2025 (7) TMI 317 - AT - Income Tax

Time limit provided u/s 11(3) for utilisation of the accumulated fund - scope of amendment - CPC has disallowed the claim while processing the return for the reason that the additional one-year period for utilisation of funds was omitted vide Finance Act 2022 w.e.f. 01.04.2023 - HELD THAT - As per provisions of Section 11(2) of the Act a trust is required to apply 85% of income during any previous year to charitable or religious purposes. As per the sub-clause (c) of Section 11(3) the accumulated amount shall be deemed to be the income of the assessee if it was not utilised within the period of five years as mentioned in Section 11(2)(a) of the Act or in the year immediately following the expiry thereof . Thus the assessee had time limit of five years and one additional year to utilise the accumulated funds. Since the funds were accumulated in this case in the F.Y. 2016-17 the extended time period for utilisation of fund was till the end of the F.Y. 2022-23. In the present case the assessee had utilised funds to the extent of Rs. 2, 32, 073/- in the additional one-year period and accordingly claimed the deduction in the return for A.Y. 2023-24. Contention of the assessee is that the amended provision would create an impossible and absurd situation as the assessee would be left with no time to utilise the funds accumulated in F.Y.2016-17 - As per the unamended provisions the assessee had additional one year to utilise the funds. The removal of additional one-year period would create an impossible or absurd situation as the assessee will be left with no time to utilise the accumulated funds. The doctrine of impossibility (lex non cogit ad inpossibilia) would be applicable in the situation when assessee would be left with no time to utilise the accumulated funds. The amendment cannot be interpreted in such a way that it makes impossible for the assessee to utilise the accumulated funds within the time period as originally provided under the provisions of the Act. It is a settled position that legal rules should not be applied rigidly or literally when doing so would lead to an unfair or impossible outcome. Rather the legal obligations should be interpreted with a degree of practicality and reasonableness taking into account the specific circumstances of the case. The law does not require anyone to perform an act that is genuinely impossible to achieve. While interpreting the amendment the legal obligations have to be interpreted with a degree of practicality and reasonableness taking into account the specific circumstances of the case. Considering this aspect CIT(A) was not correct in rejecting the appeal of the assessee. Since the assessee had utilised the funds within the time period as originally provided under the Act the adjustment made while processing the return is deleted. 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 was entitled to utilise the accumulated income from Financial Year (F.Y.) 2016-17 within the extended period of five years plus one additional year as per the pre-amendment provisions of Section 11(3)(c) of the Income Tax Act, 1961;

(b) Whether the amendment to Section 11(3)(c) by the Finance Act, 2022, which omitted the words "or in the year immediately following the expiry thereof" and came into effect from 1.4.2023, applies retrospectively to accumulated funds from earlier years, thereby curtailing the utilisation period;

(c) Whether the doctrine of lex non cogit ad impossibilia (law does not compel the impossible) is applicable in interpreting the amended provision so as to protect the assessee's right to utilise the accumulated funds within the originally prescribed time frame;

(d) Whether the unutilised accumulated income can be taxed in the Assessment Year (A.Y.) 2023-24 or only in A.Y. 2022-23 as per the provisions of Section 11(3)(iii); and

(e) Whether denying the opportunity to utilise the accumulated income defeats the charitable objectives of the trust and is contrary to the intent of Section 11 of the Act.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) and (b): Applicability of pre-amendment utilisation period versus amended provision

The relevant legal framework is Section 11(2) and Section 11(3)(c) of the Income Tax Act. Section 11(2) permits a trust to accumulate income for up to five years if it cannot apply 85% of income for charitable purposes in the year of receipt. Section 11(3)(c) originally provided that if such accumulated income is not utilised within five years or in the year immediately following the expiry of such period, it shall be deemed to be the income of the trust for taxation.

The Finance Act, 2022, effective 1.4.2023, amended Section 11(3)(c) by omitting the clause "or in the year immediately following the expiry thereof", thereby reducing the utilisation period to strictly five years without the additional grace year.

The assessee accumulated funds in F.Y. 2016-17, so the original five-year period expired on 31.3.2022. Under the pre-amendment provision, the assessee had an additional year (F.Y. 2022-23) to utilise the funds. The assessee utilised Rs. 2,32,073/- during this additional year and claimed deduction in A.Y. 2023-24.

The CPC disallowed this claim on the ground that the amended provision applies from A.Y. 2023-24, eliminating the additional year, thus the utilisation after 31.3.2022 was not permissible.

The Tribunal examined whether the amendment was intended to apply retrospectively to accumulated funds from prior years. The Tribunal noted that the amendment is substantive in nature and affects legally conferred rights. It reasoned that the amendment cannot be interpreted to curtail the utilisation period retrospectively, as it would create an impossible situation for the assessee to comply.

The Tribunal relied on the principle that legal provisions should not be applied rigidly or literally if that leads to unfair or impossible outcomes. The amendment was held to strengthen the time limit prospectively and was not intended to affect accumulated funds prior to the amendment's effective date.

Issue (c): Application of the doctrine lex non cogit ad impossibilia

The Tribunal invoked the maxim lex non cogit ad impossibilia, which means the law does not compel a person to do what is impossible. Since the additional one-year period was omitted only from 1.4.2023, it was impossible for the assessee to utilise funds accumulated in 2016-17 within five years without the additional year.

The Tribunal held that applying the amended provision to deny the utilisation during the additional year would be unjust and impossible. Therefore, the assessee's utilisation during the additional year is valid and should be allowed.

Issue (d): Taxation year of unutilised accumulated funds

The assessee contended that even if the unutilised accumulated income is taxable, it should be taxed in A.Y. 2022-23 as per Section 11(3)(iii), and not in A.Y. 2023-24. The CIT(A) had rejected this argument, applying Sections 11(3)(i) and 11(1B), which the assessee argued were irrelevant.

The Tribunal did not delve deeply into this issue but implicitly supported the assessee's position by allowing the utilisation claimed in A.Y. 2023-24, thereby negating the need to tax the amount as income in that year.

Issue (e): Impact on charitable objectives

The assessee argued that denying the opportunity to utilise the accumulated income would defeat the charitable objectives of the trust and harm its functioning, contrary to the intent of Section 11.

The Tribunal acknowledged that the purpose of Section 11 is to facilitate charitable activities and that strict and retrospective application of the amendment would frustrate this objective. The Tribunal's reasoning to allow utilisation within the originally prescribed period aligns with preserving the charitable intent of the legislation.

3. SIGNIFICANT HOLDINGS

The Tribunal held:

"The amendment cannot be interpreted in such a way that it makes impossible for the assessee to utilise the accumulated funds within the time period as originally provided under the provisions of the Act. It is a settled position that legal rules should not be applied rigidly or literally, when doing so would lead to an unfair or impossible outcome. Rather, the legal obligations should be interpreted with a degree of practicality and reasonableness, taking into account the specific circumstances of the case. The law does not require anyone to perform an act that is genuinely impossible to achieve."

The core principles established include:

• The amendment to Section 11(3)(c) by Finance Act 2022 w.e.f. 1.4.2023 is prospective and does not retrospectively curtail the utilisation period for accumulated funds from prior years.
• The assessee is entitled to utilise accumulated income within the original five-year period plus the additional one-year grace period as existed prior to amendment.
• The doctrine lex non cogit ad impossibilia applies to prevent retrospective application of the amendment that would make utilisation impossible.
• The charitable objectives underlying Section 11 must be preserved by interpreting the provisions reasonably and practically.
• The adjustment made by the CPC disallowing the utilisation of Rs. 2,32,073/- in A.Y. 2023-24 was incorrect and hence deleted.

Accordingly, the Tribunal allowed the assessee's appeal and deleted the addition of Rs. 2,32,073/- from taxable income for A.Y. 2023-24.