2025 (5) TMI 1500 - HC - Income Tax

Denial of exemption u/s 12A - Rejecting the petitioner s application for condonation of delay in filing the Audit Report in Form 10B under Rule 17B of the Income Tax Rules 1962 exercising power under Section 119(2)(b) - condition to consider genuine hardship HELD THAT - Since the petitioner was required to file the Audit Report in Form 10B in terms of Section 12A of the IT Act read with Rule 17B of the IT Rules on or before 15.01.2021 with respect to the Assessment Year 2020-21 but the same was filed on 31.03.2021 with a delay of seventy-six days the same would be treated to be filed within the period stipulated under the Circular No.16/2024 dated 18.11.2024 and taking cue from the observations made in Basanti Shial Vrs. Proper Officer 2022 (3) TMI 1303 - ORISSA HIGH COURT and Atlas PVC Pipes Limited Vrs. State of Odisha 2022 (7) TMI 130 - ORISSA HIGH COURT referring to extension of period of limitation as considered by the Hon ble Supreme Court in Suo Motu Writ Petition (C) 2022 (1) TMI 385 - SC ORDER this Court is of the considered view that sufficient cause has been shown that the petitioner had genuine hardship in complying with the statutory requirement. Therefore it is warranted to be observed that the application for condonation of delay of seventy-six days in filing Audit Report in Form 10B should have received liberal consideration and instead of showing pedantic approach the Commissioner of Income Tax ought to have been more pragmatic. Commissioner of Income Tax (Exemptions) having not appreciated the factual aspect in proper perspective and relying on Circular of the year 2015 which has been superseded by Circular dated 18.11.2024 the Order dated 17.02.2025 cannot be said to have passed in consonance with the factual and legal position as discussed hereinabove. Having not perceived the genuine hardship of the petitioner in right earnest the Commissioner of Income Tax (Exemptions) appears not to have applied his conscientious discretion to the fact- situation of the matter. Considering the reasons assigned by the petitioner which prevented it from complying with statutory requirement the Order dated 17.02.2025 passed by the Commissioner of Income Tax is liable to be set aside. Ergo finding that there was genuine hardship faced by the petitioner during the relevant period and the refusal to condoning the delay invoking power under Section 119(2) of the IT Act being arbitrary exercise of discretion to the fact-situation Order dated 17.02.2025 passed by the Commissioner of Income Tax (Exemption) Hyderabad-opposite party No.2 (Annexure-1) is hereby set aside. In consequence thereof the Commissioner of Income Tax (Exemptions)-opposite party No.2 is directed to grant all consequential relief to the petitioner by taking into account the Audit Report in Form 10B pertaining to the Assessment Year 2020-21 submitted on 31.03.2021 as if the same is filed within period specified invoking Section 119(2)(b) of the Income Tax Act 1961. Accordingly the Order raising demand for the Assessment Year 2020-21 vide intimation under Section 143 does require modification after examination of the merit the Audit Report in Form 10B furnished under Section 12A of the IT Act read with Rule 17B of the IT Rules. The matter is remitted to the CIT (Exemptions) to examine the merit of Audit Report in Form 10B prescribed under Rule 17B of the IT Rules with reference to returns filed under Section 139 of the IT Act and modify the intimation under Section 143 (Annexure-2) accordingly.

Summary

The core legal questions considered by the Court in this matter are:

1. Whether the Commissioner of Income Tax (Exemption) was justified in rejecting the petitioner's application for condonation of delay in filing the Audit Report in Form 10B under Rule 17B of the Income Tax Rules, 1962, for the Assessment Year 2020-21, exercising power under Section 119(2)(b) of the Income Tax Act, 1961.

2. Whether the delay of seventy-six days in filing the Audit Report was attributable to "genuine hardship" and "reasonable cause" in light of the COVID-19 pandemic and related government restrictions.

3. Whether the Commissioner erred in relying on an outdated Circular dated 09.06.2015 instead of the superseding Circular dated 18.11.2024 issued by the Central Board of Direct Taxes (CBDT) in considering the condonation application.

4. The legal effect of the various judicial pronouncements and government notifications/orders extending limitation periods and granting relief during the COVID-19 pandemic on the statutory timelines applicable to filing the Audit Report and related compliance.

5. Whether the impugned intimation/order under Section 143(1) of the Income Tax Act dated 30.11.2021 raising demand on the petitioner should be modified in light of the condonation of delay and acceptance of the Audit Report.

Issue-wise Detailed Analysis

Issue 1 & 3: Legality of rejection of condonation application and reliance on superseded Circular

The relevant legal framework includes Section 119(2)(b) of the Income Tax Act, which empowers the Commissioner of Income Tax to admit applications or claims for exemption or relief after the expiry of the prescribed period if there is "genuine hardship". Rule 17B prescribes the filing of Audit Report in Form 10B for charitable trusts claiming exemption under Section 12A.

The CBDT Circular No.9/2015 dated 09.06.2015, which was relied upon by the Commissioner in rejecting the application, had been expressly superseded by Circular No.16/2024 dated 18.11.2024. The latter Circular authorizes Commissioners to condone delay up to 365 days in filing Form 10B for Assessment Years 2018-19 and onwards, provided reasonable cause and genuine hardship are demonstrated, and sets a three-year limitation for filing such condonation applications.

The Court found that the Commissioner erroneously relied on the outdated Circular of 2015, which had ceased to operate upon supersession by the 2024 Circular. The petitioner's application was well within the three-year period and the delay was less than 365 days, making the Commissioner the competent authority to consider the condonation on merits.

The Court emphasized the binding nature of authoritative pronouncements and the obligation of subordinate authorities to be acquainted with and follow such law. The failure to consider the superseding Circular constituted a legal error.

Issue 2: Whether delay was due to genuine hardship and reasonable cause in context of COVID-19 pandemic

The petitioner attributed the delay to difficulties caused by the COVID-19 pandemic, including restricted movement due to government-imposed lockdowns, limited staff functioning, and logistical challenges in coordinating with the Chartered Accountant located in a different district.

The Court noted the extensive judicial and governmental recognition of the pandemic as a force majeure event. It referred to multiple Supreme Court orders extending limitation periods for judicial and quasi-judicial proceedings from March 15, 2020, to February 28, 2022, and various High Court decisions acknowledging pandemic-related hardships as sufficient cause for condonation of delay.

Further, the Court examined statutory provisions like the Epidemic Diseases Act, 1897, and the Disaster Management Act, 2005, which empowered government authorities to impose restrictions and penalties during the pandemic, underscoring the extraordinary nature of the circumstances.

The Court also relied on the CBDT's own Circular dated 30.04.2021 extending timelines for various Income Tax compliances for Assessment Year 2020-21, including filing of returns.

Judicial precedents were cited extensively to elucidate the meaning of "reasonable cause" and "genuine hardship," emphasizing a liberal and pragmatic approach rather than a pedantic or hyper-technical one. The Court underscored that genuine hardship must be understood in context, and that litigants do not benefit from delay but often suffer from it.

The Court found the petitioner's explanation plausible and consistent with the force majeure concept and pandemic-related restrictions, warranting condonation of delay.

Issue 4: Effect of judicial pronouncements and government notifications on limitation and compliance timelines

The Court analyzed the Supreme Court's suo motu orders in Suo Motu Writ Petition (Civil) No. 3/2020 and subsequent related orders, which extended limitation periods for judicial and quasi-judicial proceedings due to COVID-19. It clarified that these extensions applied to appeals, petitions, and similar proceedings but not to all statutory compliances indiscriminately.

However, the Court observed that the Income Tax Department itself issued Circulars relaxing timelines for filing returns and related documents for the Assessment Year 2020-21, recognizing the pandemic's impact.

The Court also examined clarifications issued by tax authorities regarding the scope of the Supreme Court's orders and their application to quasi-judicial proceedings, appeals, and original adjudications under GST laws, drawing parallels to Income Tax proceedings.

It was concluded that the petitioner was entitled to benefit from these extensions and relaxations, as the delay occurred during the pandemic period and was due to circumstances beyond control.

Issue 5: Consequences on the demand raised under Section 143(1) of the Income Tax Act

The petitioner's claim for exemption under Section 12A was rejected due to non-filing of the Audit Report within the prescribed period, resulting in a demand of Rs. 22,01,930/-.

Since the Court found that the delay in filing the Audit Report was liable to be condoned, the petitioner's claim for exemption could not be denied solely on the ground of delay.

The Court directed the Commissioner of Income Tax (Exemptions) to reconsider the Audit Report filed on 31.03.2021 as if it were filed within time, and to modify the impugned intimation/order under Section 143(1) accordingly after examining the merits.

Competing Arguments and Treatment

The Department contended that statutory timelines are sacrosanct and cannot be extended except by proper notification or circular. It argued that the petitioner had knowledge of the timelines and failed to comply, and that the Commissioner's discretion to reject the condonation application should not be interfered with.

The Court acknowledged the Department's position on the sanctity of timelines but emphasized that the Commissioner's discretion must be exercised judiciously, especially in the extraordinary context of the pandemic and in light of superseding Circulars and judicial pronouncements.

The Court found the Department's reliance on the outdated Circular and strict approach inconsistent with the legal framework and pandemic realities.

Conclusions

The Court concluded that the petitioner demonstrated sufficient cause amounting to "genuine hardship" and "reasonable cause" to justify condonation of the seventy-six days' delay in filing the Audit Report in Form 10B for Assessment Year 2020-21.

The Commissioner of Income Tax (Exemptions) erred in rejecting the condonation application by relying on a superseded Circular and failing to apply the law pragmatically in light of the pandemic.

The impugned order dated 17.02.2025 rejecting the condonation application was set aside, and the Commissioner was directed to consider the Audit Report as filed within time and to modify the demand accordingly.

Significant Holdings

"The Commissioner of Income Tax apparently proceeded erroneously by placing reliance on Circular dated 09.06.2015. The application for condonation of delay in filing Audit Report should have been admitted in terms of Circular dated 18.11.2024 and decided. The Order dated 17.02.2025, thus, does suffer from illegality inasmuch as the Circular dated 09.06.2015 has been superseded by the later Circular. On the date of passing Order refusing to condone the delay, said Circular dated 09.06.2015 did cease to exist."

"The pandemic situation prevailed over since March, 2020 till February, 2022 and COVID-19 virus impacted the litigants largely by preventing them from complying with the statutory requirement. By virtue of intervention of the Court, the stipulation as to the statutory period has been extended from time to time."

"The phrase 'genuine hardship' used in Section 119(2)(b) should have been construed liberally... The Legislature has conferred the power to condone delay to enable the authorities to do substantive justice to the parties by disposing of the matters on the merits... When substantial justice and technical considerations are pitted against each other, the cause of substantial justice deserves to be preferred."

"The Commissioner of Income Tax (Exemptions) having not appreciated the factual aspect in proper perspective and relying on Circular of the year 2015, which has been superseded by Circular dated 18.11.2024, the Order dated 17.02.2025 cannot be said to have passed in consonance with the factual and legal position as discussed hereinabove."

"The petitioner was entitled to the benefit of exclusion of limitation period as stipulated by the Hon'ble Supreme Court in its orders extending limitation from March 15, 2020 till February 28, 2022, and the delay in filing Audit Report due to COVID-19 pandemic constitutes 'reasonable cause' and 'genuine hardship'."

"The Commissioner of Income Tax (Exemption), Hyderabad-opposite party No.2 is directed to grant all consequential relief to the petitioner by taking into account the Audit Report in Form 10B pertaining to the Assessment Year 2020-21 submitted on 31.03.2021, as if the same is filed within period specified invoking Section 119(2)(b) of the Income Tax Act, 1961."