2024 (9) TMI 1750 - AT - Income Tax

Denial of exemption u/s 10(23C)(vi) - assessee has not furnished the audit report on the prescribed Form before specified due date HELD THAT - We find that the prescribed date for the assessee for filing audit report on Form 10BB is 30.09.2022 but the same was extended up to 07.10.2022. The audit report on Form 10BB is to be filed by the auditor. In the instant case the auditor of the assessee trust after having audited the financial statement prepared the audit report but in place of Form 10BB inadvertently furnished the information on Form 10B and uploaded it on 10.09.2022. It thus means that the audit report though on wrong Form has been filed by the auditor before the specified due date. We observe that the auditor on realising the mistake uploaded the correct Form 10BB on 20.02.2023. We thus find that in the instant case first of all the auditor of the assessee trust has duly carried out the audit work and prepared the audited financial statement and filed the audit report on Form 10BB before the prescribed due date. Secondly the correct audit report has also been furnished prior to the order of CPC. We also find that in the CPC order there is only mention about the Form 10B and not the Form 10BB which was subsequently filed. CIT(A) who was provided with all the information has not taken the cognizance of the fact that for the inadvertent mistake of the auditor in filing wrong Form assessee should not have been subjected to the huge additions. Therefore as filing of the audit report is directory in nature and the said formality has duly been completed we therefore fail to find any merit in the finding of the CIT(A) denying claim of exemptions u/s 10(23C)(vi) and the same is hereby reversed. The jurisdictional AO is directed to grant the exemption claimed by the assessee u/s.10(23C)(vi) of the Act in accordance with law. Appeal of the assessee is allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in this appeal are:

(a) Whether the assessee, a public trust running an educational institution, is entitled to exemption under section 10(23C)(vi) of the Income Tax Act, 1961, despite the audit report being filed in the wrong prescribed form (Form 10B instead of Form 10BB) before the specified due dateRs.

(b) Whether the subsequent filing of the correct audit report in Form 10BB after the due date but before the processing of the return under section 143(1) can cure the initial defect of filing the audit report in the wrong formRs.

(c) Whether the delay or error in filing the audit report in the prescribed form constitutes a substantive default leading to denial of exemption, or whether it is a technical and condonable fault that should not result in denial of exemptionRs.

(d) Whether the assessing officer and the Commissioner of Income Tax (Appeals) erred in denying the exemption fully and restricting it only to the net income after expenditure, instead of allowing the full exemption claimed as per the audit reportRs.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) and (b): Validity of exemption claim despite initial filing of audit report in wrong form (Form 10B) and subsequent filing of correct form (Form 10BB)

Relevant legal framework and precedents: Section 10(23C)(vi) of the Income Tax Act provides exemption to educational institutions subject to conditions including filing of an audit report in the prescribed form (Form 10BB) by the specified date as per Rule 16CC of the Income Tax Rules. The prescribed due date for filing Form 10BB was 30.09.2022, extended to 07.10.2022.

Court's interpretation and reasoning: The Tribunal noted that the auditor filed an audit report on 10.09.2022 but inadvertently filed Form 10B (meant for charitable institutions) instead of Form 10BB (meant for educational institutions). The correct Form 10BB was subsequently uploaded on 20.02.2023, well before the CPC processed the return under section 143(1) on 31.03.2023.

The Tribunal observed that although the initial filing was on the wrong form, the audit report was indeed filed before the specified due date, and the correct form was furnished before the return was processed. The Tribunal emphasized that the audit work was duly carried out and the audited financial statements were prepared and filed.

Key evidence and findings: The audit report on Form 10B was filed on 10.09.2022, before the due date. The correct Form 10BB was filed on 20.02.2023, prior to CPC's order dated 31.03.2023. The CPC order only mentioned the Form 10B and did not take cognizance of the subsequent filing of Form 10BB.

Application of law to facts: The Tribunal found that the filing of the audit report is a directory requirement and not mandatory in a manner that a mere technical error in the form used should not result in denial of exemption. The subsequent rectification by filing the correct form before processing of the return was held to cure the defect.

Treatment of competing arguments: The Revenue argued that the exemption should be denied as the audit report in Form 10BB was not filed by the specified due date. The assessee contended that the audit report was filed on time albeit in the wrong form and corrected subsequently. The Tribunal sided with the assessee, holding that the error was inadvertent and rectified in time.

Conclusions: The Tribunal concluded that the assessee was entitled to exemption under section 10(23C)(vi) despite the initial filing of the audit report in the wrong form, as the correct form was filed before the return processing, and the defect was technical and curable.

Issue (c): Whether the delay or error in filing audit report is substantive default or technical fault

Relevant legal framework and precedents: The law requires audit reports to be filed in prescribed forms by specified dates, but courts have held that procedural lapses which do not affect substantive compliance should be viewed leniently.

Court's interpretation and reasoning: The Tribunal held that the lapse arising from the auditor's inadvertent filing of the wrong form and subsequent rectification is a "technical and condonable fault of minor nature." The Tribunal emphasized that denying exemption on such grounds would be "grossly unjust and unreasonable."

Key evidence and findings: The auditor had carried out the audit and prepared the report correctly. The wrong form was filed due to inadvertence and corrected promptly.

Application of law to facts: The Tribunal applied the principle that procedural requirements should not be allowed to defeat substantive rights, especially when the error was rectified before any adverse action.

Treatment of competing arguments: The Revenue insisted on strict compliance with the prescribed form and due date, while the assessee argued for a liberal approach. The Tribunal adopted the latter view.

Conclusions: The Tribunal concluded that the error was technical and condonable, and should not lead to denial of exemption.

Issue (d): Whether the exemption should be restricted to net income after expenditure or allowed fully as claimed

Relevant legal framework and precedents: Section 10(23C)(vi) exempts income of educational institutions subject to conditions. The question was whether exemption applies to gross receipts or net income after deducting expenditure.

Court's interpretation and reasoning: The CIT(A) had restricted exemption to the extent of expenditure debited in the Income and Expenditure Account (Rs. 11,685,86) instead of the full amount claimed (Rs. 14,449,989). The Tribunal found this approach erroneous as the entire income was eligible for exemption under the law, given the audit report was filed and the institution met the conditions.

Key evidence and findings: The audit report and financial statements showed the income and expenditure, and the assessee claimed exemption on the full income as per section 10(23C)(vi).

Application of law to facts: The Tribunal held that since the audit report was ultimately filed correctly and conditions met, the full amount claimed as exempt should be allowed.

Treatment of competing arguments: The Revenue maintained the restriction, while the assessee argued for full exemption. The Tribunal accepted the assessee's submissions.

Conclusions: The Tribunal directed the AO to grant the exemption claimed fully under section 10(23C)(vi).

3. SIGNIFICANT HOLDINGS

The Tribunal held:

"Under the given facts and circumstances of the case, as filing of the audit report is directory in nature and the said formality has duly been completed, we, therefore, fail to find any merit in the finding of the Ld. CIT(A) denying claim of exemptions u/s 10(23C)(vi) of the Act and the same is hereby reversed."

Core principles established include:

- Filing of audit report in the prescribed form is a directory requirement and not mandatory to the extent that an inadvertent error in the form used, if rectified before the return processing, should not result in denial of exemption.

- Technical and minor procedural lapses, especially those arising from auditor's inadvertence, are condonable and should not defeat substantive rights of the assessee.

- The exemption under section 10(23C)(vi) should be allowed in full where conditions are met and audit report is duly filed, rather than being restricted to net income after expenditure without valid justification.

- The Tribunal directed the jurisdictional Assessing Officer to grant the exemption claimed by the assessee under section 10(23C)(vi) in accordance with law.