtaining a condonation of delay from the Central Board of Direct Taxes.

Dalmia Power Limited (Dalmia Power) and Dalmia Cement (Bharat) Limited (Dalmia Cement) were part of separate amalgamation transactions, both having the appointed date of 1 January 2015 (in Assessment Year (AY) 2015-16). The scheme of amalgamation in the context of Dalmia Power was approved by the National Company Law Tribunal (NCLT) in October 2017 and that of Dalmia Cement was approved in May 2018 (collectively referred to as "Scheme").

The Supreme Court noted that provisions of section 119(2)(b) of the Act applied in the context of delay in making filings on account of genuine hardship faced by the taxpayer at such time. Further, it held that such provisions would not be applicable in a case where the taxpayer has restructured their business and filed a revised return with the prior approval and sanction of the NCLT, without any objection from the tax department.

The Supreme Court relying on judicial precedents observed that Rules of procedure have been construed to be the handmaiden of justice. The purpose of assessment proceedings is to assess the tax liability of an assessee correctly in accordance with law.

Hence it may be concluded that delayed Return itself is no cause for rejection of claims for deductions or exemptions allowable under the Act. Condonation of such delay cannot be denied without stating valid reasons.

Having said this, it is advisable to file the Return on due date to claim deductions discussed above. Again the proverb "Cow in book will not eat grass" means verdicts of courts may not come handy to the assessee always.

Filing Income Tax Returns; the general apathy

Recently the Prime Minister of the Country, in his speech repeatedly chided that out of the Population of India, hardly 1% pay income tax. CBDT too says that the number of people filing income tax return is less than 5% of Population. Now a Taxpayers Charter is introduced which says what rights the assessee can expect from authorities. All assessments have been made virtual and faceless.

Income Taxes are paid only by people having an income level over the threshold limit after all eligible deductions that could be claimed are exhausted. Several deductions are available to salaried class and businessmen. Most make use of help from experts to claim the lowest taxable income possible, and may be some do creative accounting to be within the threshold limits! The reason most probably being the rates of tax are very high, except for the maiden slab. The Middle income and Rich who actually make money very hard,or have risen to that position through hard work or at a cost, fret at the possibility of contributing say, one fifth to one third of that to revenue as some sort of punishment.

The respected Finance Minister in her 2020 Budget has proposed that those who are not claiming deductions can choose to pay a lower rate of tax. Obviously what the Government hopes for is an increase in the number of filers and tax payers, so revenue generation for the Government goes up even with a reduction in rates. In our country Taxpayers are not entitled to any special privileges. We have started an effort to recognize albeit initially by giving certificates for tax paid! Only some have received it.

You would remember that the window for filing returns is now closed beyond a grace period with penalty till March 31 st of the assessment year! Due process of law will have to be faced by the assessee who intentionally delays filing return or declaring income and the department later becomes aware of it. Many technological advances have made it possible for revenue to locate people with such undisclosed income. Many have started getting notices or flags for not filing Return of Income within due date.

Why is it important that Returns have to be filed and due Tax to be paid in time by citizens of any developing country? Because the revenue of Government even today depends largely on direct taxes (up to 38% of revenue) for budget provisions. It is important that the Project outlays per budget are met according to schedules for the development needs of the country, bringing in relief for poor and amenities for its citizens and facing challenges to the country.

Post Script:

By virtue of latest amendment to 6th proviso to Section 139(1), with effect from 01/04/2020, if a person's total income without giving effect to provisions of Sections 54, 54B, 54D, 54EC, 54F, 54G, 54GA, 54GB exceeds the maximum amount which is not chargeable to income tax, such person too shall furnish a return of income on or before due date.

[The views expressed are strictly personal.]