2025 (7) TMI 653 - AT - Income Tax

Disallowance of expenses u/s 11 - form 10B was not e-filed at the time of filing of return of income - HELD THAT - We observe that both for the earlier as well as subsequent years the assessee has e-filed Form 10B within the stipulated time frame. Further for this year as well we observe that the Form 10B contained a specific UDIN mentioning the date on which the Audit Report was prepared as 29-09-2019 . Therefore it is not the case that Auditor s Report in Form 10B had not been prepared by the Auditors but there was a procedural delay in e-filing of the same. In the case of Brahmchari Wadi Trust 2025 (3) TMI 1012 - GUJARAT HIGH COURT held that where delay in filing Form No. 10 by assessee-trust had occurred due to internal administrative problems of assessee-trust since assessee-trust for past many years had substantially satisfied conditions for claiming exemption under section 11 exemption under section 11 could not be denied for non-filing of Form No. 10 in time. In the case of Sarvodaya Charitable Trust 2021 (1) TMI 214 - GUJARAT HIGH COURT held that where assessee a public charitable trust registered under section 12A had substantially satisfied condition for availing benefit of exemption as a trust it could not be denied exemption merely on bar of limitation in furnishing audit report in Form no. 10B. Claim of application of income cannot be denied to the assessee only on the ground that the assessee/the auditor of the assessee omitted to file Form 10B (auditor s report) along with return of income when the same was submitted to the Tax Authorities and the same being a procedural defect. Appeal of the assessee is allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal are:

(a) Whether the disallowance of expenses claimed under section 11 of the Income Tax Act on the ground that Form 10B was not e-filed along with the return of income is legally sustainableRs.

(b) Whether the exemption under section 11 can be denied merely due to procedural delay or non-compliance in filing the audit report in Form 10B, especially when the audit report was prepared and submitted subsequently before the completion of assessment or appellate proceedingsRs.

(c) Whether the gross amount or net income should be considered for taxation when disallowance is made under section 11Rs.

(d) The applicability and interpretation of judicial precedents regarding condonation of delay in filing Form 10B and the procedural versus substantive nature of such filing requirements.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) & (b): Validity of Disallowance on Grounds of Non-filing or Late Filing of Form 10B

Relevant Legal Framework and Precedents:

Section 11 of the Income Tax Act provides exemption to income applied for charitable or religious purposes by a trust or institution. Section 12A mandates registration of such trusts. Section 12A(1)(b) requires filing of an audit report in Form 10B along with the return of income to claim exemption under section 11. The procedural requirement of filing Form 10B is intended to ensure compliance and enable verification of accounts.

Judicial precedents from the jurisdictional High Court and ITAT have consistently held that delay or procedural non-compliance in filing Form 10B should not automatically result in denial of exemption under section 11, provided the assessee has substantially complied with the substantive conditions and files the audit report before completion of assessment or appellate proceedings. Key cases relied upon include:

• Brahmchari Wadi Trust vs. CIT (Exemption) - Delay due to internal administrative problems did not justify denial of exemption.
• Shri Parshwanath Bhakti Vihar Jain Trust vs. CIT (Exemption) - Delay caused by illness of accountant warranted remand for condonation of delay.
• Sarvodaya Charitable Trust vs. ITO (Exemption) - Substantial satisfaction of conditions precluded denial solely on limitation grounds.
• Vardhman Stanakvasi Jain Shravak Trust vs. ITO - Late filing of Form 10B during appellate proceedings could not be a ground for denial.
• Shiksha Foundation vs. ITO (Exemption) - Procedural delay without mala fide intention should be condoned.
• Jt. CIT (OSD) v. Gujarat Energy Development Agency - Filing audit report during assessment proceedings precluded denial.
• CIT v. Gujarat Oil & Allied Industries - Audit report filed before completion of assessment entitled assessee to deduction.

Court's Interpretation and Reasoning:

The Tribunal examined the facts that the assessee had prepared the audit report dated 29-09-2019 with a valid UDIN and had filed it subsequently during appellate proceedings before the CIT(A). The Tribunal emphasized that the delay was procedural and inadvertent, without any mala fide intention. It held that exemption under section 11 cannot be denied merely because Form 10B was not e-filed along with the return, especially when the audit report was submitted before the issuance of intimation under section 143(1).

The Tribunal distinguished the facts from the Supreme Court decision in Pr. CIT v. Wipro Ltd., which involved mandatory conditions for claiming benefit under section 10B(8) and the timing of declarations in original versus revised returns. The Tribunal noted that in the present case, the claim for exemption under section 11 was made in the original return itself, and the audit report was filed before completion of assessment, making the Wipro decision inapplicable.

Further, the Tribunal relied on the Supreme Court decision in Commissioner of Income-tax, Maharashtra vs. G. M. Knitting Industries, which held that filing of necessary certificates after the return but before final assessment order entitled the assessee to deduction.

Key Evidence and Findings:

The audit report was prepared timely and contained a valid UDIN. The delay in e-filing was due to inadvertence and procedural lapse. The audit report was filed before the issuance of intimation under section 143(1). The assessee had been registered under section 12A and 80G and had been filing returns and audit reports timely in previous years.

Application of Law to Facts and Treatment of Competing Arguments:

The Revenue argued that the procedural requirement of filing Form 10B along with the return is mandatory and non-compliance leads to denial of exemption. The Tribunal rejected this argument by distinguishing the facts and emphasizing the procedural nature of the delay. The Tribunal also noted that the Revenue's reliance on the Wipro decision was misplaced due to factual differences.

The Tribunal applied the principle that procedural lapses should not defeat substantive rights, especially when the legislative intent is to incentivize charitable activities and the assessee has otherwise complied substantively.

Conclusions:

The Tribunal concluded that the disallowance of exemption under section 11 solely on the ground of non-filing or late filing of Form 10B was not justified. The exemption claim should be allowed when the audit report is filed before the issuance of assessment order or appellate decision.

Issue (c): Whether the Addition Should be on Gross or Net Income

The assessee contended that any addition, if at all, should be made on net income after allowing expenses and not on the gross amount. However, this issue was not elaborately dealt with by the Tribunal as the primary ground of disallowance was procedural non-compliance, which the Tribunal found untenable. The Tribunal's decision to allow the exemption effectively rendered this issue academic.

3. SIGNIFICANT HOLDINGS

The Tribunal's crucial legal reasoning includes the following verbatim excerpts:

"In light of the above judicial precedents cited above and the assessee's set of facts, we are of the considered view that the claim of application of income cannot be denied to the assessee only on the ground that the assessee/the auditor of the assessee omitted to file form 10B (auditor's report) along with return of income, when the same was submitted to the tax authorities before the order/intimation under section 143(1) of the Act was issued."

"Accordingly, in light of the decision of Yokogawa Supreme Court (which is held that section 10A of the Act is a 'deduction provision' not an 'exemption provision') and the decision of G. M. Knitting Industries case supra, which have been rendered on a similar facts as that of the assessee i.e. claim of deduction was claimed in the original return of income itself, in our view, the ratio laid down in the Wipro Ltd. case would not disentitle assessee to claim benefit of deduction under Section 11 of the Act, once such claim has been made in the original return of income and assessee has also furnished Form 10B during the course of appellate proceedings."

"It is a well settled principle of law that if there is any ambiguity regarding interpretation of a Statutory provision, an interpretation favourable to the assessee may be taken, especially when we are dealing with Statutory provisions aimed at giving some incentive to the assessee."

"We are of the considered view that the claim of application of income cannot be denied to the assessee only on the ground that the assessee/the auditor of the assessee omitted to file Form 10B (auditor's report) along with return of income, when the same was submitted to the Tax Authorities and the same being a procedural defect."

Core principles established include:

• Filing of Form 10B is a procedural requirement and delay or non-filing along with return should not lead to denial of exemption if the audit report is filed before completion of assessment or appellate proceedings.
• Substantive compliance with the conditions of section 11 and 12A is paramount and procedural lapses should be condoned, especially when there is no mala fide intent.
• Judicial precedents support a liberal and purposive interpretation of exemption provisions to promote charitable activities.
• The decision in Wipro Ltd. is distinguishable and does not apply to claims under section 11 where the claim is made in the original return and audit report is filed before assessment completion.

Final determinations on each issue:

(a) The disallowance of expenses and denial of exemption under section 11 on the ground of non-filing or late filing of Form 10B is not sustainable.

(b) The exemption under section 11 should be allowed when the audit report is filed before the issuance of the assessment intimation or appellate order, notwithstanding procedural delay.

(c) The issue of gross versus net income addition was not specifically adjudicated due to the primary issue's resolution in favour of the assessee.