2024 (6) TMI 1474 - AT - Income Tax

Disallowing the exemption u/s.11 - appellant being public charitable trust duly registered u/s 12A - minor delay in filing of Audit Report u/s 12A(b) on 09.02.2021 (due date 15.01.2021) due to outbreak of COVID-19 pandemic - adjustment u/s 143(1) - HELD THAT - We usefully refer to the judgment rendered in the case of Association of Indian Panelboard Manufacturer 2023 (3) TMI 1374 - GUJARAT HIGH COURT wherein it has been categorically held that filing of Audit Report in Form 10B along with return of income is only a procedural requirement and cannot be construed as mandatory requirement for the purposes of claiming exemption under Sections 11 and 12 of the Act. The Hon ble Gujarat High Court has thus held that assessee is entitled to exemption claimed which was denied solely due to belated filing of Form 10B. Similar view has been taken in Shree Bhairav Seva Samiti Vs. ITO (Exemption) 2022 (12) TMI 445 - ITAT MUMBAI where the denial of exemption under Section 11 of the Act by CPC u/s 143(1) for non filing of Form 10B within prescribed due date was reversed in consonance with the judicial view available on the issue. No hesitation to hold that the claims of exemption u/s 11 and 12 of the Act by the assessee cannot be denied merely owing to so called delay in filing Audit Report in Form 10B as prescribed under Rule 17B of the Income Tax Rules. The basis for refusal of exemption thus does not survive. AO/CPC is accordingly directed to delete the adjustment made in intimation under Section 143(1) of the Act as attributable to such purported default in belated filing of Form 10B. Assessee appeal allowed.

Summary

The core legal questions considered in this appeal pertain to the denial of exemption under Sections 11 and 12 of the Income Tax Act, 1961, to a public charitable trust on the ground of delayed filing of the Audit Report in Form 10B. Specifically, the issues are:

1. Whether a minor delay in filing the Audit Report under Section 12A(b) of the Income Tax Act, 1961, particularly due to the COVID-19 pandemic and related procedural difficulties, can justify denial of exemption under Section 11 of the Act to a registered public charitable trust.

2. Whether the addition/disallowance of income on account of non-allowance of exemption under Section 11 or other applicable provisions, resulting in assessment of the trust on gross receipts without allowing any expenditure, is justified.

Issue 1: Delay in Filing Audit Report and Its Impact on Exemption under Section 11

The relevant legal framework includes Section 11 of the Income Tax Act, which provides exemption to income derived from property held for charitable or religious purposes, subject to compliance with procedural requirements under Section 12A and Rule 17B of the Income Tax Rules, 1962. The Audit Report in Form 10B must be filed to claim exemption, and Rule 17B prescribes the timeline for such filing.

The Assessing Officer (AO) denied exemption on the ground that the Audit Report was not filed within the prescribed due date of 15.01.2021, though the return of income was filed on 09.02.2021, within the extended due date of 15.02.2021. The Commissioner of Income Tax (Appeals) upheld this denial, emphasizing the procedural non-compliance.

The assessee contended that the delay was minor (25 days beyond the due date for the Audit Report) and attributable to the unprecedented COVID-19 pandemic, which caused nationwide lockdowns and restricted movement. The assessee highlighted government press releases extending the due dates for filing returns and the Supreme Court's order excluding the pandemic period from limitation calculations. The Audit Report was obtained within the original due date but filed late due to procedural difficulties.

The Court referred to authoritative precedents, notably the Gujarat High Court's ruling in Association of Indian Panelboard Manufacturer vs. DCIT, which held that the filing of the Audit Report in Form 10B is a procedural requirement and not a mandatory condition for claiming exemption under Sections 11 and 12. The Court also relied on a coordinate bench decision from the Mumbai Tribunal in Shree Bhairav Seva Samiti vs. ITO (Exemption), which reversed denial of exemption for similar reasons.

Applying these precedents, the Court reasoned that a minor delay in filing the Audit Report, especially under exceptional circumstances like the COVID-19 pandemic, should not result in denial of exemption. The Court emphasized that the procedural lapse did not affect the substantive entitlement to exemption, and the trust had complied with the substantive requirements by filing the return and obtaining the Audit Report.

Competing arguments centered on strict adherence to procedural timelines versus equitable relief in extraordinary circumstances. The Court favored a purposive interpretation that avoids penalizing the assessee for technical delays beyond their control, consistent with judicial precedents.

The Court concluded that the denial of exemption solely on the ground of delayed filing of Form 10B was unjustified and directed the AO to delete the addition made on this account.

Issue 2: Disallowance of Expenditure and Assessment on Gross Receipts

The second issue arises from the consequence of denial of exemption: the trust's income was assessed on gross receipts without allowing any expenditure, resulting in an addition of Rs. 10,67,052/-.

The Court observed that since the denial of exemption was based solely on the procedural delay in filing the Audit Report, which has been set aside, the consequential disallowance of expenditure and assessment on gross receipts also lacks justification.

The Court did not delve into detailed analysis on this issue separately, as it was intrinsically linked to the first issue. By restoring the exemption, the Court implicitly restored the entitlement to claim expenditure deductions as per the Act.

The Court directed that the addition/disallowance be deleted accordingly, thereby allowing the trust to be assessed on net income after expenditure.

Significant Holdings

The Court held: "the claims of exemption under Sections 11 and 12 of the Act by the assessee cannot be denied merely owing to so called delay in filing Audit Report in Form 10B as prescribed under Rule 17B of the Income Tax Rules. The basis for refusal of exemption thus does not survive."

It established the principle that procedural compliance, such as timely filing of the Audit Report, is not a mandatory condition for claiming exemption under Sections 11 and 12, especially where delay is minor and caused by exceptional circumstances like the COVID-19 pandemic.

The Court emphasized a purposive and equitable approach, aligned with judicial precedents, to prevent technical or procedural defaults from defeating substantive rights to exemption.

Consequently, the Court allowed the appeal, set aside the addition made under Section 143(1), and restored the exemption and related benefits to the public charitable trust.