2025 (7) TMI 891 - AT - Income Tax

Denial of exemption u/s 11 - audit report on Form No. 10B not e-filed within the prescribed time - HELD THAT - Indian Red Cross Society has been in existence for the past more than 50 years. The exemption was withdrawn only on account of some technical issue without doubting the charitable activities of the Trust. We are also in agreement with the judgment in the case of Hari Gyan Pracharak Trust 2023 (6) TMI 923 - ITAT AHMEDABAD in which by following the earlier judgment of the Coordinate Bench it has been held that filing of audit return is only procedural and the same view have been taken in the judgment of Shri Laxmanarayan Dev Shrishan Sewa Khendra 2023 (7) TMI 293 - ITAT AHMEDABAD wherein it is held that the provisions regarding furnishing of audit report along with the return has to be treated as a procedural provision. It is directory in nature and its substantial compliance would suffice. Thus the benefit of exemption should not be denied merely on account of delay in furnishing the same. Appeal of the Assessee is allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this appeal are:

(a) Whether the denial of exemption under section 11 of the Income Tax Act, 1961 (the Act) on account of non-filing of the audit report in Form No. 10B within the prescribed time is justified;

(b) Whether the order passed under section 154 of the Act by the Central Processing Centre (CPC) withdrawing exemption and assessing gross receipts is sustainable;

(c) Whether the reliance placed by the CIT(A) on CBDT Circular No. 07/2018 and the decision of the Ahmedabad Bench of ITAT concerning Forms No. 10 and 9A is appropriate in the context of delay in filing Form No. 10B;

(d) Whether the exemption under section 11 should be allowed despite procedural non-compliance, considering the nature of the assessee and the activities carried out;

(e) Whether the delay in filing the appeal by three days should be condoned.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) and (d): Denial of exemption under section 11 due to non-filing of Form No. 10B within prescribed time

Relevant legal framework and precedents: Section 11 of the Income Tax Act provides exemption to charitable or religious trusts/societies from income tax on income applied for charitable purposes. Rule 17B mandates filing of an audit report in Form No. 10B along with the return of income to claim such exemption. The furnishing of the audit report is a procedural requirement. The Gujarat High Court in CIT v. Gujarat Oil and Allied Industries Ltd. (201 ITR 325) held that the provision regarding furnishing of audit report is procedural and directory in nature, and substantial compliance would suffice. The Court emphasized that exemption should not be denied merely on account of delay in furnishing the audit report, especially when the assessee substantially satisfies the conditions for exemption.

Further, the Gujarat High Court in Sarvodaya Charitable Trust v. ITO relied on the above principle, holding that delay in furnishing audit reports should be condoned in the interest of justice and equity, especially for longstanding charitable trusts. ITAT Ahmedabad Bench decisions in cases such as Hari Gyan Pracharak Trust and Laxminarayan Dev Shrishan Sewa Khendra reiterated this principle, emphasizing that filing of audit reports is procedural and delay can be condoned.

Court's interpretation and reasoning: The Tribunal noted that the assessee is a registered society under section 12AA, engaged in bona fide charitable activities including running an educational institution and providing aid to the poor and handicapped. The exemption was withdrawn solely on account of non-filing of Form No. 10B within the prescribed time, despite the audit report being signed and eventually filed later. The Tribunal found no dispute regarding the genuineness of the charitable activities or the aims and objects of the society.

The Tribunal relied on the precedents cited by the assessee, particularly the Gujarat High Court decisions and ITAT rulings, to hold that the procedural lapse of delayed filing of Form No. 10B should not result in denial of exemption under section 11. The Tribunal emphasized that the delay was inadvertent, caused partly by technical glitches and a bona fide belief that the auditor would file the form electronically.

Key evidence and findings: The audit report was signed on 11.09.2018 but was not e-filed within the prescribed period. The exemption claimed was withdrawn by CPC via intimation dated 10.11.2019. The assessee filed an application under section 154 for rectification which was rejected. The assessee's activities and bona fide nature of the trust were not disputed. The Tribunal noted that the audit report was eventually furnished, confirming substantial compliance.

Application of law to facts: Applying the principle that procedural provisions are directory and substantial compliance suffices, the Tribunal held that denial of exemption on the ground of delayed filing of Form No. 10B was not justified. The Tribunal found that the authorities below erred in relying on Circular No. 07/2018, which pertains to Forms No. 10 and 9A, not Form No. 10B, rendering such reliance misplaced.

Treatment of competing arguments: The Revenue contended that the delay was unexplained and that the assessee was assisted by counsel capable of ensuring compliance, thus justifying denial of exemption. The Tribunal rejected this, emphasizing the equities and the longstanding charitable nature of the society, and the absence of any malafide or substantive non-compliance.

Conclusions: The Tribunal concluded that the exemption under section 11 should be allowed despite the delay in filing Form No. 10B, as the delay was procedural, inadvertent, and the assessee substantially complied with the requirements.

Issue (b): Sustainability of order passed under section 154 by CPC withdrawing exemption and assessing gross receipts

Relevant legal framework and precedents: Section 154 of the Act allows rectification of mistakes apparent from record. The CPC had passed an order withdrawing exemption and assessing gross receipts due to non-filing of Form No. 10B within the prescribed time.

Court's interpretation and reasoning: The Tribunal observed that the order under section 154 was passed mechanically without considering the substantive compliance and the nature of the procedural lapse. The Tribunal held that since the audit report was eventually furnished and the charitable activities were not in question, the rectification order withdrawing exemption was not proper.

Key evidence and findings: The audit report, though delayed, was signed and later filed. The assessee's activities were genuine and exemptible. The withdrawal of exemption was solely based on procedural non-compliance.

Application of law to facts: The Tribunal applied the principle of substantial compliance and equitable treatment to hold that the rectification order was not sustainable.

Treatment of competing arguments: The Revenue's reliance on procedural requirements was rejected in favor of equitable considerations.

Conclusions: The rectification order under section 154 withdrawing exemption and assessing gross receipts was held to be improper and set aside.

Issue (c): Appropriateness of reliance on CBDT Circular No. 07/2018 and Ahmedabad ITAT decision related to Forms No. 10 and 9A

Relevant legal framework and precedents: CBDT Circular No. 07/2018 deals with procedural aspects relating to Forms No. 10 and 9A but does not specifically address Form No. 10B.

Court's interpretation and reasoning: The Tribunal found that the CIT(A) erred in relying on this circular and the Ahmedabad ITAT decision which were inapplicable to Form No. 10B. This reliance led to an incorrect conclusion denying exemption.

Key evidence and findings: The facts pertained to delayed filing of Form No. 10B, not Forms No. 10 or 9A.

Application of law to facts: The Tribunal distinguished the present case from those covered by the circular and the cited ITAT decision, holding that the principles laid down therein were not applicable.

Treatment of competing arguments: The Revenue's reliance on such circular and precedent was rejected as misplaced.

Conclusions: The reliance on Circular No. 07/2018 and the Ahmedabad ITAT decision was held to be erroneous and did not justify denial of exemption.

Issue (e): Condonation of delay in filing the appeal

Relevant legal framework: The appeal was filed three days late. The assessee explained that the delay was due to courier delivery and intervening holidays. The CIT(DR) did not object.

Court's interpretation and reasoning: The Tribunal accepted the explanation as reasonable and condoned the delay.

Conclusions: Delay of three days in filing the appeal was condoned.

3. SIGNIFICANT HOLDINGS

"Having given our due consideration to all the relevant aspects of the matter, we are of the view that the approach in the cases of the present type should be equities, balancing and judicious. Technically, strictly and liberally speaking, the respondent no. 2 might be justified in denying the exemption under section 12 of the Act by rejecting such condonation application, but an assessee, a public charitable trust past 30 years who substantially satisfies the condition for availing such exemption, should not be denied the same merely on the bar of limitation especially when the legislature has conferred wide discretionary powers to condone such delay on the authorities concerned."

"The provision regarding furnishing of audit report with the return has to be treated as a procedural proviso. It is directory in nature and its substantial compliance would suffice. The benefit of exemption should not be denied merely on account of delay in furnishing the same and it is permissible for the assessee to produce the audit report at a later stage either before the Income-tax Officer or before the appellate authority by assigning sufficient cause."

"The CIT(Exemptions), while deciding the issue has relied upon the circular, which relates to Form No. 10 and Form No.9A. It is not applicable to facts of the case and, thus, it is held that the exemption as withdrawn u/s 11 by the order of CPC and confirmed by the CIT(A) was not proper. Thus, we direct that the said exemption u/s 11 as claimed by the assessee deserves to be allowed."

The Tribunal's final determinations are:

(i) The exemption under section 11 of the Income Tax Act should be allowed despite the delay in filing Form No. 10B, as the delay is procedural and substantial compliance has been made;

(ii) The order passed under section 154 withdrawing exemption and assessing gross receipts is set aside;

(iii) The reliance on CBDT Circular No. 07/2018 and the Ahmedabad ITAT decision regarding Forms No. 10 and 9A is misplaced and does not justify denial of exemption;

(iv) The delay of three days in filing the appeal is condoned.