2024 (5) TMI 1592 - AT - Income Tax

Denial of deduction u/s 11 - audit report in Form 10B was not filed along with the return of income but filled belatedly - procedural OR mandatory provision HELD THAT - We find that the assessee uploaded audit report under Form 10B dated 28/08/2018 on ITBA portal on 12/12/2019. The assessee claimed that the audit report was obtained before filing return of income. There is no material to disbelieve the contention of the AR for the assessee that audit report was obtained well in time. We also find that audit report was filed/ uploaded on ITBA portal before adjudication of appeal by ld CIT(A). Therefore considering the decisions of Gujarat Oil Allied Industries 1992 (9) TMI 67 - GUJARAT HIGH COURT Gujarat Paghuthan Energy Corporation (P) Ltd. 2014 (7) TMI 345 - GUJARAT HIGH COURT and Zenith Processing Mills 1995 (9) TMI 37 - GUJARAT HIGH COURT and Sakal Relief Fund 2017 (4) TMI 772 - BOMBAY HIGH COURT that uploading of audit report is a procedural provision and should not be construed as mandatory hence we direct the AO to verify the fact and allow appropriate relief to the assessee by following the aforesaid decisions. Grounds of appeal raised by the assessee is allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

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

• Whether the disallowance of the sum claimed as application of income for charitable and religious purposes under Section 11 of the Income Tax Act, 1961, on the ground that the audit report in Form 10B was not filed along with the return of income but uploaded belatedly, was justified.
• Whether the assessing authorities were correct in taxing the gross amount of income received by the assessee-trust instead of taxing the net income after deducting the amount applied to charitable or religious purposes.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Disallowance of exemption under Section 11 due to late filing of Form 10B audit report

Relevant legal framework and precedents: Section 11 of the Income Tax Act, 1961, provides exemption to trusts on income applied for charitable or religious purposes. The procedure mandates filing of an audit report in Form 10B to claim such exemption. However, the question arises whether the filing of Form 10B is a mandatory condition precedent to claim exemption or a procedural requirement.

Several judicial decisions were relied upon by the Tribunal, including:

• CIT vs. Gujarat Oil & Allied Industries (1993) 201 ITR 325 (Gujarat High Court)
• Gujarat Paghuthan Energy Corporation (P) Ltd. vs. DCIT 225 Taxman 70 (Gujarat High Court)
• Zenith Processing Mills vs. CIT 219 ITR 721 (Gujarat High Court)
• CIT vs. Sakal Relief Fund (2017) 81 taxmann.com 396 (Bombay High Court)

These decisions establish that the requirement of filing Form 10B audit report is procedural and should not be construed as mandatory to deny exemption under Section 11.

Court's interpretation and reasoning: The Tribunal observed that the assessee-trust was registered under Sections 12A/12AB and was eligible for exemption. The return of income was filed within the prescribed time, and the audit report in Form 10B was prepared before filing the return but was inadvertently not uploaded on the income tax portal at that time. The audit report was uploaded belatedly before the appellate authority's adjudication.

The Tribunal accepted the assessee's contention that there was no mala fide or attempt to evade compliance, but a procedural lapse by the auditor. It further noted that the audit report was uploaded before the hearing and decision by the Commissioner of Income Tax (Appeals).

Key evidence and findings: The assessee submitted the audit report dated 28/08/2018, which was prepared before filing the return on 29/08/2018, but uploaded only on 12/12/2019. The Tribunal found no material to disbelieve the assessee's claim regarding the timing of audit report preparation and accepted that the delay was inadvertent.

Application of law to facts: Applying the precedents, the Tribunal held that since the audit report was eventually filed before the appellate authority and no substantive prejudice was caused to the revenue, the procedural lapse should not result in denial of exemption.

Treatment of competing arguments: The Department contended that the non-filing of Form 10B with the return disentitled the assessee from claiming exemption under Section 11. However, the Tribunal rejected this strict construction, relying on judicial precedents emphasizing the procedural nature of the requirement.

Conclusions: The Tribunal directed the Assessing Officer to verify the facts and grant appropriate relief to the assessee by allowing the exemption under Section 11, after providing an opportunity of hearing, in line with the cited judicial decisions.

Issue 2: Taxation of gross income instead of net income after application to charitable purposes

Relevant legal framework: Under the Income Tax Act, income of a charitable trust is taxable only to the extent it is not applied for charitable or religious purposes. Section 11 permits deduction of income applied to such purposes from the gross income.

Court's interpretation and reasoning: The Tribunal noted that the assessing officer taxed the gross income received by the trust without allowing deduction for income applied to charitable purposes, which is contrary to the statutory scheme under Section 11.

Key evidence and findings: The assessee's return and audit report demonstrated application of income to charitable activities in education and medical fields, qualifying for exemption.

Application of law to facts: The Tribunal found the assessing officer's approach erroneous as it failed to distinguish between gross receipts and net income after application, thereby inflating taxable income.

Treatment of competing arguments: The Department supported the assessment order, but the Tribunal gave precedence to the statutory provisions and judicial interpretations favoring exemption on net income.

Conclusions: The Tribunal held that the income should be taxed net of amounts applied to charitable or religious purposes and directed the Assessing Officer accordingly.

3. SIGNIFICANT HOLDINGS

The Tribunal succinctly encapsulated the legal position regarding the procedural nature of the audit report filing requirement under Section 11:

"...uploading of audit report is a procedural provision and should not be construed as mandatory..."

This principle was pivotal in allowing the exemption despite the belated filing of Form 10B.

Core principles established include:

• The requirement to file the audit report in Form 10B to claim exemption under Section 11 is procedural and non-compliance thereof should not lead to denial of exemption if the report is filed before adjudication.
• Exemption under Section 11 applies to income net of amounts actually applied for charitable or religious purposes, and taxing gross receipts without such deduction is incorrect.

Final determinations on each issue were:

• The disallowance of exemption on the ground of late filing of audit report was set aside, and the Assessing Officer was directed to grant exemption after verification and hearing.
• The Assessing Officer was directed to tax the net income after application to charitable purposes, not the gross receipts.