Mandatory vs. Directory in Indian Income Tax Law: Procedural Compliance, Key Judgments, and the 2022–2026 Landscape

Abstract

In income tax practice, the issue of mandatory vs directory in income tax often arises when taxpayers seek to justify non-compliance with a statutory condition by arguing that “it is merely procedural—it is directory, not mandatory.” For years, this argument found some traction before tribunals and courts. However, the period 2018–2026 has seen a decisive shift. The Supreme Court has consistently held that conditions attached to deductions and exemptions are mandatory, while procedural obligations on Revenue itself are also enforced strictly in favour of the taxpayer. This article is a comprehensive, judgment-by-judgment analysis of this distinction in Indian income tax law, updated through April 2026.

Mandatory vs. Directory Provisions in Income Tax: First Principles

Every income tax practitioner needs to understand what makes a provision mandatory as opposed to directory. This is not a matter of grammatical preference — it is a legal question with significant financial consequences.

A mandatory provision must be strictly obeyed. Non-compliance renders the action void or the right forfeited. A directory provision requires substantial compliance — minor deviations do not invalidate the action, provided the purpose of the provision is served.

The Multi-Factor Test Applied by Indian Courts

There is no single rule for determining whether a provision is mandatory or directory. Courts in India apply a multi-factor, contextual test. The following factors are consistently considered:

The Supreme Court authoritatively stated this test in P.T. Rajan v. T.P.M. Sahir, (2003) 9 TMI 765 (SC): ‘The test of mandatory or directory depends on context, purport and object of the statute… a procedural provision, even if it uses the word ‘shall’, may be construed as directory if no prejudice is caused by non-compliance.’ However, as the case law since 2018 shows, this latitude has been significantly curtailed for exemption/deduction conditions.

Mandatory Provisions: Where Non-Compliance Kills the Claim

Section 10B(8) — Declaration to Opt Out of EOU Exemption

The most significant recent ruling on mandatory compliance is PCIT-III, Bangalore v. M/s. Wipro Limited, Civil Appeal No. 1449 of 2022 (Supreme Court, July 11, 2022). The Court analysed Section 10B(8) which requires a 100% EOU, if it wishes to opt out of the Section 10B deduction and instead carry forward its losses, to file a written declaration with the Assessing Officer before the due date for filing the return of income under Section 139(1).

The Court held that BOTH the following conditions are mandatory:

• Condition 1 (Mandatory): Filing a written declaration in the prescribed form with the Assessing Officer.
• Condition 2 (Mandatory): Filing this declaration BEFORE the due date for filing the return of income under Section 139(1) — not on the due date, not after the due date.

Wipro Principle: Exemption and deduction provisions must be “strictly and literally complied with.” The time limit within which a declaration must be filed is mandatory. A revised return under Section 139(5) cannot be used to withdraw a claim made in the original return and substitute a fundamentally different tax position.

— PCIT-III, Bangalore v. M/s. Wipro Ltd., Civil Appeal No. 1449/2022 (SC, July 11, 2022)

Before Wipro, several High Courts (including Karnataka HC in the same matter) had held that the time limit in Section 10B(8) was directory — that filing after the due date but before the assessment was completed should suffice. The Supreme Court decisively overruled this position.

Section 10A / 10AA — Return Filing Deadline is Mandatory

The ITAT Special Bench in M/s. Saffire Garments v. ITO, (2013) 140 ITD 6 (ITAT Special Bench, Rajkot) dealt with the Proviso to Section 10A(1A), which provides that ‘no deduction under this section shall be allowed to an assessee who does not furnish a return of his income on or before the due date specified under Section 139(1).’

The assessee filed its return for AY 2006-07 on January 31, 2007, when the due date was December 31, 2006 — a delay of one month. The AO denied the Section 10A deduction. The assessee argued the proviso was directory.

The Special Bench held the proviso mandatory. Its reasoning: The Income Tax Act, 1961 provides multiple consequences for late filing of a return — interest under Section 234A, penalty, and forfeiture of deductions. Since the interest and penalty consequences for late filing are mandatory, the deduction forfeiture consequence (Section 10A proviso) must also be mandatory. All three are consequences of the same non-compliance — filing the return late. They must be read consistently.

Key Principle from Saffire Garments:

Multiple consequences attached to the same default must be read consistently. If interest and penalty for late return filing are mandatory, the forfeiture of deduction for late return filing is equally mandatory. One consequence cannot be “directory” while others are “mandatory.”

Section 80AC — The Statutory Mandatory Condition for All Chapter VI-A Deductions

Section 80AC of the Income Tax Act, 1961 (as amended with effect from AY 2018-19 to cover all Chapter VI-A deductions) provides: ‘Notwithstanding anything contained in this Chapter, where in computing the total income of an assessee of the previous year relevant to the assessment year, any deduction is admissible under any provision of this Chapter, no such deduction shall be allowed to him unless he furnishes a return of his income for such assessment year on or before the due date specified under sub-section (1) of section 139.’

This provision covers deductions under Sections 80-IA, 80-IB, 80-IC, 80-ID, 80-IE, 80JJA, 80JJAA, 80LA, 80P, 80PA, 80QQB, 80RRB — essentially every profit-linked, sector-specific, and special category deduction under the Act.

In Uma Developers v. ITO, ITA No. 2164/Mum/2016 (ITAT Mumbai, October 11, 2019), the ITAT confirmed that Section 80AC is mandatory: the assessee filed its return for AY 2012-13 on March 31, 2013, when the due date was September 30, 2012 — a delay of six months. The Section 80IB(10) deduction (for housing projects) was denied.

The Delhi ITAT in Jajpal Singh Bisht, Delhi v. ITO, ITA No. 1244/Del./2017, confirmed this: ‘The conditions laid down in Section 80AC are mandatory and not directory, as also affirmed by the ITAT Special Bench in Saffire Garments v. ITO, 28 Taxmann.com 27.’

The Reassessment Story: Revenue’s Procedural Obligations Are Also Mandatory

The mandatory/directory distinction cuts both ways. Just as taxpayers are held strictly to their compliance obligations, Revenue is also held strictly to its procedural obligations — particularly in the highly litigated area of reassessment under Section 148 of the Income Tax Act.

Background: The Finance Act 2021 Reassessment Overhaul

The Finance Act, 2021 completely overhauled the reassessment provisions, introducing Sections 148, 148A, 149, and 151 in place of the older regime. Key features of the new regime include:

• Section 148A: Before issuing a notice under Section 148, the Assessing Officer must (a) conduct an inquiry with prior approval of the specified authority; (b) provide the assessee with an opportunity to respond to the material; and (c) pass an order with reasons for reopening.
• Section 149: Stricter limitation periods — 3 years for most cases, 10 years only if the escaped income is ₹50 lakhs or more.
• Section 151: Higher authority required to sanction reassessment — the Commissioner/Principal Commissioner rather than the Joint Commissioner for older assessments.
• These safeguards were held mandatory by the Supreme Court in Ashish Agarwal v. Union of India, (2022) 444 ITR 1 (SC).

The TOLA Controversy

A major dispute arose from the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (TOLA), enacted in the context of the COVID-19 pandemic. TOLA extended the time limits for completion of various actions under tax laws that fell for completion between March 20, 2020 and March 31, 2021. Revenue relied on TOLA to issue reassessment notices between April 1, 2021 and June 30, 2021, even though the new regime under the Finance Act 2021 had come into force from April 1, 2021.

Multiple High Courts — including Delhi, Bombay, Allahabad, and others — invalidated these notices, holding that TOLA’s extension did not survive into the new regime. Revenue challenged these decisions before the Supreme Court.

Union of India v. Rajeev Bansal (2024 INSC 754)

In Union of India v. Rajeev Bansal, Civil Appeal No. 8629 of 2024 (Supreme Court, decided October 3, 2024, 2024 INSC 754), the Supreme Court resolved the controversy in a detailed, multi-issue ruling:

• TOLA’s Extension Applies: The Supreme Court held that TOLA extends the time limits under the Income Tax Act as it exists from time to time — including the new regime. Reassessment notices issued between April 1 and June 30, 2021 for assessments time-barring during the COVID period are valid.
• New Regime’s Procedural Safeguards Are Mandatory: However, all such notices must comply with the mandatory procedural requirements of the new regime — Section 148A opportunity, Section 151 sanction from the higher authority, and material disclosure to the assessee.
• Limits on TOLA: Only assessments where the original time limit fell between March 20, 2020 and March 31, 2021 qualify for TOLA’s extension. TOLA cannot extend time limits for assessments where the original limitation period had already expired before the COVID period.
• Notices within the surviving period: Valid. Notices outside the surviving period: Time-barred and void.
• The decision validated approximately 90,000 reassessment notices nationwide while also protecting taxpayers from notices that exceeded the surviving limitation period.

Key Takeaway from Rajeev Bansal (2024):

Procedural extension provisions (TOLA) are interpreted favouring Revenue on their scope — but the mandatory safeguards protecting taxpayers (Section 148A procedure, higher authority sanction) are also mandatory and fully enforced. Revenue cannot use TOLA to bypass taxpayer protections.

— Union of India v. Rajeev Bansal, CA No. 8629/2024 (SC, October 3, 2024)

2025–2026 Updates: New Judgments Confirming the Framework

DIT v. American Express Bank Ltd. (Supreme Court, December 15, 2025)

In Director of Income Tax v. M/s. American Express Bank Ltd., Civil Application No. 8291 of 2015 (Supreme Court, decided December 15, 2025), the Court interpreted Section 44C of the Income Tax Act, 1961 — a special provision governing the deduction of head office expenditure by non-resident assessees.

American Express Bank, a non-resident banking company, claimed full deduction under Section 37(1) for head office expenses incurred exclusively for its Indian branches, arguing that Section 44C’s 5% ceiling applied only to ‘common’ expenses, not ‘exclusive’ expenses.

The Supreme Court held in Revenue’s favour: Section 44C is a special non-obstante provision that overrides Section 37(1). The definition of ‘head office expenditure’ is broad — covering all executive and general administrative expenses incurred outside India — and does not distinguish between common and exclusive expenses. Once the expenditure falls within the definition, the 5% ceiling applies. The interpretation favouring Revenue on the scope of a special limiting provision is consistent with the Dilip Kumar framework — the assessee failed to bring itself clearly within an exception to the ceiling.

Hyatt International Southwest Asia Ltd. v. CIT (Supreme Court, July 24, 2025)

In Hyatt International Southwest Asia Ltd. v. Commissioner of Income Tax, the Supreme Court confirmed the existence of a Fixed Place Permanent Establishment (PE) in India for a UAE-based company providing strategic oversight services to Indian hotels under the India-UAE DTAA.

Hyatt-UAE argued it had no exclusive or fixed premises in India and that its employees’ presence was intermittent. The Court rejected this, holding that: (a) the ‘at disposal’ test for PE does not require legal ownership or exclusive occupation; (b) sustained operational control — including over human resources, procurement, marketing, and branding — suffices; and (c) economic substance overrides legal form in PE determination.

The ruling is significant for interpretation: where a taxpayer argues it falls outside the scope of a taxing provision (here, the PE article of the DTAA) through a narrow, technical reading, courts will apply a purposive, substance-over-form analysis — which in this case favoured Revenue.

The Income Tax Act, 2025: Continuity of Procedural Principles

The Income Tax Act, 2025 came into force on April 1, 2026, replacing the 1961 Act. The 2025 Act is a structural and linguistic reorganisation, rather than a substantive overhaul. Key continuities relevant to the mandatory vs. directory framework in income tax include:

Important Note for Practitioners (From April 1, 2026):

All filings, assessments, appeals and litigations arising from the Assessment Year 2026-27 onwards will be governed by the Income Tax Act, 2025. However, matters relating to AY 2025-26 and earlier continue to be governed by the Income Tax Act, 1961. Cases from both Acts will run concurrently in courts and tribunals for several years.

All the mandatory/directory precedents discussed in this article are equally applicable to the new Act’s equivalent provisions.

Complete Mandatory vs. Directory Reference Table (Income Tax Law)

The Practitioner’s Action Checklist

Based on the entire body of case law analysed in this article, here is a complete checklist for income tax practitioners advising clients on procedural compliance:

For Taxpayers Claiming Deductions / Exemptions:

• Treat every condition attached to a deduction or exemption as mandatory unless there is a specific Supreme Court ruling holding it directory.
• Never miss the return filing due date under Section 139(1) if you are claiming any Chapter VI-A deduction. Section 80AC (or its 2025 Act equivalent) will forfeit your deduction — no exceptions.
• If you need to opt out of Section 10B/10A/10AA, the declaration must be filed before the return due date, not with the revised return.
• Do not rely on a revised return to take a fundamentally different tax position from the original return (Wipro ruling).
• File all audit reports and certification forms required as conditions for deductions before or along with the original return.
• If you have missed a deadline due to genuine cause, cite Section 273B (reasonable cause) in your written submissions and document the cause contemporaneously.

For Taxpayers Facing Reassessment Notices:

• Verify whether the notice is issued under the old regime (pre-April 1, 2021) or new regime (post-April 1, 2021).
• Under the new regime, check: (a) Was the Section 148A(b) opportunity given? (b) Was the Section 148A(d) order passed with reasons? (c) Was sanction obtained from the correct authority under Section 151?
• Under the TOLA extension, check: Did the original limitation period fall between March 20, 2020 and March 31, 2021? If the original period had expired before March 20, 2020, TOLA does not help Revenue.
• Under Rajeev Bansal (2024), notices issued April 1 – June 30, 2021 for assessments in the COVID window are valid — but must still comply with new regime procedural safeguards.
• Any reassessment notice not satisfying these mandatory conditions is void and should be challenged.

Conclusion

The mandatory vs. directory distinction in Indian income tax law is not a mere academic exercise. It determines whether a taxpayer retains or loses a deduction worth crores, and whether a reassessment notice survives or is quashed. The period 2018–2026 has produced a coherent, principled framework:

• Conditions attached to exemptions and deductions are mandatory. Miss them and you lose the benefit — regardless of the reason.
• Revenue’s own procedural obligations (Section 148A procedure, Section 151 sanction, TOLA’s surviving period) are also mandatory. Revenue cannot bypass them.
• The Income Tax Act, 2025 preserves this framework. All Supreme Court and High Court precedents on mandatory/directory provisions apply to the new Act’s equivalent provisions.
• The national exchequer interest is a legitimate consideration in interpreting exemption conditions — but it cannot override the constitutional requirement of clear statutory authority for any tax levy.

For every income tax practitioner in India, the message from the courts is clear: procedural compliance is not optional — it is substantive. File on time, file the right forms, and make the right election in the original return. The courts will not save you if you do not.

References

1. PCIT-III, Bangalore v. M/s. Wipro Ltd., Civil Appeal No. 1449 of 2022 (SC, July 11, 2022)
2. EY Tax Alert: Supreme Court — Strict Interpretation of Exemption Provision, Mandatory Compliance (July 2022)
3. Union of India v. Rajeev Bansal, CA No. 8629 of 2024 (SC, October 3, 2024) — 2024 INSC 754
4. LinkedIn Analysis: Supreme Court Settles TOLA Effect in Rajeev Bansal
5. AZB Partners: Reassessment Notices — TOLA Passes the Test of Limitation (December 2024)
6. Taxmann Analysis: Rajeev Bansal’s Case Impact Analysis (2025)
7. M/s. Saffire Garments v. ITO, ITAT Special Bench, Rajkot, (2013) 140 ITD 6
8. Uma Developers v. ITO, ITA No. 2164/Mum/2016, ITAT Mumbai (2019)
9. Jajpal Singh Bisht v. ITO, ITA No. 1244/Del./2017 (ITAT Delhi, 2017)
10. Ashish Agarwal v. Union of India, (2022) 444 ITR 1 (SC)
11. Commissioner of Customs v. Dilip Kumar & Co., (2018) 9 SCC 1 (Constitution Bench)
12. DIT v. M/s. American Express Bank Ltd., CA No. 8291/2015 (SC, December 15, 2025) — KPMG Flash News
13. DIT v. American Express Bank Ltd. — King Stubb & Kasiva Analysis
14. Hyatt International Southwest Asia Ltd. v. CIT (SC, July 24, 2025) — Alvarez & Marsal Analysis
15. Hyatt Ruling — EY Tax Alert (July 2025)
16. T. Rajan v. T.P.M. Sahir, (2003) 9 TMI 765 (Supreme Court of India)
17. SCC Online Blog: Tax Law Developments in 2025 — Key Judgments
18. Income Tax Act, 2025 — Official Notified Text (Income Tax Department)
19. ClearTax: Income Tax Act 2025 Section Numbers — Old vs New Mapping
20. Taxmann Analysis: Mandatory v. Directory — Pandora’s Box Opened Again?